Edited version of your written advice

Authorisation Number: 1013117788278

Date of advice: 2 November 2016

Ruling

Subject: Exempt Benefit to a Home Use Program

Question

Will a fringe benefit arise from the installation of a Home Use Program on an employee's computer?

Answer

No. The benefit is an exempt benefit under section 58P of the FBTAA.

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

The scheme commenced on

1 July 2016

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have provided two Fact Sheets outlining the agreement.

You have entered into an agreement with the provider of the software.

The agreement provides pricing and licensing conditions for the supply of the software products to other entities where they choose to purchase these software products.

The software provider includes a clause that enables them to offer your employees the use of their software on their home computer.

You did not negotiate for the software to be installed on your employees' computers as this is a standard clause included by the software provider in their agreements.

Your employees can obtain a single licence of the software for installation on their personal computer for a cost.

The amount charged by the software provider is listed on their website.

To obtain the software, an employee applies to the software provider for a licence.

You provide the employee with a program code which is entered together with other identifier details including your employee's work email address.

The employee enters into an individual licensing agreement with the software provider and makes the payment directly to the software provider.

You do not have any other involvement in the arrangement.

Employees who purchase the software can continue to use it until the relevant date (the expiry of the agreement) or until they cease employment (whichever is sooner).

This feature is available to employees of all employers who enter into a licensing agreement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 51

Fringe Benefits Tax Assessment Act 1986 section 58P

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Question

Will a fringe benefit arise from the installation of a Home Use Program on an employee's computer?

No. The benefit is an exempt benefit under section 58P of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Summary

The notional value of the benefit in this case is less than $300 and the specified conditions under paragraph 58P(1)(f) of the FBTAA are satisfied. Therefore section 58P of the FBTAA will apply to exempt this benefit. As the benefit is an exempt benefit, then it is not a fringe benefit as defined in subsection 136(1) of the FBTAA.

Detailed reasoning

Will a fringe benefit arise from an employee's use of software products?

The definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a benefit will be a fringe benefit where it is:

● provided to an employee or an associate of an employee,

● by the employer, an associate of the employer or a third party either under an arrangement that comes within the 'fringe benefit' definition under paragraph 136(1)(e) of the FBTAA or in circumstances that come within the 'fringe benefit' definition under paragraph 136(1)(ea) of the FBTAA,

● is provided in respect of the employment of the employee, and

● does not come within the 'fringe benefit' definition under paragraphs 136(1)(f) to (s) of the FBTAA.

In considering each of these requirements:

Is the right to use the software a benefit?

The term 'benefit' is defined in subsection 136(1) of the FBTAA as follows:

includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;….

The right to use the software comes within this definition.

Is the benefit provided to an employee or an associate of an employee?

The software is available to current employees. Therefore this requirement is satisfied.

Is the benefit provided by the employer, an associate of the employer or a third party in a situation that comes within the 'fringe benefit' definition under either paragraph 136(1)(e) or 136(1)(ea) of the FBTAA?

The terms 'provide' and 'provider' are defined as follows in subsection 136(1) of the FBTAA:

provide:

(a) in relation to a benefit - includes allow, confer, give, grant or perform; and

(b) in relation to property - means dispose of (whether by sale, gift, declaration of trust or otherwise):

(i) if the property is a beneficial interest in property but does not include legal ownership - the beneficial interest; or

(ii) in any other case - the legal ownership of the property.

provider, in relation to a benefit, means the person who provides the benefit.

The right to use the software is provided to the employee by the software provider. As the software provider is not the employer or an associate of the employer it is necessary to consider the application of paragraphs (e) and (ea) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA.

Paragraph (e) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA applies where the benefit is provided by a person who is not the employer or an associate of the employer under an arrangement covered by paragraph (a) of the 'arrangement' definition in subsection 136(1) of the FBTAA.

Paragraph (a) of the 'arrangement' definition in subsection 136(1) of the FBTAA states:

any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.

This requirement will be satisfied as the software is provided under an agreement you have with the software provider.

Is the benefit provided in respect of the employee's employment?

The benefit is provided in respect of employment as the employee's use of the software is contingent on the employee's employment with you. If the employee's employment ceases, the employee is required to remove the software from their personal computer.

Does the benefit come within the 'fringe benefit' definition under paragraphs 136(1)(f) to (s) of the FBTAA?

In these circumstances the relevant paragraph is paragraph (g) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA which provides that a benefit that is an exempt benefit will not be a fringe benefit. This includes benefits that are exempt under section 58P of the FBTAA.

Will the benefit be an exempt benefit under section 58P of the FBTAA?

Section 58P of the FBTAA provides that a minor benefit will be an exempt benefit where the notional value is less than $300 and the specified conditions are satisfied.

Section 58P of the FBTAA states:

Where:

(a) a benefit (in this section called a ``minor benefit'') is provided in, or in respect of, a year of tax (in this section called the ``current year of tax'') in respect of the employment of an employee of an employer;

(c) in the case of an expense payment benefit, a property benefit or a residual benefit - if the minor benefit were an expense payment fringe benefit, a property fringe benefit or a residual fringe benefit, as the case may be, in relation to the employer, the expense payment fringe benefit, the property fringe benefit or the residual fringe benefit, as the case requires, would not be an in-house fringe benefit;

(d) in the case of a tax-exempt body entertainment benefit where the provider incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision of entertainment to the employee or an associate of the employee:

(i) the provision of entertainment to the employee or the associate of the employee, as the case may be:

(A) is incidental to the provision of entertainment to outsiders; and

(B) neither consists of, nor is provided in connection with, the provision of a meal (other than a meal consisting of light refreshments) to the employee or the associate of the employee, as the case may be; or

(ii) the entertainment is provided to the employee or the associate of the employee, as the case may be:

(A) on eligible premises of the employer; and

(B) solely as a means of recognising the special achievements of the employee in a matter relating to the employment of the employee;

(e) the notional taxable value of the minor benefit in relation to the current year of tax is less than $300; and

(f) having regard to:

(i) the infrequency and irregularity with which associated benefits, being benefits that are identical or similar to:

(A) the minor benefit; or

(B) benefits provided in connection with the provision of the minor benefit; have been or can reasonably be expected to be provided;

(ii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of the minor benefit and any associated benefits, being benefits that are identical or similar to the minor benefit, in relation to the current year of tax or any other year of tax;

(iii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of any other associated benefits in relation to the current year of tax or any other year of tax;

(iv) the practical difficulty for the employer in determining the notional taxable values in relation to the current year of tax of:

(A) if the minor benefit is not a car benefit - the minor benefit; and

(B) if there are any associated benefits that are not car benefits - those associated benefits; and

(v) the circumstances surrounding the provision of the minor benefit and any associated benefits including, but without limiting the generality of the foregoing:

(A) whether the benefit concerned was provided to assist the employee to deal with an unexpected event; and

(B) whether the benefit concerned was provided otherwise than wholly or principally by way of a reward for services rendered, or to be rendered, by the employee;

it would be concluded that it would be unreasonable to treat the minor benefit as a fringe benefit in relation to the employer in relation to the current year of tax;

the minor benefit is an exempt benefit in relation to the current year of tax.

Guidance on the possible application of section 58P of the FBTAA is contained within Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits (TR 2007/12). In summarising the requirements of section 58P of the FBTAA, paragraphs 8 to 12 of TR 2007/12 state:

8. A minor benefit is an exempt benefit under section 58P where:

the notional taxable value of the minor benefit is less than $300; and

it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f), to treat the minor benefit as a fringe benefit.

9. In considering the application of the exemption under section 58P it is necessary to look to the nature of the benefit provided and give due weight to each of the criteria. The weight given to each criterion will also vary depending on the circumstances surrounding the provision of each benefit.

10. Section 58P does not apply to exempt all benefits that have a notional taxable value of less than $300.

11. First, there are certain benefits that are specifically excluded from section 58P. These are:

airline transport benefits;

expense payment benefits where, if the benefit was an expense payment fringe benefit, it would be an in-house fringe benefit;

property benefits where, if the benefit was a property fringe benefit, it would be an in-house fringe benefit; and

residual benefits where, if the benefit was a residual fringe benefit, it would be an in-house fringe benefit.

12. Secondly, where:

tax-exempt body entertainment is provided, and

the provider incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision of entertainment to an employee or an associate of the employee,

such benefits are excluded from consideration for exemption under section 58P, except in two limited circumstances.

In applying these guidelines it is necessary to consider:

Is the notional taxable value of the benefit less than $300?

The definition of 'notional taxable value' in subsection 136(1) of the FBTAA provides that the 'notional taxable value' of the benefit that arises from the use of the software is the amount that would be the taxable value if the benefit was a fringe benefit.

To calculate the taxable value of a fringe benefit it is necessary to first determine the type of fringe benefit that has been provided. The FBTAA is divided into thirteen different categories. Each category has its own valuation rules.

In these circumstances, the relevant category to consider is residual benefits.

A residual benefit is defined under section 45 of the FBTAA to be a benefit that does not fit within the specific categories contained in Divisions 2 to 11 of the FBTAA. As the benefit does not come within any of the other specific categories it will be a residual benefit.

The method used to calculate the taxable value of a residual benefit depends upon whether the benefit is an in-house benefit and whether it is provided for a period of more than one day.

In general terms, an in-house residual benefit requires the employer or an associate of the employer to be carrying on a business that consists of, or includes the provision of identical or similar benefits principally to outsiders. As neither the employer, nor an associate of the employer carry on a business that consists of, or includes the provision of identical or similar benefits principally to outsiders the benefit will be an external residual benefit.

The next step in determining the method to be used to calculate the taxable value of the residual benefit is to determine whether the benefit is a period benefit. In general terms a benefit will be a period benefit if it is provided for a period of more than one day. As the benefit being provided (the use of licensed software products) is provided for more than one day, the benefit will be an external period residual benefit.

The methods that are used to calculate the taxable value of an external period residual benefit are contained within section 51 of the FBTAA which states:

Subject to this Part, the taxable value of an external 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 recipients overall benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider in respect of the recipients current 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 recipients current benefit - the amount of that expenditure; or

(c) in any other case - the notional value of the recipients current benefit;

reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit.

As the provider is neither the employer, nor an associate of the employer, paragraph 51(a) of the FBTAA will not apply.

Paragraph 51(b) of the FBTAA will not apply as neither the employer, nor an associate of the employer, incur expenditure to the provider.

Therefore, paragraph 51(c) of the FBTAA will be used to calculate the taxable value of the benefit. The taxable value under paragraph 51(c) of the FBTAA is 'the notional value of the recipients current benefit reduced by the amount of the recipient's contribution insofar as it relates to the recipients current benefit'.

Subsection 136(1) of the FBTAA defines the term 'notional value' to mean:

… 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.

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? (TD 93/231) provides guidance on how to determine the 'notional value' of a property fringe benefit. Paragraphs 2 to 4 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.

Although TD 93/231 relates to the 'notional value' of a property fringe benefit, it can also be used to calculate the 'notional value' of a residual benefit.

In this case, the benefit being provided to an employee is the use of restricted licence of software products.

The notional value is the amount that an employee would have to pay for the use of the software under an arm's length agreement.

In considering whether the amount charged by the software provider is the amount that an employee would pay in an arm's length situation it is relevant to consider the following factors:

● the software provider makes the software available to employees of all employers who are software provider customers and have an Agreement.

● The amount charged by the software provider is stated on their website.

● The software is only available for the period in which an employee is employed and the employer is the software provider's customer with an active Agreement.

● the amount paid by the employer for the services provided by the software provider is not affected by whether the software is made available for the use of employees.

These factors indicate the amount paid to obtain the use of the software is the amount that the employee could reasonably be expected to pay to obtain the use of the licensed products under an arm's length transaction. Therefore, the taxable value of the benefit is determined to be below $300 and in turn the notional value for determining whether section 58P applies is also less than $300.

● Is the benefit one of the benefits listed in paragraphs 11 and 12 of TR 2007/12?

Paragraphs 11 and 12 of TR 2007/12 refer to airline transport benefits, in-house benefits and tax-exempt body entertainment benefits. As the use of the software does not come within any of these categories the benefit is not one of the benefits listed in paragraphs 11 and 12 of TR 2007/12.

● Would it be unreasonable having regard to the specified criteria in paragraph 58P(1)(f) of the FBTAA to treat the benefit as a fringe benefit?

Paragraph 58P(1)(f) of the FBTAA contains five specific criteria which must be considered in determining whether it would be unreasonable to treat the benefit as a fringe benefit. The five criteria are listed below.

For the purposes of the minor benefits exemption the term 'associated benefits' is defined in subsection 58P(2) of the FBTAA to mean a benefit that is any of the following:

● identical or similar to the minor benefit,

● provided in connection with the provision of the minor benefit, or

● identical or similar to a benefit provided in connection with the provision of the minor benefit

The use of the software is a 'once-off' use. That is, the employee is only entitled to receive the use of one version of the software.

In considering each of the five criteria of paragraph 58P(1)(f) of the FBTAA:

● The infrequency and irregularity with which associated identical or similar benefits are provided

As set out above, the use of the software is a 'once-off' use. Therefore, the benefit will not be provided on a frequent or regular basis.

● The sum of the notional taxable values of the minor benefit and associated benefits which are identical or similar to the minor benefit

As determined above the notional taxable value of the minor benefit is less than $300.

● The sum of the notional taxable values of any other associated benefits

No other associated benefits will be provided.

● The practical difficulty in determining the notional taxable values of the minor benefit and any associated benefits

As the employee orders the software from the software provider, you will not be aware of which software has been made available to a particular employee. Therefore, there will be practical difficulties in determining the notional taxable values.

● The circumstances surrounding the provision of the minor benefit and any associated benefits

Subparagraph 58P(1)(f)(v) of the FBTAA provides that it is necessary to consider whether the benefit was provided to assist the employee to deal with an unexpected event and whether the benefit was provided as a reward for services rendered. In considering these two tests, the software is not being provided to assist the employee to deal with an unexpected event and is not directly linked to the services provided by the employee.

In weighing the five factors, it can be concluded that it would be unreasonable to treat the benefit as a fringe benefit.

Therefore, as the notional value of the benefit in this case is less than $300 and the specified conditions under paragraph 58P(1)(f) of the FBTAA are satisfied, section 58P of the FBTAA will apply to exempt this benefit. As the benefit is an exempt benefit, then it is not a fringe benefit as defined in subsection 136(1) of the FBTAA.