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Ruling

Subject: GST treatment of salary sacrifice arrangements for in-house benefits

Issue/Arrangement 1

Question 1

Is your goods and services tax (GST) liability on supplies of discounted services to your employees (being supplies that are fringe benefits) calculated as 1/11^th of the amounts paid by your employees from after tax salaries? That is, are you liable to remit GST on 1/11^th of the discounted amount for the supplies?

Answer

Yes. Therefore you have overpaid GST.

Question 2

Are you entitled to a refund of the overpaid GST equal to 1/11^th of the total amounts salary sacrificed by employees for your supply of fringe benefits?

Answer

Yes.

Issue/Arrangement 2

Question 1

Are you entitled to input tax credits in relation to payments made to the supplier on behalf of your employees for supplies acquired by your employees from the supplier?

Answer

Yes.

Question 2

For GST attribution purposes, will the Commissioner accept that you 'hold' tax invoices for the acquisitions made by your employees from their supplier where you have on-demand access to those invoices via a billing system operated by you?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You enter into arrangements with your employees to supply services to them.

For the first period of the arrangement you were the retailer of the services. For the second period you were not the retailer of the services.

You consider that, where you were the retailer, you have overpaid GST on your supplies to your employees. You have remitted 1/11^th of the undiscounted price for your supplies, rather than 1/11^th of the discounted price paid by your employees from after tax dollars. You consider that you are entitled to a refund of the overpaid GST without having to reimburse your employees.

Where you were not the retailer, you consider that you are entitled to input tax credits when you make a payment on behalf of an employee to a third party retailer. You consider that this is an 'expense payment benefit' and that you have an entitlement to an input tax credit (ITC) under section 111-5(2) and section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

You consider that you hold valid tax invoices to support a claim of the input tax credits as you have 'on demand' access to copies of the relevant tax invoices (as for the period you are the billing agent of the third party retailer).

Arrangement 1 details

Your employees acquired services from you for their own private consumption.

The vast majority of your employees are not registered for GST and would not have claimed any input tax credits on their acquisitions from you.

You allowed all employees to salary sacrifice up to a certain amount each fortnight for in-house benefits.

This salary sacrifice arrangement was documented in a written nomination with your employees (made pursuant to your agreement with your employees). This was made once at the start of the arrangement and applied from that time onwards.

The written nomination provided for an employee to authorise your payroll team to reduce the employee's pre tax salary by the relevant amount.

The amounts nominated by the employee (on a fortnightly or monthly basis) are offset against the amount that would become payable on the employee's (or a family member's) account, thereby reducing the price payable for that account.

You then issue tax invoices to the employee (or family member). You have provided a sample employee tax invoice, with a summary and explanation.

Arrangement 2 details

In the second period you ceased to be the retailer of the services. From this date you commenced a service for the new provider which involved you being a billing agent (preparing and issuing bills on behalf of the provider to its customers).

You issued tax invoices to your employees in the same manner as for the first period prior. That is, the total amount payable when the tax invoice was issued to the employee was discounted by the salary sacrificed amount.

You sent an electronic data feed to the provider which included GST on the undiscounted amount. You paid the employees' salary sacrificed amounts into a bank account administered on behalf of the new provider, such that they received the undiscounted amount for the relevant tax invoice and thereby discharging the employee's liability to the provider.

As you are the billing agent, you have access to all tax invoices issued to your employees on behalf of the provider. You can readily reproduce a copy of a tax invoice to an employee that contains the same information as included on the tax invoice issued to the employee.

You have not claimed any input tax credits relating to these expenses. You have advised that your employees are not registered for GST and have not claimed any input tax credits relating to acquisitions made from the provider.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 195-1

Division 9

Subsection 9-75(3)

Division 111

Taxation Administration Act 1953

Section 105-55 of Schedule 1

Section 105-65 of Schedule 1

Fringe Benefits Tax Assessment Act 1986

Section 136

Section 20

Income Tax Assessment Act 1997

Section 995-1

Reasons for decision

Arrangement 1

Question 1

Summary

Your GST liability on supplies of discounted services to your employees (being supplies that are fringe benefits) is calculated as 1/11^th of the consideration paid by your employees from after tax salaries. You are therefore liable to remit GST on 1/11^th of the discounted amount for the supplies.

Detailed reasoning

Under arrangement 1, you supply services to your employees. You allow your employees to salary sacrifice an amount that is offset against the amount that would be payable on the employee's (or a family member's) account.

A fringe benefit is defined in section 195-1 of the GST Act as having the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).¹ The ITAA 1997 defines a fringe benefit as being defined by subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). This in turn provides that a fringe benefit is a benefit provided to an employee by an employer in respect of employment. It includes any right, benefit, privilege, service or facility.

We consider that your provision of the 'discounted' services under the salary sacrifice arrangement is a supply that is a fringe benefit. The right to the amount of offset on the account is a right of the employee under their salary sacrifice arrangement. Your supply is a supply of services or benefits provided by you to your employees in respect of their employment.

Under section 9-70 of the GST Act, the amount of GST on a taxable supply is 10% of the value of the taxable supply. Following subsection 9-75(1) of the GST Act, the value is 10/11ths of the price. Under normal rules, the price of the supply is the sum of consideration expressed as an amount of money and any non-monetary consideration (for which the GST-inclusive market value is used). The services of an employee may be consideration for the supply of a fringe benefit to that employee. Consideration for the supply of the fringe benefit may also take the form of a payment or contribution made by the recipient of the benefit.

However, under specific GST provisions the price of a supply of a fringe benefit is determined differently to the value used for other taxable supplies. Subsection 9-75(3) of the GST Act contains these rules for working out the value of a taxable supply that is a fringe benefit. It provides that for a taxable supply that is a fringe benefit, the price is the amount that represents the recipient's contribution.

In other words, it is only the contribution payment of the employee that is taken into account in working out the amount of GST on the supply of a fringe benefit. Therefore where you make a taxable supply of a fringe benefit, you are only liable for GST to the extent of the consideration payable on the supply in the form of the 'recipient's contribution'.

In your circumstances employees provide after tax monetary consideration equivalent to the discounted price. Your employee's monetary contribution is the recipient's contribution. Therefore, your GST liability is limited to this amount. You do not also have a liability to pay GST on the salary sacrificed amount.

As you have already paid GST based on the salary sacrificed offset amount, as well as the recipients contribution, you have overpaid an amount of GST.

Question 2

Summary

We have determined that you are entitled to a refund of the overpaid GST. The overpaid amount is 1/11^th of the total amounts salary sacrificed by employees for your supply of fringe benefits.

Detailed reasoning

As you have overpaid an amount of GST, and are seeking a refund of the overpaid amount, it is necessary to consider section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (section 105-65 TAA). This section places a restriction on GST refunds.

In summary for the purposes of your scenario, this section applies where you have overpaid an amount because a supply was treated as a taxable supply to any extent and the supply is not a taxable supply to that extent. Where this is the case, the Commissioner need not give you a refund of the overpaid amount where he is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply.

We consider that in your circumstances section 105-65 applies because you have treated a supply as taxable to a greater extent, than is required under the GST Act. You have not paid an amount reflecting the GST overpaid to the recipient of that supply.

However, the use of the words 'need not' in section 105-65 means that the Commissioner has a residual discretion to refund an amount, even where the section applies, if this is appropriate in particular circumstances.

Miscellaneous Tax Ruling MT 2010/1 considers this discretion, and appropriate circumstances for exercising the discretion to allow a refund. In particular, the purpose of section 105-65 is considered. The scope and purpose is to prevent windfall gains to suppliers and to require that the supplier ensures that any refund ultimately compensates the person or entity that ultimately bore the cost of the overpayment.

In these particular circumstances we consider that it is you (the supplier) that has borne the cost of the overpaid GST. You have remitted GST based on the full price of the supplies, rather than based only on the employee's contribution (recipient's contribution) as specified under subsection 9-75(3)(a)(ii) of the GST Act.

The recipients of the supplies have only paid GST to the extent of their contribution. That is, they have only paid GST being 1/11^th of their employee contribution. Your overpayment of GST is an error that does not impact on the amount required to be paid by the recipients and is akin to an arithmetic error. Therefore, it is not necessary to reimburse the recipients and you are entitled to a refund of the overpaid amount.

We note for the sake of completeness that the Commissioner's private ruling is only endorsing the underlying entitlement to the refunds rather than an actual endorsement of the amounts that you have advised. Records of your entitlement to the overpaid amounts must be kept.

Arrangement 2

Question 1

Summary

You are entitled to input tax credits in relation to payments made to the third party retailer on behalf of your employees for supplies that your employees have acquired from the retailer.

Your arrangement is considered to be an expense payment benefit under Division 111 of the GST Act.

Detailed reasoning

Subject to certain conditions, you may make a creditable acquisition where you

· reimburse an employee (or their associate) for an expense that constitutes an expense payment benefit, or

· make a payment on behalf of an employee for an expense incurred by the employee (or their associate) that constitutes an expense payment benefit².

To be a creditable acquisition the supply of the thing to the employee must be a taxable supply, and the employee must not be entitled to an input tax credit for the acquisition. Special rules in Divisions 69 and 71 of the GST Act also must be considered, but are not relevant in your circumstances.

The reimbursement must also be made for a particular expense. That is, you need to have an understanding or agreement with employees about the types of expenses you will reimburse for a particular acquisition to be a creditable acquisition under Division 111 of the GST Act. For example, requiring invoices to demonstrate that relevant purchases have been made would satisfy this requirement.

In your circumstances we consider that by making a payment of the employees' salary sacrificed amounts to the third party retailer you are making a payment on behalf of an employee for an expense incurred by the employee (or their associate). We consider that you have an agreement with your employees regarding the particular expenses.

We consider that this is an expense payment benefit. An expense payment benefit is defined in section 195-1 of the GST Act as a fringe benefit that is a benefit of a kind referred to in section 20 of the FBTAA. It includes where you make a payment in discharge, in whole or in part, of an obligation of the recipient (for example your employee) to pay an amount to a third person in respect of expenditure incurred by the recipient.

Under section 111-25 of the GST Act, as you have made a payment that constitutes an expense payment benefit, Division 111 of the GST Act applies to you as if you reimbursed your employee, or you reimbursed the employee or associate, for the expense.

The reimbursement is treated as consideration for an acquisition that you make from the employee or associate, and the fact that the supply to you is not a taxable supply does not stop the acquisition being a creditable acquisition.

As a creditable acquisition arises under Division 111 of the GST Act, you are entitled to claim an input tax credit of 1/11^th of the reimbursement (or payment).

Question 2

Summary

The Commissioner accepts that you 'hold' tax invoices for the acquisitions made by your employees from the third party retailer.

Detailed reasoning

As considered above, the requirements of Division 111 of the GST Act are met, and therefore the reimbursement is treated as consideration for an acquisition you make from your employee (or their associate).

Under section 111-15 of the GST Act, you are taken to hold a tax invoice for a creditable acquisition (the consideration for which is your reimbursement under Division 111 of the GST Act) if you hold a tax invoice for the taxable supply made to your employee (or their associate). In other words, the requirement to hold a tax invoice in order to claim an input tax credit under Division 111 of the GST Act is satisfied if you hold the employee's tax invoice for a particular expense.

The input tax credit for a creditable acquisition is attributable to a tax period if you hold the tax invoice that was issued to the person you reimbursed. The tax invoice may identify that person and not you as the recipient of the taxable supply (see paragraphs 157,158 of GSTR 2012/D3).

While you do not hold the actual tax invoice issued to the employee or their associate, you have advised that in your capacity as billing agent you have access to all tax invoices issued to relevant persons. You can readily reproduce a copy of a tax invoice to an employee that contains the same information that was issued to the employee or their associate.

Where the electronic records that you hold contain all the information requirements of a valid tax invoice (under subsection 29-70(1) of the GST Act) the Commissioner will accept that the requirement to hold a valid tax invoice is met.