Edited version of your written advice

Authorisation Number: 1012767730934

Ruling

Subject: Fringe benefits tax

Question 1

Will fringe benefits tax be payable on the transfer of funds from the employer company to the proposed employee entitlement trust?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2015

Year ended 31 March 2016

The scheme commences on:

2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The employer company (the company) was established in recent years.

In order to persuade certain employees to accept employment with the company, it was necessary to maintain visibility of the company's ongoing ability to meet its liability for the significant accrued leave entitlements that would be transferred across on commencement. This was achieved by establishing a trust to hold funds equivalent to these entitlements.

The original trust has been found to have some limitations from a financial management perspective. However from an employee relations perspective it is not acceptable to simply terminate the original trust. Management therefore proposes to replace the current trust arrangement with a new trust that addresses the limitations of the current arrangement, but which still gives the company comfort that it can continue to meet the relevant employee entitlements liabilities when due.

Practically, the existing trust funds will vest in the company and it will then make a capital contribution to the new employee entitlement trust (EET) for the relevant sum. From the point in time when the new trust is settled, no additional contributions will be made to the trust. The settlement funds will be used to reimburse the company for any annual and long service leave entitlements that it has paid to employees per the proposed Trust Deed. The proposed deed does not give the company any such rights to reimbursement for new annual and long service leave entitlements.

There are various provisions of the trust deed that are aimed at making it clear that the company receives the benefit of the trust and that no other person has rights to the trust assets. The references have been provided.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1),

Fringe Benefits Tax Assessment Act 1986 Subsection 148(2) and

Income Tax Assessment Act 1936 Section 318.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Fringe benefits tax (FBT) will not be payable on the transfer of funds from the company to the proposed EET as the transfer is not a fringe benefit as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

FBT would only be payable on the transfer of funds from the company to the proposed EET if the transfer of funds was a fringe benefit as defined in subsection 136(1) of the FBTAA. This would be the case if it was established that the trustee of the EET was an associate of the relevant employees and that the transfer of the funds was provided to the trust in respect of their employment.

In Federal Commissioner of Taxation v. Indooroopilly Children Services (Qld) Pty Ltd (2007) 158 FCR 325; [2007] FCAFC 16; (2007) 2007 ATC 4236; (2007) 65 ATR 369 (Indooroopilly), it was found that it was necessary to identify a particular employee in respect of whom a benefit is provided, which is the case in this situation as a particular group of employees can be readily identified in respect of whose employment a benefit may be provided.

It was also accepted in Indooroopilly that a benefit provided to a common associate of a number of employees, such as a trustee of a trust under which those employees are capable of benefitting, can be a fringe benefit provided that the identity of each employee who will take a benefit is known with sufficient particularity at the time that the benefit is provided.

Therefore it is necessary to consider whether the trustee of the trust is an associate of the relevant employees. The definition of an associate for FBT purposes is taken from section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In particular according to paragraph 318(1)(d) of the ITAA 1936 where the primary entity is a natural person an associate includes 'a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust'.

Paragraph 318(6)(a) of the ITAA 1936 provides that for the purposes of section 318:

a reference to an entity benefiting under a trust is a reference to the entity benefiting, or being capable (whether by the exercise of a power of appointment or otherwise) of benefiting, under the trust, either directly or through any interposed companies, partnerships or trusts;

The decision in Caelli Constructions (Vic) Pty Ltd v Commissioner of Taxation (2005) 147 FCR 449; [2005] FCA 1467; (2005) 2005 ATC 4938; (2005) 60 ATR 542, supports the view that a trustee of a trust or a non-complying superannuation fund can be an 'associate' of an employee who is capable of benefiting under the trust or fund.

Based on the trust deed, there is sufficient evidence that supports the conclusion that the employees of the company will not be capable of directly benefiting under the trust.

We must also consider whether the employees are capable of benefiting from the trust in an indirect way through an interposed company. A natural person is capable of benefiting through an interposed company where he or she is, for example, the sole shareholder and the company owns all of the units in a unit trust. The natural person is considered to be an associate of the trustee of the trust because he or she is capable of benefiting from the trust as owner of the company.

Unlike the natural person in the example, any amounts that the company receives from the EET will not flow through to its employees rather the EET will reimburse the company for amounts already paid to the employees. Therefore the trustee is not an associate of the employees on the basis that they are capable of benefiting under the trust through the company.

Additionally, the trustee of the trust is not an associate of the employees in accordance with subsection 148(2) of the FBTAA as the trustee of the trust will not receive the transfer of funds under an arrangement between the company and the employees.

Although Taxation Ruling TR 1999/5 Fringe benefits tax: employee benefit trusts and non-complying superannuation funds - meaning of 'associate'- property fringe benefits was withdrawn, the ATO view on subsection 148(2) of the FBTAA was expressed at paragraphs 24 to 28.

Although dependent on the circumstances of each case, it is considered that there will be an arrangement where the employee or employees who become beneficiaries also control, or have the ability to control the employer. In the circumstance where the employee or employees do not control the employer, there will be an arrangement where the benefits under the employee benefit trust or non-complying superannuation fund are expressly or impliedly included in the employee's remuneration package.

The employees of the company do not have the ability to control of the company. They also do not receive the benefits under the EET as part of their remuneration package as the benefit is in fact received by the company.

Since the trustee of the trust is not an associate of the relevant employees, the transfer of the funds to the EET will not be a fringe benefit. As it is not a fringe benefit it will not be subject to fringe benefits tax.