ATO ID 2012/88: Expense payment fringe benefit: recipients contribution
Date of decision: 18 October 2012
Year of income: Year ending 31 March 2013
Business line: Superannuation and Employer Obligations

Issue
If an employee is provided with an expense payment fringe benefit in relation to the payment of a proportion of the interest incurred on a loan granted to them by their employer, is the payment by the employee of the remaining interest a 'recipients contribution' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Decision
No. The payment by the employee of the remaining interest incurred on the loan is not a 'recipients contribution' as defined in subsection 136(1) of the FBTAA as the amount was not paid 'in respect of' the provision of the expense payment fringe benefit.

Facts
An employee enters into a loan agreement with their employer. Under the terms of the loan agreement, the employee is granted a loan and is under an obligation to pay the interest and principal. Under the terms of an effective salary sacrifice arrangement, an amount of the employee's pre-tax salary is paid to a salary packaging service provider (the 'SPSP') each pay. This amount is 50 per cent of the interest the employee has incurred on the loan granted by the employer. The SPSP then deposits the amount directly into the employee's loan account with the employer. The making of the payment into the employee's loan account constitutes the provision of an expense payment benefit within the meaning in paragraph 20(a) of the FBTAA and an expense payment fringe benefit as defined in subsection 136(1) of the FBTAA. The employee pays the remaining 50 per cent of the interest incurred on the loan to their employer from their after-tax salary.

Reasons for decision
Summary: All legislative references are to the FBTAA. Broadly, in the case of an expense payment fringe benefit to which paragraph 20(a) applies, the taxable value (as worked out under Subdivision B of Division 5 of Part III) is reduced by the amount of the recipients contribution. Relevantly, 'recipients contribution' is defined in subsection 136(1) as: ...(b) in relation to an expense payment fringe benefit provided in respect of the employment of an employee of an employer, being a fringe benefit to which paragraph 20(a) applies - the amount paid to the provider or to the employer by the recipient or by the employee in respect of the provision of the fringe benefit. In this case the employee pays 50 per cent of the interest incurred on the loan to the employer from their after-tax salary and is provided with an expense payment fringe benefit in relation to the other 50 per cent of the interest incurred. However, the question arises as to whether the amount paid to the employer by the employee is paid 'in respect of' the provision of the expense payment fringe benefit. The term 'in respect of' is defined in subsection 136(1) in the context of 'in respect of the employment of the employee' to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'. A number of judicial decisions have considered the meaning of the phrase 'in respect of'. In Federal Commissioner of Taxation v. Scully (2000) 201 CLR 148; 2000 ATC 4111; (2000) 43 ATR 718, consideration of the words 'in respect of' highlighted the importance of the context in which the phrase appears and resulted in the requirement that there be some 'discernible rational link' between the two subject matters. In J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; 44 ATR 22, Heerey, Merkel and Findelstein JJ stated: The words "in respect of" have no fixed meaning. They are capable of having a very wide meaning denoting a relationship or connection between two things or subject matters. However, the words must, as with any other statutory expression, be given a meaning that depends on the context in which the words are found... ...it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship... Therefore, in the context of the meaning of 'recipients contribution' in subsection 136(1) as it applies in this case, there needs to be a sufficient or material connection between the payment of the remaining 50 per cent of the interest by the employee to their employer and the provision of the expense payment fringe benefit to the employee. When the employee enters into the loan agreement with their employer they are under an obligation to pay the total amount of the interest (and the principal). The provision of the expense payment fringe benefit under the terms of the salary sacrifice arrangement discharges the obligation of the employee to pay 50 per cent of the interest incurred by them on the loan. The payment of the remaining interest by the employee from their after-tax salary relates to the employee's obligation to pay the amount of interest not covered by the provision of the expense payment fringe benefit. The payment by the employee of the remaining interest incurred is made in respect of the employee's obligation under the loan agreement and not in respect of the provision of the expense payment fringe benefit. Therefore, it is considered that there is not a sufficient or material connection between the employee's payment of the remaining interest incurred and the provision of the expense payment fringe benefit. Accordingly, as the amount is not paid 'in respect of' the provision of the expense payment fringe benefit, it is not a 'recipients contribution' as defined in subsection 136(1).

Legislative references: Fringe Benefits Tax Assessment Act 1986 Subdivision B of Division 5 of Part III paragraph 20(a) subsection 136(1)
Case references: Federal Commissioner of Taxation v Scully (2000) 201 CLR 148 2000 ATC 4111 (2000) 43 ATR 718
Subject references: Expense payment fringe benefits FBT taxable value Fringe benefits tax Recipients contributions