Edited version of your written advice

Authorisation Number: 1012663158890

Ruling

Subject: Pay-as-you-go Withholding and Fringe Benefits Tax

Issue 1 - Pay-as-you-go Withholding

Question 1

Are you required to withhold from salary payments made to scholarship holders whilst undertaking work experience under Part 2-5 of Schedule 1 of the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

Question 2

Are you required to withhold from reimbursements made to scholarship holders for the cost of educational expenses and HECS-HELP payments under Part 2-5 of Schedule 1 of TAA 1953?

Answer

No.

This ruling applies for the following periods:

1 Feb 2015 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2015 to 30 June 2017

The scheme commences on:

1 February 2015

Issue 2 - Fringe benefits tax

Question 1

Are the reimbursements made to scholarship holders for the cost of educational expenses fringe benefits for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and subject to fringe benefits tax (FBT)?

Answer

Yes

Question 2

Are the HECS-HELP payments made to scholarship holders fringe benefits for the purposes of the FBTAA and subject to fringe benefits tax?

Answer

Yes

This ruling applies for the following periods:

1 February 2015 - 31 March 2015

1 April 2015 - 31 March 2016

1 April 2016 - 31 March 2017

1 April 2017 - 31 March 2018

The scheme commences on:

1 February 2015

Relevant facts and circumstances

You will be implementing a scholarship program as part of the Employer's 'Program' to attract high performing individuals to begin developing useable skills and experience whilst undertaking their full time studies.

At the successful completion of the scholarship, scholarship holders will become permanent employees of the employer and participate in the graduate program.

Scholarship holders will be required to participate in a minimum of x weeks work experience with you, maintain a satisfactory Grade Point Average and commit to a period of bonded service of x years on completion of the scholarship. Scholarship holders will receive the following:

• The payment of salary during work experience. The salary will be applicable to the position he or she is required to undertake with you during work experience.

• An educational expenses reimbursement of up to $x per annum to be applied towards educational expenses such as textbooks or a laptop computer, upon submission of an approved expense report and copies of receipts to you in the first month of each semester.

• Reimbursement of x% of the portion of the HECS-HELP payment attributable to the scholarship holder's studies corresponding for the period for which the scholarship holder is under this contract.

In addition, the contract between you and the scholarship holder states that the scholarship holder will:

'obey and carry out all reasonable orders, instructions and directions of the employer.. regarding the scholarship, work experience and bonded service of the assisted student.'

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Part 2-5

Taxation Administration Act 1953 Schedule 1 Section 12-1

Taxation Administration Act 1953 Schedule 1 Section 12-35

Income Tax Assessment Act 1997 Section 51-10.

Income Tax Assessment Act 1997 Section 51-35

Income Tax Assessment Act 1936 Section 23L

Fringe Benefits Tax Assessment Act 1986 Section 5B

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 58P

Fringe Benefits Tax Assessment Act 1986 Section 58X

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Issue 1 - PAYG

Payments to Employees

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) provides that:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

The term 'employee' is not defined in the TAA 1953, therefore it has its ordinary meaning. Principally the relationship between an employer and employee is a contractual one. It is often referred to as a contract of service . Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services.

In this case, the scholarship holder is considered to be an 'employee' because whilst he or she is only works for you for a minimum of x weeks a year, they still have a contract of service in terms of maintaining a satisfactory grade point average and agreeing to be bonded at the conclusion of the scholarship. In addition, the contract between you and the scholarship holder states that they will obey and carry out your reasonable orders, instructions and directions, which again suggests a contract of service.

Section 12-35 of Schedule 1 to the TAA 1953 is subject to three general exceptions listed in section 12-1 of Schedule 1 to the TAA 1953:

•   an entity need not withhold an amount under section 12-35 where the whole of the payment is exempt income of the entity receiving the payment;

•   in working out how much to withhold, the payer may disregard so much of the payment as is a living-away-from-home allowance benefit as defined by section 136 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986); and

•   in working out how much to withhold, the payer may disregard so much of the payment as is an expense payment benefit as defined by section 136 of the FBTAA 1986 and is not an exempt benefit by virtue of the operation of section 22 of that Act which relates to cents per kilometre payments for motor vehicles.

In this case, the first dot point is of greatest relevance.

Are Scholarships Exempt?

Item 2.1A of section 51-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that income derived by a student receiving full-time education at a school, college or university by way of scholarship, bursary, educational allowance or educational assistance is exempt from income tax, provided it is not a payment of a type listed in section 51-35 of the ITAA 1997. The following payments are listed under section 51-35 of the ITAA 1997:

(a) a payment by the Commonwealth for assistance for secondary education

or in connection with education of isolated children;

(b) a Commonwealth education or training payment;

(c) a payment by a person or an authority on the condition that the student

will (or will if required) become, or continue to be, an employee of the

person or authority;

(d) a payment by a person or an authority on the condition that the student

will (or will if required) enter into, or continue to be a party to, a contract

with the person or authority that is wholly or principally for the labour of

the student;

(e) a payment under a scholarship where the scholarship is not provided

principally for educational purposes;

(f) an education entry payment under Part 2.13A of the Social Security Act

1991.

In this case, the scholarship is paid on condition that the scholarship holder will complete x years of bonded service at the conclusion of the scholarship (that is, be employed with you upon the completion of their degree). Accordingly, under paragraph 51-35(d) of the ITAA 1997, the scholarship is not exempt from income tax.

Reimbursements

Whilst section 12-35 of Schedule 1 to the TAA 1953 makes clear that salary has PAYG withholding obligations attached to it, it is silent on the subject of reimbursements.

The meaning of the term reimbursement (in regard to payment or payments received in regard to an expense incurred) is considered in Taxation Ruling TR 92/15. TR 92/15 states that a payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance.

In this case, expenses are incurred by the scholarship holder and then after presentation of documentation (and subject to other conditions) the holder is paid an amount that covers or partially covers education-related expenses and their HECS-HELP liability Therefore, although you call the reimbursement a scholarship (or part thereof), it is a reimbursement for tax purposes.

Where an employee receives a reimbursement from their employer it will come within section 20 of the Fringe Benefits Tax Assessment Act 1986. Therefore, pursuant to 23L of the Income Tax Assessment Act 1936 the reimbursement your scholarship holder receives is exempt income and will not be subject to PAYG withholding under Part 2-5 of Schedule 1 of the TAA 1953.

Issue 2 - FBT

Question 1

Reimbursement of education expenses

Types of fringe benefits

Section 20 of the FBTAA states when an expense payment arises. Section 20 of the FBTAA states (as relevant here):

SECTION 20

20 EXPENSE PAYMENT BENEFITS

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

(a) ...

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

Under the Employer's 'Program' educational expenses reimbursements of up to $x per annum to be applied towards educational expenses such as textbooks or a laptop computer, upon submission of an approved expense report and copies of receipts to you in the first month of each semester.

It is considered, therefore, that such reimbursements fall within paragraph 20(b) of the FBTAA and, thereby, constitute expense payment benefits for the purposes of the FBTAA.

Subsection 136(1) of the FBTAA defines an 'expense payment fringe benefit' as meaning a fringe benefit that is an expense payment benefit.

In basic terms, a 'fringe benefit' as that term defined in subsection 136(1) of the FBTAA, is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted.

It has also been determined in 'Issue 1' that the scholarship holders are considered to be the employees of the Employer.

The meaning of the phrase 'in respect of the employment of the employee' was considered in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; 44 ATR 22 (Knowles). It was found in Knowles that the words 'in respect of' must be given a meaning that depends on the context in which they are used. In the case of the FBTAA, this means that there must be a sufficient or material relationship or connection between the provision of the benefit and the employee's employment. The establishment of a mere causal link between the benefit and the employee's employment is not necessarily enough.

The scholarship holders do not gain access to the reimbursement of their education expenses unless they are part of the ' Program'. It is considered, therefore, that the reimbursements of their education expenses under that program are being provided in respect of the scholarship holders' employment with the Employer.

Consequently, it is also considered, that the reimbursements of the scholarship holders' education expenses will constitute expense payment fringe benefits unless otherwise exempted.

Section 58P of the FBTAA exemption for 'minor benefits'

Section 58P of the FBTAA provides exemption for certain benefits that are 'minor benefits'. Guidance on the operation of section 58P of the FBTAA is provided in Taxation Ruling TR 2007/12¹. TR 2007 states (as relevant here):

8. A minor benefit is an exempt benefit under section 58P³ where:

• the notional taxable value of the minor benefit is less than $300;⁴ and

• it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f), to treat the minor benefit as a fringe benefit.

9. In considering the application of the exemption under section 58P it is necessary to look to the nature of the benefit provided and give due weight to each of the criteria. The weight given to each criterion will also vary depending on the circumstances surrounding the provision of each benefit.

...

17. Paragraph 58P(1)(e) places a threshold of 'less than $300'⁵ on the notional taxable value of a minor benefit. This threshold test applies to each benefit provided to an individual employee, and/or each benefit provided to an associate of an employee, to which section 58P may apply. The threshold test is not an upper limit on the total value of minor benefits that any individual employee may receive.

18. The value of a minor benefit must relate to the 'current year of tax'. Where a benefit is provided over a period which covers two or more FBT years, only the benefit provided in the current year of tax is considered in determining the notional taxable value.

19. The words 'infrequency and irregularity' and 'identical or similar' are not defined in the FBTAA and therefore take on their ordinary meaning.

20. In having regard to the criteria contained in paragraph 58P(1)(f), the 'infrequency and irregularity' with which associated benefits have been or can reasonably be expected to be provided (subparagraph 58P(1)(f)(i)) is only one of the criteria that must be considered.

21. Even where identical or similar associated benefits have been provided infrequently and irregularly, it may nonetheless be concluded that it is reasonable to treat the minor benefit as a fringe benefit when consideration is given to the other specified criteria in paragraph 58P(1)(f).

22. In applying the 'infrequency and irregularity' criterion, it is not appropriate to stipulate the maximum number of times associated benefits that are identical or similar to a minor benefit, or benefits in connection with the minor benefit, can be provided before the criterion is not met. However, the more often and regularly those benefits are provided, the less likely it is that this criterion would be met.

It is considered given that the reimbursement amounts are up to $x and also given that such amounts are to be provided on a regular per annum basis then it is more than likely that most, if not all, instances where reimbursements are made they will not fall within the exemption afforded by section 58P of the FBTAA.

Section 58X of the FBTAA exemption for 'minor benefits'

Section 58X of the FBTAA also provides exemption for certain benefits that are 'work related items'. Section 58X of the FBTAA states (as most relevant here):

SECTION 58X EXEMPT BENEFITS - PROVISION OF CERTAIN WORK RELATED ITEMS

58X(1) [Exempt benefits]

Any of the following benefits provided by an employer to an employee of the employer in respect of the employee's employment is an exempt benefit:

(a) an expense payment benefit where the recipients expenditure is in respect of an eligible work related item;

(b) ...

(c) ...

58X(2) [Eligible work related items]

Subject to subsection (3), each of the following is an eligible work related item if it is primarily for use in the employee's employment:

(a) a portable electronic device;

(b) an item of computer software;

(c) an item of protective clothing;

(d) a briefcase;

(e) a tool of trade.

58X(3) [Later items]

...

Subsection 58X(2) of the FBTAA contains a list of items that, if provided 'primarily for use in an employee's employment', can be considered as 'eligible work related items'.

The word 'primarily' is not defined in the FBTAA and, therefore, takes on its ordinary meaning. The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01 defines 'primarily' as:

1. in the first place; chiefly; principally

An employer in applying section 58X of the FBTAA is required to have a basis for concluding that the relevant is 'primarily for use in the employee's employment'. This conclusion is based on intended use at the time the benefit is provided to the employee that is, why the relevant item (such as a laptop computer) is provided to the employee in the first place?

There is no requirement to reach this conclusion by reference to usage which can only be ascertained retrospectively. Rather this conclusion is determined by reference to the available evidence at the time the benefit is provided.

Generally, an employer will know whether the relevant item is being provided 'chiefly' or 'principally' to enable the employee to undertake their employment duties. For example, the employee's job description, duty statement or employment contract can provide a basis for concluding that the relevant item (such as a laptop computer) is primarily for business use.

Under the Employer's ' Program' reimbursements of up to $x per annum are provided towards educational expenses such as textbooks or a laptop computer.

Therefore, it is considered that exemption under section 58X is unlikely to apply in this case as the primary intention of the Employer for providing the reimbursements to the scholarship holders for the textbooks, laptop computers etc. is for the scholarship holders' education purposes rather than being provided primarily for use for by them in their employment.

Section 24 of the FBTAA 'otherwise deductible rule'

As determined previously, that the reimbursements of the scholarship holders' education expenses will constitute expense payment fringe benefits (unless otherwise exempted).

However, it may be noted that the taxable values of expense payment fringe benefits may be reduced under the 'otherwise deductible rule' (ODR) contained in section 24 of the FBTAA.

Broadly, this means that the taxable value may be reduced by the amount the employee would have been entitled to claim as an income tax deduction if they had not been reimbursed by the employer.

Applying the ODR produces different results, depending on whether a reimbursement was intended to be for the business element of the expense payment fringe benefit.

This is because the employee is entitled to an income tax deduction for that portion of the expenditure incurred to derive their assessable income, but not for that portion of the expenditure incurred for private or domestic purposes.

Liability to pay FBT

Subsection 66(1) of the FBTAA states that FBT is imposed in respect of the 'fringe benefits taxable amount' of an employer of a FBT year of tax and that any resultant FBT is payable by the employer.

Section 5B of the FBTAA sets out the methodology for establishing an employer's 'fringe benefits taxable amount' for an FBT year of tax. In determining an employer's 'fringe benefits taxable amount' the employer must allocate the taxable values of all fringe benefits, except excluded benefits, related to an FBT year to the relevant employee.

As it has been determined previously that that the reimbursements of the scholarship holders' education expenses will constitute expense payment fringe benefits the taxable values of such benefits will form part of the 'fringe benefits taxable amount' of the Employer for the relevant FBT year and, hence, a liability to FBT will arise under subsection 66(1) of the FBTAA in respect of the provision of such fringe benefits.

Question 2

HECS -HELP payments

Types of fringe benefits

It has been determined in 'Issue 1' that the reimbursements made to scholarship holders for x% of the cost of HECS-HELP payments will normally be expected to come within section 20 of the FBTAA as expense payment benefits.

For similar reasons it was determined in Question 1 that that the reimbursements of the scholarship holders' education expenses will constitute expense payment fringe benefits unless otherwise exempted, it is concluded that the reimbursements of 75% of the scholarship holders' HECS-HELP payments will also constitute expense payment fringe benefits.

Section 58P of the FBTAA exemption for 'minor benefits'

For similar reasons it was determined in Question 1 that that the reimbursements of the scholarship holders' education expenses will constitute expense payment fringe benefits will not fall within the exemption afforded by section 58Pof the FBTAA, it is concluded that the reimbursements of x% of the scholarship holders' HECS-HELP payments will also not fall within the exemption afforded by section 58Pof the FBTAA.

Section 24 of the FBTAA 'otherwise deductible rule'

As advised previously in Question 1 in respect of the reimbursements of the scholarship holders' education expenses, the taxable values of expense payment fringe benefits may be reduced under the ODR contained in section 24 of the FBTAA.

As also advised previously in Question 1 in respect of the reimbursements of the scholarship holders' education expenses, applying the ODR produces different results, depending on whether a reimbursement was intended to be for the business element of the expense payment fringe benefit.

This is because the employee is entitled to an income tax deduction for that portion of the expenditure incurred to derive their assessable income, but not for that portion of the expenditure incurred for private or domestic purposes.

However, a deduction will also not be allowed where another provision of the ITAA 1997 specifically prevents it. Paragraph 26-10(1)(cb) of the ITAA 1997 specifically prevents a deduction for payments made to reduce a debt to the Commonwealth under Chapter 3 of the Higher Education Support Act 2003 (HESA 2003), which includes HECS - HELP loans.

Therefore, section 24 of the FBTAA does not apply to the reimbursements of 75% of the scholarship holders' HECS-HELP payments.

Liability to pay FBT

For similar reasons it was determined in Question 1 that that the reimbursements of the scholarship holders' education expenses will form part of the 'fringe benefits taxable amount' of the Employer for the relevant FBT year and, hence, a liability to FBT will arise under subsection 66(1) of the FBTAA in respect of the provision of such fringe benefits, it is concluded that the reimbursement of x% of the scholarship holders' HECS-HELP payments will also form part of the 'fringe benefits taxable amount' of the Employer for the relevant FBT year and, hence, a liability to FBT will arise under subsection 66(1) of the FBTAA in respect of the provision of such fringe benefits.

¹ Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits.