Edited version of your written advice

Authorisation Number: 1051195964998

Date Of Advice: 27 February 2017

Ruling

Subject: Fringe benefits tax

Question 1

For the purposes of calculating the employer's fringe benefits taxable amount in accordance with section 5B of the Fringe Benefits Tax Assessment Act 1986, where you pay for your employee's travel expenses will the 'otherwise deductible rule' apply to reduce the value of benefit?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2016

Year ended 31 March 2017

Year ended 31 March 2018

The scheme commences on:

1 April 2015

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.

Your employee has moved residence to another location, which is a considerable distance from your premises, for personal reasons. You agreed to allow your employee to undertake most of the duties of employment from that residence however you require your employee to undertake certain tasks at your premises for a short period on a regular basis.

You reimburse your employee for the cost of the travel to and from your premises.

You are a public benevolent institution (PBI).

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 5B,

Fringe Benefits Tax Assessment Act 1986 section 5E,

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 section 57A and

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All references made in these reasons for decision are to the Fringe Benefits Tax Assessment Act 1986 unless otherwise stated.

Summary

For the purposes of calculating your fringe benefits taxable amount in accordance with section 5B, you cannot reduce the taxable value of any expense payment benefits that would be fringe benefits, but for section 57A, arising from the payment of flights.

Detailed reasoning

Benefits provided to an employee of a PBI are exempt from FBT under section 57A up to the capping threshold of $31,177 (for the years ended 31 March 2016 and 2017 only) or $30,000. If an employee is provided with fringe benefits above the capping threshold, then a PBI will be subject to FBT on those fringe benefits.

An employer that is a PBI must, therefore, determine its fringe benefits tax liability, if any, for each year of tax. To do this the employer needs to calculate its fringe benefits taxable amount in accordance with section 5B, which is the amount upon which an employer must pay FBT.

For a PBI, the employer's fringe benefits taxable amount is increased by the employer's aggregate non-exempt amount for the year of tax under subsection 5B(1D).

The employer's aggregate non-exempt amount is worked out in accordance with subsection 5B(1E). This is done by determining each employee's individual grossed-up non-exempt amount which is, effectively, the amount of any fringe benefits above the capping threshold.

In order to determine each employee's individual grossed-up non-exempt amount, the employer must work out the amount that would be each employee's individual fringe benefit amount. To do this, each benefit that:

is provided in respect of the employment of the employee

is exempt because of section 57A, and

apart from section 57A would be a fringe benefit

must be treated as if it were a fringe benefit.

Under subsection 5E(2), your employee's individual fringe benefits amount is the sum of your employee's share of the taxable value of each fringe benefit that relates to the year of tax other than an excluded benefit.

You pay for your employee's travel by way of reimbursement and this should be included in your employee's individual fringe benefits amount. If the benefit was not exempt under section 57A it would be an expense fringe payment benefit under section 20. The taxable value of that fringe benefit under section 23 is the amount of the reimbursement.

The taxable value may be reduced in accordance with section 24 where the expenditure would have been deductible to the employee had the employee incurred the expenditure (the otherwise deductible rule). Broadly this means that the taxable value may be reduced by the amount that the employee would have been entitled to claim as an income tax deduction.

The issue which therefore needs to be determined is whether or not your employee would have been entitled to a deduction for the cost of the travel had it not been reimbursed by you.

As is relevant, section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income except where the losses or outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The general rule provided by the decision of the Full Court of the High Court in Lunney and Hayley v. Commissioner of Taxation (1958) 100 CLR 478; [1958] HCA 5; (1958) 32 ALJR 139; (1958) 11 ATD 404; [1958] ALR 225 (Lunney), is that travel between home and a person's regular place of employment or business is ordinarily private travel. Williams, Kitto and Taylor JJ stated:

It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income.

As discussed in Taxation Ruling No. IT 112 The deductibility of travelling expenses between residence and place of employment or business, the decision in Lunney affirmed the long standing position that travel between home and a person's regular place of employment or business is ordinarily private travel. While travel to work is a necessary pre-requisite to earning income it is not undertaken in the course of earning that income.

As such, expenses incurred by employees for their day to day travel to their regular place of employment and back to their home are not deductible against their assessable income.

It is therefore important to identify when an employee is travelling in the course of employment (that is, in the course of producing their assessable income) as opposed to travelling to their employment.

Employees are more likely to be travelling in the course of producing assessable income where the employer requires them to travel and perform their duties at a place away from their home base or usual place of employment.

However, although employees may be required to travel and perform work away from home by their employer, any expenses incurred will not be deductible to the extent they are private or domestic in nature.

In circumstances where expenditure is incurred through or as a consequence of a choice exercised by the employee, that expenditure is likely to be considered private in nature and therefore, not deductible.

Often cited is the decision in Federal Commissioner of Taxation v. Charlton 84 ATC 4415; (1984) 71 FLR 107; (1984) 15 ATR 711, where it was concluded that the expenditure on rent was dictated not by the taxpayer's work as a coronial pathologist but by private considerations. It was therefore not incurred in gaining assessable income.

Crockett J at 84 ATC 4419-4420 noted:

The Commissioner contends (correctly in my view) that, if the taxpayer should choose to reside so far from the place where it is necessary for him to be in order to gain his income that he, not only needs to incur expense in travelling to that place but, also to incur expense in the provision to him of some accommodation transitory or discontinuous in its use and secondary to or temporarily supplemental of his actual home, then that expense, too, is for the same reason non-deductible.

The taxpayer's election to live in Melbourne and not in Bendigo meant that the rental expended on the flat in order to enable him to secure accommodation in which to recuperate from the rigours of travel and the nature of his work was an expenditure dictated not by his work but by private considerations. 

Similarly, in Federal Commissioner of Taxation v Toms 89 ATC 4373; (1989) 20 ATR 466, the Federal Court of Australia held that the taxpayer was not entitled to a deduction under subsection 51(1) of the Income Tax Assessment Act 1936 (the equivalent of section 8-1 of the ITAA 1997 at that time) for any of the living expenses. In reaching this decision Burchett J, at 89 ATC 4376, stated as follows:

… the caravan was rendered necessary as much by the taxpayer's choice of the place of his residence in Grafton as by his choice of employment in the State forest, and its purpose was to enable him to retain his residence at Grafton although employed in the State forest. Had he lived at a town closer to the forest, there is no question the caravan would have been unnecessary. 

Similar conclusions may also be found in the decision in Hancox v. Federal Commissioner of Taxation (2013) 214 FCR 25; [2013] FCA 735; (2013) 2013 ATC 20-401; (2013) 95 ATR 574.

Your employee chose to reside a considerable distance from your premises for personal reasons. You provided your employee with the option of continuing to work for you by undertaking duties remotely with the requirement that some of those duties be performed on site. In order to do this your employee must travel a long distance to your premises.

Although your employee travels a long distance and is required to do so in order to perform certain duties, the expenses incurred in undertaking that travel are a result of your employee's choice of residence. If your employee had not moved and continued to reside close to the place of employment, the travel between your employee's place of residence and place of employment would clearly have been private in nature.

Any outgoings incurred for the travel are therefore considered to be private in nature and a deduction would not be allowable under section 8-1 of the ITAA 1997. Consequently, you cannot reduce the taxable value of the benefits arising from the payment of the travel when determining employee's individual fringe benefits amount as part of the calculation of your fringe benefits taxable amount in accordance with section 5B.