Edited version of your written advice

Authorisation Number: 1012913285911

Date of advice: 18 November 2015

Ruling

Subject: Fringe Benefits Tax - expense payment fringe benefit and otherwise deductible rule

Question 1

Are the payment of university course fees and reimbursement of related costs an expense payment fringe benefit under section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If yes, is the taxable value of the expense payment fringe benefit able to be reduced due to the otherwise deductible rule under subsection 24(1) of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

1 April 201X to 31 March 201Y

The scheme commences on:

1 April 201X

Relevant facts and circumstances

A company provides specialty services to its client. This involves presenting proposals to clients, including detailed financial modelling.

The current system of sending a third party with your engineer during the financial contractual discussions with your client is not only expensive but cumbersome and unacceptable to you as you have no control or understanding of the financial modelling involved in your presentation.

The engineer's existing role includes negotiating, managing and supervising large contracts which involve commercial, technical and major legal issues.

The engineer's role requires a strong understanding of the international finance, accounting, review of balance sheets and profit and loss statements and presenting financial modelling options to clients to enable them to convince the client on your proposal.

You want to send your engineer to do relevant studies at university. The studies are required for the employee to perform their current responsibilities and not for any future or separate business or activity.

The employee will be enrolled as a full fee paying part-time student and there is no government loan scheme (e.g. HECS or HELP, etc.) being utilised. The university will invoice the employee directly. You will pay the university course fees directly to the university on behalf of the employee. You will reimburse your employee for any out of pocket related expenses. In addition, you will provide the required time for your employee to attend lectures and study time.

The employee will provide you with a copy of the invoice from the university as well as evidence of out of pocket related expenses incurred. The employee will also provide you with a declaration in an approved form by the Commissioner stating that they incurred those expenses.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20,

Fringe Benefits Tax Assessment Act 1986 Section 23,

Fringe Benefits Tax Assessment Act 1986 Section 24,

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

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question 1

Summary

The payment of university course fees and reimbursement of related expenses is an expense payment fringe benefit under section 20 of the FBTAA.

Detailed reasoning

Fringe benefits

The term 'fringe benefit' is defined under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ('FBTAA') as, broadly, a benefit provided to an employee in respect of employment, but not in the form of salary or wages.

Under subsection 136(1), a benefit provided in respect of employment includes a benefit provided to somebody by reason of that person's employment.

The definition of the term 'benefit' in subsection 136(1) of the FBTAA includes rights, privileges or services.

Where an employer pays a third party on behalf of an employee or reimburses an employee in relation to expenses in respect of the employee's employment then a fringe benefit would be provided.

Therefore you will provide a fringe benefit to your employee.

The definition of an expense payment fringe benefit which is also contained within subsection 136(1) of the FBTAA provides that a fringe benefit which comes within the expense payment definition in section 20 of the FBTAA will be an expense payment fringe benefit.

Expense payment benefit

Section 20 of the FBTAA provides that an expense payment benefit will arise where:

• the provider (in this case the employer) reimburses the employee for expenses they incur, or

• the provider (in this case the employer) pay a third party in satisfaction of expenses incurred by the employee.

In your case, you have advised that you will pay a third party, the university, directly and also reimburse your employee any related expenses incurred.

Therefore you have provided expense payment fringe benefits to your employee.

Question 2

Summary

The taxable value of expense payment fringe benefit can be reduced due to the otherwise deductible rule under subsection 24(1) of the FBTAA.

Detailed reasoning

Taxable value of expense payment fringe benefits 

The taxable value of an external expense payment fringe benefit is determined under Section 23 of the FBTAA.  

Section 23 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states as follows: 

Subject to this Part, the taxable value in relation to a year of tax of an external expense payment fringe benefit provided during the year of tax is the amount of the payment referred to in paragraph 20(a), or the reimbursement referred to in paragraph 20(b), as the cases requires, reduced, in a case to which paragraph 20(a) applies, by the amount of the recipients contribution.

 The taxable value of an expense payment fringe benefit is either the amount of payment made by the employer on behalf of the employee for an obligation incurred or the amount of reimbursement paid by the employer to the employee for an obligation the employee has paid or incurred. 

In this case, you have indicated that the expense payment fringe benefit relates to payment of costs for a university course under paragraph 20(a) and reimbursements of any related costs under paragraph 20(b) of the FBTAA. 

Therefore, the taxable value of the expense payment fringe benefit under section 23 of the FBTAA will be the amount paid to the third party for the university course costs and related expenses reimbursed by you.  

Otherwise deductible rule  

The taxable value of an expense payment fringe benefit may be reduced in accordance with the otherwise deductible rule under section 24 of the FBTAA.

Subsection 24(1) of the FBTAA permits a reduction of the taxable value of an expense payment fringe benefit under the otherwise deductible rule where all the necessary conditions of that section are met.  

Under paragraph 24(1)(b), this rule only applies where the employee would have been entitled to a once-only deduction for the expenditure paid or reimbursed by the employer. A once-only deduction is defined, in subsection 136(1) of the FBTAA, to mean one that is wholly or partly allowable under the income tax law in only one year (this would exclude deductions for depreciation expenses).

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing incurred in gaining or producing assessable income. 

However, no deduction is allowed for losses or outgoings to the extent to which they are of a capital, private or domestic nature or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible by a specific provision of ITAA 1997. 

For any deduction to be allowable under section 8-1 of the ITAA 1997 you must be able to demonstrate that there is a real and direct connection between the outgoing and the gaining of your assessable income, so that the outgoing is incidental and relevant to the actual activities that gain assessable income. 

Self-education expenses 

The Commissioner's view on the deductibility of self-education expenses is contained in Taxation Ruling TR 98/9.

Where your employee's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables them to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction. 

In accordance with TR 98/9, expenses for self-education will satisfy the requirements of section 8-1 of the ITAA 1997 if: 

• the income-earning activities are based on the exercise of a skill or some specific knowledge, and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge; or

• the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from their current income-earning activities in the future. 

Therefore, provided there is sufficient connection between the course and your employee's current income earning activities, they would be entitled to claim a deduction for self-education expenses. 

However, as stated in paragraph 15 of TR 98/9, self-education expenses will not be allowable if the study is intended to: 

• enable them to get employment;

• enable them to obtain new employment; or

• open up a new income earning activity (whether in business or in their current employment). 

The requisite connection is not shown by demonstrating only that there is some causal connection between the expenditure and derivation of the income, nor by demonstrating that the expenditure was incurred 'in connection with' the derivation of assessable income or 'for the purpose of' deriving assessable income. What must be shown is a closer and more immediate connection. The expenditure must be incurred 'in the course of' gaining or producing the assessable income.  

In your case, your employee is undertaking a financial accounting course in order to increase their knowledge and skills in their current role. The skills obtained by the employee will be used in their current role in negotiating and managing contracts for the company. 

Your employee is not undertaking the self-education in order to obtain new employment, nor are they undertaking the study in order to gain employment in a new field or endeavour.

Therefore the self-education expenses would be deductible under section 8-1 of the ITAA 1997.

The employee will provide you with documentary evidence of the course fees from the university as well as any other out of pocket related expenses. As the expense payment benefit provided by you is not a travel expense payment benefit or an overtime meal expense payment benefit, you have satisfied the requirement of documentary evidence in paragraph 24(1)(c) of the FBTAA.

The employee will also provide you with a declaration in a form approved by the Commissioner. The requirement in paragraph 24(1)(e) of the FBTAA is therefore also satisfied.

As the requirements in subsection 24(1) are satisfied, you will be able to reduce the taxable value of the expense payment fringe benefit under the otherwise deductible rule.