Edited version of your private ruling

Authorisation Number: 1012444166192

Ruling

Subject: Expense payment fringe benefit and non commercial losses

Question 1

Does section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) reduce the taxable value of an expense payment fringe benefit to nil, which has been provided to an employee, in respect of an employees business expenses (for which they would be entitled to a 'once only deduction' if the expenses had not been reimbursed by the employer), notwithstanding that the 'non commercial loss rules' in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) may have applied to the employee (and therefore the resultant tax loss from the employee's business would have been deferred until a later income year)?

Advice/Answers

No

This ruling applies for the following period

Fringe Benefits Tax

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

The scheme commenced on

1 April 2012

Relevant facts

The employer (taxpayer) and their employee plan on entering into a Salary Sacrifice Arrangement (SSA) where the taxpayer will reimburse the employee's business expenses, for which a deduction would have been claimed in the employee's personal tax return (had they not been reimbursed by the employer).

The expenses which are reimbursed under the SSA will be an expense payment fringe benefit. The employee will have incurred these expenses in the course of carrying on their business, and would have been entitled to a deduction in their personal tax return, had the expenses not been reimbursed by the taxpayer.

The employee intends to provide a declaration to the taxpayer in the approved form stating that they would have been entitled to a 'once only' deduction for the business expenses which are reimbursed. For example, the employee's business expenses would have been deductible under either section 8-1 or section 8-5 of the ITAA 1997, if they had not been reimbursed by the taxpayer.

The business expenses that are to be reimbursed would have been deductible by the employee in the course of carrying on their business. The business has in the past experienced tax losses. Due to the 'Non-commercial loss rules' in Division 35 of the ITAA 1997, the tax losses have been deferred to a later income year since the employee has not satisfied the 'income requirement'. The employees business may continue to experience tax losses in future income years which will be required to be deferred under the 'Non-commercial loss' provisions.

Relevant legislative provisions

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

Fringe Benefits Tax Assessment Act 1986 - Section 24

Fringe Benefits Tax Assessment Act 1986 - Section 20

Income Tax Assessment Act 1997 - Section 8-1

Income Tax Assessment Act 1997 - Division 35

Income Tax Assessment Act 1997 - Section 4-15

Reasons for decision

Issue 1

Question 1

Detailed reasoning

An expense payment benefit is defined in section 20 of the FBTAA. Essentially, an expense payment benefit arises where an employer pays or reimburses expenses incurred by an employee and it has the necessary nexus with the employment relationship.

Section 24 of the FBTAA provides that the taxable value of an expense payment fringe benefit can generally be reduced to nil for an expense to which the employee would have been entitled to a 'once only' income tax deduction (under the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997) for the expenditure if it had not been reimbursed by the employer.

A 'once only deduction' is defined in subsection 136(1) of the FBTAA as:

Once only deduction, in relation to expenditure, means a deduction in a year of income in respect of a percentage of the expenditure where no deduction is allowable in respect of a percentage of the expenditure in any other year of income.

In order that the taxable value of an expense payment fringe benefit provided to an employee is reduced under the otherwise deductible rule in section 24 of the FBTAA, certain requirements must be met. One requirement is that a 'once only deduction' would have 'been allowable' (or would but for the excepted provisions have 'been allowable') to the employee in respect of their expenditure.

For a 'once only deduction' to arise under subsection 136(1) of the FBTAA, 'in relation to expenditure', two conditions must be satisfied:

· The first condition requires there is a deduction in a year of income in respect of a percentage of that expenditure; and

· The second condition requires that in respect of any percentage of that same expenditure, no other deduction is allowable in any other year of income.

In the above definition of a 'once only' deduction and in section 24 of the FBTAA, the terms 'deduction' and 'allowable' refer to amounts which qualify as deductions under section 4-15 of the ITAA 1997 in the calculation of the employee's taxable income.

For an employee's expenditure in respect of an external expense payment fringe benefit to give rise to a 'once only deduction' both the first and second conditions in the definition of this term (as set out above) must be met. For these purposes, the expenditure has a hypothetical quality; that is, (as under section 24 of the FBTAA) an assumption required to be made is that the employer has not reimbursed the employee in relation to it.

To determine whether the first condition is met in the case where the expenditure is hypothetically affected by the loss deferral rule in subsection 35-10(2) of the ITAA 1997 requires consideration of the effect of that subsection.

Division 35 of the ITAA 1997 - Loss deferral rule

Division 35 of the ITAA 1997 applies special measures to prevent losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) being offset against other assessable income in the year in which the loss is incurred. Under the measures, losses that cannot be offset against other income in the year in which they arise (i.e. quarantined losses) may be carried forward to be offset in a future year when there is a profit from a non commercial activity (or against other income if certain criteria are satisfied or the Commissioner exercises his discretion).

Where the rule in subsection 35-10(2) of the ITAA 1997 applies for a particular income year, to a business activity, and the amounts attributable to that business activity for that year which could otherwise be deducted exceed the assessable income from the business activity for that year, paragraph 35-10(2)(a) of the ITAA 1997 treats the amount of the excess as though it 'were not incurred' in that income year'. The result is that only an amount equal to the amount of income from the business activity is able to be taken into account as a deduction under subsection 35-10(2) of the ITAA 1997.

There is no rule which applies to determine how much (if any) of each amount that would otherwise be deductible is left remaining as a deduction, once the loss deferral rule in subsection 35-10(2) of the ITAA 1997 has applied to it. Moreover, the loss deferral rule does not provide any basis for selectively choosing which, if any, of these amounts are to be left remaining as such a deduction.

Instead, the loss deferral rule blends all of the otherwise deductible amounts attributable to the business activity in a way where they lose their identity, and connection with the expenditure on which their initial deductibility (for example, under section 8-1 of the ITAA 1997) was based.

'In respect of' and 'once only deductions'

As previously stated, the first condition for a 'once only' deduction to arise requires that there is a deduction in a year of income 'in respect of' a percentage of the employee's notional unreimbursed expenditure.

Case law shows that there are some subject matters which are simply too far removed, when regard is had to the particular context and legislative purpose in question, to be regarded as being in respect of each other.

In the case Construction Industry Long Service Leave Board v. Irving (1997) 74 FCR 587, the Full Federal Court considered whether unpaid statutory levies qualified as debts due 'in respect of' long service leave, for the purposes of paragraph 556(1)(g) of the former corporations law. At paragraph 596 the Court said:

The remoteness of the connection between the levy payable by a particular employer and the entitlement of a worker to receive a payment from the Board is further demonstrated by the nature of the Fund. In E&L Constructions at 157, Zelling J described the LSL Fund established under the 1975 Act as a 'blended fund'. Similarly, the Fund created by the Long Service Act consists not only of levies paid by the employers, but other components, including interest on investments and fines and penalties. [emphasis added]

The Court concluded at paragraph 597:

…we do not think that any amounts of unpaid levy can be described as 'in respect of [long service leave]', within the meaning of s 556(1)(g) (iv). As we have explained, the levy is neither imposed by reason of, nor calculated by reference to, any obligation on that employer to make payments to construction workers entitled to long service leave. Neither the levy nor the Fund of which it forms part is directed exclusively to discharging the Board's obligation to make payments to construction workers entitled to long service leave.

The operation of the loss deferral rule in subsection 35-10(2) is analogous to that of former section 80 of the ITAA 1936 concerning the composition of a carried forward loss, considered by the High Court in Ravenshoe Tin Dredging Ltd v. FC of T (1966) 116 CLR 81. Like former section 80, subsection 35-10(2) creates a special deduction arising from the operation of the ITAA 1997, which is not itself made up of 'actual expenditures (refer Barwick CJ at CLR 91).

The loss deferral rule in subsection 35-10(2) of the ITAA 1997 blends all of the otherwise deductible amounts attributable to the business activity together in such a way where they lose their identity and connection with the expenditure on which their initial deductibility was based. There is no rule which applies to specify how much of any of the individual items of expenditure underpinning the affected deductions might relate to the 'non excess', that is, relate to the total of the deductions which are able to be taken into account under section 4-15 of the ITAA 1997 for the relevant year.

The absence of any specific provision or rule governing the composition of the non excess, coupled with the loss of identity between the relevant expenditures and the amount of the deductions ultimately recognised under section 4-15 of the ITAA 1997 means there is no sufficient or material link between the two.

Therefore, the first condition for there to be a 'once only deduction', that is, there is a deduction in a year of income in respect of a percentage of that expenditure, will not be satisfied for expenditure affected by subsection 35-10(2) of the ITAA 1997. This expenditure will therefore not give rise to a 'once only deduction'.

The definition of 'once only deduction' requires that both the first and second conditions be satisfied. Therefore, expenditure hypothetically affected by the loss deferral rule in subsection 35-10(2) of the ITAA 1997 can never give rise to a 'once only deduction' for the purposes of section 24 of the FBTAA.