Edited version of your written advice

Authorisation Number: 1051323704193

Date of advice: 4 January 2018

Ruling

Subject: Work related trauma

Issue 1

Question

Can Company A claim an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the medical expenses paid on behalf of a director?

Answer

Yes

Issue 2

Question

Does subsection 58J(1) of the Fringe Benefits Assessment Act 1986 (FBTAA) apply to exempt from fringe benefits tax (FBT) the medical expenses paid on behalf of a director?

Answer

Yes

This ruling applies for the following periods:

Income tax year ended 30 June 2016

Income tax year ended 30 June 2017

Income tax year ended 30 June 2018

Income tax year ended 30 June 2019

FBT year ended 31 March 2017

FBT year ended 31 March 2018

FBT year ended 31 March 2019

FBT year ended 31 March 2020

The scheme commences on:

1 April 2016

Relevant facts and circumstances

1. A director of Company A was injured in a worksite accident and as a company director is not covered by a relevant worker’s compensation law.

2. Full details of the accident, the injuries sustained and the medical expenses paid by Company A were provided.

3. All medical expenses paid were the balance after the director had claimed all relevant Medicare and private health benefits that were available.

Relevant legislative provisions

Fringe Benefits Assessment Act 1986 section 58J

Fringe Benefits Assessment Act 1986 subsection 58J(1)

Fringe Benefits Assessment Act 1986 paragraph 58J(1)(ii)

Fringe Benefits Assessment Act 1986 subsection 136(1)

Fringe Benefits Assessment Act 1986 section 137

Income Tax Assessment Act 1997 section 8-1

Taxation Administration Act 1953 section 12-35 of Schedule 1.

Taxation Administration Act 1953 section 12-40 of Schedule 1.

Reasons for decision

Issue 1

Summary

Company A is entitled to a deduction under section 8-1 of the ITAA 1997 in respect of the medical expenses they paid on behalf of the director.

Detailed reasoning

1. Section 8-1 of the ITAA 1997 states in part:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income; or

(d) a provision of this Act prevents you from deducting it.

2. As explained in our reasons in issue two the definition of an employee in subsection 136(1) of the FBTAA includes a director. In addition our reasons in issue two explain why the payments were made ‘in respect of employment’. The only reason they were not subject to FBT was because of the exemption contained in section 58J of the FBTAA.

3. However as a director of the company the person was not covered by workers compensation law.

4. In respect of payments to employees by uninsured employers, paragraph 7 of Taxation Ruling IT 2098 Deductions for workers' compensation liabilities: uninsured employers states in part;

For the purposes of sub-section 51(1), therefore, employers who carry their own workers' compensation liability will incur losses and outgoings in respect of workers' compensation when an obligation falls upon the employer to make payments to employees and/or their personal representative. In practice deductions for workers' compensation liabilities are to be allowed to uninsured employers on the following basis:

...

(b) Medical etc. expenses - in the year liability is accepted by or awarded against the employer;...

5. In applying the above paragraph Company A has accepted the liability to pay the director’s medical expenses because of the accident suffered at work. In effect in respect of the director Company A agreed to carry its own liability for any injury the director may incur while producing Company A’s assessable income.

6. Therefore these expenses are deductible under section 8-1 of the ITAA 1997.

Issue 2

Question 1

Summary

The director’s medical expenses paid by Company A are exempt benefits under section 58J(1) of the FBTAA.

Detailed reasoning

7. The definition of an employee in subsection 136(1) includes a current, future and former employee.

8. A current employee is defined (in the same subsection), as a person who receives, or is entitled to receive, salary or wages. The subsection defines salary or wages to include a payment made by a company director to which an amount must be withheld (even if the amount is not withheld) under section 12-40 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

9. Section 137 of the FBTAA expands on the definition of salary or wages to determine if a person is an employee. It requires an employer to examine how a benefit would have been treated if it was made as a cash payment. If the cash payment would have constituted salary or wages then it is a payment made to an employee.

10. In addition to be a fringe benefit the benefit must have been provided ‘in respect of employment’ The Full Federal Court decision in J & G Knowles & Associates Pty Ltd v. Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 concluded that to be in respect of employment there has to be a causal connection between the benefit and the employment.

11. In this case the payments were made to cover medical expenses incurred as a result of the injury received while generating income for Company A.

12. Had the director not been performing duties the injury would not have happened and the expenses would not have been incurred the expenses. Therefore there is a clear nexus between the payment of the medical expenses and employment.

13. In respect of medical expenses section 58J of the FBTAA provides an exemption for compensable work related trauma and subsection 58J(1) states in part:

Where –

(a) a benefit is provided in respect of the employment of an employee for or in respect of compensable work-related trauma suffered by the employee; and

(b) either of the following subparagraphs applies –

(i) the benefit is provided under a workers' compensation law that applies to that employment;

(ii) the benefit is not provided under a workers' compensation law but the provision of the benefit is reasonable having regard to all relevant matters including, but without limiting the generality of the foregoing, the value of the benefit and the nature of the effects of the trauma;

the benefit is an exempt benefit.

14. In this case as the director was not covered by a worker’s compensation law we need to examine paragraph 58J(1)(b)(ii). In examining this we have to examine whether:

● The director suffered work-related trauma

● if so, whether it was compensable work-related trauma; and

● having regards to the relevant matters whether the provision of the benefit was reasonable.

Work-related trauma

15. Work-related trauma is defined in subsection 136(1) of the FBTAA as

in relation to an employee, means:

(a) the injury of the employee (including the aggravation, acceleration or recurrence of an injury of the employee);

(b) the contraction, aggravation, acceleration or recurrence of a disease of the employee;

(c) the loss or destruction of, or damage to:

(i) an artificial limb or other artificial substitute;

(ii) a medical, surgical or similar aid or appliance used by the employee; or

(iii) clothing worn by the employee; or

(d) the coming into existence, the aggravation, acceleration or recurrence of any other physiological or psychological condition in relation to the employee that is or may be harmful or disadvantageous to, or result in harm or disadvantage to, the employee;

that is related to any employment of the employee.

16. In this case the director suffered the injury while working for Company A and thus that would meet the definition of work-related trauma.

Compensable work-related trauma

17. Compensable work-related trauma is defined at section 136(1) of the FBTAA in part as being:

'…work-related trauma suffered by an employee where:

(a) if there is no Australian workers' compensation law that applies to the employment of the employee – if any Australian workers' compensation law had applied to the employment of the employee, that law would have provided for compensation or other benefits for or in respect of the trauma; or...

18. This means that where an employee's employment is not covered by a workers' compensation law the injury will be treated as compensable if an Australian workers' compensation law had extended to that person’s employment.

19. Workers' compensation law is also defined in subsection 136(1) of the FBTAA and means

a law of the Commonwealth, a State, a Territory or a foreign country that provides for compensation or other benefits for or in respect of work-related trauma suffered by employees without requiring proof of any breach by, or by persons associated with, employers.

20. The director suffered the injury in a State that has workers’ compensation law. Had the definition of a ‘worker’ under that law been extended to cover a payment to a director then the director would have been covered by this act.

21. Therefore the director suffered compensable work-related trauma.

Is the benefit reasonable?

22. Taxation Determination TD 93/64 Fringe benefits tax: is a payment by a sporting club for medical/hospital expenses arising from injuries suffered by a player during training or playing exempt from fringe benefits tax? sets out the Commissioner's view on whether payments by sporting clubs for medical/hospital expenses arising from injuries suffered by a player during training or playing are exempt from fringe benefits tax. Paragraph 3:

'In some cases, a doctor's fee is more than the amount a player can claim as a rebate from Medicare and/or a private health fund. If the sporting club pays the difference, it is known as a "medical gap payment." Generally, we consider this type of benefit to be reasonable in terms of section 58J and the benefit is exempt from FBT.'

23. In this case Company A is making a medical gap payment for expenses that have arisen as a result of being injured at his worksite.

24. The medical expenses covered by Company A are reasonable having regards to the facts of the case.

Conclusion

25. The conditions outlines in subsection 58J(1) of the FBTAA have been satisfied and the Directors medical expenses paid by Company A are exempt benefits.