Edited version of private advice

Authorisation Number: 1051641263708

Date of advice: 28 February 2020

Ruling

Subject: Salary sacrifice - exempt FBT - PBI

Question

If the proposed restructure arrangement is entered into, can the organisation provide exempt fringe benefits to the transferred employees under a valid salary sacrifice arrangement based on the organisations status as a Fringe Benefits Tax (FBT) exempt employer?

Answer

Yes, providing the restructure arrangement does not change the organisations status as a 'registered public benevolent institution'.

This ruling applies for the following period:

FBT year ending 31 March 2020

The scheme commences on:

1^st April 2019

Relevant facts and circumstances

Organisation 1

A registered charity - Public Benevolent Institution (PBI)

A Deductible Gift Recipient (DGR)

Income Tax Exempt

FBT exempt

Organisation 2

Incorporated as a public company limited by guarantee and operated on a not-for-profit basis.

PBI

DGR

Income tax exempt

FBT exempt

Organisation 3

Incorporated as a public company limited by guarantee and operated on a not-for-profit basis.

Registered charity (social welfare)

Income tax exempt

FBT rebatable

Organisation 4

Incorporated as a public company limited by guarantee and operated on a not-for-profit basis.

Registered charity (social welfare)

Income tax exempt

FBT rebatable

Organisation 5

A public company limited by shares with no prohibition on dividends or capital returns to be paid to shareholders.

No tax concessions

The proposed merge

Organisation 1 is considering implementing a merger with organisation 2 and its subsidiaries in the following way:

·        Organisation 2 will be wound up and its assets and employees transferred to organisation 1;

·        Organisation 3, 4 and 5 will NOT be wound up but continue as subsidiary entities of organisation 1.

Organisation 1 is considering the following:

·        All employees of organisation 2 will have their employment terminated and new agreements with organisation 1 will take place.

·        Staff currently employed by the subsidiaries organisation 3, 4, and 5 will also be transferred to organisation 1 and will enter a new employment agreement with organisation 1. The question of this ruling is if this occurs can organisation 1 rely on its current FBT exemption for these employees.

·        The transferred employees will provide services to organisation 3, 4 and 5 and limited or no services to organisation 1.

The intention of organisation 1 and purpose for implementing the proposed arrangement includes:

·        Achieving administrative and operational efficiency by having organisation 1 as the entity which employs all (or the majority of) staff within the group of entities;

·        Enabling the group to be competitive with the for-profit sector in recruiting and retaining staff, including by offering competitive and fair remuneration and the flexibility of salary sacrifice arrangements.

After the merger organisation 1 will be the only company with employees.

Employees from the subsidiary companies (organisations 3, 4 and 5) will continue to do work for these companies but will be employed by organisation 1 and will receive the same tax concessions and benefits as the current employees of organisation 1.

There will be a subcontracting agreement (for provision of services) between organisation 1 and organisation 3, organisation 4 and organisation 5.

In consideration for the services provided by organisation 1, the organisations 3, 4 and 5 will pay organisation 1 contractor fees.

The transferred employees will be employed by organisation 1 but their work will be subcontracted out, and they will be providing services to organisation 3, 4 and 5 either exclusively or predominately.

Relevant legislative provisions

Subsection 136(1) of the FBTAA 1986

Section 57A of the FBTAA 1986

Section 123C of the FBTAA 1986

Reasons for decision

Summary

Your entitlement to provide exempt fringe benefits, up to the capping threshold of $30,000 per employee, is dependent on being a registered PBI with the Australian Charities and Not-for-Profits Commission (ACNC). Currently organisation 1 is a registered PBI with the ACNC. Therefore providing the ACNC agrees that your status as a registered PBI is maintained once the merge takes place then the transferred employees will be eligible for the FBT concessions.

Detailed reasoning

A 'fringe benefit' as defined in subsection 136(1) of the FBTAA is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted.

There are various benefit types that are specifically exempt or attract a concession or reduction in taxable value from the definition of a "fringe benefit".

Section 57A provides that certain employers who are registered public benevolent institutions that are endorsed under section 123C can provide benefits that exempt from fringe benefits tax (up to a capping threshold). These benefits are still reportable on employees' payment summaries or income statements unless otherwise specifically excluded from such reporting.

Benefits provided by these organisations may be exempt where the total grossed-up value of certain benefits (which are benefits not otherwise exempt) provided to each employee during the FBT year is equal to, or less than, the capping threshold.

The ACNC is responsible for determining PBI status. The ACNC registers organisations as charities, including particular types of charities such as PBI's.

An organisation which is a registered PBI, with the ACNC, will be entitled to be endorsed for FBT concessions.

Your situation

Currently organisation 1 is FBT exempt, up to the capping threshold of $30,000 per employee, as it is registered by the ACNC, and endorsed by the Commissioner of Taxation, as a PBI. The organisation provides benefits to employees under a valid salary sacrifice arrangement. The benefits provided are exempt from FBT if the total grossed-up value is equal to or less than the capping threshold.

Once the merger of the organisations takes place as described in the facts, the transferred employees will also be entitled to the same fringe benefits tax concessions as the current employees. This is reliant on organisation 1 maintaining its status as a registered PBI with the ACNC post the merge.

As a consequence of the merger the activities of the PBI will have changed significantly and is likely to impact the organisations purpose as a PBI.

However, as noted above the ACNC, is responsible for determining PBI status of organisations.

We would advise that organisation 1 to obtain guidance from the ACNC to ensure that the PBI status is maintained post merge.

Conclusion

The transferred employees will be entitled to receive exempt fringe benefits (subject to the capping thresholds) post the merge of the other entities with organisation 1 so long as organisation 1 maintains its PBI status.