Edited version of private advice

Authorisation Number: 1051847024961

Date of advice: 9 June 2021

Ruling

Subject: Payment by employer of expenses for the wake of an employee's deceased relative

Question 1

Did X (the deceased) cease to be an associate of Y (an employee of Z) under subsection 318(1) of the Income Tax Assessment Act 1936 (ITAA 1936) on his death?

Answer

Yes.

Question 2

Is X an associate of Y (an employee of Z) for the purposes of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 3

Will the payment by Z (the employer) for food, drinks and equipment hire for the wake of X, the deceased child of Y (an employee of Z), constitute the provision of a 'fringe benefit' for the purpose of subsection 136(1) of the FBTAA?

Answer

No.

This ruling applies for the following period:

FBT year ended 31 March 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

Y ('the Employee') is an employee of Z ('the Employer').

The Employee's child, X ('the Deceased'), passed away during the FBT year ended 31 March 20XX.

The Deceased was not an employee of the Employer. The Deceased did not have a will.

Upon the Deceased's death, the Deceased's Estate ('the Estate') came into effect.

An invoice was issued by W Pty Ltd to the Employer for an event held on the same date for $9,980 (including GST).

The invoice was for food, drinks and equipment hire for the wake of the Deceased.

The Employer paid the invoice during the FBT year ended 31 March 20XX.

Probate of the Estate had not been granted at the time the payment of the wake expenses was made. Accordingly, no one had been made beneficially entitled to any income of the trust estate.

There is no term in the Employee's employment contract that provides that wake expenses of family members would be paid for.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for Decision

Question 1

Did X ('the Deceased') cease to be an associate of Y ('the Employee') under subsection 318(1) of the Income Tax Assessment Act 1936 (ITAA 1936) on his death?

Summary

The Deceased ceased to be an associate of the Employee under subsection 318(1) of the ITAA 1936 on his death.

Detailed reasoning

Subsection 136(1) of the FBTAA defines the term 'associate' as having the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 318(1) of the ITAA 1936 provides that the following are associates of a natural person (the 'primary entity') (otherwise than in the capacity of a trustee):

(a)    a relative of the primary entity;

The Employee is the 'primary entity' in the current circumstances. Prima facie, the Deceased would be the Employee's associate under paragraph (a) of subsection 318(1) of the ITAA 1936, as the Deceased is the Employee's relative.

ATO Interpretative Decision ATO ID 2006/159 Fringe Benefits Tax: Residual fringe benefit: funeral expenses of deceased employee (ATO ID 2006/159) outlines that where an employer pays the funeral expenses of a deceased employee, FBT does not apply as when the individual dies, they are no longer 'a person' for the purposes of the FBTAA.

A factually different scenario has arisen in this case compared to that considered in ATO ID 2006/159. In this instance, the employee has not passed away and the benefit would therefore be provided to the Employee and his associates. On the basis that an employee ceases to be 'a person' upon their passing for the purposes of the FBTAA, it follows that an associate that is a natural person would also cease to be 'a person' for the purposes of subsection 318(1) of the ITAA 1936 upon their death.

Therefore, it is considered that upon his death, the Deceased, in his capacity as an individual, ceased to be the Employee's 'associate' pursuant to the definition of that term in subsection 318(1) of the ITAA 1936 (and in subsection 136(1) of the FBTAA).

Question 2

Is X's Estate an associate of Y (an employee of Z) for the purposes of subsection 136(1) of the FBTAA?

Summary

The Deceased's Estate is not an associate of the Employee for the purposes of subsection 136(1) of the FBTAA.

Detailed reasoning

Subsection 318(1) of the ITAA 1936 provides that the following are associates of a natural person (the 'primary entity') (otherwise than in the capacity of a trustee):

...

(d)    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;

Paragraph 318(1)(d) of the ITAA 1936 outlines that a trustee of a trust will be an associate of the primary entity where the primary entity, or another entity that is an associate of the primary entity, benefits under the trust. This means that, for the Estate to be an associate of the Employee, the Employee must benefit from the trust. As a will does not exist, and probate had not been granted at the time the benefit was provided, no entity had been made presently entitled to any capital or income of the trust estate. Accordingly, there were no beneficiaries of the Estate and the Employee was not able to benefit from the Estate.

However, the meaning of 'associate' in relation to an employee is extended under subsection 148(2) of the FBTAA. For the subsection to apply, the benefit:

         •                        must be provided 'in respect of an employee's employment' to a person who is not the employee, or an 'associate' as defined in subsection 318(1) of the ITAA 1936

         •                        must be provided under an 'arrangement' between the provider, the employer or an associate of the employer on the one hand, and the employee or an 'associate' as defined on the other.

Where the above criteria are satisfied, the recipient will be deemed to be an associate of the employee in respect of that benefit.

In this case, for the Estate to be treated as an associate of the Employee for the purposes of the extended definition in subsection 148(2) of the FBTAA:

         •                        the payment of food, drink or equipment hire must be provided in respect of the Employee's employment to the trustee of the Estate

         •                        the trustee of the Estate must not be the employee or an associate of the employee under the definition in subsection 318(1) of the ITAA 1936, and

         •                        an arrangement must exist between the provider (W Pty Ltd), the Employer and the Employee or the Estate.

Benefit provided by an employer, associate or under an arrangement

Subsection 136(1) of the FBTAA defines an 'arrangement' to mean:

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

(b)  any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The Employer paid an invoice issued to them by W's Restaurant Pty Ltd for food, drink and equipment hire. It is therefore apparent that the benefit was provided by W's Restaurant Pty Ltd under an arrangement with the Employer. No evidence was provided to indicate that the Employer and W's Restaurant Pty Ltd are associates.

It has been advised that the payment by the Employer was made on behalf of the Estate. No evidence was provided of such a direction or that there was an arrangement between the Employer, the Employee and/or the Estate to arrange and pay for the food, drink and equipment hire. However, based on the invoice it is arguable that the benefit was provided by W's Restaurant Pty Ltd under an implied arrangement with the Employer and the Estate.

In respect of employment

A benefit must be provided 'in respect of the employment of the employee' in order to be a 'fringe benefit' as defined in subsection 136(1) of the FBTAA. Further, for the Estate to be considered an associate of the Employee for the purposes of the extended definition of 'associate' under subsection 148(2) of the FBTAA, the benefit must be provided in respect of employment.

The term 'in respect of', in relation to the employment of an employee, is defined in subsection 136(1) of the FBTAA to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.'

The meaning of 'in respect of the employment' was considered in J & G Knowles v Commissioner of Taxation (Knowles), where the Full Federal Court held that there must be a 'sufficient or material, rather than a causal connection or relationship between the benefit being provided and the employment. Knowles suggests looking at the purpose or object of imposing FBT on employers which is to 'ensure that all forms of remuneration paid to employees bear a fair measure of tax...

Per paragraph 28 of Knowles provides:

While the width of the definition of "fringe benefit" was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of the employment will be helpful. If it is not then the benefit is likely to be extraneous to the employment and will not bear FBT, notwithstanding that the employment might have been a causal factor in the provision of the benefit. In particular, the fact that a benefit is provided to a director because it was authorised by that director will not, of itself, be sufficient to characterise the benefit as one which is "in respect of" the employment. Without more, it is not a product or incident of that office.

The Court in Knowles concluded at paragraph 29:

To put the matter another way, although the process of characterising the benefit provided in a particular case can involve questions of fact and degree, it is not sufficient for the purposes of the Act merely to enquire whether there is some causal connection between the benefit and the employment: see FC of T v Rowe 95 ATC 4691 at 4703 and 4710; (1995) 60 FCR 99 at 114 and 123. Although Brennan, Deane and Gaudron JJ observed in Technical Products (at Aust Torts Reports 68,622; CLR 47), that the requisite connection will not exist unless there is "some discernible and rational link" between the two subject matters which the statute requires to be linked, as was pointed out by Dawson J (at Aust Torts Reports 68,624; CLR 51), the connection must be "material".

Therefore, Knowles suggests that requiring a benefit to be a 'product' or 'incident' of employment needs:

         •                        a close relationship between the services provided and the benefit received, rather than merely a causal relationship, and

         •                        the benefit would need to be in the form of remuneration for the services for it to be provided 'in respect of' the employment.

Following Knowles, Lindgren J in Starrim Pty Ltd v FCT (Starrim) reflected on the approach taken in Knowles and concluded that there should be similarities between the former section 26(e) of the ITAA 1936 (as considered in Smith v FCT (Smith)) and FBT as this would be consistent with the Second Reading Speech on the bill for the FBTAA. Further, there are direct connections between the language adopted in the former section 26(e) and FBT. Lindgren J stated at paragraph 46:

Unrestricted by authority I would have understood that the expression [in relation to employment] bears [in the context of FBT] a generally similar meaning to that which it bears [in Smith regarding former ss26(e)]. That it should do so is consistent with the purpose of the Act as described by the then Treasurer, the Hon Paul Keating, in his Second Reading Speech on the bill for the [FBTAA], as being to "ensure that all forms of remuneration paid to employees bear a fair measure of tax..." (Parl Debs, HR, 2 May 1986 at 3020). Such a meaning is, moreover, consistent with the expressions "by reason of" and "by virtue of" in the definition of "in respect of" itself in subs 136(1) of the [FBTAA] set out earlier. The concluding words of that definition ("for or in relation directly or indirectly to, that employment") are more general. But the same words occurred in the expression "in respect of, or in relation directly or indirectly to any employment" in s 26(e) of the ITAA36 that was considered by the High Court in Smith v FC of T. I think that they should be understood conformably with the expressions "by reason of" and "by virtue of" in the definition in subs 136(1) of the [FBTAA].

The tests as to whether a benefit is provided by reason of, or by virtue of employment, as outlined by Lindgren J at paragraph 45, in the context of former subsection 26(e) of ITAA 1936are as follows:

         •                        is the benefit a ''product or incident of the employment''?

         •                        is some aspect of the employment a substantial reason for the benefit?

         •                        is the benefit ''a consequence of the existing relation of employer and employee''?

         •                        is the employment one of the ''proximate causes'' of the payment?

Lindgren J went on to cite paragraphs 28 and 29 of Knowles, as reproduced above, with approval. Accordingly, following Starrim, a benefit will be provided 'by reason of' and 'by virtue of' employment if:

         •                        the employment is the material reason that the benefit was provided, and

         •                        there is an existing employment relationship and the benefit was provided as an incident of that relationship.

The words 'in respect of' in former subsection 26(e) of the ITAA 1936 were further considered by the Federal Court in Payne v FC of T (Payne). In Payne, the employee accrued reward points from employer paid travel which was then utilised by the employee to acquire airline tickets. It was noted that the provision of Frequent Flyer tickets came about 'as a result of a purely personal contractual relationship'. This is even though the benefit arose as a 'consequence' of employment in that the flights that earned the necessary points were undertaken in the course of her employment and paid for by her employer.

The employment in Payne was, therefore, an indirect or 'contributory cause' of the receipt of the benefit. However, this was not sufficient for the benefit to be 'in respect of employment'. Therefore, Payne suggests that the words 'for or in relation directly or indirectly to, that employment' requires the employer to have some part in the arrangement by being a party to the arrangement, encouraging or paying for the benefit.

Also relating to former paragraph 26(e) the Federal Court stated in McArdle, J.W. v The Commissioner of Taxation for the Commonwealth of Australia that:

.... it is necessary to go beyond the historical or temporal connection which had existed or presently existed between an employer and an employee. It is necessary to consider whether the taxpayer received the payment in any capacity other than that of employee, whether there was any consideration other than services rendered or to be rendered, and whether it could be said that the payment was in consequence only of the employee's service or of some other consideration.

In Confidential v Commissioner of Taxation (Confidential), the AAT considered the provision of

benefits by a company to two co-directors and employees. The AAT considered Knowles and in

that case, decided on the evidence available, the benefits provided by the company were not

'fringe benefits' because '[n]one [were] a product or incident of their employment'. Relevantly, the

AAT stated at paragraph 874:

Take the motor vehicle purchased for Bert or one of his associates, for example. There is no evidence of the way in which the motor vehicle is linked to his employment. Was it required for his travelling to consult clients or for the use of his wife or daughter? If the former, there may be a discernible and rational link between Bert's employment and the expenses incurred or reimbursed for the purchase of the motor vehicle. If the latter, there is none.

Following Confidential, for a benefit to be a 'product or incident' of employment there needs to be a

connection between employment and the benefit. Such a connection would be immediately

apparent if the benefit is utilised by the employee in the course of their employment duties.

In this case, it can be accepted that a causal connection to employment exists; that is, 'but for' the employment with the Employer, the Employer would not have paid for the food, drink or equipment hire for the Deceased's wake. However, a causal connection alone is not sufficient and there must be a sufficient or material connection to employment.

To consider whether there is a sufficient or material connection between the payment of the food, drink or equipment hire for the Deceased's wake and the employment of the Employee, it must be determined whether the characterisation of the benefit can be said to be remuneration and if 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:

         •                        the Employee is employed by the Employer for which they are remunerated. The benefit was provided as a result of personal considerations, rather than the Employer wanting to remunerate the Employee

         •                        although there was an existing relationship between the Employer and Employee, the benefit did not have a connection to the duties performed by the Employee

         •                        the benefit was not a product or incident of the employment. That is, the provision of the benefit did not contemplate any of the work-related circumstances or characteristics of the Employee (for example, his work performance, status or seniority)

         •                        the provision of the benefit was entirely gratuitous and not written into any employment contract

         •                        the Employee was not provided with the benefit at his request, and

         •                        the Employer generally does not pay for the funeral or wake expenses of their employees or their employee's relatives.

Paragraph 148(1)(a) of the FBTAA outlines that a benefit will be provided in respect of employment 'whether or not the benefit is also provided in respect of, by reason of, by virtue of, or for or in relation directly or indirectly to, any other matter or thing'. In Starrim, Lingren J stated at

paragraph 48:

... [S]ubs 148(1) of the Act signifies only that the factors referred to in it are not to be treated as inconsistent with the provision of a benefit being "in respect of" employment. In some instances, at least, the subsection refers to factors that might have been thought to suggest that a benefit was not provided in respect of the employment.

While it does not in terms purport to "expand" the meaning of the expression "in respect of the employment", s 148(1) is intended to eliminate constrictive preconceptions.

Although employment of the Employee was a pre-requisite, the benefit provided to the Employee, or his associate, is not a reward for the services provided by the Employee.

Therefore, the better view is that the benefit, being the payment of food, drink and equipment hire for the Deceased's wake by the Employer lacks a sufficient or material connection to employment, that is, a connection that if present could be concluded that the benefit is provided 'in respect of' employment of an employee.

On this basis, the Estate is not an associate of the Employee for the purposes of the extended definition in subsection 148(2) of the FBTAA because, whilst it is arguable that the benefit was provided by W Pty Ltd under an implied arrangement with the Employer and the Estate, the benefit was not provided in respect of the Employee's employment to the trustee of the Estate.

Question 3

Will the payment by Z ('the Employer') for food, drinks and equipment hire for the wake of X ('the Deceased'), the deceased child of Y (an employee of Z) ('the Employee'), constitute the provision of a 'fringe benefit' for the purpose of subsection 136(1) of the FBTAA?

Summary

The payment of food, drink and equipment hire for the Deceased's wake will not constitute a fringe benefit under subsection 136(1) of the FBTAA.

Detailed reasoning

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 in the current circumstances.

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 to include 'allow, confer, give, grant or perform'.

In this case, the benefit provided was food, drink and equipment hire.

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 is 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.

In this case, the Employee was provided with food, drink and equipment hire. As per the responses to Questions 1 and 2 above, the Deceased and the Estate are not associates of the Employee.

As the benefit is provided to the Employee, the second condition (i.e. a benefit is provided to an employee) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA is satisfied.

The benefit is provided by an employer, an associate of the employer or a third party under an arrangement

'Employer' is defined in subsection 136(1) of the FBTAA to mean a current, future or former employer.

The term 'associate' was discussed in the responses to Questions 1 and 2 above.

As per the response to Question 2 above, the benefit was provided by W Pty Ltd (a third party) under an implied arrangement with the Employer and the Estate.

As such, the third condition (i.e. a benefit is provided by an employer, an associate of the employer or a third party under an arrangement with an employer) of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA is satisfied.

The benefit is provided in respect of the employment of the employee

The meaning of the term 'in respect of' was discussed in the response to Question 2 above, where it was concluded that that the benefit, being the payment of food, drink and equipment hire for the Deceased's wake by the Employer, lacks a sufficient or material connection to employment, that is, a connection that if present could be concluded that the benefit is provided 'in respect of' employment of an 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 is not satisfied.

Consequently, it is not necessary to consider the last element of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA.

Therefore, as all of the elements of the definition of a 'fringe benefit' cannot be satisfied, the payment of food, drink and equipment hire for the Deceased's wake is not a fringe benefit under subsection 136(1) of the FBTAA.