ATO ID 2006/196: Fringe Benefits Tax: in house residual expense payment fringe benefit - meaning of 'associate'
Date of decision: 25 July 2006
Year of income: Year ended 31 March 2007
Business line: Superannuation and Employer Obligations

Issue
In terms of the definition of 'associate' as provided for at subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and as expressed in the accompanying diagram, is company W an associate of the employer company E?

Decision
Yes. Company W is an 'associate' of employer company E as provided for in subsection 136(1) of the FBTAA.

Facts
Company W is an electricity producer which sells electricity to an unrelated third party electricity retailer. Company E is an employer that reimburses their employee's electricity expenses which are incurred to the third party electricity retailer. Company E is 100% owned and controlled by company D which in turn is 90% owned and controlled by company A. Company W is 90% owned and controlled by company A. The payments of the electricity expenses by the employer company E are expense payment benefits under section 20 of the FBTAA and their taxable value is to be calculated under Division 5, Subdivision B of the FBTAA.

Reasons for decision
Summary: In order to calculate the taxable value of an expense payment fringe benefit, it is necessary to consider if a benefit is an 'in house' benefit and therefore subject to concessional valuation rules. In turn a benefit will be an 'in house' benefit only if the expenditure that is reimbursed by the employer was incurred in purchasing goods or services that the employer or an associate sells to customers in the ordinary course of their business. Therefore, it needs to be determined if company W is an associate of company E (employer). The definition of 'associate' within subsection 136(1) of the FBTAA refers to the definition of 'associate' as provided for in section 318 (formerly section 26AAB) of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 318(2) helps determine who are associates of a company. In this case, the employer, Company E, is under the control of Company D, who is under the control of Company A, who is also a parent company of Company W. For the purposes of this Part, the following are associates of a company (in this subsection called the primary entity (in this case, company E)); Paragraph 318(2)(d) will apply to deem company A, a parent company of company E. (d) another entity (in this paragraph called the controlling entity ) where: (i) the primary entity is sufficiently influenced by: (A) the controlling entity; or (B) the controlling entity and another entity or entities; or In this case, the primary entity (Company E) is under 100 per cent control of Company D who is further controlled by Company A (application of subparagraph 318(2)(d)(i)(b). The next step is determining if Company W is an associate of Company E. Paragraph 318(2)(e) states: (e) another company (in this paragraph [is] called the controlled company ) where: (i) the controlled company is sufficiently influenced by: (A) the primary entity; or (B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or (C) a company that is an associate of the primary entity because of another application of this paragraph; or (D) 2 or more entities covered by the preceding sub-subparagraphs; or The application of the above section concludes that Company A is in control of Company W, and through subparagraph 318(2)(e)(i)(B), company A, being an associate of company E, means that Company W is also an associate of Company E. On that basis, company W is an 'associate' of company E under the definition of 'associate' contained in section 318 of the ITAA 1936 and as a consequence in terms of the subsection 136(1) definition of 'associate' in the FBTAA.

Legislative references: Fringe Benefits Tax Assessment Act 1986 subsection 136(1)
Subject references: Associate FBT associates Fringe benefits tax In-house residual expense payment fringe benefit FBT documentary evidence