Edited version of private advice

Authorisation Number: 1051834835358

Date of advice: 14 July 2021

Ruling

Subject: Fringe benefits tax - expense payment benefit

Question 1

Was the provision of payments or reimbursements for the exact amount of a purchase of a car in the employment arrangements between an employer and its former Executive Director (the former Executive Director) a fringe benefit?

Answer

Yes

Question 2

Was the provision of payments or reimbursements for the exact amount of a purchase of a car in the employment arrangement between an employer and the former Executive Director income subject to PAYG withholding?

Answer

No

Question 3

Was the provision of a cash retirement payment, calculated by reference to unused accrued amounts relating to the purchase of a car, subject to PAYG withholding?

Answer

Yes

This ruling applies for the following periods

Year ended 31 March 20XX

Year ended 30 June 20XX

The scheme commenced on

1 April 20XX

Relevant facts

A former Executive Director's employment package included salary, superannuation entitlements and certain allowances. The allowances included a motor vehicle amount which paid for, or reimbursed, the former Executive Director for the cost of a motor vehicle. The motor vehicle amount accrued but at no stage was the former Executive Director entitled to elect to receive the amount as cash. There was no restriction on the use of any car acquired using the motor vehicle amount, and at no stage was there a no-private-use declaration in place.

The former Executive Director did not always use the allowances or other entitlements he was entitled to and they were accumulated in an account on the employer's balance sheet.

The employer also maintained a spreadsheet to 20XX (when the former Executive director retired) which detailed when the remuneration package amounts were accrued and when they were drawn from the account. That spreadsheet also identified the nature of the draw from the account.

In the case of the motor vehicle amount, the former Executive Director and the employer agreed that the amount could not be accessed in cash by the former Executive Director. The spreadsheet demonstrates that the motor vehicle amount was exclusively used to purchase motor vehicles for the former Executive Director.

Any such motor vehicle purchase or reimbursement was included in the employer's related Fringe Benefits Tax (FBT) return, and FBT was paid by the employer.

The facts in relation to the motor vehicle amount differ from the facts in relation to other allowances that the former Executive Director was entitled to. For example, the former Executive Director's employment package included a work expenses allowance. Where that accrued, the former Executive Director was entitled to and did take that allowance in cash. Where that occurred, the employer remitted Pay-As-You-Go (PAYG) withholding to the Commissioner of Taxation.

In 20XX, the account was accessed in cash by the former Executive Director, other than the motor vehicle amount (which could not be so accessed) and a further $X for incidentals. From this point, the former Executive Director was paid salary, the work expenses allowance, and superannuation monthly, with no amounts accrued and PAYG withholding being remitted to the Commissioner of Taxation in respect of those amounts. The motor vehicle amount and $X for incidentals remained in the account.

The written Employment Contract was entered into between the former Executive Director and the employer in 20XX. The Employment Contract recorded that the former Executive Director's entitlements which continued included the entitlement to a motor vehicle amount, and the motor vehicle amount had accrued up to the date of the Employment Contract and was preserved up to that date. The motor vehicle amount would not accrue further after the date of the Employment Contract.

In 20XX, the motor vehicle amount was used to purchase a vehicle, plus tinting, for the former Executive Director.

Around that time, PAYG payment summaries were provided to the Commissioner of Taxation which indicated that the motor vehicle purchase was a fringe benefit. However, the 20XX FBT return was lodged without including the motor vehicle purchase as an expense payment fringe benefit.

The former Executive Director retired in 20XX. Prior to and around that time it was agreed between the employer and the former Executive Director that he would receive a payment calculated by reference to the balance remaining in the account for the motor vehicle amount, less PAYG withholding.

That payment was made in 20XX, and the employer remitted PAYG withholding to the Commissioner of Taxation on that amount.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 20A

Fringe Benefits Tax Assessment Act 1986 section 22

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1936 section 23L

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(4)

Income Tax Assessment Act 1997 section 6-23

Income Tax Assessment Act 1997 section 15-2

Income Tax Assessment Act 1997 section 82-130

Taxation Administration Act 1953 subsection 12-1

Taxation Administration Act 1953 section 12-35

Taxation Administration Act 1953 section 12-85

Reasons for decision

Question 1

Was the provision of payments or reimbursements for the exact amount of a purchase of a car in the employment arrangements between an employer and its former Executive Director (the former Executive Director) a fringe benefit?

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) defines a 'fringe benefit' to be a 'benefit', being a right, privilege, service or facility, provided to an employee, or an associate of an employee, by an employer, or an associate of the employer, in respect of the employment of the employee, but does not included excluded items such as salary and wages, or exempt benefits.

Section 20 of the FBTAA relates to an expense payment benefit as follows:

Where a person (in this section referred to as the provider):

(a)          makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b)          reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

The motor vehicle amount was utilised to purchase cars for the former Executive Director, satisfying paragraph 20(a) of the FBTAA being a payment in discharge of an obligation of the former Executive Director to pay an amount to a third party, a motor dealership, or to reimburse the former Executive Director for the purchase of a motor vehicle, satisfying paragraph 20(b) of the FBTAA.

The expense payment fringe benefit is not covered by a no-private-use declaration and is not an exempt benefit under section 20A of the FBTAA.

The categories listed in section 22 of the FBTAA as exempt car expense payment benefits do not apply to the motor vehicle amount as the allowance was not used to compensate the former Executive Director for car usage, Division 28 of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply, and the benefit does not relate to relocation expenses.

A fringe benefit does not include a payment of salary and wages, which is defined in subsection 136(1) of the FBTAA to include:

(a)          a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; ...

Subsection 12-1(1A) of the Taxation Administration Act 1953 (TAA) states:

An entity need not withhold an amount under Subdivision 12-B, Subdivision 12-C or section 12-120 or 12-190 from a payment if the whole of the payment is not assessable income and is not exempt income of the entity receiving the payment.

Subsection 23L(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states:

Income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer.

The motor vehicle amount is considered to be an expense payment fringe benefit. It is therefore not assessable income and is not exempt income, is not subject to withholding, and is not a payment of salary and wages.

Subsection 12-1(3) of the TAA also states that withholding is not required from an expense payment benefit:

In working out how much to withhold under section 12-35, 12-40, 12-45, 12-47, 12-115, 12-120, 12-315 or 12-317 from a payment, disregard so much of the payment as:

(a)          is an expense payment benefit as defined by section 136 of the Fringe Benefits Tax Assessment Act 1986; and

(b)          is not an exempt benefit under section 22 of that Act (about reimbursement of car expenses on the basis of distance travelled).

The motor vehicle amount does not have the features of an allowance in section 15-2 of the ITAA 1997 or Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement (TR 92/15) which states:

2. A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

The motor vehicle amount paid the former Executive Director the exact amount for the purchase of a motor vehicle, and for tinting. The payment is a reimbursement of an exact amount, not an allowance paying a predetermined amount to cover an estimated expense.

Subsection 6-5(4) of the ITAA 1997 states:

In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

The former Executive Director could not direct how the amount was applied or dealt with, he could not access the amount in cash, and there was no benefit from the motor vehicle amount until the amount was used to purchase a vehicle, and tinting. The motor vehicle amount was not derived as ordinary income.

It is accepted that the motor vehicle amount is an expense payment fringe benefit with respect to the purchase of the car and tinting. The 20XX FBT return will need to be amended to include the expense payment fringe benefit.

Question 2

Was the provision of payments or reimbursements for the exact amount of a purchase of a car in the employment arrangement between an employer and the former Executive Director income subject to PAYG withholding?

As concluded above in question 1, the motor vehicle amount is considered to be a fringe benefit, and not ordinary income.

As stated above in relation to subsection 23L of the ITAA 1936, a fringe benefit is not assessable income and is not exempt income, and is therefore not subject to withholding under subsection 12-1(1A) of the TAA.

The provision of the motor vehicle amount is therefore not income subject to PAYG withholding.

Question 3

Was the provision of a cash retirement payment, calculated by reference to unused accrued amounts relating to the purchase of a car, subject to PAYG withholding?

The former Executive Director received a payment calculated by reference to the balance remaining in the account for the motor vehicle amount shortly before his retirement. The payment was made as salary and wages of the former Executive Director, subject to PAYG withholding.

Alternatively, the payment may be an employment termination payment (ETP), as stated in subsection 82-130(1) of the ITAA 1997:

A payment is an employment termination payment if:

(a)          it is received by you:

(i)            in consequence of the termination of your employment; or

(ii)           after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

All of the conditions in subsection 82-130(1) of the ITAA 1997 need to be satisfied for the payment to be an ETP.

The phrase 'in consequence of' as been considered in several cases, and in Taxation Ruling TR 2003/13 Income tax: employment termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

At paragraph 18 of TR 2003/13, the meaning of 'consequence' was quoted from the Shorter Oxford English Dictionary to be:

1.            A thing or circumstance which follows as an effect or result from something preceding.

The event in question (something preceding) is the retirement of the former Executive Director. The thing or circumstance is the payment calculated on the balance in the account for the motor vehicle amount. This payment did not follow the retirement of the former Executive Director.

The payment was made before the retirement of the former Executive Director. The amount paid was a specific amount relating to a motor vehicle amount, and could have been made whether the former Executive Director continued his employment or ceased employment.

It is accepted that the payment was not made in consequence of the retirement of the former Executive Director. The payment is not an employment termination payment under section 12-85 of the TAA.

It is accepted that the payment is ordinary income under section 6-5 of the ITAA 1997 and is subject to PAYG withholding under section 12-35 of the TAA.