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Ruling

Subject: Provision of an in-house residual fringe benefit

Question 1

Is the provision of a discount on a product purchased by an employee an in-house residual fringe benefit under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Yes.

Question 2

In determining the taxable value of an in-house residual fringe benefit, under section 48 of the FBTAA, is the lowest price at which the provider would offer an identical benefit to the public calculated by:

· Disregarding any reductions in cost to which a particular individual may be entitled as a result of the government scheme; and

· Taking into account the discount offered to the public through various arrangements?

Yes.

Question 3

Will the reduction in the cost through operation of a government scheme constitute a recipient contribution?

Yes

This ruling applies for the following periods:

01/04/2012 - 31/03/2106

The scheme commences on:

01/04/2012

Relevant facts and circumstances

A company has an agreement with its employees to provide them with a product.

Employees are able to choose the product which suits them best from the ranges available and either a X% or Y% discount is offered from the full premium rate.

The company has an agreement with its associates (as defined in section 318 of the Income Tax Assessment Act 1936) to provide their employees with a product.

Employees of these associates (within the meaning of section 318 of the Income Tax Assessment Act 1936) of the company are able to choose the product that suits them best and either a X% or Y% discount is offered from the full premium rate.

The company offers, under arms length transactions in the ordinary course of business carried on by it, similar policies to members of the public with a discount available on these products.

The employees pay for the product on a monthly basis and identical benefits are provided to members of the public on the same basis and in the ordinary course of business of the company.

The government provides, through a scheme, a reduction in the cost of the product. The reduction in cost is based on a percentage of the cost which is otherwise payable.

Under the agreement with the employer it is mandatory for any employee who will purchase a product to claim a reduction in cost through the government scheme.

There is no salary sacrifice element to the arrangement.

Relevant legislative provisions

Section 46 of the FBTAA 1986

Section 48 of the FBTAA 1986

Subsection 136(1) of the FBTAA 1986

Section 149 of the FBTAA 1986

Reasons for decision

Question 1

Summary

The requirements for an in-house residual fringe benefit are met where the company provides a discount on the product to its employees and employees of its associates.

Detailed reasoning

An in-house residual fringe benefit in relation to an employer as defined in subsection 136(1) of the FBTAA 1986 includes a residual fringe benefit in relation to the employer where both of the following conditions are satisfied:

(i) the provider is the employer or an associate of the employer;

(ii) at or about the comparison time the provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders.

Residual fringe benefits are essentially, fringe benefits that remain, or are left over, because they are not one of the more specific categories of fringe benefit (subsection 136(1) of the FBTAA 1986 and section 45 of the FBTAA 1986). The provision of a discounted product by the provider to its employees and employees of its associates is a residual fringe benefit.

The provider is the employer or an associate of the employer and it carries on a business that includes the provision under arms length transactions of identical or similar benefits to the public generally.

Thus the requirements for the benefit to be an in-house residual fringe benefit are met.

Question 2

Summary

The lowest price at which an identical benefit (other than as to price) was sold to a member of the public is calculated by:

· Disregarding any reduction in cost as a result of the employee participating in the government scheme, and

· Taking into account the discount offered to the public through various arrangements.

Detailed reasoning

An in-house non-period residual fringe benefit means an in-house residual fringe benefit that is not provided during a period. In determining whether a benefit is provided during a period section 149 of the FBTAA 19896 provides that a benefit shall be deemed to be provided during a period if the benefit :

· Is deemed to be provided for a period of more than 1 day , and

· Is not deemed by a provision of the FBTAA 1986 to be provided at a particular time or on a particular day.

As the product is being provided on an ongoing basis it is being provided for a period of more than one day.

However, subsection 46(2) of the FBTAA 1986 states as is relevant,

Where:

(a) a residual benefit…not being a residual benefit constituted by a lease or licence of property, is provided on the basis that, in respect of each of a number of regular periods ( in this subsection referred to as a "billing period") commencing on or after 1 July 1986 …a payment is to be made in respect of the provision of the benefit during the billing period; and

(b) identical benefits are provided to members of the public on the same basis and in the ordinary course of business carried on by the person providing the eligible benefit;

the following provisions have effect:

(c) the provision of the eligible benefit during each billing period shall be taken to constitute a separate benefit;

(d) each such separate residual benefit shall be deemed to have been provided at the time at which the payment in respect of the billing period concerned is due and payable, and not otherwise.

The requirements of paragraphs 46(2)(a) and 46(2)(b) are met as:

· the residual benefit is not a lease or licence in respect of property;

· monthly payments will be made so a payment will be made at regular intervals, and

· identical benefits are provided to the public on the same basis and in the ordinary course of business by the provider.

Therefore, the provision of the product during each month will be deemed to be a separate benefit provided at the time the monthly payment is due and payable.

The benefit will be an in-house non-period residual fringe benefit and the relevant calculation method for its taxable value is that contained within section 48 of the FBTAA 1986.

Section 48 of the FBTAA 1986 provides as is relevant that the taxable value of an in-house non-period residual fringe benefit is calculated in relation to an employer in relation to a year of tax as being:

(a)  where at or about the comparison time, identical benefits were provided by the provider:

(i) in the ordinary course of business to members of the public under an arms length transaction or arms length transactions

 ... and

(ii) in similar circumstances and subject to identical terms and conditions (other than as to price as those that applied in relation to the provision of the recipients benefit to the recipient

an amount equal to 75% of the lowest price at which an identical benefit was sold to a member of the public or

(b)  ...

reduced by the amount of recipients contribution (emphasis added)

Paragraph 48(a) of the FBTAA 1986 applies as the provider provides:

· identical benefits in the ordinary course of business to members of the public under arm's length transactions,

· in similar circumstances and subject to identical terms and conditions (other than price).

The relevant valuation method is thus that contained in paragraph 48(a) which provides that the taxable value will be 75% of the lowest price at which an identical benefit was sold to a member of the public less the amount of the 'recipients contribution'.

'Price' is not defined in the FBTAA 1986 and takes on its ordinary meaning. The Macquarie Dictionary [MultiMedia], version 5.0.0, 1/10/01, defines price as being 'the sum of money or its equivalent for which anything is bought, sold or offered for sale'.

The government assistance is provided to the individual under a particular act. It is not relevant to the process of determining the price at which a similar policy is to be offered for sale.

The lowest price at which an identical benefit would be offered to the public by the employer is the amount of the obligation to the provider prior to any reduction to which a particular individual may be entitled under the government act.

As identical benefits are offered to the public at a discount from full premium rate the lowest price for the purposes of section 48 of the FBTAA 1986 is full premium rate less the discount. Using the example of a $3,000 full premium rate (prior to any reduction in premium) the lowest price at which an identical benefit was sold to a member of the public would be $2700 if the discount was 10% (i.e. $3,000 reduced by 10%).

Question 3

Summary

Where the employee claims a reduction in the cost under the government scheme, an amount equal to that reduction paid by the employee to the employer, will constitute a recipient contribution.

Detailed reasoning

The definition of 'recipient's contribution' (as is relevant) in subsection 136 (1) FBTAA is:

(a) in relation to a residual fringe benefit means the amount of any consideration paid to the provider or to the employer by the recipient or by the employee in respect of the provision of the recipients benefit, as the case may be, reduced by the amount of any reimbursement paid to the recipient in respect of that consideration

By agreeing to claim the government assistance, an amount equal to that reduction is paid by the employee to the employer pursuant to their agreement in respect of the fringe benefit and will be a recipient's contribution.