Edited version of your private ruling

Authorisation Number: 1012611215286

Question 1

Is a musical instrument a tool of trade or an eligible work related item to an orchestra member for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Advice/Answers

Yes

Question 2

If the employer reimburses the exact cost incurred by an orchestra member for the purchase of an instrument (which is an eligible work related item) via a salary sacrifice arrangement, is this an expense payment benefit within the section 20 definition of the FBTAA?

Advice/Answers

Yes

Question 3

Would an expense payment benefit in relation to a musical instrument for an orchestra member be a exempt fringe benefit within either section 58X(1)(a) or 58(2)(e) of the FBTAA, since musical instruments are a musician's tool of trade and also an eligible work related item?

Advice/Answers

Yes

Question 4

If (i) to (iii) are satisfied, and the employer is considered to have provided an exempt fringe benefit to an orchestra member, will the employer be able to claim 100% of the GST tax credits upon reimbursing the full cost to the employee upon the provision of a tax invoice from the employee.

Advice/Answers

Yes, you are entitled to claim 100% of the GST tax credits on a musical instrument upon reimbursing the full cost to the employee upon the provision of a tax invoice from the employee.

Question 5

If (i) to (iv) are satisfied is there a limitation placed on the number of times the orchestra member can purchase a musical instrument to be classified as an eligible work related item or a tool of trade?

Advice/Answers

Yes

This ruling applies for the following periods:

Year ending 2015

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The employer proposes to enter into an arrangement with an orchestra member who is an employee.

Details of the arrangement are as follows:

• An orchestra member of the employer purchases a musical instrument for 100% work related purposes;

• Payment is made by the employee either by credit card, eftpos, cheque or direct cash;

• The orchestra member presents the tax invoice relating to the musical instrument purchase to the employer for reimbursement;

• The employer reimburses the orchestra member for the total GST inclusive cost of the musical instrument purchased, which relates to his or her work for the employer as part of an effective salary sacrifice arrangement.

The employee is a resident of Australia and it is their role with their employer to play a musical instrument.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 58X,

Fringe Benefits Tax Assessment Act 1986 Section 20,

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20,

A New Tax System (Goods and Services Tax) Act 1999 Section 111-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 15-20,

A New Tax System (Goods and Services Tax) Act 1999 Subsection 111-5(1),

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 111-5(1)(ab),

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 and

A New Tax System (Goods and Services Tax) Act 1999 Section 111-10.

Question 1

Subsection 58X(2) of the FBTAA lists the items that, if provided primarily for use in an employee's employment are 'eligible work related items' that may be subject to exemption. Included in this list, at paragraph (e), is a tool of trade.

The term 'tool of trade' is not defined in the FBTAA; therefore it takes its ordinary meaning.

Tool is defined in the Macquarie Dictionary (sixth edition - October 2013) as:

1. an instrument, especially one held in the hand, for performing or facilitating mechanical operations, as a hammer, saw, file etc.

2. any instrument of manual operation

The meaning of 'tool of trade' has been commented on in various court cases arising from the interpretation of various sections of bankruptcy law.

In Vaughn v. Official Trustee in Bankruptcy (1996) 71 FCR 34 (Vaughn) the expression 'tools of trade' was considered by the Full Federal Court by reference to The New Shorter Oxford English Dictionary (1993) as:

Tool: 1. A thing used to apply manual force to an object or material, esp. a device designed for some particular mechanical function in a manual activity, as a hammer, a saw, a fork; an implement. Now also, a powered machine used for a similar purpose…2trans. & fig. a thing (concrete or abstract)used in carrying out of some occupation or pursuit; a means of effecting a purpose or facilitating an activity.

'Tools of Trade': the basic equipment required for a particular occupation.

In terms of the dictionary definition quoted in Vaughn, a thing will qualify as a tool, where it meets either definition rather than a composite or both.

Furthermore, for an item to qualify as a 'tool', whilst it must meet the necessary condition of being dependent on manual operation to give effect to its purpose, it can also be electrically powered. For instance, it would be accepted that both a hand saw and a power saw used by a tradesman would both be 'tools of trade'.

In Van Houwelingen, Re; Toledo Berkel Pty Ltd v. Official Receiver in Bankruptcy (1953) 56 WALR 21 (Toledo-Berkel) it was said, by Dwyer C.J (at ages 23-24), in finding that an electrically operated cake mixer was not a tool of trade:

A cab has been held by the Court of Appeal in England to be a tool of trade in certain circumstances, (see Lavell v. Richings); so has a piano and a sewing machine. These articles were at the material times in personal use by their operators for the purpose of subsistence. It appears necessary, therefore, to not only the article in its intrinsic nature, but also whether it is in use and by whom and the manner and circumstances of use.

Possible the nearest approach to the legalistic meaning may be found in Bouviers Dictionary, where the definition and illustrations are as follows:

The implements which are commonly used by the hand of one man in some manual labour, necessary for his subsistence. It includes patterns used in manufacturing; a mill saw; an instrument called a billy and a jennie; a gin and grist mill a threshing machine. As used in exemption laws, it includes any instrument necessary for the prosecution of a trade, including a lathe; sewing machines; a piano; a violin; a cornet; a gun; a net and boat; cheese vats; presses, and knives; the surgical instruments of a physician; and the office furniture of a lawyer; an iron safe used by an insurance agent; it does not include the apparatus of a printing office.

I am inclined also to think that in ordinary speech, tools of trade conveys and idea of something more personal in use than plant and machinery, a difference which is perhaps plainer in Bouviers definition.

There is however, one common characteristic present in all definitions and decisions of a tool, and that is manual operation; and when I am asked what real difference can it make, in determining whether a specific article is a tool or not, that in one case it is worked substantially by manual manipulation and in the other operated by electricity without manual manipulation, I can only answer that in my opinion that difference is the essential determinant.

Also, as referred to in Toledo-Berkel above, further guidance on the meaning of the expression tool of trade was also provided in Lavell v. Richings [1906] 1 KB 480, where a cab was held to be an implement of trade of a cab driver. In Gonski v. Durrell [1918]2 KB 14 a sewing machine was held to be a tool or implement of man's trade. In Boyd Ltd v. Billham [1909] 1KB 14 a piano forte was held to be a tool or implement of trade of a music teacher.

In summary, a tool of trade has the characteristics of being necessary for a person to undertake their occupation and being substantially manually operated. The tool itself may be large or small, and the person using it does not need to be in a "trade".

The issue is whether a musical instrument is necessary for an employee to undertake his or her duties of employment and whether it is substantially manually operated. The musical instrument is essential in carrying out the employees duties for their employer. Furthermore, such an instrument is substantially or wholly dependent on manual operation to give effect to its purpose.

On that basis, it is therefore considered that the musical instrument is an eligible work item being a tool of trade under section under paragraph 58X(2)(e) of the FBTAA.

Question 2

Section 20 of the FBTAA essentially provides that an expense payment fringe benefit may arise in either of two situations:

(a) Where an employer pays a third party in satisfaction of expenses incurred by an employee; or

(b) Where an employer reimburses an employee for expenses they incur

Taxation Ruling TR 92/15 - Income tax and fringe benefits tax: the difference between an allowance and a reimbursement, explains the difference between an allowance and reimbursement for the purposes of determining whether a payment is a fringe benefit under the FBTAA, or whether that payment is assessable income under the Income Tax Assessment Act.

Paragraph 9 and 10 of TR 92/15 state:

9. The word "reimburse" is defined under subsection 136(1) of the FBTAA to include any act having the effect or result, direct or indirect, of a reimbursement. Since neither the FBTAA nor the ITAA provides a more descriptive definition beyond that, the ordinary meaning of the work applies. The Macquarie dictionary defines the word "reimburse" as a repayment for expense or loss incurred, or a refund.

10. The ordinary meaning of the word "reimburse" implies that the recipient is to be compensated exactly for an expense already incurred although not necessarily disbursed. However whether payment is made before or after expenses are incurred by the recipient, it qualifies as a reimbursement when the provider considers the expense to be its own and the recipient incurs the expense on behalf of the provider. As a result, a requirement that the recipient vouches or substantiates expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance.

It is therefore considered that an expense payment benefit will arise under section 20 of the FBTAA from the reimbursement by the employer to its employee for the cost of a musical instrument purchased by that employee.

Question 3

Paragraph 58X(1)(a) of the FBTAA provides the an expense payment benefit provided by an employer to an employee in respect of the employees employment is an exempt benefit where the relevant employees expenditure is in respect of an eligible work related item.

Paragraph 58X(2)(e) essentially provides that a tool of trade is an eligible work related item for the purposes of paragraph 58X(1)(a) if it primarily for use in the employees employment.

It has already been established that a musical instrument provided to an orchestra member is an eligible work related item on the basis that is a tool of trade. On that basis, it can be concluded that an expense payment benefit provided by the employer for the cost of a musical instrument purchased by the employee is an exempt benefit under paragraph 58X(1) of the FBTAA.

Question 4

Under section 11-20 of the GST Act you are entitled to input tax credits on any creditable acquisition that you make. Further section 15-20 of the GST Act provides that you are entitled to an input tax credit for any creditable importations that you make. Paragraph 111-5(1)(ab), of the GST Act provides that an employer makes an acquisition that can be a creditable acquisition or creditable importation, subject to certain conditions, where an employee is reimbursed for an expense that constitutes an expense payment benefit.  

The expense payment benefit, in these circumstances, is not a creditable acquisition unless the supply of the thing acquired by the employee is a taxable supply. Furthermore, it is not a creditable acquisition to the extent that the employee is entitled to an input tax credit for the thing acquired in incurring the expense. As the employee does not conduct his or her own enterprise he or she would not be entitled to the input tax credit themselves. 

Expense payment benefit, under section 195-1 of the GST Act, means a fringe benefit that is a benefit of a kind referred to in section 20 of the FBTAA 1986. Under the FBTAA 1986 the definition of a 'fringe benefit' in subsection 136(1) of that Act excludes a benefit which is an exempt benefit under that Act. However, for the purposes of the GST Act, under section 195-1 of that Act, 'fringe benefit' has the meaning given by section 995-1 of the ITAA 1997 but includes a benefit within the meaning of subsection 136(1) of the FBTAA 1986 that is an exempt benefit for the purposes of that Act. 

Under section 111-10 of the GST Act, where a creditable acquisition arises under Division 111, you are entitled to claim an input tax credit of 1/11^th of the reimbursement.  

Therefore, when you reimburse the orchestra member the full cost of a musical instrument the acquisition will be a creditable acquisition or creditable importation, and thus you will be entitled to claim 100% of the input tax credit for the GST paid in the cost of that instrument as the reimbursement constitutes an expense payment benefit or exempt benefit under the FBTAA. However, this will only be the case when the supply of the instrument to the employee is a taxable supply or taxable importation and the employee provides you with their tax invoice or evidence of importation for that acquisition.

Goods and Services Tax Ruling GSTR 2001/3 outlines the Commissioners view on how GST applies to supplies of fringe benefits. The ruling is available on our website at www.ato.gov.au.

Summary

The employer is entitled to claim the GST credit on the reimbursement of the cost of the musical instrument to the employee under paragraph 111-5(1)(ab), of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 5

Under former paragraph 58X(2)(e), a tool of trade only needed to be provided by the employer to be exempt. However, tools of trade acquired after 13 May 2008 must be "primarily for use in the employees employment" as well as subject to meeting the requirements of subsection 58X(3) of the FBTAA.

Subsection 58X(3) of the FBTAA provides:

58X(3) [Later items] An item (the later item) listed in subsection (2) is not an eligible work related item if, earlier in the FBT year, an expense payment benefit or a property benefit of the employee has arisen in relation to another item that has substantially identical functions to the later item.

This means that an eligible work related item ("later item") is not exempt if, earlier in the FBT year, an item with substantially identical functions was provided. However subsection 58X(4) of the FBTAA provides that subsection 58X(3) does not apply if the later item is a replacement item for the earlier provided item.

A later item will be considered a replacement item if the later item is a replacement for an item which has been lost, destroyed or needed replacing because of developments in technology.

In summary, this means that where there has been an expense payment benefit in relation to a musical instrument earlier in an FBT year, the provision of another musical instrument in that same year will not be an exempt benefit under section 58XC(1) of the FBTAA, unless it is a replacement item.