Edited version of your written advice

Authorisation Number: 1012830621739

Date of advice: 29 June 2015

Ruling

Subject: Fringe benefits tax - residence provided to director shareholder

Question 1

Will the provision of the property by the taxpayer to an individual, being both a shareholder and director of the taxpayer, be considered a 'fringe benefit' for the purposes of the definition in section 136(1) of the Fringe Benefits Tax Assessment Act 1986 ('FBTAA')?

Answer

Yes.

This ruling applies for the following periods:

1 April 2013 to 31 March 2014

Relevant facts and circumstances

The taxpayer purchased a property in the early 1990s.

The property is the main residence of two individuals.

The two individuals ('the director/shareholders') are both directors of the taxpayer and they are both equal shareholders of the taxpayer. There are no other shareholders.

The taxpayer receives market rate rent from the director/shareholders for the occupation of the property. Any excess expenditure for the property over and above the rental amount is paid by the director/shareholders.

The taxpayer has never made any payments to either of the director/ shareholders in the form of director's fees or any other kinds of payments.

The financial statements of the taxpayer show loans made to its shareholders.

The taxpayer is described on its most recently lodged income tax return as being an investment company. The principal activity of the taxpayer according to the financial statements is rental service.

The taxpayer reports the rent received from the director/shareholders as income on its income tax returns. It also claims income tax deductions for expenses incurred in relation to the property.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 137

Fringe Benefits Tax Assessment Act 1986 paragraph 148(1)(a)

Taxation Administration Act 1953 section 12-40 of Schedule 1

Reasons for decision

Question 1

Summary

The property was provided to the director/shareholders in respect of their employment as employees of the taxpayer. As a result a 'fringe benefit', as defined in subsection 136(1) of the FBTAA, has been provided.

Detailed reasoning

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA as a benefit that is provided to an employee by their employer in respect of the employment of the employee. Subsection 136(1) further defines a 'benefit' to be any right, privilege, service or facility.

Employee

An 'employee' is defined in subsection 136(1) of the FBTAA is defined as a 'current employee', a 'future employee' or a 'former employee'. A 'current employee' is further defined as someone entitled to receive 'salary or wages'. 'Salary or wages', as defined in subsection 136(1) of the FBTAA, includes payments of remuneration to a director from which an amount must be withheld under section 12-40 of Schedule 1 to the Taxation Administration Act 1953.

Section 137 of the FBTAA extends the definition of 'salary or wages' to include benefits that would constitute salary or wages if they were instead provided by way of a cash payment.

Paragraph 4 of Miscellaneous Taxation Ruling MT 2019 Fringe benefits tax: shareholder employees of family private companies and directors of corporate trustees provides the following example:

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.

However, 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 fringe benefits tax purposes.

In respect of employment of employee

In considering whether a benefit is provided to an employee 'in respect of' their employment, subsection 136(1) defines 'in respect of', in relation to the employment of an employee, to include:

by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

The term 'employment' involves the holding of an office, pursuant to subsection 136(1) of the FBTAA, which would include holding the office of director of a company.

MT 2019 deals specifically with the circumstances where a family private company provides benefits to a shareholder of the company who is also a current employee of the company.

Paragraph 9 of MT 2019 lists a number of factors that may be relevant in concluding whether a non-cash benefit was provided as remuneration for services or in the capacity of the shareholder. Those factors include:

• Nature of the benefit;

• Any cash remuneration paid;

• The nature and extent of any trading activities of the company;

• The extent of any services rendered by the shareholder director; and,

• The extent of his or her shareholding.

Paragraph 10 of MT 2019 considers that, generally, where a family company claims an income tax deduction for expenditure incurred in providing a benefit to a shareholder director, this suggests that the benefit is provided by way of remuneration.

However, paragraph 12 of MT 2019 considers the scenario where the family company allows the shareholder director to occupy a home owned by the company in their capacity as shareholders. It considers the following examples:

1. Where a company does not carry on a business, the property is occupied rent-free by the shareholder directors who have performed only minimal duties, and the company has not claimed deductions relating to the property, it would be accepted that the benefit was not provided in respect of employment; and,

2. Likewise, where a company rents the property to the shareholder directors for an amount equal to the expenses incurred by the company, it would generally be accepted that the accommodation was not provided in respect of their employment, but rather a reimbursement type arrangement.

Miscellaneous Taxation Ruling MT 2016 Fringe benefits tax: benefits not taxable unless provided in respect of employment considers whether a farm homestead occupied by a family whose private company conducts the farming business in which they work and which holds the title to the homestead would be considered to be provided to the family in respect of their employment. MT 2016 states at paragraph 14:

If the arrangement under which title to the homestead lies in the private company has been treated by the parties as a family arrangement rather than as a business one for income tax purposes this will be an indication that the occupancy did not arise in respect of employment of the family members by the company. The arrangement may, for example, owe its existence to previous death duty considerations. In that case it would be expected that expenditures in relation to the homestead, e.g., repairs, fuel, would be met by the occupants and, being private expenses, not claimed as deductions.

Further, MT 2016 states at paragraph 15:

If, on the other hand, the homestead was being treated by the company as a business asset and income tax deductions were being claimed for expenses incurred by the company in respect of the homestead it would generally be concluded that the occupancy of the homestead was a fringe benefit arising in respect of employment by the company.

If a benefit is provided in respect of both employment and for some other reason, such as a shareholding interest, paragraph 148(1)(a) of the FBTAA provides that the benefit will still be considered to be provided in respect of the employment of an employee.

In the taxpayer's circumstances

In these circumstances, the taxpayer has provided a benefit to the two director/shareholders, by providing them the right to occupy the property. The property is their main residence.

The director/shareholders are both directors of the taxpayer and they are both equal shareholders of the taxpayer. There are no other shareholders.

The taxpayer has never made any payments to either of the director/shareholders in the form of director's fees or any other kinds of payments.

The financial statements of the taxpayer show loans made to the shareholders

The taxpayer is an investment company. In these circumstances, it is considered that the director/shareholders will have minimal duties in their individual capacities as a director of the taxpayer.

The taxpayer receives market rate rent from the director/shareholders for the occupation of the property. Any excess expenditure over and above the rental amount is paid by the director/shareholders.

While these facts are similar to the example provided in paragraph 12 of MT 2019, the taxpayer reports the rental income on its income tax returns, and also claims income tax deductions for expenses incurred in relation to the property.

As the taxpayer claims deductions for expenses in respect of the property, the property is treated as a business asset, and thus, we consider that the provision of the property is provided in respect of employment by the company.

Regardless of whether the benefit was also provided as a result of the director/shareholders' shareholding in the taxpayer, section 148 of the FBTAA provides that the benefit will still be considered to be provided in respect of their employment by the taxpayer.

The benefit has not been received by the director/shareholders solely by reason of their shareholding. However, section 137 of the FBTAA will apply to include the provision of the non-cash benefit as 'salary and wages' by virtue of the extended meaning give to the expression under subsection 136(1) of the FBTAA. As a result, we consider the director/shareholders to be employees of the taxpayer, pursuant to the definition of 'current employee' in subsection 136(1), as they receive 'salary and wages', as deemed under section 137.

As a benefit, in the form of a right to occupy the property, has been provided to both of the director/shareholders as employees of the taxpayer, in respect of their employment by the taxpayer, we consider it to be a 'fringe benefit', in accordance with the definition in subsection 136(1) of the FBTAA.