Edited version of private advice

Authorisation Number: 1052062922741

Date of advice: 15 December 2022

Ruling

Subject: Education cost for an overseas employee's children - reduction in taxable value

Question

Where an employer pays for the education costs for an overseas employee's children, can the taxable value of the fringe benefit provided be reduced under section 65A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

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

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

You are an Australian company, and your parent entity is based overseas.

You have an overseas employee working for you under a subclass 482 visa which was issued on xx August 20XX, and which expired on xx August 20XX.

The employee is currently still living and working in Australia on a bridging visa whilst waiting for the outcome of their permanent residency application.

The employee's usual place of residence is overseas.

The employee is the managing director of the company.

The employee is required to live outside his home country in order to perform the duties in Australia.

The employee has two children, under 6, who attend an international school an in Australia.

The school's program differs from other programs offered to children aged three to five in Australia in its structured educational mission and its official Department of Education curriculum. The students attend five days a week from 8.50 am to 3.15 pm. The curriculum sees the children working towards Early Stage 1 outcomes of the NSW Education Standards Authority (NESA) syllabus in all Key Learning Areas within the overseas educational framework.

You pay for the employee's children's education costs directly to the school.

All of these costs were incurred by you after the employee's posting commenced.

The benefit you provide to the employee is not included in a salary sacrifice arrangement.

The school has confirmed in writing that:

•         the employee's youngest child has been enrolled at the school since 17 August 20XX on a full-time education basis;

•         the employee's eldest child has been enrolled at the school since 19 August 20XX on a full-time education basis;

•         the school is registered under Part 7 of the Education Act 1990 as a school of a prescribed kind for foreign nationals or children of foreign nationals.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 65A

Fringe Benefits Tax Assessment Act 1986 section 136

Fringe Benefits Tax Assessment Act 1986 section 143B

Reasons for decision

Question 1

Where an employer pays for the education costs for an overseas employee's children, can the taxable value of the fringe benefit provided be reduced under section 65A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Summary

Yes.

Detailed reasoning

An employer that pays for or reimburses the education costs in respect of a child of an employee is providing an expense payment benefit under section 20 of the FBTAA.

However, the taxable value of that benefit is able to be reduced under section 65A of the FBTAA where certain conditions are met.

Condition one

For an expense payment fringe benefit, the recipient's expenditure must be in respect of the full-time education of a child of the employee who is aged less than 25 years on the day in which the benefit was provided (subsection 65A(a)(ii) of the FBTAA 1986).

In your situation, the school in which the employee's children are enrolled in have confirmed that both children attend the school on a full-time basis, that is, five days per week from 8.50 am to 3.15 pm.

Furthermore, both of the employee's children were aged less than 25 years on the days in which the benefit was provided.

Therefore, this condition is satisfied.

Condition two

The full-time education needs to be provided at an educational institution or by a tutor (subsection 65A(b) of the FBTAA).

An educational institution is defined in subsection 136(1) of the FBTAA to include a school, college or university.

The term 'school' is not defined in the FBTAA and takes its ordinary meaning in the context of where it appears.

The Macquarie Dictionary Online[1] defines a school as 'a place or establishment where instruction is given, esp. one for children'.

You provided a certificate showing the school that the employee's children are enrolled in is registered as a school by the NSW Education Standards Authority.

Therefore, this condition is satisfied.

Condition three

The whole or part of the full-time education of the child must be undertaken while the employee is an 'overseas employee' (subsection 65A(c) of the FBTAA).

An employee will be treated as an overseas employee under section 143B of the FBTAA, where:

•         the employee's usual place of residence is in a particular country (the home country);

•         the employee performs their employment duties at a place outside the home country; and

•         the employee is required to live outside the home country in order to perform those duties at their overseas workplace.

In your case, the employee's usual place of residence is overseas (their home country), the employee is required to perform their employment duties here in Australia and the employee is required to live outside their home country in order to perform those duties at their Australian workplace.

The employee was living and working in Australia on a subclass 482 visa and is currently living and working in Australia on a bridging visa while they await the outcome of their permanent residency applicant. As such, the employee will remain being an 'overseas employee' until such time as:

•         they become a permanent Australian resident; or

•         they no longer live and work in Australia.

Therefore, this condition is satisfied.

Condition four

The benefit must be provided under the provisions of an industrial instrument (such as an award or employment contract) or it is customary for employers in the same industry to provide benefits of the same kind as the benefit provided to the recipient (subsection 65A(d) of the FBTAA).

You told us the benefit you are providing the employee is not included in a salary sacrifice arrangement. Therefore, it is unlikely the benefit is being provided under an industrial instrument.

Taxation Determination TD 94/97 Fringe benefits tax: what does the phrase 'customary for employers in the industry' mean in relation to the provision of fringe benefits to employees? explains what is meant by the phrase 'customary for employees in the industry' in various provisions of the FBTAA, including section 65A.

Paragraph 2 of TD 94/97 states:

A benefit will be accepted as being customary where it is normal or common for employees of that class or job description in that industry to be provided with the same or similar benefits. It is not necessary that all or even the majority of employees in the industry receive the benefit. Where the provision of the benefit is unique, rare or unusual within an industry it would not be accepted as being customary.

TD 94/97 also has the following example:

Oil Driller Pty Ltd regularly employs expatriate technicians on secondment from the parent company in the United Kingdom. These employees are provided with return travel to their UK home for themselves and their families twice a year during their secondment. It is accepted that it is customary for employees of that type to be provided with such benefits, notwithstanding that industry employees generally do not receive similar benefits.

In your case, the employee is an overseas executive employee (the managing director of the Australian subsidiary of the parent company). We accept it is customary for overseas executive employees to be provided with benefits relating to the education of their children.

Therefore, this condition is satisfied.

Condition five

Where the benefit is an expense payment fringe benefit, documentary evidence of the recipients' expenditure must be provided to the employer before the declaration date (the date the employer's FBT return is due or such date as the Commissioner allows) (subsection 65A(e) of the FBTAA).

You are paying for the employee's children's education costs directly to the school. Therefore, you would already have in your possession the necessary documentary evidence of the employee's expenditure (most likely the receipt showing that you paid the school fees) that is required for record keeping purposes so you can correctly account for the benefit being provided to the employee in your FBT return.

Therefore, this condition is satisfied.

Conclusion

The taxable value of a fringe benefit that meets the conditions in subsections 65A(a) to (e) of the FBTAA will be reduced to the extent that it is attributable to the education of the child during a specified qualifying period under subsection 65A(f) of the FBTAA.

We consider that all the requirements for a reduction of the taxable value of the fringe benefits that you provide to the foreign employee in Australia in respect of the education of their children will be satisfied under section 65A.

Therefore, section 65A of the FBTAA applies to reduce the taxable value of the fringe benefit provided to the employee in respect of the full-time education of their children.

However, if the employee obtains permanent residency, they will no longer satisfy the overseas employee requirement and eligibility to the reduction would cease.

Calculating the FBT reduction

The reduction in the taxable value of the benefit is based on the "attributable percentage", that is, the period in which the relevant conditions are satisfied (subsection 65A(f) of the FBTAA).

For employee posting periods of more than 28 days, the reduction starts on the day on which the academic period commenced (i.e., the first day of the school term in which the overseas employee's posting commenced) and ends on the day on which that academic period ended (i.e., the last day of the school term in which the overseas employee's posting ceased).

When an overseas employee does not cease their posting because they become a permanent resident, the cessation date for the attributable percentage is the day on which that academic period ended (i.e., the last day of the school term in which the overseas employee became a permanent resident).

As your employee's posting period was more than 28 days and they have applied for permanent residency, the reduction in taxable value of the benefit being provided starts on the day on which the academic period when the employee commenced their posting started and ends on the day in which the academic period ends when the employee either ceases their posting or becomes a permanent resident.

[1] Macmillan Publishers Australia, The Macquarie Dictionaryonline, www.macquariedictionary.com.au, accessed 29 November 2022.