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Edited version of your written advice
Authorisation Number: 1051203606445
Date of advice: 20 March 2017
Ruling
Subject: In-house Property Fringe Benefit
Question 1
Should rebates paid by Company X to Company Y pursuant to the Plan, be taken into account to identify the lowest price at which Company X sells property to Company Y, for the purpose of determining the taxable value of the property provided by Company X to employees as in-house fringe benefits under subparagraph 42(1)(a)(i)(A) of the FBTAA?
Answer
Yes
This ruling applies for the following periods:
01 April 2016 to 31 March 2018
The scheme commences on
1 April 2016
Relevant facts and circumstances
Company X manufactures property. Company X provides this property manufactured by them to their employees, associates and employees' immediate family members at a discount.
Company Y acquisition of property from Company X
Company Y is an independent distributor of the property in Australia. It does not share common ownership with Company X, and is not an associate of Company X per section 136 of the FBTAA or section 318 of the ITAA 1936.
Company Y acquires the property in bulk and wholesale from Company X and on sell the property for a profit.
The locally manufactured property which Company Y acquires from Company X is the same as that which Company X provides to employees at a discount.
The Price is made up of a Retail Price less GST. The wholesale price which Company X and Company Y have agreed in respect of Company Y's acquisition of property from Company X is at a discount to the Price.
Company Y is also entitled to receive a rebate from Company X where property is sold pursuant to the Plan. The amount of the rebate varies depending on the property type and a Category.
Plan
Pricing for the property, acquired under the Plan is determined by a Category.
Where the property is provided to customers under the a Plan, the sales margin which Company X, Company Y and others receive on sale is reduced due to the agreement to sell at a discount to the Price.
The Plan, including Company Y, follows the following process:
● A customer is entitled to purchase the property at a discount to the Price.
● The seller is entitled to an agreed margin on the ultimate sale of the property which results in a total rebate, to which they are entitled on the supply.
● Company Y is to contribute a balance amount of the Price of the property towards the rebate the seller receives.
● Company X contributes the balance of the rebate amount by paying it to Company Y.
For supplies of property to a customer category Company X pays a rebate to Company Y for the supply. This occurs approximately one month after the sale.
Relevant legislative provisions
Fringe Benefits Assessment Act 1986 Subparagraph 42(1)(a)(i)(A).
Fringe Benefits Assessment Act 1986 Subsection 136(1)
Income Tax Assessment Act 1936 Section 318
Reasons for decision
Summary
Rebates paid by Company X to Company Y pursuant to a Plan, will be taken into account to identify the lowest price at which Company X sells the property to Company Y, for the purpose of determining the taxable value of the property provided by Company X to employees as in-house fringe benefits under subparagraph 42(1)(a)(i)(A) of the FBTAA.
Detailed reasoning
In-house property benefits are discussed in subsection 136(1) of the FBTAA, where it is stated that:
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…
Identical property is further defined in subsection 136(1) of the FBTAA as:
Identical property, in relation to the recipients property in relation to a property fringe benefit, means other property that is the same in all respects, including physical characteristics, quality and reputation, except for differences (if any) that are minimal or insignificant and do not affect the value of the property.
Finally, subparagraph 42(1)(a)(i)(A) of the FBTAA provides that where the property was manufactured by the benefit provider, the taxable value of an in-house property fringe benefit is, if any identical property was, at or about the provision time, sold by the provider in the ordinary course of business under arm's length transactions to manufacturers, wholesalers or retailers, the lowest price at which it was sold under such a transaction (less any employee contribution):
42(1) [Calculation of taxable value] |
Subject to this Part, the taxable value of an in-house property fringe benefit in relation to an employer in relation to a year of tax is:
(aa) … |
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(ab) …; or |
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(a) if neither paragraph (aa) nor (ab) applies and the recipient's property was manufactured, produced, processed or treated by the provider: (i) if identical property that was manufactured, produced, processed or treated, as the case may be, by the provider was, at or about the provision time, sold by the provider in the ordinary course of business to purchasers being manufacturers, wholesalers or retailers - an amount equal to: (A) if any of that identical property was, at or about the provision time, sold by the provider under an arm's length transaction or arm's length transactions - the lowest price at which it was sold under such a transaction; or …. | ||
Application to Company X
Company X is in the business of manufacturing property in Australia. They provide these same products at a discount to their employees, Company X associates and employees' immediate family members. In particular, Company X is in the business of providing identical or similar property to outsiders, including Company Y and other entities. Therefore Company X is providing in-house property fringe benefits in accordance with subsection 136(1) of the FBTAA.
Subparagraph 42(1)(a)(i) of the FBTAA concentrates on whether the property manufactured by Company X and provided to employees and their associates, is identical to that provided to a wholesaler, manufacturer or retailer, in the ordinary course of business. Here, Company X manufactures the property throughout Australia in the ordinary course of their business. The property distributed to employees, associates, wholesalers and retailers are identical or similar.
Company X provides property to Company Y on a wholesale basis. Wholesale is not defined in the FBTAA therefore it takes its ordinary meaning. The Macquarie Dictionary defines wholesale as the sale of commodities in large quantities, as to retailers or jobbers rather than to consumers directly (distinguished from retail). Company X sells property to Company Y under these conditions as described, therefore this requirement is satisfied.
The final component to be determined is the taxable value of the property. This is determined using the lowest price at which an identical item is sold in an arm's length transaction.
The property that Company X provides to Company Y is identical to those which they provide to their employees, associates and employees relatives. Subsection 136(1) of the FBTAA defines arm's length transaction as 'a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction'. Company X states that they provide property to Company Y who is an independent distributor of the property. They do not share common ownership and do not influence, control or dictate to each other. They have however, negotiated the terms of supply of the property. Therefore it is considered that Company Y's acquisition of property from Company X is at arm's length.
Company X has provided that the lowest price at which the property was sold includes the rebate paid to Company Y by Company X. This is because it relates directly to the supply of property and reduces Company Y's out of pocket expenditure incurred in respect of the supply.
In this case, Company Y acquires property from Company X at arm's length. Where property is provided to customers under the plan, Company Y receives a rebate. This property is the same as those which Company X provides to employees at a discount.
Therefore it is considered that the lowest arm's length price includes the rebate paid by Company X to Company Y, as they are directly and immediately connected with the supply of property to Company Y.