Edited version of private advice

Authorisation Number: 1012622754014

Ruling

Subject: Salary Sacrifice Arrangements - Expense Payment Fringe Benefits

Question 1

Did Employer A provide exempt benefits, under section 57A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), to Employee Z under the terms of effective salary sacrifice arrangements during the period 1 April 2011 to 31 March 2012 inclusive?

Answer

No

Question 2

Did Employer A provide exempt benefits, under section 57A of the FBTAA, to Employee Z under the terms of effective salary sacrifice arrangements during the period 1 April 2012 to 31 March 2013 inclusive?

Answer

No

Question 3

Did Employer A provide exempt benefits, under section 57A of the FBTAA, to Employee Z under the terms of effective salary sacrifice arrangements during the period 1 April 2013 to the end of October 2013?

Answer

No

This ruling applies for the following periods:

1 April 2011 to 31 March 2012

1 April 2012 to 31 March 2013

1 April 2013 to end of October 2013

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

It had been recorded in the month 19XX management meeting minutes of Employer A that Employer A and Employee Z were considering entering into salary sacrifice arrangements and that Employee Z would provide written substantiation to Employer A about how funds provided to Employee Z under any such salary sacrifice arrangements were actually expended.

There was no written agreement between Employer A and Employee Z concerning salary sacrifice arrangements in the period month 19XX to the end of month 20XX.

Employer A and Employee Z entered into a signed written agreement at the beginning of month 20XX (month 20XX Agreement).

The month 20XX Agreement was entered into by the signing parties with the intention that there would be valid salary sacrificing arrangements between them from the beginning of month 20XX.

Employer A and Employee Z then entered into a further signed written agreement at the beginning of month 20YY (month 20YY Agreement) that replaced the month 20XX Agreement.

The month 20YY Agreement was entered into by the signing parties with the intention that there would be valid salary sacrificing arrangements between them from the beginning of month 20YY.

Under the terms of the month 20YY Agreement, Employer A was to make regular payments of $X per fortnight into a bank account in Employee Z's name.

Employer A had no rights over the bank account.

The bank account was linked to a debit card that allowed Employee Z to pay for living expenses as required. Employee Z had an additional bank account into which the balance of Employee Z's salary was paid.

The month 20YY Agreement contained a list of items for which Employee Z was expected to subsequently expend any funds deposited by Employer A into the bank account.

There is no record of any written substantiation being given by Employee Z to Employer A during the period from early month 20YY to the end of month 20ZZ on what the funds drawn by Employee Z from the bank account were actually expended.

The majority (approximately 75%) of the funds expected to be expended by Employee Z on items listed in the month 20YY Agreement were in respect of various car loans.

However, all of these various car loans were extinguished in early 200Y.

There were no other written agreements, similar to the month 20YY Agreement, entered into between Employer A and Employee Z between the beginning of month 20YY and the end of month 20ZZ.

No amounts were deposited by Employer A into the bank account after the end of month 20ZZ.

Amounts of $X per fortnight were regularly paid by Employer A into the bank account during the whole period from 1 April 2011 to the end of month 20ZZ.

Employer A did not withhold, pursuant to section 12-35 of the Taxation Administration Act 1953 (TAA), any amounts from the $X per fortnight paid into the bank account during the period 1 April 2011 to the end of month 20ZZ.

Any funds paid by Employer A into the bank account which were not expended by Employee Z on any of the items listed in the month 200Y Agreement were expended by Employee Z on various other 'living expenses' including expenditures on 'rent increases', 'private health insurance', 'car insurance', 'memberships', 'motor vehicle operating costs' and 'groceries'.

Employer A is a registered health promotion charity.

Employer A is endorsed by the Commissioner as a registered health promotion charity.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 57A

Fringe Benefits Tax Assessment Act 1986 Subsection 57A(1)

Fringe Benefits Tax Assessment Act 1986 Section 123C

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(4)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Subsection 6-10(3)

Income Tax Assessment Act 1936 Section 23L

Taxation Administration Act 1953 Section 12-35

Reasons for decision

Issue 1

Question 1

Detailed reasoning

Were benefits provided under an effective salary sacrifice arrangement?

1. Taxation Ruling TR 2001/10 provides the following guidance in relation to the meaning of the term 'salary sacrifice arrangement' (SSA):

19. 'Salary sacrifice arrangement' - in this Ruling [TR 20001/10], the term salary sacrifice arrangement means an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value. The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to pay FBT, if any, on the benefits provided.

20. ...

21. 'Effective SSA' - an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

22. 'Ineffective SSA' - an ineffective SSA involves the employee directing that an entitlement to receive salary or wages that has been earned (see paragraph 23 of this Ruling) is to be paid in a form other than as salary or wages.

23. 'Entitlement to receive salary or wages that have been earned' - personal services remuneration arrangements usually provide that the employee is entitled to be paid salary or wages at fixed intervals when he or she has performed services for the employer over a fixed period. To the extent that services for that period have been performed, everything has been done by the employee in earning the entitlement to salary or wages...

2. Therefore, to determine whether there was an 'effective salary sacrifice arrangement' in this particular instance requires that all of the following basic elements were present during the relevant period:

(a) There is an arrangement between the employer and employee.

(b) The employee agrees, under the terms of that arrangement, to forego part of the employee's future salary in return for the employer providing benefits of a similar value to the amount of salary forgone.

(c) The employer agrees, under the terms of that arrangement, to reduce part of the employee's future salary and provide benefits of a similar value to the amount of salary forgone.

(d) The employee's future salary is reduced according to the terms of that arrangement between the employer and employee.

(e) The employer provides benefits of a similar value to the amount of the employee's future salary forgone under the terms of that arrangement.

(a) was there an arrangement between the employer and employee?

3. This requirement is met as there was a signed agreement between Employer A and Employee Z in early month 20YY.

(b) did the employee agree to forego salary in return for benefits?

4. This requirement is met as Employee Z effectively agreed, under the terms of the month 20YY Agreement, to forego future salary in return for benefits.

(c) did the employer agree to provide benefits in return for reduced salary?

5. This requirement is met as Employer A effectively agreed, under the terms of the month 20YY Agreement, to provide benefits in return for a reduction in Employee Z's future salary.

(d) was the employee's salary reduced by the employer under the arrangement?

6. Paragraph (a) of the definition of the term 'salary or wages', in subsection 136(1) of the FBTAA, includes in that term a payment from which an amount must be withheld (even if the amount is not withheld) under section 12-35 of the Taxation Administration Act 1953 (TAA) to the extent that the payment is assessable income.

7. During the period 1 April 2011 to 31 March 2012 inclusive, amounts of $X per fortnight were regularly paid by Employer A into the bank account in apparent conformity with the terms of the month 20YY Agreement.

8. Employer A did not withhold, pursuant to section 12-35 of the TAA, any amounts in respect of the payments to the bank account during the relevant period.

9. Therefore, Employer A when making the payments into the bank account had seemingly proceeded on the basis that Employer A was not providing those amounts by way of salary to Employee Z.

10. Nonetheless, an 'effective salary sacrifice arrangement' requires that the employee agrees to forego part of the employee's expected salary in return for the employer providing benefits of a similar value to the amounts forgone.

11. Once Employer A had made the payments into the bank account Employer A had no rights, whatsoever, to make any disbursements from the funds held there.

12. Therefore, Employer A could not validly utilise the bank account to discharge any obligations of Employee Z to pay third persons nor could Employer A validly utilise the bank account to make any reimbursements to Employee Z in respect of expenditure incurred by Employee Z.

13. Neither could the payments by Employer A into the bank account be said to discharge any obligations of Employee Z to pay third persons and neither could the payments by Employer A into the bank account be said to constitute any reimbursements of expenditure incurred by Employee Z.

14. The payments by Employer A into the bank account merely provided an ongoing pool of funds from which Employee Z could subsequently draw to meet any obligations Employee Z had incurred to pay third persons for goods or services.

15. There was no more than a causal connection between the deposit of the funds into the bank account by Employer A and the subsequent use of such funds by Employee Z to pay third persons for good or services.

16. However, the definition of the term 'reimburse', in subsection 136(1) of the FBTAA, is wide enough to include payments already incurred although not necessarily disbursed.

17. Nonetheless, the quantum of the payments made by Employer A into the bank account remained the same from the beginning of month 20YY to the end of the relevant period despite the fact that the car loans (being approximately 75% of the total value of the items listed in the month 20YY Agreement) were extinguished in early month 200Z.

18. The payments by Employer A into the bank account during the relevant period could only, at best, possibly be in relation to some of the items (being approximately 25% of the original value) listed in the month 20YY Agreement.

19. The quantum of the payments by Employer A into the bank account continued unabated during the relevant period without any apparent regard to changed circumstances and with no apparent attempt by Employer A to substantiate exactly how such funds had been, or were going to be, subsequently utilised.

20. Therefore, it is considered the payments by Employer A into the bank account did not constitute 'reimbursements' as that term is normally understood.

21. Despite the apparent intentions of the parties, the particular arrangements entered into during the relevant period were incapable of, and thereby ineffective in, providing benefits of a similar value to future salary forgone by Employee Z.

22. Therefore, it is also considered that during all of the relevant period there was no 'effective salary sacrifice arrangement' in place.

23. TR 2001/10 provides the following guidance regarding the derivation of income by employees:

25. An employee does not derive ordinary or statutory income from the provision of personal services until the income either has been received by him or her or is taken by subsection 6-5(4) or 6-10(3) of the ITAA 1997 to have been received when the employer deals with the amount in some other way on behalf of the employee. Once an employee has earned an entitlement to receive an amount of salary or wages, any ordinary or statutory income later received by the employee from that entitlement or taken to be received on behalf of the employee is derived as salary or wages income. By section 11-5 of Schedule 1 to the TAA, salary or wages are taken to be paid to the employee when the employer deals with the amount in any way on the employee's behalf or as the employee directs.

...

63. Section 6-5 of the ITAA 1997 includes in the assessable income of a person income according to ordinary concepts, termed 'ordinary income', 'derived' by that person during the year of income. Section 6-10 includes in the assessable income of a person 'statutory income', being amounts included in assessable income under other provisions about assessable income. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not assessable income.

...

67. For an amount received to be income according to ordinary concepts, it must be money or something that can be converted into money (see Alexander Tennant v. Robert Sinclair Smith [1892] 3 TC 158; [1892] AC 150; FC of T v. Cooke & Sherden 80 ATC 4140; (1980) 10 ATR 696). Accordingly, if a benefit provided in an effective SSA is convertible into money, the amount will form part of the employee's ordinary or statutory income and...will be derived as either 'salary or wages' assessable income or 'fringe benefits' exempt income.

...

68. An employee derives ordinary and statutory income as an employee according to the principles discussed in paragraphs 63 to 67 above. That income can either be derived as salary or wages assessable income under section 6-5 or section 6-10 of the ITAA 1997 or as 'fringe benefits' exempt income under section 23L of the ITAA 1936. The character of the ordinary and statutory income is determined by whether the income is paid as salary or wages or is provided as 'fringe benefits' (within the meaning of that term in subsection 136(1) of the FBTAA) at the time it is derived.

24. The term 'fringe benefit' as defined in subsection 136(1) of the FBTAA basically means, as relevant here, a benefit that is provided to an employee by an employer in respect of the employee's employment and such a benefit is not otherwise exempted.

25. It has been determined previously (at paragraph 21 above) that the particular arrangements entered into during the relevant period were incapable of, and ineffective in, providing benefits of a similar value to future salary forgone by Employee Z.

26. The finding that there were no benefits provided to Employee Z under the particular arrangements consequently means that there cannot have been any 'fringe benefits' provided to Employee Z under those arrangements.

27. As the amounts paid by Employer A into the bank account during the relevant period cannot be regarded as being the provision of fringe benefits to Employee Z then section 23L of the ITAA 1936 cannot apply to exempt such amounts from being the assessable income of Employee Z during that period.

28. Therefore, it is considered that the payments by Employer A into the bank account, during the relevant period, constitute assessable income of Employee Z under section 6-5 or section 6-10, as applicable, of the ITAA 1997.

29. This requirement is not met as Employee Z's salary was not, in fact, reduced under the relevant arrangement.

(e) did the employer provide benefits of a similar value to the employee?

30. It was determined previously (at paragraph 12) that Employer A could not validly utilise the bank account to discharge any obligations of Employee Z to pay third persons nor could Employer A validly utilise the bank account to make any reimbursements to Employee Z in respect of expenditure incurred by Employee Z.

31. It was also determined previously (at paragraph 15) that the payments by Employer A into the bank account had no more than a causal connection between the deposits of the relevant funds and the subsequent use of such funds by Employee Z to pay third persons for goods or services.

32. It was further determined previously (at paragraph 20) that the payments by Employer A into the bank account did not constitute 'reimbursements' as that term is normally understood.

33. However, Employer A did, in fact, make payments of money into the bank account and, under certain circumstances, a payment of money can itself constitute a 'benefit' for the purposes of the FBTAA.

34. Nonetheless, it is considered that there is no real basis for determining that the payments by Employer A into the bank account were anything other than assessable income of Employee Z given that such payments of money were but the first steps of an ineffective arrangement to provide benefits to Employee Z.

35. Therefore, this requirement is not met as there were no benefits, for the purposes of the FBTAA, provided to Employee Z in respect of the payments by Employer A into the bank account.

Conclusion on whether benefits were provided under an effective salary sacrifice arrangement

36. There were no benefits for the purposes of the FBTAA provided by Employer A to Employee Z under an effective salary sacrifice arrangement during the relevant period as there was no effective salary sacrifice arrangement in place during the whole of that period and the payments by Employer A into the bank account were, otherwise, assessable income of Employee Z.

Where exempt benefits provided under section 57A of the FBTAA?

37. Subsection 57A(1) of the FBTAA states that where the employer of an employee is a registered public benevolent institution endorsed under section 123C of the FBTAA then a benefit provided in respect of the employment of the employee is an exempt benefit.

38. Despite the facts that Employer A is a registered public benevolent institution endorsed under section 123C of the FBTAA and also that Employee Z is an employee of Employer A, exemption under subsection 57A(1) of the FBTAA presupposes that a benefit for the purposes of the FBTAA has been provided to the employee.

39. However, it has been determined previously (at paragraph 35) that no benefits for the purposes of the FBTAA were provided to Employee Z under the relevant arrangements.

40. Therefore, exemption under subsection 57A(1) of the FBTAA has no application to this particular case.

Conclusion on whether Employer A provided exempt benefits, under section 57A of the FBTAA, pursuant to effective salary sacrifice arrangements

41. Employer A did not provide exempt benefits, under section 57A of FBTAA, to Employee Z during the period 1 April 2011 to 31 March 2012 inclusive as there were no effective salary sacrifice arrangements in place, nor relevant benefits provided for the purposes of the FBTAA, during that particular period.

Question 2

Detailed reasoning

1. For similar reasons it was determined previously (at paragraph 41) that Employer A did not provide exempt benefits, under section 57A of FBTAA, to Employee Z under the terms of effective salary sacrifice arrangements during the period 1 April 2011 to 31 March 2012 inclusive it is also concluded that Employer A did not provide exempt benefits, under section 57A of the FBTAA, to Employee Z under the terms of effective salary sacrifice arrangements during the period 1 April 2012 to 31 March 2013 inclusive.

Question 3

Detailed reasoning

1. For similar reasons it was determined previously (at paragraph 41) that Employer A did not provide exempt benefits, under section 57A of FBTAA, to Employee Z under the terms of effective salary sacrifice arrangements during the period 1 April 2011 to 31 March 2012 inclusive it is also concluded that Employer A did not provide exempt benefits, under section 57A of the FBTAA, to Employee Z under the terms of effective salary sacrifice arrangements during the period 1 April 2013 to the end of October 2013.