Taxation Law

MONASH

BUSINESS

SCHOOL

TOPIC 6

FRINGE BENEFITS TAX

BTF5965 TAXATION LAW | SEMESTER 1, 2019

BTF5965 S1 2019 2

 Task 1 Online Quiz Results

– Available Wednesday 10 April

 Task 2 Written Assignment Question

– released Friday 12 April

WEEK 6 UPDATE

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 A receipt from employment and providing personal services may be

subject to income tax or fringe benefits tax:

Employee liable Employer liable

HOW ARE RECEIPTS FROM PERSONAL SERVICES AND EMPLOYMENT TAXED?

| PoTL paragraph [6.10]

Receipt from personal services and employment

Ordinary income (s 6-5)

(Topic 3)

Non-cash benefits & other allowances

s 15-2 ITAA97

s 23L ITAA36

(Topic 3)

Is it a Fringe Benefit? (this lecture)

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 FBT provisions are contained in the:

– Fringe Benefits Tax Assessment Act 1986 (Cth) (“FBTAA”)

– Fringe Benefits Tax Act 1986 (Cth)

 Key differences between income tax and FBT include:

FEATURES OF THE FBT REGIME

| PoTL paragraph [7.10]

1

• Tax is levied on the employer, not employee on the provision of fringe benefits – see s 66 FBTAA

• Tax is levied on the employer’s “fringe benefits taxable amount” (s 5B)

2

• FBT year is from 1 April to 31 March, being the “year of tax” Rate of tax is 47%, comprising of the top individual tax rate of 45%, plus Medicare levy of 2% for the FBT year ended 31 March 2018

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 Central to the imposition of FBT is the term “fringe benefit” as

defined in s 136(1) FBTAA

 A fringe benefit exists where there is:

 Specific exclusions exist, eg salary and wages

DEFINITION OF A FRINGE BENEFIT

| PoTL paragraph [7.20]

1 • A benefit

2 • Provided during the year of tax

3 • By an employer, associate or third party arranger

4 • To an employee or an associate

5 • In respect of the employment of the employee.

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 ‘Benefit’ has a very wide definition:

– Includes any right, privilege, service or facility provided under an

arrangement in relation to the performance of work: s 136(1)

– Specific categories of fringe benefits exist

 ‘Provided during the year of tax’:

– In relation to a benefit: includes “allow, confer, give, grant or

perform”

– In relation to property: disposal of a beneficial interest in or legal

ownership of the property

– Provided” also includes where provision of the benefit is

prohibited but the prohibition is not consistently enforced: s

148(3)

DEFINITION OF A FRINGE BENEFIT:

‘BENEFIT’ AND ‘PROVIDED DURING THE YEAR OF TAX’

| PoTL paragraphs [7.30] – [7.40]

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 A benefit needs to be provided by either:

DEFINITION OF A FRINGE BENEFIT:

BY AN EMPLOYER, ASSOCIATE OR THIRD PARTY

| PoTL paragraphs [7.50] – [7.58]

Employee or

associate (future, current or

former)

Associate of employer (eg related party)

Employer (future, current or

former)

Third party arranger

(under an arrangement with the

employer)

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 There must be a causal link (ie nexus) with employment

– “In respect of” means the benefit must be provided “by reason of,

by virtue of, or for or in relation directly or indirectly to, that

employment”: s 136

 Nexus requirement subject to judicial consideration:

– “Sufficient and material relationship”: J & G Knowles &

Associates Pty Ltd v FCT (2000)

– Loan to company directors and shareholders not “in respect of

employment”: Starrim Pty Ltd v FCT (2000)

DEFINITION OF A FRINGE BENEFIT: ‘IN RESPECT OF THE EMPLOYMENT OF THE EMPLOYEE’

| PoTL paragraphs [7.70] – [7.75]

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 The definition of a “fringe benefit” specifically excludes certain items

from being a fringe benefit, including (s 136(1)):

EXCLUSIONS

| PoTL paragraphs [7.80] – [7.85]

1 • Salary or wages

2 • Superannuation contributions

3 • Payments from superannuation funds

4 • Benefits under an employee share scheme

5 • Payments on termination of employment

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 Common issue is whether a payment to an employee constitutes an

allowance or reimbursement:

Contrast

 employer reimburses employee for cost of sports club membership fees.

 employer providing an allowance for participation in sports.

EXCLUSIONS:

ALLOWANCE VS. REIMBURSEMENT

| PoTL paragraph [7.85]

Allowance

• Constitutes “salary and wages” and hence excluded from being a fringe benefit

Reimbursement

• Does not constitute “salary and wages”

• “Reimburse” defined as “any act having the effect or result, direct or indirect, or a reimbursement”: s 136(1)

MONASH

BUSINESS

SCHOOL

DETERMINING THE TAXABLE VALUE

OF A FRINGE BENEFIT

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 There are thirteen categories of fringe benefits:

 You only need to know those shown in yellow

CATEGORIES OF FRINGE BENEFITS

| PoTL paragraph [7.90]

Examinable categories

• Car fringe benefits

• Loan fringe benefits

• Debt waiver fringe benefits

• Expense payment fringe benefits

• Property fringe benefits

• Meal entertainment fringe benefits

Other categories

• Housing fringe benefits

• Living-away-from-home allowance fringe benefits

• Airline transport fringe benefits

• Board fringe benefits

• Tax-exempt body entertainment fringe benefits

• Car parking fringe benefits

• Residual fringe benefits

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 Two methods exist to calculate the taxable value of a car fringe

benefit

 Statutory formula method applies automatically unless the employer

elects to use the cost basis: s 10(1)

 An employer can choose either method for a car that gives rise to a

fringe benefit

 Cost basis requires log book and odometer records to be

maintained: ss 10A and 10B

 Note – any related ‘car expenses’ are exempt benefits – s 53

CATEGORIES OF FRINGE BENEFITS:

1. CAR FRINGE BENEFITS

| PoTL paragraphs [7.120]

Statutory formula method: s 9

Cost basis: s 10

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Statutory formula method: s 9

 Taxable value for FBT years starting 1 April 2011:

 Base value of the car is broadly (s 9(2)):

– Cost (if purchased) or leased car value (if leased)

– Note - base value is reduced by 1/3rd if the relevant FBT year

commences at least four years after the car is first held

CATEGORIES OF FRINGE BENEFITS:

CAR FRINGE BENEFITS

| PoTL paragraphs [7.130]

0.2 Base value

of the car

No. of days during the year where car

FBs are provided by the employer

Number of days in that year of tax

Amount (if any)

of the recipient’s payment, eg

petrol costs not reimbursed

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 Example:

– GST registered entity provides a car to an employee

– The car was purchased by employer on 1 April 2018 for

$20,000 (including GST) and travels a total of 10,000km, of

which 8,000km was for work

– The employee contributed $100 towards the car

– The taxable value of the car will be calculated as follows

= $3,900

Note – actual business related travel irrelevant under statutory

formula.

CATEGORIES OF FRINGE BENEFITS:

CAR FRINGE BENEFITS

| PoTL paragraph [7.130]

0.2 20,000

365

365

100

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Cost basis: s 10

CATEGORIES OF FRINGE BENEFITS:

CAR FRINGE BENEFITS

| PoTL paragraphs [7.140]

Taxable value

C (100% - BP) R

Where Explanation

“C” Is the operating cost of the car during the period

Any costs relating to the car that was incurred, eg repairs.

If the car is owned, “C” includes deemed depreciation and

deemed interest: s 11.

“BP” Is the “business use percentage”

“R” Is the amount is the amount of the recipient’s payment

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 Example:

– GST registered entity provides a car to an employee for the full

FBT year, incurring the following costs:

Calculate the taxable value under cost method:

– (i) if the car was purchased (within last 4 years);

– (ii) if the car was leased with annual lease payments of $6,000

CATEGORIES OF FRINGE BENEFITS:

CAR FRINGE BENEFITS

| PoTL paragraph [7.140]

Item Amount

Repairs and maintenance $750

Fuel and oil expenses $1,500

Registration and insurance expenses $1,400

Base value of car $20,000

Log book business percentage 60%

NB: Employee paid $100 for car washes from post-tax income

which was not reimbursed

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 C = operating cost of the car, calculated as follows:

CATEGORIES OF FRINGE BENEFITS:

CAR FRINGE BENEFITS

| PoTL paragraph [7.140]

Item Purchased Leased

Repairs and maintenance $750 $750

Fuel and oil expenses $1,500 $1,500

Registration and insurance expenses $1,400 $1,400

Deemed depreciation ($20,000 x 25% x 365/365) $5,000 -

Deemed interest ($20,000 x 5.20% x 365/365) $1,040 -

Lease Charges - $6,000

Total for C = $9,690 $9,650

Less Business % = 60% ($5,814) ($5,790)

Less Recipient’s contribution ($100) ($100)

= Taxable value $3,776 $3,760

Suppose BP = 10% $8,585

Suppose BP = 90% $865

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 A loan fringe benefit arises each year when an employer provides

an employee (or associate) with a loan: s 16

– Benefit is essentially the interest “saved” by the employee from a

loan with a low interest rate

 Taxable value is calculated under (s 18):

 Statutory interest rate: 5.20% for year from 1 April 2018 (TD 2018/2)

 Subject to otherwise deductible rule via s 24: TV is reduced by the

‘notional deduction’ - see [12.810] re interest deductions (‘use of

funds’ rule in Munro’s case).

CATEGORIES OF FRINGE BENEFITS:

1. LOAN FRINGE BENEFITS

| PoTL paragraphs [7.170] – [7.190]

Loan amount

(Statutory interest rate less Actual

interest rate)

No. of days loan provided during the year

No. of days in FBT year

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 Example:

– On 1 April 2017, Mick received a loan from his employer in the

amount of $150,000 at 3% per annum

– Repayments are interest only

 Taxable value calculated under (s 18):

= $3,300

 Subject to otherwise deductible?

 Use of funds test – Munro’s case

 What if employer a bank and loan application fee of $500 is waived?  A separate FB arises (Residual Benefit) - Westpac Banking Corp v FCT (1996)

CATEGORIES OF FRINGE BENEFITS:

LOAN FRINGE BENEFITS

| PoTL paragraphs [7.170] – [7.190]

$150,000 5.20% - 3.00% 365

365

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 A debt waiver fringe benefit arises under s 45 when:

 Debt must be waived due to the employment relationship and not for

some other reason, eg. an irrecoverable debt

 Taxable value (s 15):

CATEGORIES OF FRINGE BENEFITS:

DEBT WAIVER FRINGE BENEFITS

| PoTL paragraphs [7.150] – [7.160]

1

• An employee (or associate) owes an amount to an employer

2

• The employee (or associate) is released from his / her obligation to repay all or some of that amount

Taxable value

Amount of the loan that no longer needs to be repaid

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 An expense payment fringe benefit arises under s 20 where:

 Note ‘external’ expense payment fringe benefit vs ‘in-house’ expense

payment fringe benefit

– External: taxable value is the amount reimbursed by the employer

(s 23), subject to the otherwise deductible rule

 Note – a “no private use declaration” can exempt all benefits of a

particular type that would have zero TV: s 20A

– In house: taxable value = 75% of arm’s length cost (ss 48, 49)

CATEGORIES OF FRINGE BENEFITS:

EXPENSE PAYMENT FRINGE BENEFITS

| PoTL paragraphs [7.200] – [7.210]

1

• An employer pays an expense incurred by the employee; or

2

• An employer reimburses an employee for expenditure incurred by the employee.

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 A property fringe benefit arises where an employer provides an

employee (or associate) with property: s 40

– Title or ownership passes

– Defined to mean tangible and intangible property: s 136

 Exempt benefits include:

– Where property is consumed on a working day and on the

employer’s business premises by the employee: s 41

 Taxable value for an external benefit is the cost to the employer, or

expenditure incurred by the employer to provide the property

 Note - If an employer provides services rather than property that

would be a residual benefit.

CATEGORIES OF FRINGE BENEFITS:

PROPERTY FRINGE BENEFITS

| PoTL paragraphs [7.250] – [7.260]

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 It is necessary to determine whether the taxable value of a fringe

benefit can be reduced by one of the following methods:

REDUCTIONS IN TAXABLE VALUE

| PoTL paragraph [7.360]

1 • It is an in-house fringe benefit

2 • There is a recipient’s contribution

3 • The otherwise deductible rule applies

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• The taxable value of all in-house fringe benefits (namely, expense,

property or residual) for each particular employee is reduced by

$1,000:

– Where the taxable value of in-house fringe benefits is

< $1,000, the taxable value is reduced to nil.

– Reduction relates to each particular employee separately and

cannot be done on an aggregate basis.

REDUCTIONS IN TAXABLE VALUE:

IN-HOUSE FRINGE BENEFITS

| PoTL paragraph [7.370]

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 The “taxable value” of certain fringe benefits (eg expense payment)

is reduced by the amount the recipient contributes

– Does not apply to car, debt waiver and loan fringe benefits

• For example:

 employer provides an external expense payment fringe benefit of $1,000.

 If the employee contributes 50% to the fringe benefit, the taxable value will be reduced to $500.

REDUCTIONS IN TAXABLE VALUE:

RECIPIENT’S CONTRIBUTION

| PoTL paragraph [7.380]

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 The taxable value of certain fringe benefits can be reduced by the

“otherwise deductible rule”:

– Taxable value is reduced to the extent the amount would have

been deductible to the employee, had the employee incurred the

expense directly – see Topics 8-10

 Note:

– Only applies in relation to the employee (not associates)

– Expense must give rise to a one-time-only deduction (eg capital

allowance deduction would not qualify)

– Where a benefit is provided to an employee and their associate

jointly, it is applied on a proportionate basis

REDUCTIONS IN TAXABLE VALUE:

OTHERWISE DEDUCTIBLE RULE

| PoTL paragraph [7.390]

MONASH

BUSINESS

SCHOOL

EXEMPT FRINGE BENEFITS

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 There are a number of benefits that are exempt from FBT. No FBT

liability arises in relation to an exempt fringe benefit.

 Exempt benefits in Div 13 include:

EXEMPT FRINGE BENEFITS

| PoTL paragraph [7.310]

Common exemptions

• Minor benefits

• Work-related items

• Membership fees and subscriptions

• Single-trip taxi travel

• Various job relocation expenses

Other exemptions (not discussed)

• Reimbursements for costs of travelling to an interview or selection tests for certain future and current employees

• Certain medical benefits

• Costs of providing newspapers and periodicals for business purposes

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MINOR BENEFITS

 Broadly, a benefit will be a minor benefit where (s 58P(1)(e) and (f)):

 $300 limit is applied to each benefit and is not a cumulative

exemption

 Frequency and regularity of the minor benefit (and similar or

connected benefits) taken into consideration

EXEMPT FRINGE BENEFITS:

| PoTL paragraph [7.320]

“Notional taxable value”

$300

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 Certain work-related items are exempt fringe benefits when used

primarily in the employee’s employment, subject to a limit of one item

of each type per employee each year (s 58X):

 Limit of one portable electronic device does not apply if the employer

is a “small business entity” (aggregated turnover < $10m) – s 58X(3)

EXEMPT FRINGE BENEFITS:

WORK-RELATED ITEMS

| PoTL paragraph [7.330]

1 • A portable electronic device

2 • An item of computer software

3 • An item of protective clothing

4 • A briefcase

5 • A tool of trade

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Membership fees and subscriptions

 The following benefits are exempt benefits whether paid for directly

the employer or by way of a reimbursement (s 58Y):

Single-trip taxi travel

 Exempt when the single-trip taxi travel begins or ends at the

employee’s place of work: s 58Z

Note also s 47 exempt residual benefits [7.290] and various

employment related relocation expenses [ss 58A-58D]

EXEMPT FRINGE BENEFITS:

MEMBERSHIP FEES, SUBSCRIPTIONS & TAXI TRAVEL

| PoTL paragraphs [7.340] – [7.350]

1 • Subscription to a trade or professional journal

2 • Entitlement to use a corporate credit card

3 • Entitlement to use an airport lounge membership

MONASH

BUSINESS

SCHOOL

CALCULATING FBT LIABILITY

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Liability is imposed upon an employer – see s 66

Tax is levied on the employer’s “fringe benefits taxable

amount” (s 5B) = the sum of:

Type 1 aggregate FBAs

+ X 47% Type 2 aggregate FBAs

LIABILITY TO PAY FBT

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 After determining the taxable value for each fringe benefit, the

employer’s FBT liability can be calculated undertaking the following

steps:

STEPS FOR CALCULATING FBT LIABILITY

| PoTL paragraph [7.400]

1 • Classify the benefit as a type 1 or type 2 benefit

2 • Calculate the ‘fringe benefits taxable amount’

3 • Calculate the FBT liability based on the FBT rate

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 It is necessary to determine whether the fringe benefit is classified

as Type 1 or Type 2

 Taxable value of a fringe benefit is “grossed up” by the Type 1 or

Type 2 classification

 The key purpose of “grossing up” is to add the FBT payable and

GST saved on the fringe benefit back into the tax base

STEP 1:

TYPE OF FRINGE BENEFIT

| PoTL paragraph [7.400]

• Where the employer is entitled to GST input tax credits

Type 1

• Any fringe benefit which is not a Type 1 fringe benefit

Type 2

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 The next step is to calculate the “fringe benefits taxable amount” as

prescribed by s 5B, using annual FBT gross up factors - link

Type 1 fringe benefits taxable amount

 Based on the FBT rate of 47% (for year ending 31 March 2019) and

GST rate of 10%

Type 2 fringe benefits taxable amount

 Based on the FBT rate of 47%

STEP 2:

FRINGE BENEFITS TAXABLE AMOUNT

| PoTL paragraph [7.410]

Total taxable value of all Type 1 fringe benefits

2.0802

Total taxable value of all Type 2 fringe benefits

1.8868

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 Based on ss 5B(1A) and 66, the employer’s fringe benefits tax

liability is:

 The FBT rate is 47%, comprising of the highest marginal tax rate of

45% plus the Medicare levy of 2%.

STEP 3:

FRINGE BENEFITS TAX LIABILITY

| PoTL paragraph [7.420]

Type 1 fringe benefits taxable

amount

Type 2 fringe benefits taxable

amount

FBT rate 47%

(for year ending 31/3/19)

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Assume an employer reimburses an employee $1,500 for the cost of

international phone calls, which are GST-free. An expense payment

fringe benefit will have arisen with a $1,500 taxable value

 The FBT liability will be as follows:

1. Classify the benefit: Type 2 (not a creditable acquisition)

2. The ‘fringe benefits taxable amount’ is $2,830, calculated as:

3. FBT liability based on the FBT rate is $1,330, calculated as:

FBT LIABILITY EXAMPLE

| PoTL paragraphs [7.400] – [7.420]

Total taxable value of all Type 2 fringe benefits = $1,500

1.8868

Type 1 fringe benefits taxable

amount = $0

Type 2 fringe benefits taxable amount = $2,830

FBT rate 47% (for year ending

31/3/18)

MONASH

BUSINESS

SCHOOL

INTERACTION WITH OTHER TAXES

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Employer

 Costs of providing the fringe benefit are generally deductible as an

ordinary business expense: s 8-1 ITAA97; see lectures 6 and 7

 Costs of FBT liability is also generally deductible: s 8-1 ITAA97

 Certain expenses (eg entertainment) are not deductible under

income tax, however it becomes deductible if incurred in the

provision of a fringe benefit

Employee

 Fringe benefits constitute non-assessable non-exempt income of the

employee: s 23L ITAA36

 Forgoes deductions relating to FB’s provided – loss or outgoings are

not incurred by employee

INTERACTION WITH INCOME TAX

| PoTL paragraphs [7.430] – [7.440]

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Employer

 Acquisitions of fringe benefits for employees may constitute a

creditable acquisition for GST purposes: see Topic 11.

INTERACTION WITH GST

| PoTL paragraph [7.450]

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Determine whether the following benefits are fringe benefits or exempt fringe benefits and, where applicable, the relevant category of fringe benefit. Provide reasons for your answer:

(a) Payment to employee for the estimated cost of the employee’s home phone bill as the employee sometimes has to use the home phone for work purposes.

(b) Provision of accommodation at the family home to a child who is over 21 and works in the family business.

(c) Payment of employee’s superannuation contribution by the employer to a complying superannuation fund.

(d) Loan by Company X to one of its directors, Rupert, who is also a shareholder in the company. The company’s rules do not permit loans to directors.

PoTL END OF CHAPTER REVISION QUESTIONS

Question 7.1

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(e) Payment of taxi fare by employer for employee to travel home after working late.

(f) Flowers sent to a sick employee. The flowers cost $75.

(g) Provision of a car for an employee’s private use, including payment of all fuel costs by the employer.

(h) Provision of sandwiches at a lunchtime seminar held at the employer’s premises.

(i) Provision of an all-expenses-paid holiday to an employee who has had to work every weekend for the last six months.

(j) Provision of two laptop computers to an employee who regularly attends clients’ premises.

Question 7.1 continued

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Question 7.2

Jenny is an employee of the university. She is provided with 10 gift

vouchers worth $50 each for use at the local supermarket as a

Christmas gift. Advise Jenny and the university of the tax

consequences of this transaction.

Question 7.3

Robert borrowed $10,000 from his employer on 4 September 2017 as

his home was damaged in a freak storm. The loan was provided at no

interest. On 15 January 2018, his employer informed Robert that he

was only required to repay half the loan as he is a valued employee.

Advise Robert and his employer of the tax consequences of this

transaction.

Review questions

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WEEK 6

– Task 2 Written Assignment question released Friday

WEEK 7

– Capital Gains Tax (lectures by Diane Kraal)

EASTER BREAK---------------------

WEEK 8

– General deduction (Diane Kraal)

– Task 2 - Written Assignment due Sunday 5th May

WEEK 9

– Specific deductions (Wayne Gumley)

WEEK 10

– Capital allowances (Diane Kraal)

Next few weeks