Edited version of your private ruling

Authorisation Number: 1012589250462

Ruling

Subject: Residual benefits and the use of a motor vehicle exemption

Question 1

Will bus transport provided under the proposed arrangement be an exempt benefit under subsection 47(6) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes. However, the exemption will not apply if the transport card is used in a manner that is contrary to your policy. For example, if the card is used for transport on a vehicle other than a bus or the travel is not limited to travel between the employee's residence and place of work.

This ruling applies for the following periods:

Year ended 31 March 2015

Year ended 31 March 2016

Year ended 31 March 2017

Year ended 31 March 2018

Year ended 31 March 2019

The scheme commences on:

1 April 2014

Relevant facts and circumstances

The employer is proposing to include the use of an electronic 'smartcard' transport card as an available benefit that can be part of a SSA.

The SSA will be an effective SSA as defined in paragraph 21 of Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements.

The employer will purchase the transport cards and register the cards in their name.

They will then distribute the cards to the employees who have included the use of a transport card as part of their SSA.

To obtain the use of a transport card an employee will be required to complete a declaration:

Where the transport card is used outside the agreed terms and conditions under the policy, the employer will adjust the salary and wages of the employee so as to recover any additional costs that arise from the use of the card. A continued breach of policy will result in the cancellation of the card.

The employee will determine an annual amount to salary sacrifice on a prospective basis. This amount will then be divided by the number of pay cycles and paid periodically onto the transport card by the employer.

A transport card provided to an employee under this arrangement will only be cashed out in the event of the cessation of employment of the employee, a change in the employee's circumstances such as the employee being unable to use the card as a result of moving residence or the employee's death. In this case, any refund will be returned to the employee or the employee's estate as salary and wages less the relevant PAYG withholding.

In the event an employee loses his or her transport card, the original card will be cancelled and a replacement card will be provided with the balance of the original card to be transferred to the replacement card.

Periodical auditing of individual cards will be conducted by the card administrator to ensure adherence to the policy.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Subsection 47(6)

Fringe Benefits Tax Assessment Act 1986 Paragraph 47(6)(a)

Fringe Benefits Tax Assessment Act 1986 Paragraph 47(6)(aa)

Fringe Benefits Tax Assessment Act 1986 Paragraph 47(6)(b)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Subsection 47(6) of the FBTAA provides an exemption for the private use of certain motor vehicles where certain conditions are met.

Subsection 47(6) states:

Where:

(a) a residual benefit consisting of the provision or use of a motor vehicle is provided in a year of tax in respect of the employment of a current employee;

(aa) the motor vehicle is not:

(i) a taxi let on hire to the provider; or

(ii) a car, not being:

(A) a panel van or utility truck; or

(B) any other road vehicle designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passenger; and

(b) there was no private use of the motor vehicle during the year of tax and at a time when the benefit was provided other than:

(i) work-related travel of the employee; and

(ii) other private use of the motor vehicle by the employee or an associate of the employee, being other use that was minor, infrequent and irregular;

the benefit is an exempt benefit in relation to the year of tax.

Therefore, the provision of travel to the employees will be an exempt benefit where:

(i) the benefit is a residual benefit

(ii) the benefit consists of the use of a motor vehicle

(iii) the benefit is provided to a current employee

(iv) the motor vehicle is not one of the above listed exclusions

(v) the only private use of the motor vehicle is:

• work related travel of the employee; and

• other private use by the employee or an associate of the employee is minor, infrequent and irregular.

(i) Will the benefit be a residual benefit?

Section 45 of the FBTAA defines a residual benefit as a benefit that does not come within Subdivision A of Divisions 2 to 11 of the FBTAA.

Under the proposed arrangement the employer will purchase a transport card and provide it to the employee for him or her to use. The card will be held in the employer's name and is their property. Therefore, the relevant benefit providing to the employee is the use of a transport card to travel on public transport.

Guidance for determining whether the arrangement involves the provision of a residual benefit was provided by the decision in National Australia Bank Ltd v Federal Commissioner of Taxation 93 ATC 4914; (1993) 123 ALR 349, (the NAB Case). In that case, the employer authorised employees who worked specified shifts, to travel to and from work in a taxi using Cabcharge vouchers which were debited to the Bank's account each month.

In considering the type of benefit that had been provided, Ryan J stated at ATC 4939:

What I regard as the preferable view, that the contract is between the taxi cab operator and the Bank, accommodates the arrangement under which the shift supervisor arranges for the attendance of one or more taxi cabs and two or more employees travel in the same cab. The contract which the taxi cab operator then and there makes is to attend at the Bank's premises and convey one or more of its employees as directed, in consideration of the provision by the Bank of a warrant authorising the cost of the conveyance to be met by Cabcharge on the Bank's account.

Further at ATC 4940 Ryan J stated:

As already indicated, I have accepted that the provision by the Bank to Mr Brewster of transport by taxi cab was a benefit as defined in the Act. I have also explained why the benefit is not an expense payment fringe benefit by virtue of any provision of Subdivision A of Division 5 of the Act. Since it has not been suggested to within Subdivision A of any of Divisions 2 to 4 or 6 to 11, it follows that it is a residual benefit by virtue of s. 45 of the Act.

The arrangement is similar to the situation that existed in the NAB Case as the employer will be providing employees with cards that are purchased by you and registered in their name. The employees will then use the card to obtain travel on public transport.

Support for this conclusion is provided in Taxation Ruling TR 1999/10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments (TR 1999/10).

Paragraph 86 in discussing the use of a Life Gold Pass or a Severance Pass states:

We do not consider that the issuing of passes under the Life Gold Pass and Severance Pass Schemes attracts any income tax implications. However, travel benefits received in relation to each use of a Gold Pass or Severance Pass by a Member will be taxed as a residual benefit, within the meaning of section 45 of Division 12 of the FBTAA, to the provider of the pass.

The use of each of the transport cards can be considered similar to the use of the Cabcharge in the NAB Case and the use of the Life Gold Pass or Severance Pass.

Therefore, the benefit received by the employees will be a residual benefit which is the provision of transport.

(ii) Will the benefit consist of the use of a motor vehicle?

Motor vehicle is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as being any motor-powered road vehicle (including a 4 wheel drive vehicle). Accordingly, this definition encompasses a bus.

The question arises as to whether providing transportation on a bus constitutes the 'use' of a bus. The Federal Court in NAB Case took the view that it would not have considered a benefit constituted by providing the transportation of an employee in a taxi cab to be 'the provision or use' of a motor vehicle but for the presence of subsection 47(6)(aa) of the FBTAA. The fact that paragraph (aa) was inserted into subsection 47(6) by Act No. 139 of 1987 suggests that Parliament considered that the words 'use of a motor vehicle' in subsection 47(6)(a) included a passenger's travel in a taxi.

Arguing by analogy, use of a motor vehicle would also include a passenger's travel in a bus.

Support for this conclusion is provided by ATO Interpretative Decisions ATO ID 2001/313 Fringe Benefit Tax: Exempt Residual Benefit and ATO ID 2009/140 Fringe Benefits Tax: Exempt benefits: free travel on bus - private use.

ATO ID 2001/313 states:

The word "use" has a broad meaning. It is not restricted to situations where the employee has control of a vehicle. While the facts that the bus carried a number of employees on a pre-organised route, at pre-organised times enables the benefit to be described as the provision of transport, they do not alter the fact that the benefit consisted of "the use of a motor vehicle".

Each of the transport cards can be used when travelling on a bus. When this occurs the benefit will consist of the use of a motor vehicle.

However, the transport cards can be used for travel on other forms of public transport.

In accordance with the guidance provided in ATO Interpretative Decision ATO ID 2010/163 Fringe Benefits Tax Exempt Benefits: motor vehicle not for private use - tram, a train, tram and ferry is not a motor vehicle. Consequently if a transport card is used to travel on one of these forms of transport, the benefit will not consist of the use of a motor vehicle.

(iii) Will the benefit be provided to a current employee?

A 'current employee' is defined in subsection 136(1) of the FBTAA to mean 'a person who receives, or is entitled to receive salary or wages.'

As the benefit will be provided through a salary sacrifice arrangement which by its nature requires the recipient to be receiving salary or wages, this requirement is met.

(iv) Is the motor vehicle one of the listed exclusions?

The bus is not a taxi, panel van, utility truck or a vehicle designed to carry a load of less than one tonne. Therefore this condition is met.

(v) Will the private use of the motor vehicle be restricted to:

(a) work related travel of the employee, and

(b) other private use by the employee or an associate of the employee which is minor, infrequent and irregular?

Work-related travel is defined in subsection 136(1) of the FBTAA to mean:

(a) travel by the employee between:

(i) the place of residence of the employee; and

(ii) the place of employment of the employee or any other place from which or at which the employee performs duties of his or her employment; or

(b) travel by the employee that is incidental to travel in the course of performing the duties of his or her employment.

Private use is defined in subsection 136(1) of the FBTAA to mean:

in relation to a motor vehicle, in relation to an employee or an associate of an employee, means any use of the motor vehicle by the employee or associate, as the case may be, that is not exclusively in the course of producing assessable income of the employee.

Paragraph 47(6)(b) of the FBTAA requires the private use of the motor vehicle during the year of tax to be restricted to travel between home and work and other private use that is minor, infrequent and irregular.

An employee who has the use of a transport card under a salary sacrifice may use public transport to undertake private travel. If the employee does this by using a transport card or ticket which the employee has purchased, the question arises as to whether this public transport will affect the application of paragraph 47(6)(b)?

In considering this question, the introductory words to subsection 47(6) of the FBTAA indicate the private use being considered is that provided 'in respect of the employment of a current employee'.

The phrase 'in respect of' in relation to the employment of an employee is defined in subsection 136(1) of the FBTAA to include 'by reason of, by virtue of, for or in relation directly or indirectly to, that employment'.

The meaning of this phrase was considered by the Federal Court in J & G Knowles v. Federal Commissioner of Taxation [2002] 96 FCR 402; 2000 ATC 4151; 44 ATR 22 (Knowles).

In Knowles, the Full Federal Court considered the judgements in Smith v. FCT (1987) 164 CLR 513; 19 ATR 274; 87 ATC 4883 and Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 31 ATR 392; 95 ATC 4691 before concluding that it is not sufficient for the purposes of the FBTAA to conclude that there is a causal connection between the benefit and the employment.

At paragraph 26 the Court said:

Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment.

At paragraphs 28 and 29, the Court said:

While the width of the definition of 'fringe benefit' was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit. In particular, the fact that a benefit is provided to a director because it was authorised by that director will not, of itself, be sufficient to characterise the benefit as one which is 'in respect of' the employment. Without more, it is not a product of incident of that office.

To put the matter another way, although the process of characterising the benefit provided in a particular case can involve questions of fact and degree, it is not sufficient for the purposes of the FBTAA merely to enquire whether there is some causal connection between the benefit and the employment: see FCT v Rowe (1995) 60 FCR 99 at 114 and 123; 31 ATR 392 at 404 and 412; 95 ATC 4691 at 4703 and 4710. Although Brennan, Deane and Gaudron JJ observed in Technical Products (at 47), that the requisite connection will not exist unless there is some discernible and rational link between the 2 subject matters which the statute requires to be linked, as was pointed out by Dawson J (at 51), the connection must be material.

In applying this decision, the only private use that will be 'in respect of the employment' of the employee will be the private use that occurs through the use of the transport card that the employer provides. Although the employee may at a different time use a bus for a private purpose, this travel will not be in respect of the employment of the employee as the travel is purchased directly by the employee under a separate arrangement.

Therefore, this requirement will be met if the only private journeys undertaken by the employee using the transport card provided are between home and work. If the employee uses the transport card to undertake other private journeys this requirement may not be met.

Conclusion

Assuming that the employees only use the transport cards to travel between home and work on a bus the use of the card by the employee will be an exempt benefit as:

(i) the benefit is a residual benefit

(ii) the benefit consists of the use of a motor vehicle

(iii) the benefit is provided to a current employee

(iv) the motor vehicle is not one of the above listed exclusions

(v) the only private use of the motor vehicle is:

• work related travel of the employee and

• other private use by the employee or an associate of the employee is minor, infrequent and irregular.

However, if the transport card is used for other private travel or for travel on another form of public transport the use of the card will not be an exempt benefit.

Given the possible alternate outcomes the employer needs to ensure they are able to verify as part of their audit process that:

• if the sacrificed amount is paid to the employee the employee deposits the amount paid onto the card;

• the transport card is only used to travel on bus; and

• the private journeys are restricted to travel between home and work.