Edited version of private advice

Authorisation Number: 1051690563422

Date of advice: 2 July 2020

Ruling

Subject: Fringe benefits tax and scholarships

Question 1

Does the provision of an educational scholarship to a student whose parent is an employee of the entity or one of its entities constitute a 'fringe benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 2

Does the provision of an educational scholarship to a student whose parent is an employee of the entity or one of its entities - that is partially or fully funded and administered by one of the entities partners, - constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA?

Answer

No.

This ruling applies for the following periods:

FBT year ending 31 March 20XX

FBT year ending 31 March 20XX

FBT year ending 31 March 20XX

FBT year ending 31 March 20XX

FBT year ending 31 March 20XX

The scheme commenced on:

13 January 20XX

Relevant facts and circumstances

The entity is planning to introduce an annual, part-fee scholarship per annum to a student enrolled in full-time study.

The student must be over 18, unmarried and living in the family home.

As the entity already offers a number of scholarships, it would like to limit applications to students whose parents work for the entity or one of its entities.

As the student is over 18, he or she is technically responsible for his or her own educational loans and expenses. The parent will not be involved in the scholarship application process, nor the selection of the winner. The scholarship will be awarded to a student by a panel of staff based on criteria that includes effort, previous academic results and achievements (including commitment to their local community).

All criteria are considered independently of the employee. As such, one student will be successful, and several others will not be.

Once the scholarship is awarded, the student will need to meet a pre-determined grade point average to retain the scholarship, which can be subsequently removed.

The aim of the scholarship is to recognise the student's efforts and achievements and assist the student to become financially independent sooner.

The scholarship will be open to students at any stage of their degree in an undergraduate course. Any awards will have requirements attached.

This is currently a proposed arrangement. The entity anticipates it will receive a number of applications for the scholarship and it will be a competitive process.

Alternative Scenario:

The entity has been approached by one of its partners, to partially or fully fund and administer this scholarship. In this alternative scenario, a representative of the partnership entity will sit on and/or chair the panel that determines the award recipient.

If such a scenario were to occur, the arrangement would be captured in a simple memorandum of understanding (MOU), without any financial consequence if either party were to withdraw. The agreement would not likely exceed two years in the first instance.

The entity is not linked to the partner in terms of its ownership or control.

Where the scholarship that is awarded to a student (whose parent works at the entity or one of its entities) is partially funded by the partner, the entity may or may not also partially fund the scholarship as well.

Relevant legislative provisions

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Subsection 148(1) of the Fringe Benefits Tax Assessment Act 1986

Section 318 of the Income Tax Assessment Act 1936

Reasons for decision

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; ...

'Provide' in relation to a benefit is defined in subsection 136(1) of the FBTAA to include 'allow, confer, give, grant or perform'.

The giving or granting of an educational scholarship 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.

An 'associate' is defined in subsection 136(1) of the FBTAA as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

'Associates of a natural person' is defined in subsection 318(1) of the 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; ...

As per the facts, the educational scholarship (the benefit) is to be awarded to a student whose parent is an employee of the entity or one of its entities (the employer). As the student who is awarded the scholarship must be a relative of an employee of the entity (or one of its entities), that student will be an associate of the employee.

Therefore, as the benefit (the provision of an educational scholarship) would be provided to an associate of an employee of the entity (or one of its entities), the second condition (i.e. a benefit is provided to an employee or an associate of an employee) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA would be satisfied.

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.

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

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

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

(b) 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;

(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;

(d) another entity (in this paragraph called the controlling entity) where:

(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

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

(A) the controlling entity; or

(B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);

(e) another company (in this paragraph called the controlled company) where:

(i) the controlled 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) a 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 controlled 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 other 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 the other paragraphs of this subsection;

(f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

This element of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA would be satisfied if, as per paragraph (e) of the definition, the relevant benefit is provided by a person (the 'arranger') other than the employer or an associate of the employer under an arrangement between the employer (or an associate of the employer) and the arranger. For the purposes of paragraph (e) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA, an 'arrangement' - as defined in paragraph (a) of the definition of an 'arrangement' in subsection 136(1) of the FBTAA - is:

any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings...

Alternatively, this element of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA would be satisfied if, as per paragraph (ea) of the definition, the relevant benefit is provided by a person other than the employer or an associate of the employer, if the employer or an associate of the employer knowingly:

                                          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.

First scenario as per the facts

With respect to the first scenario in the facts, the partially funded scholarship is provided to an associate of an employee of the entity or one of its entities. That is, the benefit is provided by an employer.

Alternative scenario as per the facts

In the alternative scenario in the facts, the scholarship that is provided is funded at least partially, if not fully, by a partner entity.

This partner entity does not fall within one of the 'associates of a company' as provided in subsection 318(2) of the ITAA 1936 and is therefore not an associate of the entity or one of its entities.

Therefore, the benefit is not provided by either the employer (at least, not solely) or by an associate of the employer.

It is necessary to then determine whether, in the alternative scenario, the benefit provided would be provided by a third party pursuant to paragraphs (e) or (ea) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA.

As per the facts provided, if the alternative scenario was to occur, the arrangement would be captured in a Memorandum of Understanding (MOU), without any financial consequences if either party were to withdraw. Such an agreement/arrangement/understanding between the entity (or one of its entities) and the partner entity in these circumstances would satisfy paragraph (e) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA.

At the very least, it is considered that subparagraph (ea)(i) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA would likely be satisfied as the relevant benefit (the educational scholarship) would be provided by a third party where the employer or an associate of the employer knowingly participates in or facilitates the provision or receipt of this benefit.

Therefore, the third condition (i.e. a benefit is provided by an employer, an associate of an employer or a third party) 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 - 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'.

The full Federal Court in Knowles also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'.

To consider whether there is a sufficient or material connection between the awarding of a scholarship to a student (who has a parent who is an employee of the entity or one of its entities) 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 provision of an educational scholarship to a student (who has a parent who is an employee of the entity or one of its entities) and the employment of the employee (the parent of the student awarded a scholarship):

·         The awarding of an educational scholarship will not take into account any of the work-related characteristics of the employee (that is, work performance, status or seniority), and

·         The scholarship will be awarded based on the merit of the student; specifically, effort, previous academic results and achievements (including commitment to their local community), which is not under the control of the employee or the employer.

·         A competitive process will be run, with a number of applications anticipated for the first year the scholarship will be offered. If only 1 scholarship is awarded, then a large percentage of the applications will be unsuccessful.

Although employment of the employee is a pre-requisite, the benefit provided to the student who is awarded the scholarship (whose parent is an employee of the entity or one of its entities) is not a reward for the services provided by the employee. Given the number of unsuccessful applications, it is by no means certain that employment at the entity will result in the awarding of a scholarship to an employee's dependent.

It is therefore considered that:

·         the awarding of a scholarship to a student lacks a sufficient or material connection to that student's parent's employment at the entity or one of its entities), and

·         the provision of a scholarship to a student (whose parent is an employee employed by the entity or one of its entities) is not provided 'in respect of employment of the employee'.

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.

Conclusion

With respect to the both scenarios provided in the facts, as all of the conditions of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA are not satisfied, the provision of an educational scholarship to a student whose parent is an employee of the entity or one of its entities - by either the entity (or one of its entities) or one of its partners - would not constitute a 'fringe benefit'.

Question 2

Summary

As determined above, it is considered that the provision of an educational scholarship to a student whose parent is an employee of the entity or one of its entities would not constitute a 'fringe benefit' as defined in subsection 136(1) of the FBTAA. This is on the basis that such a benefit would not be provided in respect of the employment of the employee of the entity or one of its entities. As there is no fringe benefit, it makes no difference to our determination if the scholarship is funded by one of the entities partners.

The same reasons for decision apply as in Question One.