Edited version of private advice

Authorisation Number: 5010062650826

Date of advice: 16 April 2020

Ruling

Subject: FBT and provision of rent-free accommodation by company to director

Question

Is the provision of rent-free accommodation to X by Y Pty Ltd subject to Fringe Benefits Tax (FBT)?

Answer

No

This ruling applies for the following period:

FBT year 1 April 20XX to 31 March 20XX

FBT year 1 April 20XX to 31 March 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

Z Pty Ltd (the Trustee Company) as trustee for the Y Family Trust (the Trust) has applied for a private ruling regarding whether the provision of rent free accommodation (the Benefit) provided to A (a director) is a Fringe Benefit for Fringe Benefit Tax purposes.

The Trust conducts a business in property rental.

The directors of the Trustee Company are A, B, C, D and E (the Directors).

The Trustee Company pays a salary to some of the Directors for inspecting properties, liaising with rental property agents and identifying new investment properties.

The Directors receive the following director's fees: Other directors of the Company do receive a salary for inspecting properties, liaising with rental property agents and identifying new investment properties.

C receives a director's salary of $XXX per annum from the Trustee.

D receives a director's salary of $XXX per annum from the Trustee.

E receives a director's salary of $XXX per annum from the Trustee.

A is not an employee of the trustee and has never taken any salary or directors fees from the Trustee Company.

The Trustee Company purchased accommodation which is used solely as a private residence for A (the Accommodation).

The acquisition was financed by an existing loan facility for the Trust.

The property was purchased from an unrelated party at market value.

A has not entered into a lease arrangement with the Trustee Company for her use of the Accommodation.

A does not pay rent to the Trustee Company for her use of the Accommodation.

The Trustee Company does not claim any expenses in relation to the Accommodation, because it is not income producing.

A is XX years of age.

A's living expenses are funded by savings from a former overseas business.

The trust deed of the Trust has provision for beneficiaries to benefit from rent free accommodation (the Accommodation).

Paragraph 10.4 of the Trust's trust deed provides:

'Powers to deal with Property:

(a) (i) The Trustee may determine any rental to be paid for the use of any purpose;

(ii) The Trustee may allow any Beneficiary to occupy, have custody of or use of any property of the Trust on any terms the Trustee thinks fit.

(iii) The Trustee may purchase or lease any real or personal property for the use of any Beneficiary.'

The beneficiaries as provided by the trust deed of the Trust are:

a.    Primary Beneficiaries:

·         C

·         D

·         E

b.    General Beneficiaries: 'any person who is a grandparent, parent, brother, sister, child, grandchild, niece or nephew of a Primary Beneficiary and the spouses of those persons.'

A and B are spouses of one another and are parents of C, D and E.

A is a parent of the Primary Beneficiaries and therefore she is a General Beneficiary of the Trust.

A can occupy the Accommodation rent free as a beneficiary of the Trust.

Issues not covered in the ruling

·         Is the provision of rent free accommodation to A who is a shareholder of the Trustee Company a deemed dividend subject to Division 7A of the Income Tax Assessment Act 1936?

·         Is the value of the rent free accommodation provided to A ordinary income in accordance with section 6-5 of ITAA 1997?

·         Tax deductibility of costs for the rent free accommodation.

·         Withholding tax.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 25

Summary

Question 1

The provision of rent free accommodation to A, who is a director and shareholder of the Trustee Company for the Trust, constitutes a housing benefit in accordance with section 25 of FBTAA

Question 2

The housing benefit provided to A is not a 'housing fringe benefit' as defined in subsection 136(1) of the FBTAA as the benefit is not provided 'in respect of' her employment with the Trustee Company for the Trust.

A received the benefit of rent free accommodation from the Trust in their capacity as a beneficiary of the trust.

Detailed reasoning

Question 1

Section 25 of the FBTAA stipulates that the existence of a housing right granted to a person during a year of tax constitutes a benefit to that person. Section 136 defines a housing right as the granting of a lease or licence to occupy or use a unit of accommodation as the person's usual place of residence.

A unit of accommodation is defined in section 136 as including a house, flat or home unit, accommodation in a hotel, hostel, motel or guesthouse, accommodation in a bunkhouse or other living quarters, accommodation in a ship, vessel or floating structure, and a caravan or mobile home.

The provision of rent free accommodation to A, who is a director and shareholder of the Trustee Company for the Trust, constitutes a housing benefit in accordance with section 25 of FBTAA

Question 2

In this case a 'housing fringe benefit' as defined in subsection 136(1) will arise in relation to the provision of rent free accommodation to A if the housing benefit is provided 'in respect of' A's employment with the Trustee Company.

A benefit provided in relation to an employee of an employer will only be a fringe benefit where it is provided in respect of the employment of the employee. The phrase 'in respect of 'is defined in subsection 136(1) in relation to the employment of an employee to include by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

The definition of 'fringe benefit' brings in only benefits provided in respect of employment which to some extent limits the scope of the Act. A benefit that happens to be provided to an employee (or associate, etc.) but which is not in respect of the employment is not a fringe benefit. In Starrim Pty Ltd v FC of T 2000 ATC 4460, for example, a bank loan on-lent by a company to its sole directors did not result in a loan fringe benefit because there was not the necessary connection between employment and the benefit. Rather, there was a commercial purpose underlying the loan. On the other hand, the taxpayer in Curtain World Pty Ltd v DFC of T 99 ATC 2020 failed to convince the Administrative Appeals Tribunal (AAT) that the provision of luxury vehicles to its employee directors was not in respect of their employment. The AAT was not convinced that the provision of the cars was connected with a reduction of loan accounts or unpaid distributions, i.e. in respect of something other than employment.

In J & G Knowles & Associates v FC of T 2000 ATC 4151, the phrase ' ' in respect of ' ' was held to require a ' ' nexus, some discernible and rational link, between the benefit and employment ' '. However it could not be said that any causal relationship between the benefit and the employment was a sufficient link so as to result in a taxable transaction. What must be established was whether there was a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment.

In Case 28/97, 97 ATC 321, the AAT held that the trustee of a family trust was not liable for fringe benefits tax in respect of a residence occupied by two of its directors as the residence had not been provided to the directors in respect of their employment. Rather, the directors had negotiated for use of the residence in their personal capacities and for their private purposes.

The housing benefit provided to A is not a 'housing fringe benefit' as defined in subsection 136(1) of the FBTAA as it is not provided 'in respect of' her employment with the Trustee Company.

Conclusion

The housing benefit provided to A is not a 'housing fringe benefit' as defined in subsection 136(1) of the FBTAA as the benefit is not provided 'in respect of' her employment with the Trustee Company.

A received the benefit of rent free accommodation from the Trust in her capacity as a beneficiary of the Trust.