Edited version of private advice

Authorisation Number: 1012677106455

Ruling

Subject: Non cash benefit provided to employee / trust beneficiary

Question 1

Is the applicant classified as an employee of the private company?

Answer

Yes

Question 2

Is the private company liable for Fringe Benefits Tax?

Answer

No

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The applicant is one of the two directors and shareholders of the company, as trustee for the family trust. The applicant has never taken any salary or director's fees from the company since the inception of the company.

The applicant's roles as director of the company include managing current investments, administrative duties and seeking new investments.

The family trust conducts a business in residential property development.

No other family members work for the company or the trust.

The applicant is the beneficiary of the family trust.

The company, in its capacity as trustee for the family trust, purchased X apartments for the benefit of trust beneficiaries which are solely used for private residence purposes, one the applicant and another one for family members of the applicant. Accordingly, no rent was paid to the company, nor does the company claim any with regards to the properties as they are not income producing.

The acquisition of the properties was paid for by the applicant's personal funds, with no finance. The properties were purchased from an unrelated party and at market price.

The applicant's living expenses are funded by savings.

The company, as trustee for the family trust, does not provide any other benefits such as motor vehicle for private use.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 subsection 137(1)

Taxation Administration Act 1953 section 12-35

Taxation Administration Act 1953 section 12-40

Reasons for decision

Issue 1

Question 1

Summary

The applicant is not classified as an employee of the company for the purposes of subsection 136(1) of the FBTAA 1986.

Detailed reasoning

In considering whether the applicant is an employee of the company as trustee for the family trust, it is necessary to consider if the company, in its capacity as the trustee of the family trust is the applicant's employer.

Subsection 136(1) of the FBTAA defines an employer as:

(a)  a current employer;

(b)  a future employer; or

(c)  a former employer;

Current employer is defined in subsection 136(1) to mean a person (including a government body) who pays, or is liable to pay, salary or wages, while future employer is defined to mean a person who will become a current employer.

Salary or wages is defined under subsection 136(1) to mean:

(a)  a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; and

(b)  The withholding payments covered by this definition include:

• section 12-35 for a payment to an employee, and

• section 12-40 for a payment to a company director.

Section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA) states

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).

Section 12-40 of Schedule 1 of the TAA states:

A company must withhold an amount from a payment of remuneration it makes to an individual:

(a)  if the company is incorporated as a director of the company, or as a person who performs the duties of a director of the company;

Although both of these sections involve a payment being made, subsection 137(1) of the FBTAA extends the definition of salary or wages to include a person who does not receive a cash payment but receives a benefit which would have been salary or wages if it had been a cash payment. It states:

For the purpose only of ascertaining whether a person is an employee or an employer within the meaning of this Act, where:

(a)  a benefit is provided by a person (in this subsection referred to as the first person) to, or to an associate of, another person (in this subsection referred to as the second person);

(b)  but for this subsection, the benefit would not be regarded as having been provided in respect of the employment of the second person; and

(c)  either of the following conditions is satisfied:

(i)  if the benefit were provided by the first person by way of a cash payment to the second person, the payment would constitute salary or wages paid by the first person to the second person;

(ii) all of the following conditions are satisfied:

(A) subparagraph (i) does not apply in relation to the benefit;

(B) the first person is an associate of a third person or the benefit is provided under an arrangement between the first person and a third person;

(C) if the benefit were provided by the third person by way of a cash payment to the second person, the payment would constitute salary or wages paid by the third person to the second person;

a definition in subsection 136(1) applies as if the benefit were salary or wages paid to the second person by:

(d)  in a case to which subparagraph (c)(i) applies the first person; or

(e)  in a case to which subparagraph (c)(ii) applies the third person.

Paragraphs 4 and 20 of Miscellaneous Taxation Ruling MT 2019: Fringe Benefits Tax: shareholder employees of family private companies and directors of corporate trustees are relevant to your situation.

Paragraph 4 states:

Section 137 of the Fringe Benefits Tax Assessment Act 1986 extends the definition of employee for the purposes of that Act to include persons who receive non-cash remuneration for services rendered in circumstances where they would have met the subsection 136(1) definition of 'current employee' if that non-cash remuneration had been received by way of a cash payment. This means, for example, that a director of a company who does not receive any cash remuneration but who does receive non-cash benefits by way of remuneration is treated as an employee for FBT purposes. Conversely, if a non-cash benefit is received by a director solely by reason of his or her shareholding rather than by way of remuneration, the receipt of that benefit would not result in the director being treated as an employee for FBT purposes.

Paragraph 20 states:

Where a company is a trustee of a trust estate, the company may be an employer for FBT purposes in two capacities. First, the company will be an employer in its own right if it employs persons in those activities (which may include holding the position of trustee of one or more trust estates) that it carries out in its own right. The directors of the company would be employed in this capacity. Secondly, the company will be an employer in the capacity of trustee of a trust estate if it employs persons in activities carried on by the trust.

The applicant states that the trust conducts a business in property development and the applicant's main duties are managing investments administrative duties and sourcing new investments. It is also stated that the applicant receives no benefits apart from the rent free accommodation.

The above discussion into the definition of employer, as a result of subsection 137(1) of the FBTAA, indicates that the applicant is treated as an employee of the company as trustee of the family trust.

Question 2

Summary

The provision of accommodation to the applicant and family members is in respect of rights established under the family trust deed, and not a fringe benefit, and thus, no FBT is payable.

Detailed Reasoning

The provision of rent free accommodation to the applicant and family members (as they are associates) will be a fringe benefit and subject to fringe benefits tax if provided in respect of the applicant's employment. However, if provided for another reason, the benefits will not be subject to fringe benefits tax.

From the facts provided with your ruling request, the provision of a non-cash benefit to the applicant may have been provided to them in several capacities:

1. As a deemed employee of the company (being a director);

2. As a shareholder of the corporate trustee;

3. As an employee of the trust (as the trust operates a property development business)

4. As a beneficiary of the trust.

Section 136(1) of the Fringe Benefit Tax Assessment Act (FBTAA) 1986 defines a fringe benefit, and requires, among other things, that a benefit must be provided to an employee (or to an associate of an employee such as a family member) in respect of employment of that employee.

The primary factor in this case is determining if the benefit is provided to the applicant in respect of employment.

The term 'in respect of employment' has been considered by the courts on numerous occasions. In J and G Knowles and Associates Pty Ltd v. Commissioner of Taxation the full Federal Court examined the definition of fringe benefit and noted that:

...Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment...

In this situation, the applicant wears many hats in association with the corporate trustee (as stated above). Miscellaneous tax ruling MT 2019 provides guidance for fringe benefit tax purposes, in deciding whether a non-cash benefit is provided in one's capacity as a shareholder, director/employee, or beneficiary of a family trust.

The applicant has advised that the benefit was provided as a beneficiary of the family trust. MT 2019 provides guidance on this particular scenario at paragraph 21 and which state:"

21. Questions have been asked as to whether the FBT would apply where the corporate trustee of a family trust estate provides a non-cash benefit such as the free occupancy of a family home to a beneficiary of the trust estate who is also a director of the corporate trustee, but is not employed in any activities carried on by the trust. This could occur where a resolution is passed by the corporate trustee authorising the granting of the non-cash benefit to the beneficiary pursuant to the terms of the trust deed.

22. In these circumstances, it would ordinarily be clear that the benefit is provided to the beneficiary by reason of his or her position as a beneficiary of the trust estate rather than by reason of his or her position as director of the corporate trustee. Where non-cash benefits are provided in such situations it may be necessary to consider whether an effective distribution of trust income for income tax purposes has been made to or for the benefit of the beneficiary.

The family trust Deed dated allows the trustee to purchase property for the use of beneficiaries, and the trustee has discretion to determine if rent shall be payable.

Despite the applicant having been deemed an employee as a consequence of subsection 137(1) of the FBTAA, due to paragraph 10.4 of the trust deed it is considered the benefits were provided in respect of being a beneficiary of the trust. That is the combination of only being deemed an employee and paragraph 10.4 of the trust deed has the effect that there is not a sufficient or material link to employment.

Therefore, as the benefits were provided in respect of being a beneficiary of the family trust, the company is not liable for fringe benefits tax on these benefits.