Edited version of private advice

Authorisation Number: 1051581638192

Date of advice: 25 September 2019

Ruling

Subject: Fringe benefits tax - educational trust

Question

Does the provision of an educational scholarship or grant to a dependant of an employee constitute a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

This ruling applies for the following periods

Year ended 31 March 2019

Year ended 31 March 2020

Year ended 31 March 2021

Year ended 31 March 2022

The scheme commenced on

1 April 2018

Relevant facts

An educational fund was established for the benefit of an international employer for its employees and their dependants worldwide. The intention of the Trust Deed is to benefit employees and dependants of Qualifying Companies.

The Principal Company and the employer are Australian residents for Australian tax purposes.

Membership of the Trust

Membership of the Trust is stated in of the Trust Deed:

Membership of the Trust is automatically accorded to all Employees for the time being.

Management and administration of the Fund

The Fund is administered and managed independently of the Employer Group. The Fund is administered in accordance of the Trust Deed, which states:

The management and administration of the Trust shall be vested in the Trustees who are empowered to make payments to Employees or Dependants in terms of the objectives of the Trust.

Trustees are appointed in accordance with the Trust Deed, which states:

The power of appointing Trustees of the Trust shall be as follows:

(a) the Trustees from time to time shall appoint such number of Trustees as they see fit, subject to a minimum of two such appointees;

(b) the Principal Company shall appoint at least one Trustee and may also appoint additional Trustees so long as at all times a majority in number of Trustees have been appointed by the Trustees.

The Group does not make regular contributions to the Fund from year to year. The Scholarships are fully funded by the corpus of the Fund comprising the initial settled sums and income from the Fund's investments.

Scholarships and Grants

The Trustees can pay to or for employees and dependants such benefits as are determined from time to time by the Trustees to be appropriate and equitable.

The Trustees of the Fund offer annual educational scholarships to dependants of employees of Qualifying Companies who are engaged in full time tertiary education. The Trustees of the Fund also offered 'Grants to Dependants' and 'Grants to Employees' for part time study that would qualify under the same criteria as the scholarships to dependants.

A limited number of Scholarships and Grants are offered so there is an element of competition.

Under the Scholarship's eligibility rules, dependant applicants must be dependent on an employee who has been employed by one of the Qualifying Companies for at least two years on a permanent basis at the time that the Scholarship is awarded.

The Qualifying Companies notify students about the availability of the Scholarships at the start of each calendar year by distributing the Scholarship Booklet, which is prepared by the Fund. Applications are required to be submitted directly to the Fund Administrator by 31 March annually.

The Scholarships and Grants are an award for merit to qualifying dependants. Successful candidates are selected wholly independently of the company by a sub-committee of the Trustees that does not include the Company Trustees. The Scholarship Booklet states:

Both programs will be administered by a person (the Trust Secretary) appointed by the Trustees and independent of the Company.

The Trust Secretary will be responsible for:

·        Receiving applications

·        Collating and checking same

·        Submitting the applications to the Trustees (or a sub-committee of the Trustees) at the appropriate time each year for deliberation and decision

The sub Committee can be either, the Trust Secretary and an independent Trustee or two independent Trustees.

All dealings with the applicants after the awards have been made will be the responsibility of the Trust Secretary.

All decisions will be the responsibility of and at the absolute discretion of the Trustees. This includes the discretion to disband, defer, alter and amend the criteria of the scholarships and grants to dependants at any time.

Applications are assessed according to independent criteria including academic achievements, cultural and sporting activities, and whether the applicant does anything else to assist their university financing (such as part-time work).

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1936 Section 318

Reasons for decision

Does the provision of an educational scholarship or grant to a dependant of an employee employed by a Qualifying Company constitute a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

The definition of 'fringe benefit' is provided in subsection 136(1) of the FBTAA:

in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person 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;

in respect of the employment of the employee, but does not include:

...

Associates

'Associate' is defined in subsection 136(1) of the FBTAA as

the meaning given by section 318 of the Income Tax Assessment Act 1936.

'Associates of a natural person' is defined in subsection 318(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as follows:

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) ...

(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;

...

It is accepted that a dependant as defined in the Trust Deed is a relative of an employee, and satisfies subsection 136(1) of the FBTAA.

'Associates of a company' is defined in subsection 318(2) of the ITAA 1936 to include:

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

...

(c) 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;

The employer is the primary entity. The direct beneficiaries of the trust are employees, and dependants of employees of the employer, not the employer itself. The company does not benefit under the trust. Therefore, the trustee is not an associate of the employer.

The dependants of employees of the employer are accepted as associates of employees of the employer. The benefits of educational scholarships and grants are not provided by the employer, but by the Educational Fund, which is not an associate of the employer.

Paragraphs (c) and (d) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA are not satisfied.

Arrangement between the employer and an arranger

Membership of the Trust is limited to employees, and their dependants, of Qualifying Companies. Membership of the Trust has an employment relationship.

The benefit of educational scholarships and grants does not arise from an arrangement between the employer and an arranger.

Educational scholarships and grants are limited to 25 scholarships and 20 grants to dependants of employees each year. The scholarships and grants are awarded on merit independently of the employer. The decision to pay scholarships and grants will be made by the Trustees. At all times, the Trustees will have a majority over the Principal Company.

Therefore, the benefit of scholarships and grants are provided independently of the employer, by the Trustees. The benefits are not provided in an arrangement between the employer and an arranger, the Trustees. Paragraph (e) of the definition of 'fringe benefit' is not satisfied.

The employer participates in, facilitates or promotes a scheme or plan involving the provision of the benefit. The employer promotes the provision of the benefit by notifying students about the availability of the scholarships at the start of each calendar year by distributing the Scholarship Booklet.

The Trust Deed states that the Principal Company shall appoint at least one Trustee so long as at all times a majority of Trustees have been appointed by the Trustees.

The employer therefore participates in, facilitates or promotes a scheme or plan involving the provision of the benefit. Paragraph (ea)(ii) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA is therefore satisfied.

Benefit 'in respect of employment'

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, in examining the meaning of 'in respect of' an employee's employment, held that the phrase required a 'nexus, some discernible and rational link, between the benefit and employment', though noted that 'what must be established is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment'.

To consider whether there is a sufficient or material connection between the scholarship and grants paid to dependants of employees, and the employment of the employee, it is necessary to determine whether the characterisation of the benefit can be said to be remuneration, and whether the benefit is a product or incident of the employment.

In the present circumstances, the following factors lead to a conclusion that there is not a sufficient or material connection between the payment of the scholarship or grant and the employment of the employee:

• The awarding of the scholarships and grants does not take into account any of the work related characteristics of the employee (i.e. work performance, status or seniority)
• Up to 25 scholarships and up to 20 grants are awarded based on the merit of the dependant of the employee; specifically, academic achievements, cultural and sporting activities, and whether the applicant does anything else to assist their university financing (such as part-time work).

The scholarships and grants are awarded based on the academic and other achievements of the dependant of the employee, which is not under the control of the employee or the employer.

Although employment of the employee is a pre-requisite, the benefit provided to the dependant of the employee is not a reward for the services provided by the employees.

It is accepted that the scholarships and grants lack a sufficient or material connection to employment.

It is accepted that the provision of an educational scholarship or grant by the Educational Fund to a dependant of an employee employed by the employer is not provided 'in respect of employment of the employee', and does not constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA.