Edited version of your written advice

Authorisation Number: 1012940472413

Date of advice: 29 January 2016

Ruling

Subject: Fringe Benefits Tax - notional value

Question

Will the notional value of the benefit that is used to calculate the taxable value of the fringe benefit that arises from the provision of a flight to an employee be equal to the value advised by the airline where the flight is provided on a stand-by basis?

Answer

Yes

This ruling applies for the following periods:

1 April 2016 - 31 March 2017

1 April 2017 - 31 March 2018

1 April 2018 - 31 March 2019

1 April 2019 - 31 March 2020

1 April 2020 - 31 March 2021

The scheme commenced on

1 April 2016

Relevant facts and circumstances

The employer proposes to enter into an arrangement with an airline for the provision of flights to its employees.

Under the arrangement employees will be able to purchase a seat on a service operated by the airline on a stand-by basis.

An employee who purchases a stand-by seat will pay the airline directly for the flight.

Alternatively, the airline will provide the employee with seats on a service operated by the airline under the employer's reward program.

All of these flights will be provided on a stand-by basis.

A stand-by seat will only be allocated after full fare paying passengers have checked in, been issued with a boarding pass and allocated a seat on the flight.

An employee receiving a stand-by seat will be ranked behind seats allocated to the airlines employees, their nominated beneficiaries and employees of the airline's related entities.

Under the arrangement entered into with the airline, the airline will provide you with details of the flights provided to employees, the values of those flights and the amounts received from employees for the flights.

You are not an associate of the airline.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 50, and

Fringe Benefits Tax Assessment Act 1986 subsection 136(1).

Reasons for decision

Will the notional value of the benefit that is used to calculate the taxable value of the fringe benefit that arises from the provision of a flight to an employee be equal to the value advised by the airline where the flight is provided on a stand-by basis?

An employee who either purchases a flight on a stand-by basis from the airline, or who receives a reward flight will receive an external non-period residual fringe benefit.

Section 50 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) sets out the three alternate methods used to calculate the taxable value of an external non-period residual fringe benefit.

Section 50 of the FBTAA states:

Subject to this Part, the taxable value of an external non-period residual 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 benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider for the benefit;

(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 benefit - the amount of that expenditure; or

(c) in any other case - the notional value of the benefit at the comparison time;

reduced by the amount of the recipients contribution.

Paragraph 50(a) of the FBTAA applies where the provider of the benefits is the employer or an associate of the employer. As the flights are provided by The, airline, which is not the employer, nor an associate of the employer, the method set out in paragraph 50(a) of the FBTAA will not apply.

Paragraph 50(b) of the FBTAA applies where the employer, or an associate, incurred expenditure to the provider under an arm's length transaction. As neither the employer, nor an associate, incurred any expenditure to the provider in relation to the provision of the flights, the method set out in paragraph 50(b) of the FBTAA will not apply.

As neither paragraph 50(a), nor paragraph 50(b) apply, the taxable value of the fringe benefits that arise from the flights will be determined under paragraph 50(c). Paragraph 50(c) of the FBTAA provides that the taxable value will be the 'notional value' of the benefit at the comparison time, less the amount of the recipient's contribution.

What is the notional value of the benefit?

The term 'notional value' is defined in subsection 136(1) of the FBTAA to mean:

in relation to the provision of property or another benefit to a person, means the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm's length transaction.

Guidance for determining the 'notional value' of a property benefit is provided in Taxation Determination TD 93/231 Fringe benefits tax: what is an acceptable method for determining the 'notional value' of a property fringe benefit for the purpose of sections 42 and 43 of the Fringe Benefits tax Assessment Act 1986?

Paragraphs 2 to 5 of TD 93/231 state:

2. To ascertain the 'notional value' of a property fringe benefit the employer must determine the amount the employee would have to pay for a comparable (on the basis of age, type and condition) benefit under an arm's length transaction.

3. This Office will accept a number of ways of obtaining the notional value including:

• the price of comparable goods advertised in local newspapers and/or relevant magazines or similar publications;

• the price paid for comparable goods at a public auction;

• the price of comparable goods at a second-hand store; or

• the market value of the goods determined by a qualified valuer.

4. The lowest value obtained using any of these methods will be acceptable.

5. Valuation methods which are not acceptable to this Office include the lease residual value, the tax written down value or the 'best offer' made by an employee.

In applying this guidance to the flights, the amount paid by the employees for the stand-by flights will be accepted as being the 'notional value' if the transaction occurs on an arm's length basis.

Are the flights provided under an arm's length transaction?

Taxation Determination TD 95/63 Fringe benefits tax: where a car is acquired at the end of a lease, is the acquisition at the residual value an 'arm's length transaction' for the purposes of section 43 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? considered the Federal Court decision in Granby Pty Ltd v. FC of T (1995) 30 ATR 400; 95 ATC 4240 (the Granby case). In that case, the Federal Court determined that, where a lessor and a lessee had dealt with each other at arm's length in the initial lease transaction, the acquisition by a lessee for the residual value at the completion of the lease was also a dealing at arm's length.

In the Granby case, Lee J said at 95 ATC 4244:

If the parties to the transaction are at arm's length it will follow, usually, that will have dealt with each other at arm's length. That is, the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargain may be.

That is not to say, however, that parties at arm's length will be dealing with each other at arm's length in a transaction in which they collude to achieve a particular result or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps, to promote the interests of the other. As in Minister of National Revenue v Merritt 69 DTC 5159 at 5166 where the parties to the transaction were parties at arm's length, the terms of a loan transaction made between them had been dedicated by a unilateral decision of one of them and no independent will in the formation of that transaction had been exercised by the other. It followed that it could not be said that the parties had dealt with each other at arm's length at the material time.

In applying this guidance, you are independent of the airline and the employees are independent from the airline. Consequently, as both you and the employees are at arms-length from the airline, it is accepted that the transactions between the employees and the airline will be undertaken on an arm's length basis unless there is something to indicate that there is an arrangement designed to achieve a lower value.

The facts as provided do not provide a basis for concluding that there is such an arrangement. Although you entered into an arrangement with the airline for the flights to be provided to employees on a stand-by basis there is nothing to indicate that the amount charged by the airline is less than the amount that would be charged in an arm's length situation. In this regard, it is accepted that the amounts paid by the full fare paying passengers are not relevant as the stand-by seats are dependent upon a seat being available after full fare paying passengers have checked in and seats have been provided to employees of the airline and its related entities.

Therefore, it is accepted that the notional value that is used to calculate the taxable value of the fringe benefits that arise from the provision of the flights will be the amount charged by the airline for the stand-by flights.