Edited version of private advice

Authorisation Number: 1012662855872

Ruling

Subject: permanent Residency Visa Expense

Issue 1 - income tax

Question 1

Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 for the full payment of the invoice amount in applying for permanent residency visa in Australia for your employee?

Answer

Yes.

This ruling applies for the following period:

1 July 2014 to 30 June 2015

The scheme commences on:

1 July 2014

Issue 2 - fringe benefits tax

Question 1

Will a fringe benefit arise under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) from the payment of the employee's permanent residency visa application?

Answer

Yes.

Question 2

If the answer to Question 1 is yes, is the payment of the permanent residency visa for your employee an expense payment fringe benefit pursuant to subsection 136(1) of the FBTAA?

Answer

Yes.

Question 3

If the answer to Question 2 is yes, will the taxable value be calculated in accordance with section 23 of the FBTAA?

Answer

Yes.

This ruling applies for the following periods:

1 April 2014 to 31 March 2015

1 April 2015 to 31 March 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The taxpayer is a company.

The company is a developer and supplier of specialised machinery.

The employee commenced working for you during the 2014 income year.

The employee is employed by you on a temporary 4 year 457 visa.

The employee and his family relocated from an overseas country to Australia during the 2014 income year.

The chief executive officer has decided to sponsor the employee's application for a Permanent Residence Visa 187.

You will be paying the cost for the employee's Permanent Residence Visa application during the 2015 income year.

The employee will not be contributing towards the cost of the visa.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 23

Reasons for decision

Issue 1 Question 1

Summary

You are entitled to claim a deduction under section 8-1 of the ITAA 1997 for expenses incurred in applying for permanent residency visa in Australia for your employee.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature, or relates to the earning of exempt income.

In determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered.

Subsection 8-1(1) of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a ^*business for the purpose of gaining or producing your assessable income.

However subsection 8-1(2) of the ITAA 1997 states that you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your ^*exempt income or your ^*non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

The first limb in section 8-1 is available to all taxpayers, whether in business or not. To be deductible under the first limb, a loss or outgoing must be relevant and incidental to gaining or producing assessable income (Ronpibon Tin NL v FCT; Tongkah Compound NL v FCT (1949) 78 CLR 47; 4 AITR 236) In other words there must be a connection between the expenditure and the operations or activities directed to the production of assessable income.

The second limb applies only where the taxpayer is carrying on a business. The two limbs are not mutually exclusive and a business expense is frequently deductible under either. To be deductible under the second limb, a loss or outgoing must be part of the cost of trading operations to produce income (John Fairfax & Sons v FCT (1959) 101 CLR 30).

Under the second limb of section 8-1 of ITAA 1997, a taxpayer carrying on a business is entitled to deduct outgoings or losses which are necessarily incurred in carrying on a business to produce assessable income.

The expenditure in question, the cost of the Permanent Residency Visa for the employee, is considered a cost of recruitment. Expenses such as costs of recruitment are a business expense and deductible under section 8-1 of the ITAA 1997 unless capital in nature and denied by subsection 8-1(2) of the ITAA 1997.

Paragraphs 13 to 16 of Taxation Ruling TR 2000/5: Income tax and fringe benefits tax: costs incurred in preparing and administering employment agreements; explain when the costs of obtaining an employment contract give rise to a deduction.

Paragraph 15 of Taxation Ruling TR 2000/5 states that the costs incurred by an established business in renewing, extending or renegotiating agreements with current employees are a normal business expense and would therefore be allowable as a deduction under section 8-1 of the ITAA 1997.

The cost of obtaining a permanent residency visa for your employee is part of the cost of extending or renegotiating the employee's employment contract. In accordance with paragraph 15 and example 4 of TR 2000/5 this expense is an allowable deduction under section 8-1 of the ITAA 1997.

Issue 2 Question 1

Summary

A fringe benefit will arise under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) from the payment of the employee's permanent residency visa application.

Detailed reasoning

Broadly, the definition of a fringe benefit in subsection 136(1) of the FBTAA provides that a fringe benefit will arise when:

• a benefit;

• is provided to an employee, or an associate of an employee;

• by the employer, an associate of the employer, or a third party under an arrangement involving either the employer, or an associate of the employer;

• if the benefit is provided in respect of the employment of the employee; and

• the benefit is not one of the benefits listed in paragraphs (f) to (s) of the fringe benefit definition.

Each of these conditions is considered below:

Is there a benefit?

The definition of the term 'benefit' in subsection 136(1) of the FBTAA provides that a benefit includes:

any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

In addition to this general definition of benefit, section 20 of the FBTAA provides that a benefit will be provided when:

… 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) reimburses another person (in this section also referred to as the "recipient"), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

Under an arrangement with your employee, you will make a payment to the government agency to discharge an obligation of the employee to obtain a permanent residency visa. This will be a benefit under paragraph 20(a) of the FBTAA.

Is the benefit provided to an employee or an associate of an employee?

The benefit will be provided to the employee as you are making a payment to discharge the obligation of an employee.

Is the benefit provided by the employer, an associate of the employer, or a third party under an arrangement involving either the employer, or an associate of the employer?

The benefit will be provided by the employer.

Is the benefit provided in respect of the employment of the employee?

The definition of 'in respect of' in subsection 136(1) of the FBTAA provides that 'in respect of' includes '… by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'. As you will only be paying the cost of the visa application of the employee the payment will be in respect of the employment of the employee as the employment is the reason for the payment being made.

Is the benefit one of the benefits listed in paragraphs (f) to (s) of the fringe benefit definition?

Paragraphs (f) to (s) of the fringe benefit definition list benefits that are not considered to be a fringe benefit. The payment of an obligation of the employee is not one of the listed benefits.

Conclusion

As each of the conditions contained within the fringe benefit definition of subsection 136(1) of the FBTAA are met, a fringe benefit will arise from the payment of the visa application for your employee.

Issue 2 Question 2

Summary

The payment of the permanent residency visa for your employee is an expense payment fringe benefit pursuant to subsection 136(1) of the FBTAA.

Detailed reasoning

Expense payment fringe benefit is defined in subsection 136(1) of the FBTAA to be an expense payment benefit.

An expense payment benefit is defined in subsection 136(1) of the FBTAA as a benefit referred to in section 20.

As discussed above 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) reimburses another person (in this section also referred to as the "recipient"), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

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

Accordingly, an expense payment fringe benefit may arise pursuant to section 20 of the FBTAA where:

(1) an employer pays a third party in satisfaction of expenses incurred by the employer, or

(2) an employer reimburses an employee for expenses incurred by the employee.

In either scenario, the expenses may be business expenses, private expenses or a combination of the two.

In your case, you state you will pay the cost of your employee's permanent residence visa application. As you will pay your employee's permanent residence visa application, the benefit will be an expense payment fringe benefit in accordance with subsection 136(1) of the FBTAA.

Issue 2 Question 3

Summary

The taxable value of an expense payment fringe benefit will be calculated in accordance with section 23 of the FBTAA.

Detailed reasoning

The taxable value of an expense payment fringe benefit is determined under section 23 of the FBTAA which states:

Subject to this Part, the taxable value in relation to a year of tax of an external expense payment fringe benefit provided during the year of tax is the amount of the payment referred to in paragraph 20(a), or the reimbursement referred to in paragraph 20(b), as the cases requires, reduced, in a case to which paragraph 20(a) applies, by the amount of the recipients contribution.

The taxable value of an expense payment fringe benefit is either the amount of payment made by the employer on behalf of the employee for an employee obligation or an amount of reimbursement paid by the employer to the employee for an obligation the employee has paid or incurred.

In general, an in-house expense payment fringe benefit arises where the expenditure paid for or reimbursed by an employer was incurred by the employee in the purchase of goods and services of a kind that the employer sells to customers or clients in the ordinary course of the business.

In your case, you are in the business of developing and suppling specialised machinery. Accordingly, the provision of expense payment fringe benefit to your employee to pay for his permanent residence visa is not considered to be in the ordinary course of your business. It is therefore considered that the benefit provided is an 'external' expense payment fringe benefit.

In your case, you have stated that the expense payment fringe benefit relates to the payment of a permanent residency visa application for an employee. Based on the information provided, a recipient's contribution will not be made by the employee.

Therefore the payment of the employee's permanent residency visa gives rise to an external expense payment fringe benefit as set out in section 23 of the FBTAA.