Edited version of your written advice

Authorisation Number: 1012969423447

Date of advice: 19 February 2016

Ruling

Subject: Debt waiver fringe benefits

Question 1

Is the waiver of your employee's debt a debt waiver fringe benefit in accordance with Division 3 of the Fringe Benefits Tax Assessment Act (FBTAA)?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2011

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

Year ended 31 March 2017

Year ended 31 March 2018

Year ended 31 March 2019

The scheme commences on:

During the year ended 3 March 2011

Relevant facts and circumstances

You mistakenly allowed an employee to over utilise their leave entitlements prior to the cessation of their employment resulting in them being overpaid.

You have a policy which states that when an employee has been overpaid an amount that they are not entitled to they are required to repay the amount.

You sent multiple letters to your employee requesting repayment of the debt. They did not make payment.

You then took legal action against the employee. At a pre-trial conference a settlement was reached with the employee where you agreed to accept an amount less than the full amount owing in satisfaction of the debt.

Your employee paid this amount and the remaining debt was written off by you.

You have provided that the decision to waive the remaining debt was a business decision based on the fact that it was not cost effective to pursue a recovery of that amount.

You have confirmed that debts owed to you by employees and non-employees are only written off on a commercial basis when it is uneconomical to pursue the debt.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 14

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

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.

Taxation Determination TD 2008/11 Fringe benefits tax: 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? (TD 2008/11) confirms that where an employer mistakenly pays an amount to an employee that the employee is not legally entitled to but is obliged to repay, a subsequent waiver of the obligation to repay the amount is a debt waiver benefit in accordance with section 14 of the FBTAA.

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.

Therefore, considering the definition of debt waiver benefit in section 14 of the FBTAA and the explanation provided in TD 2008/11, you will have provided your employee with a debt waiver benefit if:

1. your employee had an obligation to pay or repay an amount to you, and

2. you waived that obligation.

1. Did your employee have an obligation to pay or repay an amount to you?

You mistakenly allowed an employee to over utilise their leave entitlements prior to the cessation of their employment resulting in them being overpaid. Your internal policy states that when an employee has been overpaid an amount that they are not entitled to they are required to repay the amount.

The fact sheet Repayment of income - overpayment of salary or a benefit draws a distinction between situations in which employees are legally entitled to receive an overpayment of income and situations where they are not. In general terms, an employee is legally entitled to receive an overpayment of income if the employee correctly received an amount, but later events meant the amount had to be repaid. Conversely an employee is not entitled to receive overpaid income if the employee received the payment due to an error or mistake. The fact sheet provides the following example of an overpaid amount an employee was not entitled to receive:

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 by Hannah. The circumstances are such that Hannah has an obligation to repay the amounts paid by mistake…

As stated above, you mistakenly allowed an employee to over utilise their leave entitlements prior to the cessation of their employment. This resulted in an overpayment of money to them. Therefore, your employee was not entitled to receive this income and according to your policies the employee is liable to repay the overpayment.

2. Did you waive your employee's obligation to repay the amount?

The overpayment was discovered around the time of the cessation of your employee's employment. You made several attempts to recover the overpayment. When that was unsuccessful you took legal action against the employee. At a pre-trial conference a settlement was reached with the employee where you agreed to accept an amount less than the full amount owing in satisfaction of the debt.

Your employee paid this amount and the remaining debt was written off by you.

According to the definition of debt waiver benefit provided by section 14 of the FBTAA, the waiver of the remaining debt constitutes a debt waiver benefit.

Is the debt waiver benefit a fringe benefit?

A fringe benefits tax obligation will only arise where the debt waiver benefit is a fringe benefit according to the FBTAA. The definition of 'fringe benefit' provided by subsection 136(1) of the FBTAA requires, amongst other things, that for a benefit to be a fringe benefit, the benefit must be provided 'in respect of the employment of the employee.'

Subsection 136(1) of the FBTAA defines 'employee' to include current, future and former employees. A 'current employee' is defined as 'a person who receives, or is entitled to receive, salary or wages' and a 'former employee' is defined as 'a person who has been a current employee'. Therefore, the employee in this scenario who has since ceased employment with you is considered to be an employee for the purposes of the FBTAA.

Therefore, the debt waiver benefit that was provided to your employee when you waived her obligation to repay the remainder of their outstanding debt will only be a fringe benefit if it was provided in respect of their employment.

Subsection 136(1) provides the following definition of the term 'in respect of' in this context:

in respect of, in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

The phrase 'in respect of the employment of the employee' 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 and 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)

TD 2008/11 states that unless there are facts that indicate a contrary conclusion, where an employer mistakenly pays an amount to an employee that they are not legally entitled to and subsequently waives their obligation to repay the amount, the circumstances are likely to have the 'sufficient or material' connection with the employee's employment that is required for the benefit to be considered a fringe benefit. 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.

Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax: response to questions by a major rural organisation (MT 2021) provides further guidance for determining whether a debt waiver benefit is provided in respect of an employee's employment:

4. DEBT WAIVER FRINGE BENEFITS

QUESTION 1

The Act appears to make no distinction between the writing off of a bad debt and a debt waiver. Does the writing off of a bad debt constitute a release from payment and thus a debt waiver benefit?

ANSWER

The writing off of a bad debt by an employer does not of itself constitute waiver. However, if the debt is written off in circumstances where the employer absolves the employee from his or her obligation to pay the debt, the amount that the employee is no longer obliged to pay will be a debt waiver benefit. The waiver will not, however, be a fringe benefit if the debt is bad (e.g., it cannot be recovered because the employee has no assets) and is waived for reasons unrelated to the employment relationship.

QUESTION 2

If a distinction does exist between a bad debt and a waiver, what evidence will be required to demonstrate beyond doubt that a debt is bad, and that FBT is not payable?

ANSWER

The fact that a debt is waived because it is bad rather than by reason of the employment relationship could be established, for example, by showing that reasonable efforts were made to recover the debt and that the waiver was in line with the policy of the company in relation to the waiver of debts owing by non-employees.

…

QUESTION 4

Circumstances may arise in which a settlement of debt is negotiated to avoid legal costs with the result that less than the total outstanding debt is repaid. Does anything in the Act exclude the unpaid portion from being deemed waiver of debt that is subject to FBT?

ANSWER

If it can be established that the reasons for releasing part of the debt are entirely unrelated to the employee's employment, a debt waiver fringe benefit will not arise.

Whether a debt waiver benefit provided to an employee when you waive their obligation to repay an overpayment of salary, is provided in respect of their employment is a question of fact dependant on the specific circumstances of the case.

In this scenario you followed your internal policy and vigorously pursued the debt to the point of pursuing legal action. At a pre-trial conference a settlement was reached with the employee where you agreed to accept an amount less than the full amount owing in satisfaction of the debt. Your employee paid this amount and the remaining debt was written off by you. The decision to waive the remaining debt was a business decision based on the fact that it was not cost effective to pursue a recovery of that amount.

You have confirmed that debts owed to you by employees and non-employees are only written off on a commercial basis when it is uneconomical to pursue the debt.

Considering the definition of the phrase 'in respect of employment' within the definition of 'fringe benefit' and the guidance specific to these circumstances provided by TD 2008/11 and MT 2021, we do not consider that the debt waiver benefit you provided your employee when you waived their debt was provided 'in respect of' their employment.

As the benefit was not provided in respect of your employee's employment the benefit is not a 'fringe benefit' according to the definition provided by subsection 136(1) of the FBTAA