Edited version of your private ruling

Authorisation Number: 1012426113393

Ruling

Subject: Fringe Benefits Tax

Question 1

Are the recreational facilities provided by the local recreation centre to a current employee of the local government council under payment Option 1 exempt benefits under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

Is a reimbursement by the local government council under payment Option 2 in relation to the expenses a current employee incurs for the use of recreational facilities of the local recreation centre, an exempt benefit under subsection 47(2) of the FBTAA?

Answer

No

Question 3

If the reimbursement by the local government council under payment Option 2 in question 2 above is an expense payment fringe benefit under section 20 of the FBTAA, does section 62 of the FBTAA apply to reduce the taxable value?

Answer

Yes

This ruling applies for the following period:

Year ended 31 March 2013

The scheme commences on:

On or after 1 January 2009

Relevant facts and circumstances

The local government council intends to enter into effective salary sacrificing arrangements with its current employees to include the provision or use of the local recreation centre which is a recreational centre owned by the local government council.

The local recreation centre is open to the public as well as to local government council employees. It is located in the building of the local government council and managed by local government council employees.

The local recreation centre provides members of the public with the use of various recreational facilities.

The local government council carries on a business that consists of or includes the provision of identical or similar benefits (in respect of the provision or use or recreational facilities) principally to outsiders.

There are two payment options:

Option 1

The local government council proposes to invoice itself for the provision or use of recreational facilities to its employees. The invoice will be the standard invoice with the same rate charged to the public. The local government council will not apply a credit or discount to its employees. The local government council will provide its employees with the use of these recreational facilities and make the appropriate salary sacrifice adjustments.

Option 2

Employees are directly invoiced by the local recreation centre. Employees will provide documentary evidence of the expenditure incurred (invoices) to the local government council by the declaration date. The local government council would then reimburse employees expenses and make the appropriate salary sacrifice adjustments.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 47(2).

Fringe Benefits Tax Assessment Act 1986 Section 62.

Fringe Benefits Tax Assessment Act 1986 Section 20.

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1).

Fringe Benefits Tax Assessment Act 1986 Section 45.

Fringe Benefits Tax Assessment Act 1986 Section 38.

Income Tax Assessment Act 1997 Section 32-10.

Income Tax Assessment Act 1997 Section 32-40.

Income Tax Assessment Act 1997 Section 32-5.

Income Tax Assessment Act 1997 Section 32-20.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Act 1997 Subsection 900-115(2).

Further issues for you to consider

This ruling is based on the in-house fringe benefit provisions that are currently contained in the FBTAA.

On 22 October 2012, as part of the Mid-Year Economic and Fiscal Outlook 2012-13, the Government announced reforms to remove the concessional fringe benefits tax (FBT) treatment for in-house fringe benefits accessed through a salary sacrifice arrangement. If enacted, the proposed measure will apply from 22 October 2012 for salary sacrifice arrangements made after the announcement, and from 1 April 2014 for salary sacrifice arrangements made before the announcement on 22 October 2012.

You should note that if the law is substantively changed, the part of the private ruling dealing with the changed law ceases to apply.

Tax Laws Amendment (2012 measures no 6) Bill 2012 contains these changes and is currently before the House of Representatives. The bill can be accessed via the following link: http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r4939.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Are the recreational facilities provided by local recreation centre to a current employee of the local government council under payment Option 1 exempt benefits under subsection 47(2) of the FBTAA?

Summary

As all of the requirements of subsection 47(2) of the FBTAA are satisfied where current local government council employees are provided with recreational facilities from the local recreation centre under payment Option 1 then those benefits are exempt benefits.

Detailed reasoning

The term benefit as defined in subsection 136(1) of the (FBTAA) includes any right, privilege, service or facility.

In the present case the benefit provided to the employees of the local government council, is for the employee's use of the recreation facilities at the local recreation centre, over the course of the year.

It is considered an employee provided with recreational facilities from their own employers recreation centre constitutes the provision of a benefit as that term is defined in subsection 136(1) of the FBTAA.

A benefit that satisfies subsection 47(2) of the FBTAA is an exempt benefit.

Subsection 47(2) of the FBTAA states:

Where:

(a) a residual benefit provided to a current employee in respect of his or her employment consists of:

(i) the provision, or use, of a recreational facility; or

(ii) and

(b) the recreational facilities or , is located on business premises of:

(i) the employer; or

(ii) if the employer is a company, of the employer or of a company that is related to the employer;

the benefit is an exempt benefit.

The term residual benefit is defined in subsection 136(1) of the FBTAA to mean a benefit that is a residual benefit by virtue of section 45 of the FBTAA.

Section 45 of the FBTAA provides:

A benefit is a residual benefit for the purposes of the Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

Under this scheme, the only potential benefits that may arise within Division 2 to 11 are:

(a) tax-exempt body entertainment benefit and

(b) expense payment fringe benefit.

Is the benefit a tax-exempt body entertainment benefit?

In coming to our decision we have taken into account ATO Interpretative Decision ATO ID 2008/60 Fringe Benefit Tax Residual fringe benefit: tax-exempt body recreation centre has been applied to this scheme.

Section 38 of the FBTAA provides:

38 Tax-Exempt Body Entertainment Benefits

Where, at a particular time, a person (in this section referred to as the "provider") incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision, in respect of the employment of an employee, of entertainment to a person (in this section referred to as the "recipient") being the employee or an associate of the employee, the incurring of the expenditure shall be taken to constitute a benefit provided by the provider to the recipient at that time in respect of that employment.

'Entertainment' as defined in subsection 136(1) of the FBTAA and by extension section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in its meaning, entertainment by way of recreation. The term recreation is further defined in subsection 995-1(1) of the ITAA 1997 to include amusement, sport or similar leisure-time pursuits.

An employee's use of the recreation centre is entertainment by way of recreation under section 32-10 of the ITAA 1997.

As provided by section 38 of the FBTAA, the employer incurs expenditure operating the recreation centre which is partly in respect of the provision, in respect of the employment of the employee, of entertainment to the employee.

Where this expenditure is also 'non-deductible exempt entertainment expenditure', as defined in subsection 136(1) of the FBTAA, the incurring of the expenditure will be deemed to constitute a benefit as described in section 38 of the FBTAA.

Subsection 136(1) of the FBTAA provides:

non-deductible exempt entertainment expenditure' means non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income.

non-deductible entertainment expenditure' means a loss or outgoing to the extent to which:

(a) section 32-5 of the Income Tax Assessment Act 1997 applies to it, or would apply if it were incurred in producing assessable income; and

(b) apart from that section, it would be deductible under section 8-1 of that Act, or would be if it were incurred in producing assessable income;

(on the assumption that section 32-20 of the Income Tax Assessment Act 1997 had not been enacted).

The local government council would be deriving assessable income and deducting its operating expenses if it were not exempt from income tax. The local government council incurs operating expenses in carrying on the business of the local recreation centre. This operating expenditure would also be entertainment expenditure under section 32-5 of the ITAA 1997 then the employer will have incurred 'non-deductible entertainment expenditure' which is also 'non-deductible exempt entertainment expenditure'. Under these circumstances the employer would have provided a benefit under section 38 of the FBTAA.

However, section 32-40 of the ITAA 1997 provides an exception to what is considered entertainment expenditure in section 32-5 of the ITAA 1997.

Section 32-40 of the ITAA 1997, at Item 3.1, provides:

Section 32-5 does not stop you deducting a loss or outgoing for ... 3.1 providing entertainment for payment in the ordinary course of a business that you carry on.

The local government council carries on a business of providing the use of the recreation centre principally to members of the public for payment. The business is one of providing recreation which is entertainment and the activity is considered to be 'in the ordinary course of a business'. Section 32-40 of the ITAA 1997 is therefore satisfied. This means that the employer's expenditure is not entertainment expenditure within section 32-5 of the ITAA 1997; is not 'non-deductible entertainment expenditure' within subsection 136(1) of the FBTAA and is not 'non-deductible exempt entertainment expenditure' within subsection 136(1) of the FBTAA.

The benefit provided to the employee, being the use of the recreation centre over the course of the year is therefore not a benefit covered by section 38 of the FBTAA.

Is the benefit an expense payment benefit?

An expense payment fringe benefit is defined in subsection 136(1) of the FBTAA as a fringe benefit that is an expense payment benefit.

An expense payment benefit is defined in subsection 136(1) of the FBTAA to mean a benefit referred to in section 20 of the FBTAA.

Section 20 of the FBTAA sets out the circumstances in which an expense payment benefit will be taken to be provided.

The Tax Office publication Fringe benefits tax: a guide for employers at page 6 states that an expense payment fringe benefit may arise where the employer:

§ reimburses an employee for expenses they incur, or

§ pays a third party for expenses incurred by an employee.

In either case, the expenses may be business or private expenses, or a combination of both, but they must be incurred by the employee.

Under payment option 1, the local government council l proposes to invoice itself for the provision or use of recreational facilities to its employees. The invoice will be the standard invoice with the same rate charged to the public. The local government council will not apply a credit or discount to its employees. The local government council will provide its employees with the use of the recreational facilities and make the appropriate salary sacrifice adjustments.

As the local government council does not make a payment to a third party or a reimbursement to an employee, no expense payment benefit is provided.

Conclusion

As the benefit provided to the employee is neither a tax-exempt body entertainment benefit nor an expense payment fringe benefit and it does not fall within any of the categories of benefits covered by Subdivision A of Divisions 2 to 11 (inclusive) of Part III of the FBTAA, it is therefore a 'residual benefit' under section 45 of the FBTAA.

Recreational facility

Subsection 136(1) of the FBTAA defines recreational facility as a facility for recreation, but does not include a facility for accommodation or a facility for drinking or dining.

The local recreation centre provides members of the public with the use of various recreational facilities.

The local recreation centre is a recreational facility for the purposes of subsection 47(2) of the FBTAA.

Business premises

The term business premises is defined in subsection 136(1) of the FBTAA to mean, as far as is relevant in this case, in relation to a person, premises, or a part of premises, of the person used, in whole or in part, for the purposes of business operations of the person.

Paragraph 12 of Taxation Ruling TR 2000/4: Fringe benefit tax: meaning of business premises considers what constitutes business premises. It provides guidance concerning two requirements that must be satisfied for premises to be classified as 'business premises of the employer'. These requirements are the control the employer has over the premises and the consistency of an employer's actions and activities on the premises with those of normal business practices.

Paragraph 7 of TR 2000/4 addresses the first requirement that the premises or part of the premises are under the control of the person (employer). A person's control is satisfied because of ownership of premises, or has exclusive occupancy rights as lessee of premises.

The term person is defined in subsection 136(1) of the FBTAA to include a body politic.

The second requirement in TR 2000/4 is that the premises or part of premises must be used by the person, in whole or in part, for the purposes of their business operations.

The local recreation centre is located in the building of the local government council and managed by local government council employees. The local government council carries on a business (in respect of the provision or use of recreational facilities) principally to outsiders. The local government council is conducting business operations of the local recreation centre at its premises.

As all of the requirements of subsection 47(2) of the FBTAA are satisfied where current local government council employees are provided with recreational facilities from the local recreation centre under payment Option 1 then those benefits are exempt benefits.

Question 2

Is a reimbursement by the local government council under payment Option 2 in relation to the expenses a current employee incurs for the use of recreational facilities of the local recreation centre, an exempt benefit under subsection 47(2) of the FBTAA?

Summary

The reimbursement of a current employee for expenses incurred in relation to the use of recreational facilities of the local recreation centre under payment Option 2 is not an exempt benefit under subsection 47(2) of the FBTAA.

Detailed reasoning

In addressing question 1 above, it has been concluded that an employee provided with recreational facilities by the local recreation centre is provided with a benefit for the purposes of the FBTAA.

It has also been explained above that a benefit arising under section 20 of the FBTAA is defined as an "expense payment benefit" in subsection 136(1) of the FBTAA.

Under payment arrangement Option 2, the local government council intends to reimburse a current employee for expenses the employee incurs in relation to the use of local recreation centre recreational facilities.

Paragraphs 3 and 4 of Taxation Ruling 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement considers what constitutes a reimbursement.

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance

4. The meaning of the word "reimburse" includes payments made in advance of expenditure as long as those payments possess the characteristics outlined in paragraph 3.

Paragraph 20(b) of the FBTAA sets out that a reimbursement from one person (referred to as the provider) to another person (referred to as the recipient) shall be taken to constitute the provision of a benefit.

This means that a reimbursement of a current employees recreational facility expenses constitutes an expense payment benefit under paragraph 20(b) of the FBTAA.

It has been explained above that a residual benefit is a benefit that is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

An expense payment benefit is included in Division 5 of the FBTAA which is within Divisions 2 to 11 inclusive of the FBTAA.

As an expense payment benefit, a reimbursement cannot be a residual benefit because it cannot satisfy the requirements of section 45 of the FBTAA.

Not being a residual benefit, a reimbursement also cannot satisfy the requirements of subsection 47(2) of the FBTAA.

Therefore, the reimbursement of a current employee for expenses incurred in relation to the use of the local recreation centre recreational facilities under payment Option 2 is not an exempt benefit under subsection 47(2) of the FBTAA.

Question 3

If the reimbursement by the local government council under payment Option 2 in question 2 above is an expense payment fringe benefit under section 20 of the FBTAA, does section 62 of the FBTAA apply to reduce the taxable value?

Summary

It has been determined that the local government council reimbursement of a current employee for expenses incurred in relation to the use of the local recreation centre recreational facilities will constitute in-house residual expense payment fringe benefits. These benefits are in-house fringe benefits and therefore are eligible fringe benefits for the purposes of section 62 of the FBTAA. Therefore, the reduction of aggregate taxable value under section 62 of the FBTAA will apply.

Detailed reasoning

Section 62 of the FBTAA provides for the reduction of aggregate taxable value of certain eligible fringe benefits that include 'in-house fringe benefits'.

The definition of 'in-house fringe benefit' contained in subsection 136(1) of the FBTAA includes an 'in-house expense payment fringe benefit'.

'In-house expense payment fringe benefit', also defined in subsection 136(1) of the FBTAA, includes an 'in-house residual expense payment fringe benefit'.

'In-house residual expense payment fringe benefit' is defined in subsection 136(1) of the FBTAA as:

in-house residual expense payment fringe benefit', in relation to an employer, means an expense payment fringe benefit in relation to the employer where:

(a) the recipients expenditure was incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance) by a person (in this definition called the "residual benefit provider");

(b) if the residual benefit provider is the employer or an associate of the employer at or about the time that, if the residual benefit had been a residual fringe benefit, would have been the comparison time, the residual benefit provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders;

(c) if the residual benefit provider is not the employer or an associate of the employer:

(i) the residual benefit provider purchased the benefit from the employer or an associate of the employer (which employer or associate is in the definition called the "seller"); and

(ii) at or about the time that, if the residual benefit had been a residual fringe benefit, would have been the comparison time both the residual benefit provider and the seller carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders; and

(d) documentary evidence of the recipients expenditure is obtained by the recipient and that documentary evidence, or a copy, is given to the employer before the declaration date.

As relevant to this scheme, an 'in-house residual expense payment fringe benefit' requires that:

(a) The fringe benefit is an 'expense payment fringe benefit';

(b) The employee's expenditure is incurred on the provision of a residual benefit (other than a benefit provided under a contract of investment insurance);

(c) The residual provider is either (as applicable):

(i) The employer or the employers associate who, at the relevant time, carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; and

(d) Documentary evidence of an employees expenditure provided to the employer before the declaration date.

(a) Expense payment fringe benefit

It has been concluded in the answer to question 2 above that a reimbursement of expenses incurred by a current local government council employee constitutes an expense payment benefit under paragraph 20(b) of the FBTAA.

As far as is relevant in this case, a fringe benefit as defined in subsection 136(1) of the FBTAA is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted or excluded.

The proposal by the local government council to reimburse a current employee for expenses the employee incurs in relation to the use of the local recreation centre recreational facilities will, when acted upon, only arise due to the employer and employee relationship between those current employees and the local government council (as evidenced by the relevant salary sacrifice arrangements between them).

Therefore, the proposal by the local government council to reimburse the current employees expenditure in respect of the use of local recreation centre will, when acted upon, constitute an expense payment fringe benefit.

This condition is satisfied.

(b) Employee's expenditure incurred in respect of a residual benefit

It has been concluded in the answer above that an employees expenses incurred in relation to the use of the local recreation centre recreational facilities is in respect of a residual benefit (i.e. it is not in respect of a property benefit).

Therefore, this condition is satisfied.

(c)(i) The employer, or an associate of the employer, is the residual benefit provider who carries on a business of providing identical or similar benefits principally to outsiders

The local government council is the employer of the current employees.

The residual benefit, in this case, is the provision or use of recreational facilities managed and operated by the local government council and located in the local government council building.

This means that the local government council is both the employer and the residual benefit provider.

It was concluded in the answer to question 1 above, with reference to Taxation Ruling 2000/4, that the operations of the local recreation centre constitute the carrying on of a business.

The meaning of principally is not defined in the FBTAA.

The Tax Office publication Income tax guide for non-profit organisations, at page 52 states that principally means mainly or chiefly and that less than 50% is not principally.

Therefore, under such guidance, principally may be regarded to mean more than 50% or, alternatively, more than half, of the time.

Outsider is defined in subsection 136(1) of the FBTAA as being:

in relation to the employment of an employee of an employer, means a person not being:

(a) an employee of the employer;

(b) an employee of an associate of the employer;

(c) an employee of a person (in this definition referred to as the ``provider'') other than the employer or an associate of the employer who provides benefits to, or to associates of, employees of the employer or an associate of the employer under an arrangement between:

(i) the employer or an associate of the employer; and

(ii) the provider or another person; or

(d) an associate of an employee to whom any of the preceding paragraphs apply.

Therefore, an outsider is someone who is not an employee of the relevant employer, not an employee of an associate of that employer, not an employee of someone who provides benefits to the employees of either that employer or that employers associate under an arrangement between them and also not to any associates of these employees.

It is accepted that the local recreation centre provides recreational facilities principally to individuals who are outsiders i.e. to members of the community at large.

Therefore, this condition is satisfied.

(d) Documentary evidence of an employees expenditure provided to the employer before the declaration date

'Documentary evidence' is defined in subsection 136(1) of the FBTAA as follows:

in relation to an expense incurred by a person, means a document that would constitute written evidence of the expense obtained in a way described in Subdivision 900-E of the Income Tax Assessment Act 1997 if the expense were a work expense, and Division 900 of that Act applied to the person.

Subsection 900-115(2) of the ITAA 1997 sets out the specific requirements that must be met to amount to full written substantiation of the expense for the subsequent purpose of constituting 'documentary evidence' as defined in subsection 136(1) of the FBTAA.

Declaration date refers to the date an employer is required to lodge their FBT return for the FBT year, or such later date as the Commissioner allows.

It is accepted that by the declaration date, an employee would provide the local government council with documentary evidence of expenses incurred in respect of the use of the local recreation centre recreational facilities.

Therefore this condition is satisfied.

Summary on 'in-house residual expense payment fringe benefit'

The proposal by the local government council to reimburse a current employee for expenses the employee incurs in relation to the use of the local recreation centre recreational facilities under payment Option 2 will, when acted upon, constitute in-house residual expense payment fringe benefits as all the required conditions would be satisfied.

Conclusion on application of section 62 of the FBTAA

It has been determined above that the local government council reimbursement of a current employee for expenses incurred in relation to the use of the local recreation centre recreational facilities will constitute in-house residual expense payment fringe benefits. These benefits are in-house fringe benefits and therefore are eligible fringe benefits for the purposes of section 62 of the FBTAA.

Therefore, the reduction of aggregate taxable value under section 62 of the FBTAA will apply.