Private ruling: Payments from an employee remuneration fund
Date of advice: 22 May 2020
Published: August 2020
Ruling period: FBT Year ended 31 March 2020 | FBT Year ended 31 March 2021
Date scheme commenced: April 2019

Ruling: Q1: Would the employer incur a liability to FBT in respect of the payment of benefits (a) to (i) described in the Trust Deed if those benefits were paid in the year ending 31 March 2020 or 2021, because the payments constitute an expense payment fringe benefit as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ? | A1: Yes | Q2: Would the employer incur a liability to FBT in respect of the payment of benefits (j) to (m) of the Trust Deed if those benefits were paid in the year ending 31 March 2020 or 2021, where the amounts constitute payments that are not included in the definition of a fringe benefit in subsection 136(1) of the FBTAA? | A2: No | Q3: Upon termination of the Fund, would the employer incur a liability to FBT in respect of payments made pursuant to the Trust Deed if the Fund were wound up and those payments made in the year ending 31 March 2020 or 2021, because the payments constitute a fringe benefit as defined in subsection 136(1) of the FBTAA? | A3: No

Relevant facts and circumstances: The Fund was established by a trust deed. Beneficiary of the Fund is defined as "an Employee or a Dependant of an Employee." In turn, Employee is defined as a person who is employed by the Employer. A director of the Employer shall be deemed to be an employee. Employer is defined in the trust deed. A Dependant is defined as: The spouse and any child of an Employee or deceased Employee and any other person whom the Trustee determines to be or have been actually dependent, wholly or partially, on an Employee or deceased Employee. The Trustee will determine either to pay, apply or set aside part or all of the Fund's net income for one or more of the Beneficiaries or to accumulate it. The Trustee is permitted to provide to Beneficiaries the following benefits and payments: a) Medical or pharmaceutical expenses of a Beneficiary; b) Chiropractic expenses of a Beneficiary; c) Physiotherapy expenses of a Beneficiary; d) Dental expenses of a Beneficiary; e) Optical expenses of a Beneficiary; f) Funeral expenses of a Beneficiary; g) Educational expenses of a Beneficiary; h) Group medical insurance cover for or in respect of a Beneficiary; i) Group or individual life insurance cover for or in respect of a Beneficiary; j) Any insurance proceeds received in respect of or for the benefit of such Beneficiary; k) A gratuity to or for the benefit of a Beneficiary who is suffering from sickness, injury, incapacity (including mental or physical incapacity), disability, psychological stress or distress; l) Lump sum in the events of death, trauma, disability or illness of a Beneficiary; m) Lump sum or gratuity in the event of termination of the Beneficiary's employment because of redundancy. Upon termination of the Fund the order of application of the assets of the Fund is set out as follows: 1. Firstly, in payment to Beneficiaries of all claims made and accepted by the Trustee up to the termination; 2. Secondly, if the Trustee so decides, for the benefit of such of the Beneficiaries in such proportions and on such basis as the Trustee decides in its absolute discretion. 3. In default of appointment of the whole of the assets of the Trust Fund pursuant to its purpose the balance of the Trust Fund shall be transferred to the trustees of one or more like funds. Assumptions That the relevant payments happen in the FBT year of tax ending either 31 March 2020 or 2021

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 20 | Fringe Benefits Tax Assessment Act 1986 section 45 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision: Summary: The payment of a benefit described in (a) to (i) of the Trust Deed constitutes an expense payment fringe benefit to the extent that that payment discharges an obligation of the recipient to pay an amount to the relevant service provider. The taxable value of such an expense payment fringe benefit would be determined in accordance with sections 22A to 24 of the FBTAA. | Detailed Reasoning - Detailed reasoning: The deed envisages the payment of any claims made by Beneficiaries for: a) Medical or pharmaceutical expenses of a Beneficiary; b) Chiropractic expenses of a Beneficiary; c) Physiotherapy expenses of a Beneficiary; d) Dental expenses of a Beneficiary; e) Optical expenses of a Beneficiary; f) Funeral expenses of a Beneficiary; g) Educational expenses of a Beneficiary; h) Group medical insurance cover for or in respect of a Beneficiary; i) Group or individual life insurance cover for or in respect of a Beneficiary; Note (1) : Only where the relevant insurance policies were owned by a Beneficiary with the result that the Beneficiary would have an obligation to pay the premiums would a liability to FBT arise if the Fund were to pay the premiums. As Beneficiaries are defined by reference to employment with the employer, the employer would be liable in that case for any FBT payable in respect of the abovementioned fringe benefits (h) and (i) . The payment of the types of expenses listed (a) to (i) are expenses in circumstances where the Beneficiary would have an obligation to pay an amount to a third person in respect of expenditure incurred by the Beneficiary. As a result, such payments of expenses would be taken to be "the provision of a benefit by the provider [i.e., the Fund] to the recipient [i.e. the Beneficiary] and an expense payment benefit as defined in s 136(1). Since benefits during the life of the fund may only be provided to a Beneficiary and only employees or Dependants of employees may be Beneficiaries, the payment of benefits during the life of the fund is inextricably linked to the employment of the Employees. These benefits provided may be seen to be in respect of an employee's employment and, consequently, will be fringe benefits as defined in s 136(1). FBT would be payable on the taxable value of those expense payment fringe benefits (a) to (i) as calculated pursuant to subdivision B of Division 5 of the FBTAA. | Detailed Reasoning - Question 2: Would the employer incur a liability to FBT in respect of the payment of benefits (j) to (m) of the Trust Deed if those benefits were paid in the year ending 31 March 2020 or 2021, where the amounts constitute payments that are not included in the definition of a fringe benefit in subsection 136(1) of the FBTAA? | Summary: j) Any insurance proceeds received in respect of or for the benefit of such Beneficiary; k) A gratuity to or for the benefit of a Beneficiary who is suffering from sickness, injury, incapacity (including mental or physical incapacity), disability, psychological stress or distress; l) Lump sum in the events of death, trauma, disability or illness of a Beneficiary; m) Lump sum or gratuity in the event of termination of the Beneficiary's employment because of redundancy. | Detailed Reasoning - Detailed reasoning: Benefits will only be subject to FBT if they are fringe benefits as defined in s 136(1). The definition of fringe benefit in s 136(1) excludes certain things from being fringe benefits even if otherwise they might fall within the definition. Benefits described in (j),(k),(l) and (m) of the Trust Deed paid to Beneficiaries of the Fund are excluded and would not be subject to FBT in the hands of the employer. | Detailed Reasoning - Question 3: Upon termination of the Fund, would the employer incur a liability to FBT in respect of payments made pursuant to the Trust Deed if the Fund were wound up and those payments made in the year ending 31 March 2020 or 2021, because the payments constitute a fringe benefit as defined in subsection 136(1) of the FBTAA? | Summary: The distribution of the Fund's assets upon winding up is subject to very different rules to those which govern the payment of benefits to Beneficiaries during the life of the Fund. As a result, there is not the same nexus with employment, resulting in the application or allocation of the Fund's assets pursuant to clause 6 - even if to people who might otherwise be Beneficiaries - not being "in respect of the employment" of an employee for the purposes of the definition of fringe benefit in s 136(1). | Detailed Reasoning - Detailed reasoning: The termination of the Fund is dealt with under the Trust Deed as is the provision of benefits to Beneficiaries. The disbursement of the Fund's assets upon termination of the Fund is governed by the terms of the deed which provides: · On or as soon as practicable after termination of the Trust, the Trustee shall apply and allocate the assets of the Trust Fund after payment of all expenses as follows: · Firstly, in payment to Beneficiaries of all claims made and accepted by the Trustee up to the termination; · Secondly, if the Trustee so decides, for the benefit of such of the Beneficiaries in such proportions and on such basis as the Trustee decides in its absolute discretion. · In default of appointment of the whole of the assets of the Trust Fund the balance of the Trust Fund shall be transferred to the trustees of one or more like funds. The trust deed requires that any remainders of the Fund's assets to be distributed to 'like funds' with no discretion. The Fund falls within the meaning of 'ERT arrangement' in paragraph 8 of Taxation Ruling TR 2018/7 Income tax: employee remuneration trusts since it involves a trust being established to facilitate the provision of benefits to employees of an employer. As mentioned, in order for a benefit to be subject to FBT, that benefit needs to be provided in respect of employment. 'In respect of' is defined in subsection 136(1) to mean 'in relation to the employment of an employee' whether direct or indirect. J&G Knowles and Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402 elaborated on this requirement in stating that a nexus was required that showed a 'sufficient or material, rather than casual' relationship between the benefit and the employment. TR 2018/7 states at paragraph 60 that: 60. Benefits have an insufficient connection with employment and are unlikely to be remuneration or remuneration in nature when they are received by the employee other than in their capacity as an employee, such that it can be concluded after consideration of all relevant circumstances, that the benefit is not being provided to the employee in respect of employment. This will arise where the consideration for the payment is not the employment services. Factors that will evidence that benefits provided by a trustee are not remuneration or remuneration in nature include the following: · the benefits are consideration for an arm's length surrender, exercise or disposal of an asset (property or rights) and that asset was acquired in return for valuable and arm's length consideration (or as remuneration, and those rights were appropriately dealt with as such) · t he benefits arise because the recipient is a beneficiary of a trust and the trustee has exercised its power under the deed to provide those benefits to the recipient independent of an arrangement or understanding with, or direction by, the employer · the benefits do not rely on continuing employment nor have regard to, or are conditional upon, individual employment-related performance conditions, or · the timing and amount of benefits is identical in respect of all recipients who hold the same property or rights, regardless of their employment relationship with the employer. [emphasis added] If a Beneficiary were to receive a distribution upon the termination of the Fund, that distribution would arise because the recipient was a "beneficiary of a trust" (that is, the Fund) and the trustee exercised a discretionary power to pay that distribution to the recipient. This distribution would be independent of any arrangement or understanding with the employer or any direction from the employer. Further, any such receipt by a Beneficiary upon termination of the Fund would in no way be conditional upon individual employment-related performance. Applying the Commissioner's comments above, an application or allocation of assets to a Beneficiary by the Trustee of the Fund pursuant to the deed would not be seen to be in relation to the employment of the Beneficiary or any person of whom the Beneficiary was a Dependant. Distributions pursuant to the deed would, consequently, not be subject to FBT. TR 2018/7 also states at paragraph 54 that: 54. Trust distributions not dealt with by the trust assessing provisions can be assessed as ordinary or statutory income to the employee if they bear that character in the hands of the employee. 55. Therefore, excluding the employee's exempt income or non-assessable non-exempt income, benefits paid by the trustee to an employee are taxed in the following order: (a) Subdivision 207-B of the ITAA 1997, on so much of a franked distribution of the ERT that is attributed to the employee, along with their share of the attached franking credit. (b) Paragraph 97(1)(a) of the ITAA 1936, if they are presently entitled to a share of the income of the ERT and are not under a legal disability, on that same share of the section 95 net income of the ERT. (c) Section 6-5 of the ITAA 1997, for amounts paid as remuneration. (d) So much of a capital gain of the ERT they are taken to have made under Subdivision 115-C of the ITAA 1997. Applying the above, it may be expected that a payment to a Beneficiary pursuant to the deed would be taxed in the hands of the recipient in the above manner, noting that it is not expected that any amount would be paid "as" - that is, in the form or nature of - remuneration for the purposes of paragraph (c) above. Further, since the corpus contributed to the Fund was not assessable income, to the extent that any payment pursuant to the deed was represented by that corpus it would be excepted from taxation under section 99B of the ITAA36 by virtue of paragraph (2)(a) of that section