Edited version of private advice

Authorisation Number: 1012646834268

Ruling

Subject: Fringe benefits tax

Question

Do payments made by an employer to the mortgagor of an employee's residential property give rise to a fringe benefit?

Answer

No. The payments will not be a fringe benefit as they are employment termination payments which are required to be shown on the payment summary given to the employee.

This ruling applies for the following periods:

1 April 2013 to 31 March 2014

The scheme commences on:

1 April 2013

Relevant facts and circumstances

The employer employed the employee in 2010 for a fixed term under an Agreement executed by the employer and the employee (the Agreement).

A Deed (the Deed) was executed in 2013 between the employer and the employee whereby the employer and the employee agreed that the employee's employment would terminate in late 2013.

The Agreement provides that the employer will pay the employee during the term of the Agreement an annual salary and also non-salary and wage fringe benefits which are subject to the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for each year.

The Agreement set out the amounts of the non-salary and wage fringe benefits payable by the employer to the employee during the term of the Agreement.

The employee was also entitled to a range of other payments and benefits under the Agreement.

The employer and the employee agreed to settle all matters in relation to the termination on the terms contained in the Deed.

The Deed provides that during the employment, the employee has been provided with non-salary and wage benefits including contributions to the employee's residential property mortgage.

The Deed states that following the cessation of employment, the employee has no outstanding entitlement from the employer other than as provided for in the Deed.

The Deed provides that it is agreed that the employer will continue to offer mortgage support to the employee for a period in accordance with the provisions of the deed ...

Amount and timing of mortgage contributions

The deed provides that the employer will make the following payments directly to the mortgagor of the employee's residential property by direct deposit into a bank account

• within 7 business days of the date of execution of the Deed

• three months after the date of execution of the Deed by the employee

Payments were made in accordance with the Deed.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Division 82

Taxation Administration Act 1953 Section 16-165

Reasons for decision

Under the arrangement the employer has made payments to the mortgagor of the employee's residential property pursuant the Deed.

In general terms, the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA provides that these payments will be a fringe benefit if the following conditions are satisfied:

(a) a benefit is provided

(b) the benefit is provided to an employee or an associate of an employee

(c) the benefit is provided by the employer, an associate or a third party under an arrangement

(d) the benefit is provided in respect of the employment of the employee, and

(e) the benefit does not come within any of paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA.

These conditions are considered in relation to the employer's circumstances below.

(a) Is a benefit provided?

Section 20 of the FBTAA states:

Where a person (in this section referred to as the "provider"):

(a)  makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the "recipient"), to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b)  …;

the making of the payment referred to in paragraph (a), … shall be taken to constitute the provision of a benefit by the provider to the recipient.

The payments made by the employer to the mortgagor of the employee's residential property satisfy paragraph 20(a) of the FBTAA. Therefore, the payments are a benefit pursuant to section 20 and a benefit has been provided.

(b) Is the benefit provided to an employee or an associate of an employee?

The benefit, being the payments made by the employer to the mortgagor of the employee's residential property, is provided to the employee. It is noted that an 'employee' is defined at subsection 136(1) of the FBTAA to mean a current, future or former employee. Therefore, the benefit is provided to the employee even though the employee's employment has been terminated.

(c) Is the benefit provided by the employer, an associate or a third party under an arrangement?

The benefit is provided by the employer.

(d) Will the benefit be provided in respect of the employment of the employee?

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

In the ATO publication, Fringe benefits tax: a guide for employers, the following is stated at chapter 1.1:

According to the fringe benefits tax (FBT) legislation, a fringe benefit is a benefit provided in respect of employment. This effectively means a benefit provided to somebody because they are an employee. The 'employee' may even be a former or future employee.

…

As a guide to whether a benefit is provided the benefit in respect of employment ask yourself whether you would have provided the benefit if the recipient had not been an employee.

Consistent with subsection 136(1) of the FBTAA and Fringe benefits tax: a guide for employers, the benefit is provided in respect of the employment of the employee.

(e) Will the benefit come within any of paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA?

Paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA list certain benefits and payments that are not included in the definition of a fringe benefit.

For the purpose of this ruling the relevant paragraph is paragraph (lc) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA which provides that a fringe benefit does not include a benefit that is an employment termination payment within the meaning of the Income Tax Assessment Act 1997 (ITAA 1997).

The definition of 'employment termination payment' is contained in section 82-130 of the ITAA 1997.

In general terms, section 82-130 of the ITAA 1997 provides that a payment is an employment termination payment if the following conditions are satisfied:

(a) it is received by the employee (per subparagraph 82-130(1)(a))

(b) it is received in consequence of the termination of the employee's employment (per sub-subparagraph 82-130(1)(a)(i))

(c) it is received no later than 12 months after that termination (per subparagraph 82-130(1)(b)), and

(d) it is not a payment mentioned in section 82-135 (per subparagraph 82-130(1)(c)).

These conditions are considered in relation to the employer's circumstances below.

(a) Are the payments made by the employer to the mortgagor of the employee's residential property received by the employee?

Section 80-20 of the ITAA 1997 contains the meaning of the expression 'received by you' for the purposes of section 82-130. Subsection 80-20(2) relevantly states:

(2) A payment is treated as being ... received by you, if it is made:

(a) for your benefit; …

As the payments were made directly to the employee's mortgage account, the payments were made for the benefit of the employee and accordingly are to be treated as having been received by the employee for the purposes of section 82-130 of the ITAA 1997.

(b) Are the payments made by the employer to the mortgagor of the employee's residential property received in consequence of the termination of employment?

Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13) provides the ATO view of the meaning of the phrase 'in consequence of' in the context of the expression 'in consequence of the termination of any employment'. TR 2003/13 applies to that expression as used in the Income Tax Assessment Act 1936 under the 'eligible termination payment' regime which covered lump sum payments to a taxpayer whether from a superannuation entity or from a termination of employment. That regime was abolished from 1 July 2007.

It was replaced by two new concepts under the ITAA 1997 for the year ended 30 June 2008 and later years. A 'superannuation lump sum benefit' now covers payments from superannuation entities. An 'employment termination payment' now covers payments in consequence of the termination of employment of a person.

TR 2003/13 may still be relied on for the ATO view of the meaning of the expression 'in consequence of the termination of your employment' in sub-subparagraph 82-130(1)(a)(i) of the ITAA 1997.

The first dot point in paragraph 2 of TR 2003/13 states that the meaning of the phrase is relevant for determining whether a severance payment, such as a 'golden handshake' made in respect of a taxpayer by a former employer of the taxpayer, is in effect an employment termination payment.

TR 2003/13 rules relevantly as follows at paragraphs 5 and 6:

5. The phrase 'in consequence of' is not defined in the ITAA 1936. However the words have been interpreted by the courts in several cases. ... the Commissioner considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

[emphasis added]

Paragraph 30 of TR 2003/13 provides explanation in respect of severance payments such as 'golden handshakes':

A payment that is made in respect of a taxpayer by a former employer after the termination of the taxpayer's employment, such as a golden handshake, is a payment that follows as an effect or result of the termination. Accordingly, the payment is made in consequence of the termination of employment. In such circumstances there is a causal connection between the payment and the termination of employment in that the payment would not have been made to the taxpayer but for the termination of the employment.

The question is whether the payments made by the employer to the mortgagor of the employee's residential property were made in consequence of the termination of the employee's employment for the purposes of sub-subparagraph 82-130(1)(a)(i) of the ITAA 1997.

TR 2003/13 states at paragraph 5 that the test for a payment made in consequence of the termination of employment is whether 'but for the termination of employment, the payment would not have been made to the taxpayer'.

Under the Agreement the employee was to be paid specific amounts of non-salary and wage fringe benefits as well as some other payments and benefits. In accordance with the Deed the employee was not entitled to any further such payments or benefits under the Agreement after the date of termination of the Agreement.

Therefore, the payments made by the employer to the mortgagor of the employee's residential property pursuant to the Deed were made to the employee in consequence of the termination of his employment because they would not have been made but for the termination of that employment.

(c) Are the payments received no later than 12 months after the termination?

The payments were received no later than 12 months after the termination.

(d) Are the payments made by the employer to the mortgagor payments that are mentioned in section 82-135?

The payments are not payments that are mentioned in section 82-135 of the ITAA 1997.

Conclusion

All of the conditions of the definition of employment termination payment in section 82-130 of the ITAA 1997 are met in relation to the payments made by the employer to the mortgagor of the employee's residential property pursuant to the Deed. As such, the payments are employment termination payments within the meaning of the ITAA 1997 and are benefits that come within paragraph (lc) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA.

As the definition of a fringe benefit in subsection 136(1) of the FBTAA provides that a fringe benefit does not include a benefit comes within any of paragraphs (f) to (s), the payments do not give rise to a fringe benefit.

Please Note:

Although you are not liable to pay fringe benefits tax on payments that are employment termination payments, you are required by section 16-165 of the Taxation Administration Act 1953 to give a payment summary to the employee that covers the payments and give a copy of the summary to the Commissioner.