Edited version of your written advice

Authorisation Number: 1012769323528

Ruling

Subject: Debt Waiver Fringe Benefit

Question 1

Will a debt waiver fringe benefit arise if you decide to take no action in relation to an overpayment of salary or wages that the employee was legally entitled to receive?

Answer

No

Question 2

Will a debt waiver benefit arise from the salary overpayment if you write-off an employee's obligation to repay an obligation that the employee was not legally entitled to receive?

Answer

Yes

Question 3

If a debt waiver benefit arises from the write-off will the debt waiver benefit be a fringe benefit if the amount written off is less than $300?

Answer

No

Question 4

If a debt waiver benefit arises from the write-off will the debt waiver benefit be a fringe benefit if the amount is written off as a bad debt in accordance with the policy that applies to the waiver of bad debts owing by non-employees?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2015

Relevant facts and circumstances

You offer salary sacrifice arrangements (SSA) to your employees.

The salary sacrifice option is offered to employees on a cost neutral basis. That is, the amount of salary paid to an employee who has entered into a SSA will be the amount of salary that would otherwise have been paid if the employee had not entered into an SSA, less the cost of the benefits to the employer. These costs include any FBT paid by the employer in relation to the benefits provided.

At the end of each year, you reconcile the costs of providing the benefits with the reduction in salary. If it is determined a salary overpayment has occurred as a result of the costs of providing the benefits (including the amount of FBT paid) exceeding the reduction in salary, you generally take action to recover the overpayment.

When an overpayment is identified you will generally contact the employee to advise him or her of the overpaid amount and to seek to make arrangements for the overpaid amount to be repaid.

Where the employee is still employed by you, the overpaid amount can be recovered by making a deduction from the pre-tax salary if the employee acknowledges the overpaid amount.

Alternatively, if the employee has ceased to be employed by you, the former employee is required to repay the overpaid amounts from his or her after tax income.

Not all employees acknowledge the overpayment and agree to repay the overpaid amount. For example, some employees are not able to be contacted and other employees dispute the requirement for the amount to be repaid.

You have conducted a review of the overpaid amounts that are not being recovered or repaid by employees.

You are proposing to write-off amounts under $100 as it is impractical or uneconomic to recover the overpaid amount.

There currently are no amounts between $100 and $300.

You obtained legal advice in relation to the recoverability of the amounts greater than $300.

The legal advice is that the overpaid amounts cannot be recovered as the employees have sufficient grounds to legally challenge any attempt to recover the overpaid amount. This advice was based on undertakings and advice given to these employees at the time they entered into the salary sacrifice arrangements.

Relevant legislative provisions

Fringe Benefit Tax Assessment Act 1986 Subsection 136 (1)

Fringe Benefit Tax Assessment Act 1986 Section 14

Fringe Benefit Tax Assessment Act 1986 Section 58P

Reasons for decision

Will a debt waiver benefit arise if the amount overpaid is written-off?

Section 14 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) sets out the circumstances in which a debt waiver benefit will be provided. Section 14 states:

Where, at a particular time, a person (in this section referred to as the provider) waives the obligation of another person (in this section referred to as the recipient) to pay or repay to the provider an amount, the waiver shall be taken to constitute a benefit provided at that time by the provider to the recipient.

Subsection 136(1) defines 'waive' to include release.

In the situation being considered the employees were overpaid an amount of salary.

You have received legal advice that some of the overpayments cannot be recovered due to undertakings given at the time the employees entered into the SSA. The effect of these undertakings was that you agreed to pay the employees the stated amount of salary. That is, the employees are able to claim that they were legally entitled to receive the amount of salary that they were paid.

Guidance as to the actions to be taken where an overpayment of salary occurs is provided in:

• Taxation Determination TD 2008/10 Fringe benefits tax: where an employer recognises they mistakenly paid to their employee an amount that the employee is not legally entitled to, but is obliged to repay, and afterwards allows the employee time to repay the amount, is there a 'loan benefit' under subsection 16(1) of the Fringe Benefits Tax Assessment Act 1986?

• Taxation Determination TD 2008/11: where an employer mistakenly pays to their employee an amount that the employee is not legally entitled to, but is obliged to repay, does the employer's subsequent waiver of that obligation constitute a 'debt waiver benefit' under section 14 of the Fringe Benefits Tax Assessment Act 1986?

• The fact sheet PAYG withholding - repayment of overpaid amounts

• The fact sheet Repayment of income - overpayment of salary or a benefit.

These publications make a distinction between a situation in which the employee is legally entitled to the income and a situation in which the employee is not entitled to the income.

In general terms, an employee is legally entitled to receive the income if the employee correctly received an amount, but later events meant the amount had to be repaid. The fact sheet Repayment of income - overpayment of salary or a benefit provides the following example of such a situation:

Charlotte was a member of the Australian Defence Force (ADF). On 1 March 2003, she was offered $50,000 (referred to as a retention bonus) to sign on for another five years of service. Under the terms of the contract, she was required to repay the bonus, on a pro rata basis if she failed to serve for five years. She signed up for the retention bonus on 20 March 2003 and included the $50,000 as part of her assessable income in her 2003 tax return.

Three years into the contract she resigned from the ADF, and was required to repay two-fifths of the retention bonus. She has now repaid the amount required. As Charlotte has repaid the $20,000 she can amend her assessment for the 2003 income year. In her amendment she would request that her income be decreased by $20,000 for the 2003 year.

By contrast, an employee is not entitled to receive the income if the employee received the payment due to an error or mistake. The fact sheet Repayment of income - overpayment of salary or a benefit provides the following example of such a situation:

Hannah is in receipt of a social security payment. A review of her circumstances established that she had been mistakenly paid amounts totalling $825 during the 2006-07 income year, due to an incorrect income declaration be Hannah. The circumstances are such that Hannah has an obligation to repay the amounts paid by mistake. As Hannah was not entitled to the $825, her assessment can be amended to reduce her assessable income.

This difference in classification affects both the actions that an employee can take to reduce their taxable income in the year the payment was received and whether a fringe benefits tax liability will arise if the amount is not repaid.

If the employee was entitled to the income, he or she can request an amendment to their income tax assessment for the year in which the income was included when the amount is repaid.

Alternatively, if the employee was not entitled to receive the amount and the employer decides that the employee is required to repay the overpaid amount, the employer will issue an amended payment summary to the employee which the employee can use to request an amendment to their income tax assessment for the year in which the income was included. In this second situation, the employee does not need to wait until the amount has been repaid to request the amendment of their income tax assessment.

The fringe benefits tax consequences that can arise in this second situation where an employer mistakenly pays an amount to an employee that the employee is not entitled to, but is obliged to repay are discussed in TD 2008/10 (in the context of whether a loan benefit arises) and TD 2008/11 (in the context of whether a debt waiver benefit arises).

In answer to the question of whether a debt waiver will arise where an employer waives an obligation that arose from an employee mistakenly being paid the employee is not legally entitled to receive paragraph 1 of TD 2008/11 states:

Yes. Where an employer mistakenly pays to their employee an amount that the employee is not legally entitled to, but is obliged to repay, the employer's subsequent waiver of that obligation constitutes a 'debt waiver benefit' under section 14 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)¹ provided by the employer to the employee at the time of the waiver.

Paragraphs 2 and 3 of TD 2008/11 provide the following example:

2. Sam works as a public servant in a government department (the employer). Sam is paid her salary on a fortnightly basis by direct credit into her bank account. During the period July 2007 through to February 2008 (2007-08 FBT Year) Sam temporarily performed duties at a higher pay scale level. A review during March 2008 of the higher duty payments made to Sam was undertaken by the employer's human resources section. The review established that Sam had, in error, been mistakenly paid three amounts of $500 to which she was not legally entitled. The circumstances are such that Sam has an obligation to repay the three amounts paid by mistake. In April 2008, the following FBT year, Sam's employer waives her obligation to repay the three mistakenly paid amounts of $500.

3. Each waiver gives rise to a ' debt waiver benefit' under section 14 provided by Sam's employer to Sam at the time of the waiver.

The facts as provided indicate that you have received advice that some the amounts classified as overpayments were payments that the employees were legally entitled to receive. These additional amounts of salary were subject to PAYG at the time the payments were made and have been included in the income tax assessments of the employees.

As the employees were legally entitled to receive these salary payments, a fringe benefit will not arise from your decision not to pursue these amounts as the employee has not received an additional benefit. The benefit received was a payment of salary or wages which is excluded from being a fringe benefit by paragraph (f) of the fringe benefit definition in subsection 136(1) of the FBTAA.

By contrast, as set out in paragraph 10 of TD 2008/10, an employee will receive an additional benefit when he or she is given time to repay a mistakenly paid amount. Paragraph 10 of TD 2008/10 states:

It is the employer's allowing of time to the employee to repay the mistakenly paid amount (rather than the employer's payment under a mistake) that gives rise to a loan benefit. The employer's allowing of time for the employee to repay the mistakenly paid amount to which the employee is not legally entitled, but is obliged to repay, gives rise to the making of a 'loan' as that term is inclusively defined in subsection 136(1).

This principle also applies where the employer waives an employee's obligation to repay an amount mistakenly paid as this waiver gives rise to a debt waiver benefit.

It should be noted that in this second situation, the employee is able to request an amendment to their income tax assessment to exclude the mistakenly paid amount, even though the amount has not been repaid. To do this, the employer is required to issue an amended payment summary to the employee for the relevant income year.

In your ruling application you contend the use of the word 'may in the SSA means a debt waiver benefit cannot arise. In relation to this contention, it is important to clarify the facts as to the actual situation. That is, is there an amount which the employee is required to repay?

As set out in the publication PAYG withholding - repayment of overpaid amount:

If you overpay an employee (or other payee), you must decide if the payee is required to repay the overpaid amount.

If you decide that the employee is not obliged to repay the overpaid amount, you do not need to do anything. If you are a state or Australian government department or agency, legislation may mean your employee must repay the overpaid amount.

From your application it appears you have taken actions to require the employees to repay the amounts they were not legally entitled to receive. This indicates a decision has been made to require the amounts to be repaid. Therefore, a subsequent decision to write-off these amounts will create a debt waiver benefit.

If a debt waiver benefit arises from the write-off will the debt waiver benefit be a fringe benefit if the amount written off is less than $300?

In general terms, section 58P of the FBTAA provides that a benefit will be a minor benefit where:

• the notional taxable value is less than $300, 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.

Where the amount written off is less than $300 the notional taxable value will be less than $300.

The five criteria listed in paragraph 58P(1)(f) are as follows:

• the infrequency and irregularity with which associated identical or similar benefits are provided;

• the sum of the notional taxable values of the minor benefit and associated benefits which are identical or similar to the minor benefit;

• the sum of the notional taxable values of any other associated benefits;

• the practical difficulty in determining the notional taxable values of the minor benefit and any associated benefits; and

• the circumstance surrounding the provision of the minor benefit and any associated benefit.

For the purpose of minor benefit exemption, the term 'associated benefits' is defined in subsection 58P (2) of the FBTAA 1986 to mean a benefit that is any of the following:

• identical or similar to the minor benefit;

• provided in connection with the provision of the minor benefit; or

• identical or similar to a benefit provided in connection with the provision of the minor benefit.

In addition:

• the associated benefit and the minor benefit must relate to the same employment of a particular employee, and

• an associated benefit does not include a benefit that is an exempt benefit under any provision of the FBTAA other than this section.

In the situation being considered, there are no associated benefits as the debt write-off is a 'once off' event. Therefore, in considering the five criteria in paragraph 58P91)(f):

• as the benefit is provided under a 'once off' event the benefit is provided infrequently and irregularly;

• the sum of the notional taxable value of the minor benefit and any identical or similar benefits will be less than $300;

• there are no other associated benefits;

• there is no practical difficulty in determining the notional taxable value as the amount written off is known;

• the benefit is not provided to assist the employee with an unexpected event and is not provided principally by way of reward for services rendered.

In considering these factors, although there is no practical difficulty in determining the notional value and the benefit is not provided to assist the employee to deal with an unexpected event, it is accepted that it would be unreasonable for the written-off amount to be treated as a fringe benefit as it is a 'once off' event where the notional value of the benefit and associated benefits is less than $300 and the benefit is not provided principally by way of reward for services rendered.

Therefore, a fringe benefit will not be provided when an amount of less than $300 is written off.

If a debt waiver benefit arises from the write-off will the debt waiver benefit be a fringe benefit if the amount is written off as a bad debt in accordance with the policy that applies to the waiver of bad debts owing by non-employees?

In general terms a debt waiver fringe benefit will arise when an employer provides a debt waiver benefit to an employee where the benefit is provided in respect of the employment of the employee.

The phrase 'in respect of the employment of the employee' is not defined in the FBTAA. However, it was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Commissioner of Taxation (2000) 96 FCR 402. In that case the Full Federal Court held that:

The phrase requires a 'nexus, some discernible and rational link, between the benefit an employment'. That, however, does not take the matter far enough. For what is required is a sufficient link for the purpose of the particular legislation… It cannot be said that any causal relationship between the benefit and the employment is a sufficient link so as to result in a taxable transaction. (at FCT 408) … what must be established is whether there is sufficient or material, rather than a, causal connection or relationship between the benefit and the employment. (at FCR 410)

Guidance in relation to the circumstances in which a debt waiver benefit will not be considered to be provided in respect of the employment of the employee is provided in paragraphs 10 to 12 of TD 2008/11.

Paragraphs 10 to 12 of TD 2008/11 state:

10. Unless there are facts indicating a contrary conclusion (such as some capacity other than as employee in respect of which the benefit was provided by the employer to their employee), the debt waiver benefit taken under section 14 to be provided by the employer to the employee in the circumstances that are the subject of this ruling is likely to possess a 'sufficient or material' connection with the employee's employment and is therefore considered to be a benefit provided by the employer to the employee 'in respect of the employment of the employee'. However, whether this is the case is a question of fact to be decided on the circumstances of each case.

11. Facts that may indicate such a contrary conclusion would include where the employee's obligation to repay the amount of the payment made by mistake is waived because it is a bad debt (for example, the amount cannot be recovered because the employee has no assets) rather than by reason of the employment relationship. That fact could be established by showing that reasonable efforts were made to recover the amount from the employee but that was unsuccessful and that the waiver was in line with the employer's policy in relation to the waiver of bad debts owing by non-employees.

12. Other facts that may also indicate a contrary conclusion would include where the employee's obligation to repay the amount of the payment made by mistake is waived because it is uneconomic to recover the amount from the employee. That fact could be established by showing that the employer adheres to a policy of not pursuing any debts owed to it that are below a certain amount (because the employer has reasonably assessed that it is uneconomic for them to do so) and that the waiver of the employee's obligation to repay the amount of the payment made by mistake occurs under that policy, rather than by reason of the employment relationship. Such a policy would have to apply to all debts owed to it, not only debts owed by employees.

In applying these paragraphs, a debt waiver fringe benefit will not arise when the amount is written off as a bad debt in circumstances when the debt would be written off if the amount was owed by a non-employee.