Fringe benefits tax Modules 1 5
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Fringe benefits tax Modules 1 – 5
Copyright notice Copyright © CPA Australia Ltd (ABN 64 008 392 452), 2011. All rights reserved. Save and except for third party content, all content in these materials is owned or licensed by CPA Australia Ltd under enforceable agreement. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act 1968 (Cth) (or any other applicable legislation throughout the world), or as otherwise provided for in this copyright notice, no part of these materials may in any manner or any medium whether now existing or created in the future, (including but not limited to electronic, mechanical, microcopying, photocopying or recording) be reproduced, adapted, stored in a retrieval system or transmitted without the prior written permission of the copyright owner. Modification of the materials for any other purpose than provided under this notice is a violation of CPA Australia Ltd’s copyright and other proprietary rights. All trademarks, service marks and trade names are proprietary to CPA Australia Ltd. For permission to reproduce any material, a request in writing is to be made to the Legal Business Unit, CPA Australia Ltd, Level 20, 28 Freshwater Place, Southbank, Victoria 3006. Disclaimer CPA Australia Ltd has used reasonable care and skill in compiling the content of this material. However, CPA Australia Ltd makes no warranty as to the accuracy or completeness of any information in these materials. These materials accompany the CPA Australia Ltd material ‘Fringe Benefit Tax’ and are intended to be a guide only. No part of these materials or any other materials comprising the ‘Fringe Benefit Tax’ course are intended to be advice, whether legal or professional. All names, figures, solutions and scenarios are fictitious and have been established for training purposes only. You should not act solely on the basis of the information contained in these materials as parts may be generalised and the application of exercises, examples and case studies may vary from organisation to organisation and may apply differently to different people and circumstances. Further, as laws change frequently, all practitioners, readers, viewers and users are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Limitation of liability To the extent permitted by applicable law, CPA Australia Ltd, its employees, agents and consultants exclude all liability for any loss or damage claims and expenses including but not limited to legal costs, indirect special or consequential loss or damage (including but not limited to, negligence) arising out of the information in the materials. Where any law prohibits the exclusion of such liability, CPA Australia Ltd limits its liability to the resupply of the information.
Module 1 FBT fundamentals
Contents
Program overview ............................................................................................................................................ 1
Learning objectives................................................................................................................................................................1
Benefits..................................................................................................................................................................................1
Benefits for the organisation ............................................................................................................................... 1
Benefits for the individual .................................................................................................................................... 1
Evaluation of the program......................................................................................................................................................2
Topic 1 – Introduction to fringe benefits tax ................................................................................................. 3
1 Background.........................................................................................................................................................................3
1.1 Legislation...............................................................................................................................................................3
1.2 Outline of the FBT system ......................................................................................................................................4
1.3 Key learning points .................................................................................................................................................4
Topic 2 – Key provisions................................................................................................................................. 5
2 Outline of the FBT provisions .............................................................................................................................................5
2.1 Definition of ‘benefit’ ...............................................................................................................................................5
2.1.1 Exercise 1 .................................................................................................................................................. 6
2.2 Definition of fringe benefit .......................................................................................................................................6
2.2.1 ‘in relation to ...’ .......................................................................................................................................... 9
2.2.2 ‘provided during or in respect of a year of tax’ ........................................................................................... 9
2.2.3 ‘provided to an employee or to an associate of the employee’ ................................................................ 10
2.2.4 ‘provided by the employer or an associate of the employer, or another person’...................................... 14
2.2.5 ‘in respect of employment’ ....................................................................................................................... 16
2.2.6 Exercise 2 ................................................................................................................................................ 19
2.2.7 The exclusions ......................................................................................................................................... 20
2.3 Fringe benefits taxable amount ............................................................................................................................23
2.3.1 Aggregate fringe benefits amounts .......................................................................................................... 23
2.3.2 Employee’s share..................................................................................................................................... 24
2.3.3 What is a ‘GST creditable benefit’?.......................................................................................................... 24
2.3.4 Fringe benefits amounts........................................................................................................................... 24
2.3.5 Excluded fringe benefits........................................................................................................................... 24
2.3.6 The rationale for grossing-up ................................................................................................................... 28
2.3.7 Calculation of the gross-up factors........................................................................................................... 29
2.4 Employer’s FBT payable.......................................................................................................................................30
2.4.1 Increase for exempt employers (‘capping’ of exempt benefits)................................................................ 30
2.4.2 Rebatable employers (‘capping of rebate’) .............................................................................................. 33
2.5 Calculation example .............................................................................................................................................36
2.6 Key learning points ...............................................................................................................................................38
Topic 3 – Benefit categories ......................................................................................................................... 39
3 Benefit categories and taxable value................................................................................................................................39
3.1 Car benefits ..........................................................................................................................................................39
3.1.1 Taxable value........................................................................................................................................... 39
3.1.2 Exempt benefits ....................................................................................................................................... 40
3.1.3 Road and bridge tolls ............................................................................................................................... 40
3.1.4 Reduction in taxable value ....................................................................................................................... 40
3.2 Debt waiver fringe benefits ...................................................................................................................................40
3.2.1 Taxable value........................................................................................................................................... 40
3.2.2 Reduction in taxable value ....................................................................................................................... 41
3.3 Loan fringe benefits ..............................................................................................................................................41
3.3.1 Taxable value........................................................................................................................................... 41
3.3.2 Exempt loans ........................................................................................................................................... 41
3.3.3 Reduction in taxable value ....................................................................................................................... 42
3.3.4 Substantiation .......................................................................................................................................... 42
3.4 Expense payment fringe benefits .........................................................................................................................44
3.4.1 Taxable value........................................................................................................................................... 44
3.4.2 Exempt benefits ....................................................................................................................................... 44
3.4.3 Reduction in taxable value ....................................................................................................................... 45
3.4.4 Substantiation requirements .................................................................................................................... 47
3.5 Housing fringe benefits .........................................................................................................................................48
3.5.1 Taxable value........................................................................................................................................... 48
3.5.2 Exempt housing benefits.......................................................................................................................... 48
3.6 Living-away-from-home fringe benefits.................................................................................................................48
3.6.1 Taxable value........................................................................................................................................... 48
3.6.2 Declaration ............................................................................................................................................... 49
3.7 Airline transport fringe benefits .............................................................................................................................49
3.7.1 Taxable value........................................................................................................................................... 49
3.7.2 Reduction in taxable value ....................................................................................................................... 49
3.7.3 Substantiation requirements .................................................................................................................... 50
3.8 Board fringe benefits.............................................................................................................................................50
3.8.1 Taxable value........................................................................................................................................... 50
3.8.2 Reduction in taxable value ....................................................................................................................... 50
3.9 Meal entertainment ...............................................................................................................................................51
3.10 Tax-exempt body entertainment fringe benefits .................................................................................................51
3.10.1 Taxable value......................................................................................................................................... 51
3.11 Car parking fringe benefits..................................................................................................................................51
3.12 Property fringe benefits.......................................................................................................................................51
3.12.1 Exempt benefits ..................................................................................................................................... 53
3.12.2 Reductions in taxable value ................................................................................................................... 53
3.12.3 Substantiation requirements .................................................................................................................. 54
3.12.4 Reduction in taxable value – property provided in respect of car .......................................................... 54
3.13 Residual fringe benefits ......................................................................................................................................54
3.13.1 Taxable value – in-house residual fringe benefits.................................................................................. 54
3.13.2 Taxable value – external residual fringe benefits................................................................................... 55
3.13.3 Motor vehicles other than cars ............................................................................................................... 55
3.13.4 Reduction in taxable value under the ‘otherwise deductible’ rule .......................................................... 55
3.13.5 Substantiation requirements .................................................................................................................. 55
3.14 Key learning points .............................................................................................................................................56
Topic 4 – Exemptions from FBT ................................................................................................................... 57
4 Exemptions from FBT introduction ...................................................................................................................................57
4.1 Religious institutions .............................................................................................................................................57
4.2 Public benevolent institutions and hospitals .........................................................................................................58
4.3 Minor benefits .......................................................................................................................................................58
4.3.1 Exclusions ................................................................................................................................................ 60
4.3.2 Christmas gifts ......................................................................................................................................... 61
4.4 Work-related items................................................................................................................................................61
4.4.1 Mobile phones.......................................................................................................................................... 61
4.4.2 Laptops, notebooks and similar computers.............................................................................................. 61
4.5 Long-service awards.............................................................................................................................................62
4.6 Safety awards .......................................................................................................................................................63
4.7 Trainees engaged under the Australian Traineeship Scheme..............................................................................63
4.8 Membership fees and subscriptions .....................................................................................................................63
4.9 Taxi travel .............................................................................................................................................................63
4.10 Other miscellaneous benefits .............................................................................................................................64
4.10.1 Provision of food or drink in conjunction with a ‘board benefit’ .............................................................. 64
4.10.2 International organisations, diplomatic and consular privileges ............................................................. 64
4.10.3 Accommodation, fuel, food and drink provided to live-in residential care workers................................. 64
4.10.4 Travel expenses in respect of employment interviews and selection tests............................................ 64
4.10.5 Relocation costs..................................................................................................................................... 64
4.10.6 Newspapers and periodicals for business purposes.............................................................................. 65
4.10.7 Benefits provided in respect of compensable work-related trauma ....................................................... 65
4.10.8 In-house health care facilities................................................................................................................. 65
4.10.9 Certain travel to obtain medical treatment ............................................................................................. 65
4.10.10 Compassionate travel .......................................................................................................................... 66
4.10.11 Work-related medical examination, medical screening, preventative health care, counselling or
migrant language training.................................................................................................................................. 66
4.10.12 Emergency assistance (health care).................................................................................................... 67
4.10.13 Live-in domestic employees – religious institutions ............................................................................. 67
4.10.14 Live-in help – elderly or disadvantaged persons.................................................................................. 68
4.10.15 Non-live-in domestic employees .......................................................................................................... 68
4.10.16 Deposits under the Small Superannuation Accounts Act 1955............................................................ 68
4.10.17 Approved student exchange programs ................................................................................................ 69
4.10.18 Recreational and child care facilities.................................................................................................... 69
4.10.19 worker entitlement funds ...................................................................................................................... 69
4.10.20 Workers compensation ........................................................................................................................ 69
4.11 Key learning points .............................................................................................................................................70
Topic 5 – Reductions in taxable value ......................................................................................................... 71
5 Reductions in taxable value introduction ..........................................................................................................................71
5.1 Remote area residential fuel.................................................................................................................................71
5.2 Remote area housing assistance .........................................................................................................................72
5.3 Remote area holiday transport – not subject to ceiling.........................................................................................72
5.4 Remote area holiday transport – subject to ceiling...............................................................................................73
5.5 Overseas employment holiday transport ..............................................................................................................73
5.6 Relocation – where transport is by employee’s car ..............................................................................................73
5.7 Relocation – temporary accommodation ..............................................................................................................74
5.8 Relocation – meals ...............................................................................................................................................74
5.9 Employment interviews and selection tests – where transport is by employee’s car ...........................................74
5.10 Occupational health and migrant language training – where transport is by employee’s car.............................75
5.11 In-house fringe benefits – tax-free threshold ......................................................................................................75
5.12 Living-away-from-home – food provided ............................................................................................................76
5.13 Entertainment expense payment benefits ..........................................................................................................76
5.14 Overseas employees – education of children.....................................................................................................76
5.15 Remote area home ownership schemes ............................................................................................................77
5.16 Key learning points .............................................................................................................................................78
Topic 6 – Other matters ................................................................................................................................. 79
6.1 GST and fringe benefits.................................................................................................................................................79
6.1.1 Supplies that consist of providing a fringe benefit .............................................................................................79
6.1.2 GST input tax credits .........................................................................................................................................80
6.2 Reportable fringe benefits..............................................................................................................................................82
6.2.1 Calculating grossed-up individual fringe benefits amounts................................................................................85
6.2.2 Illustration of calculation of FBT and reportable fringe benefits amount............................................................87
6.3 Reporting and payment of FBT......................................................................................................................................88
6.3.1 Annual FBT return .............................................................................................................................................88
6.3.2 Instalments of FBT.............................................................................................................................................89
6.3.3 Payment of FBT.................................................................................................................................................89
6.4 General substantiation requirements.............................................................................................................................89
6.5 Double counting of benefits ...........................................................................................................................................90
6.5.1 Employee of employer and employer’s associate .............................................................................................90
6.5.2 Two or more employers .....................................................................................................................................90
6.5.3 Benefit provided to employee and associate jointly...........................................................................................90
6.5.4 Benefit provided jointly to two or more associates of employee ........................................................................91
6.6 Key learning points ........................................................................................................................................................91
Topic 7 – Exercise on calculating FBT and reportable fringe benefits..................................................... 92
7.1 Instructions ....................................................................................................................................................................92
7.2 Exercise 3 ......................................................................................................................................................................92
7.3 Exercise answer template..............................................................................................................................................93
Appendices..................................................................................................................................................... 95
Appendix 1: Employer’s FBT flowchart................................................................................................................................95
Appendix 2: Loan fringe benefit declaration ........................................................................................................................96
Appendix 3: Expense payment benefit declaration..............................................................................................................97
Appendix 4: Living-away-from-home declaration.................................................................................................................98
Appendix 5: Airline transport benefit declaration .................................................................................................................99
Appendix 6: Property benefit declaration...........................................................................................................................100
Appendix 7: Residual benefit declaration ..........................................................................................................................101
Appendix 8: Remote area holiday transport declaration....................................................................................................102
Appendix 9: Relocation transport declaration ....................................................................................................................104
Appendix 10: Employment interview or selection test declaration.....................................................................................105
Appendix 11: Migrant language training declaration..........................................................................................................106
Suggested answers ..................................................................................................................................... 107
FBT module 1: FBT fundamentals
Topic 1 – Introduction to fringe benefits tax
1 Background
Fringe benefits tax (FBT) was introduced on 1 July 1986. It broadly taxes employers in respect
of (mostly) non-cash benefits provided to employees in addition to, or in place of, cash salary. It
was introduced to overcome the real or perceived unfairness and loss to the revenue from the
practice of providing (tax-free) fringe benefits rather than salary.
However, not all benefits caught by the legislation are in the nature of a replacement for salary.
The legislation also covers benefits provided:
• to associates of employees
• by an associate of an employer or another person acting on behalf of the employer.
FBT also applies to Commonwealth and State Government departments and instrumentalities.
One of the great difficulties the FBT legislation has to come to terms with is the valuation of
particular benefits. As a result, the legislation establishes many categories of fringe benefits,
each with its own valuation provisions. It is necessary to determine which category a particular
benefit falls into before it is possible to say what the taxable value of that benefit is.
1.1 Legislation
The FBT system is implemented by the following Acts:
• Fringe Benefits Tax Assessment Act 1986 (FBTAA) which outlines the machinery for
assessment and collection of tax.
• Fringe Benefits Tax Act 1986 which simply imposes the tax.
• Fringe Benefits Tax (Application to the Commonwealth) Act 1986 which provides for FBT
to apply to Commonwealth Government employers.
The FBT year is not the same as the income tax year. The FBT year begins on 1 April and ends
on 31 March.
© CPA Australia Ltd 2011 3FBT module 1: FBT fundamentals
1.2 Outline of the FBT system
The FBT system is set out in the FBTAA:
• Part IIA (sections 5A to 5F) sets out how employers calculate their FBT liability, from the
individual amounts of fringe benefits provided.
• Part III sets out:
– each of the 13 types of (taxable) fringe benefit and the method for calculating the taxable
values.
– the exempt benefits and the conditions and requirements that must be met.
– the circumstances and amount of any reduction in taxable value for specific benefits.
• Part IIIA sets out the rebate of FBT available for certain employers.
• The rest of the Act deals with liability to pay tax, returns and assessments, and other
administrative provisions.
1.3 Key learning points
Before we move on to the next topic, check that you can:
• Explain the purpose of FBT.
KEY POINT • Broadly outline the FBT legislation.
• Define fringe benefits, exempt benefits, taxable value and reductions in
taxable value.
4 © CPA Australia Ltd 2011FBT module 1: FBT fundamentals
Topic 2 – Key provisions
2 Outline of the FBT provisions
In Topic 2 you will start by gaining an understanding of the key provisions and how they relate
to each other by considering the flowchart in Appendix 1. The flowchart outlines the framework
of the legislative provisions and the key concepts and definitions you will need to understand.
This will allow you to see the amount on which the employer must pay FBT, how this is
calculated, and what definitions and concepts you will need to understand in detail.
Refer to Appendix 1 at the back of the learning materials.
APPENDIX
2.1 Definition of ‘benefit’
‘Benefit’ is defined in the FBTAA with an ‘inclusive’ definition which expands its general or
dictionary meaning. The Macquarie Dictionary defines benefit to mean ‘anything that is for the
good of a person or thing’.
The FBTAA has the following definition of ‘benefit’:
benefit includes 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;
ii. the provision of, or of the use of facilities for, entertainment, recreation or
instruction; or
iii. the conferring of rights, benefits or privileges for which remuneration is payable in the
form of a royalty, tribute, levy or similar exaction;
(b) a contract of insurance; or
(c) an arrangement for or in relation to the lending of money.
It should be noted that a benefit is not ‘provided’ if it is obtained through the employee’s
fraudulent activity that is not condoned by the employer (ID 2003/458).
In Slade Bloodstock Pty Ltd v FC of T 2007 ATC 5276, the Full Federal Court held that there
was real doubt as to whether the repayment of a loan was a ‘benefit’, as distinct from the
discharge of a pre-existing right, and that it would not seem to be encompassed by the terms of
para (c) of the definition.
© CPA Australia Ltd 2011 5FBT module 1: FBT fundamentals
2.1.1 Exercise 1
Exercise 1
Consider the following situations. Which are ‘benefits’ according to the definition of ‘benefit’ for
FBT purposes?
Circumstances Benefit?
Yes No
An employer provides a car to an employee for private use.
An employer pays an employee his weekly wages.
An employer provides a loan to an employee for investment purposes.
An employer provides the use of desks, chairs and computers for work
purposes.
Check your answer against the suggested answer at the end of this module.
SUGGESTED
ANSWERS
2.2 Definition of fringe benefit
Once we have determined if a benefit has been received, we need to determine if it is a ‘fringe
benefit’.
Only fringe benefits are taxable under the fringe benefits tax legislation.
Not all benefits are fringe benefits. Consider the elements required to amount to a fringe benefit
in the definition below.
‘Fringe benefit’ is defined in the FBTAA to mean:
fringe benefit, in relation to an employee, in relation to the employer of the employee, in
relation to a year of tax, means a benefit:
(a) provided at any time during the year of tax; or
(b) provided in respect of the year of tax;
being a benefit provided to the employee or to an associate of the employee by:
(c) the employer; or
(d) an associate of the employer; or
6 © CPA Australia Ltd 2011FBT module 1: FBT fundamentals
(e) a person (in this paragraph referred to as the arranger) other than the employer or an
associate of the employer under an arrangement covered by paragraph (a) of the
definition of arrangement between:
(i) the employer or an associate of the employer; and
(ii) the arranger or another person; or
(ea) a person 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;
in respect of the employment of the employee, but does not include:
(f) a payment of salary or wages or a payment that would be salary or wages if salary or
wages included exempt income for the purposes of the Income Tax Assessment Act
1936; or
(g) a benefit that is an exempt benefit in relation to the year of tax; or
(h) a benefit constituted by the acquisition by the employee, or by a relative of the
employee, of a share in a company, or of a right to acquire a share in a company,
under a scheme for the acquisition of shares by employees, where section 26AAC of
the Income Tax Assessment Act 1936 applies in relation to the acquisition; or
(ha) a benefit constituted by the acquisition by a person of a share or right under an
employee share scheme (within the meaning of Division 13A of Part III of the Income
Tax Assessment Act 1936); or
(hb) a benefit constituted by the acquisition by a trust of money or other property where the
sole activities of the trust are obtaining shares, or rights to acquire shares, in a
company (the employer), or a holding company (within the meaning of the
Corporations Act 2001) of the employer, and providing those shares or rights to
employees of the employer; or
(j) a benefit constituted by:
(i) the making of a payment of money to a superannuation fund (as defined by
subsection 6(1) of the Income Tax Assessment Act 1936) that the person making
the payment had reasonable grounds for believing was a complying
superannuation fund (as defined by subsection 267(1) of the Income Tax
Assessment Act 1936) for the purpose of making provision for superannuation
benefits for the employee (whether or not the benefits are payable to a dependant
of the employee if the employee dies before or after becoming entitled to receive
the benefits); or
(ii) the making of a payment of money to a non-resident superannuation fund (within
the meaning of section 6E of the Income Tax Assessment Act 1936) where:
(A) the payment is for the purpose of making provision for superannuation
benefits for the employee (whether or not the benefits are payable to a
dependant of the employee if the employee dies before or after becoming
entitled to receive the benefits); and
(B) the employee is an exempt visitor to Australia for the purposes of
section 517 of that Act in relation to the year of income in which the
payment is made; or
(iii) the making of a payment of money to an RSA (within the meaning of the
Retirement Savings Accounts Act 1997) that is held by the employee; or
© CPA Australia Ltd 2011 7FBT module 1: FBT fundamentals
(k) a payment within the meaning of Subdivision AA of Division 2 of Part III of the Income
Tax Assessment Act 1936 that would be an employment termination payment within
the meaning of that Subdivision if:
(i) subparagraphs (a)(ii), (iii), (iiia) and (iv) of the definition of employment
termination payment in subsection 27A(1) of that Act were omitted;
(ii) a reference in paragraph (b) of that definition to a superannuation fund included a
reference to a fund of the kind referred to in subparagraph (a)(iii) or (iiia) of that
definition;
(iii) subparagraphs (b)(I), (ii) and (iii) of that definition were omitted; and
(iv) paragraph (k) of that definition were omitted; or
(ka) an exempt resident foreign termination payment, or an exempt non-resident
foreign termination payment, as defined by subsection 27A(1) of the Income Tax
Assessment Act 1936; or
(kb) a payment to which section 27CAA or 27CE of the Income Tax Assessment Act 1936
applies; or
(m) consideration of a capital nature for, or in respect of:
(i) a legally enforceable contract in restraint of trade by a person; or
(ii) personal injury to a person; or
(n) a payment of an amount that, under any provision of the Income Tax Assessment Act
1936, is deemed to be a dividend paid to the recipient; or
(p) a payment made, or liability incurred, to a person to the extent that the payment or
liability is, by virtue of subsection 65(1A) of the Income Tax Assessment Act 1936,
deemed not be income of the person for the purposes of that Act; or
(q) a benefit constituted by the conferral of a present entitlement to, or a distribution of,
income or capital to the extent that subsection 271-105(1) of Schedule 2F to the
Income Tax Assessment Act 1936 would prevent the inclusion of the amount or value
of the income or capital in assessable income, assuming that it would otherwise be so
included; or
(r) anything done in relation to a shareholder in a private company (as those terms are
defined in section 6 of the Income Tax Assessment Act 1936), or an associate of such
a shareholder, that causes (or will cause) the private company to be taken under
Division 7A of Part III of that Act to pay the shareholder or associate a dividend; or
(s) a loan (within the meaning of section 109D of the Income Tax Assessment Act 1936),
if:
(i) a dividend is not taken to be paid under that section in relation to the loan, but
would be if section 109N of that Act were disregarded; or
(ii) an amount is not included, as if it were a dividend, in the assessable income of an
entity under section 109XB of that Act in relation to the loan, but would be if
section 109N of that Act were disregarded.
Some benefits are expressly excluded as fringe benefits and do not give rise to any FBT
liability. From the above definition one discern the following key exclusions:
• exempt benefits
• salary or wages
• most superannuation fund contributions (see below)
• payments from certain superannuation funds
8 © CPA Australia Ltd 2011FBT module 1: FBT fundamentals
• benefits under employee share schemes or trusts, including in respect of individuals
engaged in foreign service, and including certain stapled securities acquired under such
schemes and indeterminate rights
• payments on termination of employment
• capital payments for enforceable contracts in restraint of trade
• capital payments for personal injury
• payments deemed to be dividends for income tax purposes and loans that comply with the
deemed dividend provisions in Div 7A of ITAA36
• payments to an associated person to the extent that they are not considered by the
Commissioner to be deductible
• amounts that have been subject to family trust distribution tax
• certain distribution entitlements of individual venture capital managers.
The following amounts have been held to be salary and wages (rather than fringe benefits):
• an allowance paid to employees in place of medical benefits insurance (Tubemakers of
Australia v FCT 93 ATC 4207)
• payments made to employees for the cost of fares to and from work, regardless of whether
public transport was used (Roads and Traffic Authority of NSW v FCT 93 ATC 4508)
• retention payments made to a person in consideration of the person providing services for
12 months and paid in addition to normal periodic salary (Dean v FCT 97 ATC 4762).
Benefits provided under an ‘effective’ salary sacrifice arrangement are not salary and wages
and conversely benefits provided under ‘ineffective’ arrangements are salary and wages and
not subject to FBT (TR 2001/10). Also, costs incurred by an employer in administering such
arrangements do not give rise to a fringe benefit (ID 2001/333).
Where a person is being paid their parental leave pay by an employer in accordance with the
Paid Parental Leave Act 2010, the employee can salary sacrifice their parental leave pay for
non-cash remuneration as parental leave pay is salary and wages as defined for FBT purposes
when paid by the person’s employer.
The fundamental elements of the definition of ‘fringe benefit’ are further explained below.
2.2.1 ‘in relation to ...’
The definition of fringe benefit relates to a relationship between an employee and his or her
employer for a particular FBT year.
While benefits can be provided to people other than the employee, or by someone other than
the employer, the concept of fringe benefit requires that there be a relationship of
employer/employee. It is in this context that the rest of the definition has application.
2.2.2 ‘provided during or in respect of a year of tax’
Fringe benefits liability is calculated over a year (the FBT year). A fringe benefit for a particular
year means a fringe benefit provided during that year or in respect of that year of tax. The FBT
year runs from 1 April to 31 March.
© CPA Australia Ltd 2011 9FBT module 1: FBT fundamentals
2.2.3 ‘provided to an employee or to an associate of the employee’
Very often benefits are provided to the employee, but a fringe benefit can also arise if a benefit
is provided to an associate of the employee.
An employee
There have been a number of recent cases that challenged the ATO’s interpretation of this
component of the definition. The most important decision was that of the Federal Court in
Indooroopilly Children Services (Qld) Pty Ltd v Commissioner of Taxation (subsequently
confirmed by the Full Federal Court) which was considered a test case for the principle
contained in the decision of Essenbourne v Federal Commissioner of Taxation.
In Essenbourne’s case it was noted that for a fringe benefit to arise, there is a requirement
under the FBTAA that the particular employee to whom the benefit is provided be identified.
This may not be possible where benefits are provided indirectly to a group of employees
through a discretionary trust.
The Indooroopilly case was concerned with employee benefit trusts and the ATO’s position that
fringe benefits tax applied to the amount contributed by the employer to the trust. The argument
that was made against this position was that the failure to identify ‘an employee’ that will benefit
from the trust, which is a necessary element of the requirement of a fringe benefit, results in no
fringe benefit arising.
The Federal Court (affirmed by the Full Federal Court on appeal) upheld the position in
Essenbourne that no fringe benefit arises unless a particular employee can be identified in
connection with the benefit.
Subsequent to the Indooroopilly decision, the ATO withdrew their position on the application of
FBT to employee entitlement funds (benefit trusts).
In Cameron Brae Pty Ltd v FCT (2006) 63 ATR 488, it was also held that contributions to a non-
resident superannuation fund on behalf of 2 employees were not made in respect of their
employment as the contributions provided only an expectancy of a favourable exercise of the
trustee's discretion in their favour.
On the other hand, in Caelli Constructions (Vic) Pty Ltd v FCT (2005) 60 ATR 542 where the
taxpayer paid contributions to an industry redundancy fund on behalf of its employees, the
Federal Court held that each employee to whom a benefit was provided was identified. This was
because the amount of a contribution was fixed by reference to the actual employment of each
employee and the contributions were credited to each employee's ‘Worker's Account’ in the
fund.
In 2007 the ATO released Taxpayer Alert TA 2007/2 to counter the increased marketing of tax
avoidance schemes following the Indooroopilly decision. In TA 2007/2, the ATO note that these
undesirable funds commonly have the following characteristics:
• The employer agrees to participate in a domestic or offshore entitlement fund, controlled by
a trustee associated with those who market the arrangement.
• The employer pays contributions to the entitlement fund on the basis that the contributions
are to be set aside to meet entitlements that may arise in the future for employees.
• The arrangement may be marketed with the claim that the contributions are financed through
a promissory note or loan, or that there may be cash or in-specie payments.
• The entitlement fund purportedly invests the contributions on behalf of the employees, or
their nominees, for the purpose of meeting entitlements that may arise in the future.
10 © CPA Australia Ltd 2011FBT module 1: FBT fundamentals
• The arrangement may be marketed with the claim that the contributions to the entitlement
fund are to be invested in tax-free offshore life insurance bonds. In practice an employer’s
contribution may be returned to the employer via associates.
The Commissioner considers that contributions to such employee entitlement funds may be
non-deductible, or in the case that they are ruled to be deductible, that Part IVA will apply to the
arrangement.
Submissions have been made to the NTLG FBT subcommittee that employer contributions to
staff social clubs should not be subject to FBT as a particular employee cannot be identified in
connection with the benefits. In ATO ID 2007/208 the Commissioner confirms that with respect
to contributions relating to a ‘social club’, at the time the benefit is provided by the employer to
the ‘social club’, the identity of employees is not known with ‘sufficient particularity’, despite the
fact that the social club has been established solely for the benefit of employees of the
employer. It cannot be ascertained at that point in time that there has been a benefit provided in
respect of any particular individual employee. Thus employer contributions to a social club do
not constitute a fringe benefit as they do not relate to a particular employee.
However the Commissioner noted in Taxation Ruling 2010/6 that the issue of bonus units to
employees as part of an employee benefit trust arrangement is a fringe benefit at the time of
issue or transfer, provided the issue of the bonus unit does not create a right to receive salary or
wages (a right to receive salary or wages or bonus income is not a fringe benefit).
The actual term ‘employee’ is defined in the FBTAA to mean a current, future or former
employee. Consequently, a benefit provided to a newly recruited employee, who has not yet
begun work, would be a ‘fringe benefit’. Similarly, a benefit provided to an ex-employee can be
a fringe benefit.
The term ‘current employee’ is defined in section 136 to mean ‘a person who receives, or is
entitled to receive, salary or wages’.
‘Salary or wages’ is defined to mean:
(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; and
(b) a payment from which an amount must be withheld (even if the amount is not withheld)
under section 12-47 in Schedule 1 to the Taxation Administration Act 1953 where:
(i) the payment is made to a religious practitioner by a religious institution; and
(ii) the activity or series of activities for which the payment is made is done by the
religious practitioner as a member of the religious institution.
© CPA Australia Ltd 2011 11You can also read
