ATO ID 2003/836: Expense payment fringe benefit: reimbursement of legal expenses
Date of decision: 12 August 2003
Year of income: Year ended 30 June 2000 Year ended 30 June 2001 Year ended 30 June 2002
Business line: Superannuation and Employer Obligations

Issue
Does the reimbursement of an individual's legal expenses, incurred in appearing before an enquiry into the activities of the individual's former employer, constitute the provision of an 'expense payment fringe benefit' as defined at subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Decision
Yes. The reimbursement of the individual's legal expenses constitutes the provision of an expense payment fringe benefit.

Facts
An individual was employed by an authority of the State (the authority). The authority was established under a State Act and is an associate of the State pursuant to subsection 159(2) of the FBTAA. After the individual ceased employment with the authority, a report raised concerns about the activities and management of the authority during the period when the individual was employed by that authority. Subsequently, an enquiry was formed to enquire into whether there had been any illegal or improper conduct in a number of matters relating to the authority. These matters included activities involving the individual during the period they were employed by the authority. The individual was subpoenaed to appear before the enquiry as a key witness and a person with an interest in the proceedings. The individual incurred legal costs in relation to this appearance. The State reimbursed the individual's legal expenses in appearing before the enquiry. This reimbursement was paid subject to the individual having discharged their duties in good faith and not being guilty of misconduct, or not having acted negligently, or not being convicted of an offence in relation to such conduct. The enquiry did not find any wrongdoing by the individual. The State also reimbursed the legal expenses of other persons who were not employees of the authority. The reimbursement did not constitute a benefit included within paragraphs (f) to (s) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.

Reasons for decision
Summary: An 'expense payment fringe benefit' is defined in subsection 136(1) to mean a fringe benefit that is an expense payment benefit. An 'expense payment benefit' is defined in subsection 136(1) of the FBTAA to mean a benefit referred to in section 20. Section 20 of the FBTAA provides that where a person reimburses another person (the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient; the reimbursement shall be taken to constitute the provision of a benefit by the provider to the recipient. Thus the reimbursement of a person's expenses constitutes the provision of an expense payment benefit to the person. 'Fringe benefit' is defined in subsection 136(1) of the FBTAA and relevantly includes a benefit provided to an employee by their employer (or an associate of the employer) in respect of the employment of the employee, but does not include a benefit included within paragraphs (f) to (s) of the definition. Consequently, the reimbursement of a person's expenses will constitute the provision of an expense payment fringe benefit where the person is an employee of the employer and the reimbursement is provided to the person by the employer (or an associate of the employer) in respect of the employment of the employee. Subsection 136(1) of the FBTAA defines 'employee' to include a former employee and 'employer' to include a former employer. Therefore, the reimbursement of a former employee's expenses by an associate of a former employer constitutes the provision of a benefit to an employee by an associate of the employer. The expression 'in respect of the employment of the employee' was considered by the Full Federal Court in J & G Knowles v FCT [2000] FCA 196; 2000 ATC 4151; (2000) 44 ATR 22. The Full Federal Court said that what must be established is a 'sufficient or material relationship' rather than a 'causal link' between the benefit and the employment. The relevant question to ask is whether the benefit is a product or incident of the person's former employment. In this case, the enquiry was formed to enquire into whether there had been any illegal or improper conduct in a number of matters relating to the agency, including the activities and involvement of the individual as an employee of the authority. The State reimbursed the individual's legal expenses in appearing before the enquiry because, as a former employee of the authority, they had an interest in the proceedings, and they considered the individual to have discharged their employment duties in good faith. These factors indicate that the reimbursement of the legal expenses was a product of the individual's former employment. The reimbursement had the requisite 'sufficient or material relationship' to the individual's former employment such that the reimbursement could be said to have been provided in respect of the employment of that individual. Thus, the reimbursement of the individual's legal expenses is considered to constitute the provision of an expense payment fringe benefit as defined in subsection 136(1) of the FBTAA.

Legislative references: Fringe Benefits Tax Assessment Act 1986 section 20 subsection 136(1) subsection 159(2)
Case references: J & G Knowles v FCT [2000] FCA 196 2000 ATC 4151 (2000) 44 ATR 22
Subject references: Benefit Expense payment fringe benefits Fringe benefits tax Legal expenses