Private ruling: Otherwise deductible rule
Date of advice: 29 March 2018
Published: June 2018
Ruling period: 1 April 2017 to 31 March 2022
Date scheme commenced: 1 April 2017

Ruling: A1: Yes. | Q1: Where expenditure that is incurred by an Employee and reimbursed by the Employer consists of two separate components, can the taxable value of the total expenditure be reduced by the ‘otherwise deductible rule’ pursuant to section 24 of the FBTAA? | A2: Yes.

Relevant facts and circumstances: An Employee has incurred expenses. The Employer reimburses the Employee for the expenses incurred and includes the full amount of the reimbursement as an expense payment fringe benefit in the relevant year’s Fringe Benefits Tax (FBT) return. Under the Employer’s Expense Reimbursement Policy, the Employer pays the Employee a reimbursement allowance to the value of $X per year to cover the expenses incurred.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 20 | Fringe Benefits Tax Assessment Act 1986 Section 24 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: A reduction in taxable value is available under the ‘otherwise deductible rule’ pursuant to section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for expenditure that is incurred by an Employee and reimbursed by the Employer. | Detailed Reasoning - Detailed reasoning: An ‘expense payment fringe benefit’ is defined in subsection 136(1) of the FBTAA to mean a fringe benefit that is an expense payment benefit. That same provision defines an ‘expense payment benefit’ as a benefit referred to in section 20 of the FBTAA. Section 20 of the FBTAA states that an expense payment benefit may arise in either of two ways: 1. where the provider makes a payment which wholly or partly discharges an obligation of the recipient to pay an amount to a third person, or 2. where the provider reimburses the recipient wholly or partly for an amount of expenditure incurred by the recipient. The benefit arises at the time when the provider makes the payment discharging the obligation to the third party, or makes the reimbursement payment. In the current circumstances, the Employer (the ‘provider’) reimburses the Employee (the ‘recipient’) for expenditure incurred by the Employee, thus constituting an expense payment fringe benefit pursuant to section 20 of the FBTAA. Under section 24 of the FBTAA, the taxable value of an expense payment fringe benefit provided to an employee may be reduced to the extent to which the employee would have been entitled to a ‘once-only’ income tax deduction for the expenditure concerned had it not been paid or reimbursed by the benefit provider. This is known as the ‘otherwise deductible rule’. A ‘once-only’ deduction is one that is wholly or partly allowable in one year for the expenditure, and not in any other year. An expense payment fringe benefit is reduced by the ‘notional deduction’ which is, as specified in paragraph 24(1)(ba) of the FBTAA, the difference between the deduction that would be allowable if the employee had paid the whole of the expenditure incurred and had not been reimbursed for any part of it (the ‘gross deduction’) and the actual deduction allowable to the employee for the expenditure. In the present circumstances, the Employee has incurred expenses in the course of gaining or producing their assessable income. As the expenses have been incurred by the Employee in gaining or producing their assessable income, these expenses would be ‘otherwise deductible’ to the Employee in their personal income tax return under section 8-1 of the Income Tax Assessment Act 1997 had the Employer not reimbursed the expenditure. The Employer reimburses the Employee for the expenses incurred. Therefore, section 24 of the FBTAA applies to reduce the taxable value of expenditure that is incurred by the Employee and reimbursed by the Employer. | Summary: On the same basis as concluded in the response to Question One, where expenditure incurred by an Employee and reimbursed by the Employer consists of two components, and that expenditure was incurred by the Employee in gaining or producing their assessable income, the taxable value of the total expenditure may be reduced by the ‘otherwise deductible rule’ pursuant to section 24 of the FBTAA.

Is a reduction in taxable value available under the ‘otherwise deductible rule’ pursuant to section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for expenditure that is incurred by an Employee and reimbursed by the Employer?