Edited version of your written advice

Authorisation Number: 1012940296806

Date of advice: 2 February 2016

Ruling

Subject: Fringe benefits tax - property fringe benefits

Question 1

Is the taxable value of a property fringe benefit calculated under section 42 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No. As the benefit is not an in-house property benefit, the taxable value is calculated in accordance with paragraph 43(c) of the FBTAA.

This ruling applies for the following periods:

1 April 2015 to 31 March 2019.

Relevant facts and circumstances

The employer has initiated a "Program" for those employees and their families (associates) who may be suffering from a particular disease. The program is implemented as a compassionate gesture by the employer and consists of providing the medication to employees and their families free of charge.

The medication recently obtained Therapeutic Goods Administration (TGA) approval in Australia and has been reimbursed on the Pharmaceutical Benefits Scheme (PBS) for patients in some instances. The medication is also available for other similar diseases via private purchase, providing the treating specialist is willing to prescribe the medication to these patients at the list price at the time of purchase.

Pharmaceutical Benefits Scheme (PBS)

The PBS is a program of the Australian Government that provides subsidised prescription medicines to residents of Australia. The PBS ensures that Australian residents have affordable and reliable access to a wide range of necessary medicines. From 1 January 2015, under the PBS, patients are only required to pay up to $37.70 for prescription drugs. Concession card holders are required to pay up to $6.10 per script.

Summary of the arrangement

The employer acquires the medication from an overseas entity and ordinarily resells the product to Australian wholesalers at what is known as the 'list price' .The medication is then on-sold by the wholesalers to pharmacies and hospitals that will dispense the medication to patients. Patients would generally go to a pharmacy (hospital pharmacy) and purchase the medication. For eligible patients, where PBS reimbursement is available, the price paid is $37.70 and the subsidised amount is then claimed by the pharmacy from the Government. For other patients the price paid is the list price, which is currently $xxx per dose. In the case of the Program for employees, the medication is shipped to the hospital/pharmacy at no cost and is available free of charge for employees and their immediate family and offered at a nominal cost to employees' extended family.

Extended family is defined as the employee's parents in-law, grandchildren, siblings, siblings in-laws, nieces and nephews. Where the benefit is provided to members of the extended family the employee is required to pay $xxx per dose by way of salary deductions

Under the Program the employer provides the benefit to the employee or associate indirectly - i.e. the employer is not able to administer the medication. Therefore there is an agreement with a hospital for the hospital to supply the medication to the employee or associate. The hospital or pharmacy places an order for the medication through a wholesaler, who in turn orders the medication from the employer. The wholesalers are not associates of the employer.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986

Section 40

Section 42

Subsection 42(1)

Section 43

Paragraph 43(a)

Paragraph 43(b)

Paragraph 43(c)

Subsection 136(1)

Reasons for decision

Will the benefit be a property fringe benefit as defined in subsection 136(1) of the FBTAA?

Property fringe benefit is defined in subsection 136(1) of the FBTAA to mean a "fringe benefit that is a property benefit", and property benefit is defined in that subsection to mean:

a benefit referred to in section 40, but does not include a benefit that is a benefit by virtue of a provision of Subdivision A of Divisions 2 to 10 (inclusive) of Part III.

Section 40 of the FBTAA states that where a person provides property to another person the provision of the property shall be taken to constitute a benefit provided to the recipient at that time.

Property is defined in subsection 136(1) to mean intangible and tangible property, and tangible property is defined in subsection 136(1) to mean goods including animals, gas and electricity.

It is accepted that the provision of the medication will constitute a property fringe benefit.

Will the benefit be considered to be an in-house benefit under section 136(1) of the FBTAA?

Subsection 136(1) of the FBTAA gives the definition of in-house property fringe benefit:

in-house property fringe benefit, in relation to an employer, means a property fringe benefit in relation to the employer in respect of tangible property:

(a) where both of the following conditions are satisfied:

(i) the provider is the employer or an associate of the employer; and

(ii) at or about the provision time, the provider carried on a business that consisted of or included the provision of identical or similar property principally to outsiders; or

(a) where all of the following conditions are satisfied;

(i) the provider is not the employer or an associate of the employer;

(ii) the property was acquired by the provider from the employer or an associate of the employer(which employer or associate is in this definition called the 'seller"); and

(iii) at or about the provision time, both the provider and the seller carried on a business that consisted of or included the provision of identical or similar property to outsiders.

For a property fringe benefit to be an "in-house property fringe benefit", the benefit must arise from tangible property, and if the provider of the benefit is the employer or an associate of the employer, then at or about the provision time that employer (or associate) must have carried on a business consisting of, or including, the provision of identical or similar property to outsiders.

If the provider of the benefit is not the employer or an associate of the employer, then:

(a) the provider must have acquired the property from the employer or an associate of the employer, and

(b) at or about the provision time, both the provider and the seller of the property must have carried on a business consisting of, or including, the provision of identical or similar property to outsiders.

Provision of the medication

• The medication (property) is dispensed by / administered by a pharmacy or hospital (the provider).

• The property is acquired by the pharmacy / hospital from wholesalers.

• The wholesalers are not the employer or an associate of the employer.

• As the conditions in both paragraphs 136(1)(a) and (b) of the FBTAA are not met, the benefit cannot be an "in-house property fringe benefit".

By definition, the provision of the medication will constitute an external property benefit. Subsection 136(1) of the FBTAA defines "external property fringe benefit" as:

"in relation to an employer, means a property fringe benefit in relation to the employer other than an in-house property fringe benefit."

Subject to this Part, the taxable value of an external property fringe benefit in relation to an employer in relation to a year of tax is:

(a) where the provider was the employer or an associate of the employer and the recipients property was purchased by the provider under an arm's length transaction at or about the provision time - the cost price of the recipients property to the provider;

(b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the property - the amount of that expenditure; or

(c) in any other case - the notional value of the recipients property at the provision time; reduced by the amount of the recipients contribution.

Paragraph 43(a) of the FBTAA deals with the valuation of an external property fringe benefit where the provider of the benefit is the employer or an associate of the employer.

Paragraph 43(b) of the FBTAA deals with the valuation of an external property fringe benefit where the provider is a third party who is paid by the employer or by an associate of the employer under an arm's length transaction in respect of the provision of the property concerned. An "arm's length transaction'' is one in which the parties are dealing with each other at arm's length in relation to the transaction (subsection 136(1) of the FBTAA). This covers cases where an employer or associate simply requests a third party supplier to supply property to an employee or associate and pays the bill.

As paragraphs 43(a) and 43(b) of the FBTAA are not applicable in this instance, the taxable value of the benefit must be determined in accordance with paragraph 43(c) of the FBTAA.

Paragraph 43(c) of the FBTAA deals with the valuation of an external property fringe benefit in circumstances where paragraphs 43(a) and 43(b) do not apply. 'Notional value' is defined in subsection 136(1) of the FBTAA as the amount that a person could reasonably be expected to have been required to pay to obtain the property under an arm's length transaction. The notional value of the recipient's property is to be determined at the 'provision time' (the time at which the benefit is provided).

What is the amount a person could reasonably be expected to pay?

Under the Pharmaceutical Benefits Scheme (PBS), the cost of the medication will be $37.70 or $6.10 if they are concessional patients. However, the program to provide the medication does not extend to employees or associates who are eligible for subsidised scripts under the PBS.

Members of the public who are not eligible for subsidised scripts under the PBS are required to pay the full cost of the medication which is $xxx per dose.

Accordingly, the amount an employee or associate (who is not eligible for a subsidised script) could reasonably be expected to pay under an arm's length transaction for the medication is $xxx per dose (the list price). Therefore the notional value of the property fringe benefit will be the list price, which is currently $xxx per dose.

Benefits provided to 'extended family members'

The employer program to provide medication is also available to an employee's 'extended family'. Extended family is defined as the employee's parents in-law, grandchildren, siblings, siblings in-laws, nieces and nephews.

Where the benefit is provided to members of the extended family the employee is required to pay $xxx per dose by way of salary deductions. This amount represents the recipient's contribution and will reduce the taxable value of the fringe benefit.