Edited version of your written advice

Authorisation Number: 1051322003088

Date of advice: 20 December 2017

Ruling

Subject: FBT Otherwise Deductible Rule (ODR)

Question 1

Are reimbursements made by the company to the partners of the partnership for the purchase of assets under $20,000 a fringe benefit under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No

Question 2

If the answer to question 1 is yes, what type of fringe benefit is being provided and can the taxable value be reduced to nil using the otherwise deductible rule under section 24 or section 52 of the FBTAA 1986?

Answer

Not applicable/required to be answered

Question 3

Will the company be able to make a 100% tax deduction for the assets purchased by the company directors/employees under section 328-180 of the Income Tax Assessment Act 1997 (ITAA 1997).

Answer

No

This ruling applies for the following periods:

1 July 2016 – 30 June 2017

1 July 2017 – 30 June 2018

1 April 2016 – 31 March 2017

1 April 2017 – 31 March 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The company offers services to the general public.

You state that the company meets the criteria to be a Small Business Entity (SBE).

There is also a related entity being a partnership.

Both entities operate from the same premises. Both entities cross refer their respective client bases.

The directors of the company are considered employees of the company.

These employees are also partners in the partnership.

The partnership has purchased general office equipment such as office chairs, computer equipment, sundry office equipment and fit out acquisitions.

In the future the company may need to look at an upgrade of the telephone system and file server.

As a small business the company buys equipment as needed or as the opportunity arises.

The assets in question were purchased between 1 July 2016 and 30 June 2018.

The cost of the acquisitions varied but all cost less than $1,000 each.

The company has budgeted $20,000 for the file server and telephone system.

Recarpeting of office $6,500.

Assets will be acquired in the name of the partnership.

The assets will be used 100% by the partnership.

You are proposing to reimburse money to the partners of the partnership for the assets they have purchased.

You state that the equipment purchases as outlined in the facts will be eligible for the 100% deduction in the year of acquisition.

Assets are used immediately upon acquisition.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 24

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 148(1)

Fringe Benefits Tax Assessment Act 1986 Section 52

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 40-30(2)

Income Tax Assessment Act 1997 Section 40-40

Income Tax Assessment Act 1997 Subsection 328-110(1)

Income Tax Assessment Act 1997 Subsection 328-180

Income Tax Assessment Act 1997 Subsection 328-180(1)

Income Tax Assessment Act 1997 Subsection 328-180(4)

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax Assessment Act 1936 Section 318

Income Tax Assessment Act 1936 Subsection 318(1)

Income Tax Assessment Act 1936 Subsection 318(4)

Reasons for decision

Question 1

Summary

On examination of your circumstances, it is considered that the company is proposing to make a reimbursement to the partners in the partnership (a related entity where the partners are also directors and employees of the company) for expenses the partners have incurred on behalf of the company and the partnership. In making those reimbursements you are not providing the benefit in respect of the employees’ employment and as such, you are not providing a fringe benefit under subsection 136(1) of the FBTAA 1986.

Detailed reasoning

Fringe Benefits Tax

Subsection 136(1) of the FBTAA defines ‘expense payment fringe benefit’ as a fringe benefit that is an expense payment benefit. A ‘fringe benefit’ is defined in subsection 136(1) of the FBTAA, which holds that the following conditions must be satisfied:

1. A benefit is provided at any time during the year of tax.

2. The benefit is provided to an employee or an associate of the employee.

3. The benefit is provided by:

a. their employer; or

b. an associate of the employer; or

c. a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party; or

d. a third party other than the employer or an associate of the employer, if the employer or an associate of the employer:

i. participates in or facilitates the provision or receipt of the benefit; or

ii. participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

4. The benefit is provided in respect of the employment of the employee.

5. The benefit is not one that is specifically excluded as per paragraphs (f) to (s) of the definition of a fringe benefit in subsection 136(1) of the FBTAA.

A discussion is provided below in respect of whether each element or condition of the definition of a fringe benefit is satisfied.

A benefit is provided

Subsection 136(1) of the FBTAA provides a broad definition of a ‘benefit’ as including:

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; …

Based on the facts, the company will be providing a benefit by reimbursing the partners for office assets they have purchased for the partnership.

The provision by the company to pay for the expenses falls within the definition of a ‘benefit’ as defined in subsection 136(1) of the FBTAA.

As such, the first condition (i.e. the provision of a ‘benefit’) of the definition of a ‘fringe benefit’ – as defined in subsection 136(1) of the FBTAA – would be satisfied.

The benefit is provided to an employee or an associate of the employee

An ‘employee’ is defined in subsection 136(1) of the FBTAA to mean a current, future or former employee.

The facts state that the directors are also employees of the company and partners in the partnership.

Subsection 136(1) of the FBTAA provides certain definitions which apply for the purposes of that act. This subsection states that the term ‘associate’ has the meaning given by section 318 of the ITAA 1936, which provides:

318(1)

For the purposes of this Part, the following are associates of an entity (in this subsection called the "primary entity") that is a natural person (otherwise than in the capacity of trustee):

(a) a relative of the primary entity;

(b) a partner of the primary entity or a partnership in which the primary entity is a partner;

(c) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(d) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(e) a company where:

(i) the company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) another company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection.

318(4)

For the purposes of this Part, the following are associates of a partnership (in this subsection called the "primary entity"):

(a) a partner in the partnership;

(b) if a partner in the partnership is a natural person - any entity that, if that natural person were the primary entity, would be an associate of that natural person because of subsection (1) or (3);

(c) if a partner in the partnership is a company - any entity that, if the company were the primary entity, would be an associate of the company because of subsection (2) or (3).

As the company works closely with the partnership it can be said that the company is influenced by the partnership and therefore this criterion is met.

The benefit is provided by an employer, an associate of the employer or a third party

‘Employer’ is defined in subsection 136(1) of the FBTAA to mean a current, future or former employer.

The company is considered an associate of the partnership.

Therefore, the third condition (i.e. a benefit is provided by an employer) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA would be satisfied.

The benefit is provided in respect of the employment of the employee

As per subsection 136(1) of the FBTAA, ‘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.

Subsection 148(1) of the FBTAA stipulates that a benefit will be provided in respect of the employment of an employee:

● whether or not the benefit also relates to some other matter or thing;

● whether the employment is past, present or future;

● whether or not the benefit is surplus to the recipient's requirements;

● whether or not the benefit is also provided to another person;

● whether or not the benefit is offset by any inconvenience or disadvantage;

● whether or not the benefit is provided or used, or required to be provided or used, in connection with any employment;

● whether or not the provision of the benefit is in the nature of income, and

● whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee.

In J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 (Knowles), the full Federal Court – examined the meaning of ‘in respect of’ an employee’s employment.

At paragraphs 28 and 29, the court said:

While the width of the definition of “fringe benefit” was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit. \in particular, the fact that a benefit is provided to a director because it was authorised by that director will not, or itself, be sufficient to characterise the benefit as one which is “in respect of” the employment. Without more, it is not a product or incident of that office.

To put the matter another way, although the process of characterising the benefit provided in a particular case can involve questions of fact and degree, it is not sufficient for the purposes of the FBTAA merely to enquire whether there is a causal connection between the benefit and the employment. See FCT v Rowe (1995) 60 FCR 99 at 114 and 123; 31 ATR 292 at 404 and 412; 95 ATC 4691 at 4703 and 4710. Although Brennan, Deane and Gaudron JJ observed in Technical Products (at 47), that the requisite connection will not exist unless there is “some discernible and rational link” between the two subject matters which the stature requires to be linked, as was pointed out by Dawson J (at 51) the connection must be “material”.

Based on the facts, the connection between the benefit being received by employees is causal. That is, the employees are being reimbursed because of their role as partners in the partnership rather than because of their employment.

As such, the fourth condition (i.e. a benefit is provided in respect of the employment of the employee) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA would not be satisfied. The benefit is therefore not a fringe benefit.

Question 2

Summary

Not required to be answered.

Question 3

Summary

A taxpayer can obtain an immediate write off under section 328-180 of the ITAA 1997 for assets purchased on the basis the cost is less than $20,000 at the end of the income year ending 30 June 2018 and they are the holder of the assets and they are only used for business purposes. However as the company is not the holder of the assets, because the partnership is the legal owner, the immediate write off deduction is not allowable.

Detailed reasoning

As a general rule you can claim deductions for expenses incurred in gaining or producing assessable income. The cost of acquiring capital assets is generally not deductible. You might be able to claim a deduction for the decline in value of the cost of capital assets used in gaining assessable income.

A small business entity that has elected to use the small business entity capital allowance rules in Subdivision 328-D of the ITAA 1997 for an income year may immediately write off the taxable use portion of the cost of an asset acquired for less than the threshold amount.

The taxable use of a depreciating asset is the portion of an asset’s use in an income year that is for the purposes of producing assessable income (subsection 328-205(3) of the ITAA 1997). The deduction for the assets that cost less than the threshold is claimed in the income year in which the asset was first acquired or installed ready for use.

The threshold is $20,000 for assets first acquired between 12 May 2015 and 30 June 2018 (subsection 328-180(4) of the Income Tax (Transitional Provisions) Act 1997).

The conditions for the application of the immediate write off for assets costing less than $20,000 are set out in subsection 328-180(1) of the ITAA 1997, namely:

a) The taxpayer was a small business entity for the year in which the deduction is claimed and the year in which the taxpayer started to hold the asset;

b) The taxpayer chooses to use the simplified depreciation system for small business entities;

c) The asset is a depreciating asset whose cost at the end of the income year in which it was used or was installed ready for use for a taxable purpose is less than $20,000.

The taxpayer advised that they are a small business entity for the purpose of subsection 328-110(1) of the ITAA 1997, and will chose to apply the small business entity capital allowance rules in Subdivision 328-D, and that the assets listed in the facts will have a cost of less than $20,000.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (section 40-30 of the ITAA 1997). Land, trading stock and intangible assets not listed in subsection 40-30(2) of the act and are not depreciating assets.

It follows that the assets listed in the facts are depreciating assets. Any costs relating to the installation of the assets will form part of the cost of this depreciating asset. Provided that the assets are a depreciating assets and not capital and has a cost of less than $20,000 at the end of the income year ending 30 June 2018, the taxpayer will be entitled to claim an immediate write off under section 328-180 of the ITAA 1997.

Holder of Asset

A deduction for the decline in value of a depreciating asset for an income year can only be claimed by a person who “held” the asset at any time during the income year. The general rule is that the owner (or the legal owner, if there is both a legal and an equitable owner) holds the asset. Section 40-40 of the ITAA 1997, discusses this fully.

As the company is not the legal owner of the assets – the partnership is -the Commissioner does not consider that the company is “holding” the assets for the required period and is therefore not entitled to the immediate asset right off as outlined in Subdivision 328-D of the ITAA 1997.