Private ruling: Payments for HECS Fees and Fringe Benefit Tax
Published: February 2013
Ruling period: FBT year ended 31 March 2009 | FBT year ended 31 March 2010
Date scheme commenced: 1 April 2008

Ruling: Q1: If an Employer paid their Employee an amount through the payroll system to cover their HECS fees, will this be a taxable fringe benefit? | A1: Yes | Q2: If the Employer paid their Employees' HECS fees on their behalf, will this be a taxable fringe benefit? | A2: Yes

Relevant facts and circumstances: 1. The Employer paid their Employees their Higher Education Contribution Scheme (HECS) fees. 2. The contract with the Employees states that the Employer will pay the HECS fees on their behalf. It does not stipulate how these are paid but simply that 'tutorial fees' will be paid by the Employer. 3. In the relevant FBT year, the Employer paid their Employees an exact amount through payroll grossed up to allow them to pay the HECS fees themselves (i.e. HECS fees due plus employee's marginal tax rate = payment to staff). The Employer named this amount an allowance. 4. The employment contract also stipulated that the Employees must use this amount to pay their HECS fees. 5. In the subsequent FBT year, the Employees made payments to their universities for the up-front HECS fees due on their university courses. 6. In the subsequent FBT year, the Employer paid their Employees' up-front HECS fees on their behalf to the respective Universities that the Employees attended after the Employees showed the Employer their bill for the HECS fees.

Relevant legislative provisions: Section 136 of the FBTAA 1986 | Section 20 of the FBTAA 1986 | Section 24 of the FBTAA 1986 | Section 8-1 of the ITAA 1997 | Paragraph 26-20(1)(cb) of the ITAA 1997

Reasons for decision: Summary: The Employer stated that it paid their Employees an amount through the payroll system to cover their HECS fees. Was that payment an allowance or a reimbursement? | Detailed Reasoning - Allowance: An allowance normally forms apart of an employee's salary and wages and is assessable for income tax under section 6-5 of the ITAA 1997. Guidance on what is an allowance is found in Taxation Ruling TR 92/15 Income tax and fringe benefit tax: the difference between an allowance and a reimbursement , where in paragraphs 2 it states: 2. A payment is an allowance when a person s paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance. In this case, the amount paid by the Employer did not match up with the description of an allowance above. Firstly, even though the Employer paid a definite predetermined amount, it was not made to cover an estimated expense. The Employer paid the Employee exactly the amount of their HECS bill plus their marginal tax rate i.e. they paid the HECS bill exactly after it has been issued. Secondly, the Employees were instructed that the amount had to be used for the payment of the HECS fees. Hence, the Employees could not use the amount at their discretion. Further, paragraph 7 and 8 of the TR92/15 states: What is an allowance? ………………………. 7. In Case 153 10 TBRD 480 the Taxation Board of Review said at 484: "Our view is that between employer and employee there is a marked difference between a reimbursement and an allowance. A reimbursement transfers from the employee to the employer the burden of expenses actually incurred in the course of employment. An allowance is designed to compensate the employee because the employer does not wish to be under the obligation of meeting such expenses directly or indirectly". A similar position was adopted in Case B55 (1951) 2 TBRD (NS) 227. 8. The Canadian case of R v Davis (1978) DLR (3d) 233 lends further support to this position. In that case, Anderson J held at 235 and 237 that an allowance includes a payment to be made for a particular purpose which does not carry with it any liability to account. He added that it is an amount determined arbitrarily and set as a top limit. Also, it is clearly to be distinguished from a 'reimbursement' which indicates a payment of a variable sum dependent on a precise accounting for the actual expenditure. In this case, firstly the Employer was under an obligation to pay the tutorial fees (University fees and HECS fees) of the Employees under the employment contract. Hence, the Employer can be held to account for the expenses actually incurred by the Employees. Secondly, the amount paid was not set to an arbitrary top limit but based on the actual amount of HECS fees incurred by the Employee. Therefore, in accordance with the view expressed by TR 92/15, the Employer did not pay an allowance when it paid an amount to cover the employees' HECS fees in the relevant FBT year. | Detailed Reasoning - Reimbursement: A reimbursement of an expense, incurred by an employee, by an employer normally forms apart of an expense payment fringe benefit which is subject to fringe benefits tax under section 20 of the FBTAA 1986. A fringe benefit, as defined in subsection 136(1) of the FBTAA 1986, arises where a benefit is provided to an employee by an employer or a third party under an arrangement with the employer in respect of the employee's employment and where such a benefit is not otherwise exempted. Subsection 136(1) of the FBTAA 1986 provides that a fringe benefit which comes within the expense payment definition in section 20 of the FBTAA 1986 will be an expense payment fringe benefit. Section 20 of the FBTAA 1986 provides that an expense payment benefit will arise in two ways: · where the provider (in this case the Employer) reimburses the recipient (in this case the Employee) for expenses they incur, or · where the provider (the Employer) pays a third party in satisfaction of expenses incurred by the recipient (the Employee). The term reimbursement is not defined under subsection 136(1) of the FBTAA, but the shorter term 'reimburse' is. The definition states: Includes any act having the effect or result, direct or indirect, of a reimbursement. Further guidance for reimbursement is found in Taxation Ruling TR 92/15 Income tax and fringe benefit tax: the difference between an allowance and a reimbursement, where in paragraphs 9 and 10 it states: 9. The word reimburse is defined under subsection 136(1) of the FBT to include any act having the effect or result, direct or indirect, of a reimbursement. Since neither the FBTAA nor the ITAA provides a more descriptive definition beyond that, the ordinary meaning of the word applies. The Macquarie dictionary defines the word reimburse as repayment for expense or loss incurred, or a refund. 10.The ordinary meaning of reimburse implies that the recipient is to be compensated exactly for an expense already incurred although not necessarily disbursed. The definition of reimburse under subsection 136(1) of the FBTAA is wide enough to include payments made before expenses are incurred. However, whether payment is made before or after expenses are incurred by the recipient, it qualifies as a reimbursement when the provider considers the expense to be its own and the recipient incurs the expense on behalf of the provider. In this case, the employee does pay the HECS expense. However, the provider, the Employer, considers the expense its own when it pays an amount equivalent to the student contribution amount to its employees. This is evidenced by the Employer making provisions at the beginning of employment that they will pay for the employees' tutorial fees. The Employees were instructed that a condition for the amount paid was that it had to be used for the payment of their HECS fees. The amount paid was also calculated exactly to the amount of the HECS fees due to each employee, plus the marginal rate of tax that would be payable by the employee if the amount is a taxable allowance and not an approximate amount. As per the taxation ruling TR92/15, it is possible for a reimbursement to be made in advance before the payment is made. It occurs in this case as the employee is the one who pays the bill and not the Employer. From the above it can be said that a reimbursement is a payment to a recipient for an expense incurred. The word incurred has no statutory definition but guidance can be found in Taxation Ruling TR 97/7 Income tax: section 8-1 meaning of incurred timing of deductions. Paragraphs 5 and 6(a) of TR 97/7 state: 5. As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. But this broad guide must be read subject to the propositions developed by the courts, which are set out immediately below. 6. The courts have been reluctant to attempt an exhaustive definition of a term such as incurred. The following propositions do not purport to do this, they help to out line the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred: (a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum; The term incurred implies an existing obligation or liability owed by the recipient. In this case, the employee enrols in a course of study, a liability of the student contribution amount is created for the employee by the university on the university student course fee stream revenue account. The liability is incurred by the employee enrolled as a student in the academic year in which the employee enrols and is able to be clearly ascertained. Therefore, the Employer reimbursed the employee for the expenses, of HECS fees, incurred by the employee, rather than gave an allowance in the relevant FBT year. The employee is the recipient of the expense payment by the Employer. Hence, the Employer paid an expense payment fringe benefit to its Employees pursuant to paragraph 20(b) of the FBTAA 1986 when paid the amount to cover the Employees' HECS fees in the relevant FBT year. Whether or not the expense payment fringe benefit gives rise to a taxable fringe benefit, will depend on whether the otherwise deductible rule under section 24 of the FBTAA 1986 applies. | Detailed Reasoning - Otherwise Deductible Rule: The taxable value of an expense payment fringe benefit may be reduced under section 24 of the FBTAA to the extent that the 'otherwise deductible' rule (ODR) applies. The ODR applies where the recipient of the benefit, the employee, would have been entitled to a 'once only' income tax deduction for the expenditure had it not been paid or reimbursed by the employer. A 'once only' deduction is one that is wholly or partly allowable in only one year (therefore excluding claims such as those relating to the 'decline in value' of depreciating assets that are spread over a number of years). The Employee has made up-front payment of their HECS fees to reduce their HECS-HELP loans. Paragraph 26-20(1)(cb) of the ITAA 1997 operates to deny the Employee a deduction for these payments. Therefore the Employee cannot claim a deduction in respect of these payments under section 8-1 of the ITAA 1997, or any other section of the ITAA 1997 or the Income Tax Assessment Act 1936 . Accordingly the taxable value of the expense payment fringe benefit cannot be reduced to any extent under the otherwise deductible rule under section 24 of the FBTAA 1986. | Detailed Reasoning - Conclusion: Therefore, in the relevant FBT year, the whole amount the Employer has paid to its employees to cover their HECS fees was a taxable expense payment fringe benefit pursuant to paragraph 20(b) of the FBTAA 1986. | Detailed Reasoning - Question 2: A fringe benefit, as defined in subsection 136(1) of the FBTAA 1986, arises where a benefit is provided to an employee by an employer or a third party under an arrangement with the employer in respect of the employee's employment and where such a benefit is not otherwise exempted. Subsection 136(1) of the FBTAA 1986 provides that a fringe benefit which comes within the expense payment definition in section 20 of the FBTAA 1986 will be an expense payment fringe benefit. Section 20 sets out the circumstances of when this type of benefit occurs. Section 20 provides that an expense payment fringe benefit will arise in two ways: · where the provider (in this case the Employer) reimburses the recipient (in this case the Employee) for expenses they incur, or · where the provider (the Employer) pays a third party in satisfaction of expenses incurred by the recipient (the Employee). In this case, the Employer made the HECS payment directly to the creditors e.g. university for up-front HECS payments and the Tax Office for the other HECS payments on behalf of its employees when the Employees presented them with their HECS bill. Hence, the Employer is paying a third party in satisfaction of the expenses incurred by the employee. Section 20 is satisfied and an expense payment fringe benefit existed. Similarly to issue 1, the taxable value of this expense payment fringe benefit cannot be reduced under the otherwise deductible rule under section 24 of the FBTAA 1986. Therefore, in the subsequent FBT year, the whole payment the Employer made to the Universities for the up-front HECS fees of its Employees was an expense payment fringe benefit pursuant to paragraph 20(a) of the FBTAA 1986 and subject to Fringe Benefits Tax.

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