Private ruling: FBT: Residual benefits
Published: April 2013
Ruling period: 1 April 2013 to 31 March 2014
Date scheme commenced: 1 April 2013

Ruling: Q1: Does the provision of a discounted corporate health offer to an employee of the Entity give rise to a residual fringe benefit as defined in subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA) ? | A1: Yes | Q2: Where a residual benefit does arise from the arrangement described in question 1, is the taxable value of the fringe benefit nil? | A2: Yes

Relevant facts and circumstances: A health insurance provider (the Provider) offered a 'corporate discount' to the entity's employees. The Provider is not an associate of the Entity. The Provider has offered the Entity's employees a discount on personal health insurance premiums under a corporate offer. Employees are free to take up the offer, or not. The Entity does not incur any costs in respect of employees who take up the offer. The Entity will not know whether any employees take up the discount offer, nor the amount of discount actually received by employees. The corporate discount was offered to the Entity by way of verbal communication from the provider. The Entity simply needs to confirm with the provider that it wishes to participate in this arrangement then Entity's employees will be able to make arrangements directly with the provider themselves to access the discounted premiums. The Entity was initially unaware that this discount offer was available and did not enter into any negotiations to obtain it. The Provider offers/advertises Corporate member benefits on its website.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 50 | Fringe Benefits Tax Assessment Act 1986 Section 136 | Fringe Benefits Tax Assessment Act 1986 Section 45 | Fringe Benefits Tax Assessment Act 1986 Section 46

Reasons for decision: Detailed Reasoning - Question 1: Does the provision of a discounted corporate health offer to an employee of the Entity give rise to a residual fringe benefit pursuant to section 45 of the FBTAA)? | Summary: The provision of the benefit to employees of the Entity by the Provider as described in the arrangement will give rise to a residual fringe benefit pursuant to section 45 of the FBTAA. | Detailed Reasoning - Residual fringe benefit: The definition of a fringe benefit in subsection 136(1) of the FBTAA in general provides that a benefit will be a fringe benefit when that benefit is provided to an employee or an associate of the employee in respect of the employment of the employee by an employer (or its associate) or under an arrangement between the employer and a third party, unless the benefit is specifically excluded from being a fringe benefit. Section 136(1) defines an arrangement as: (a) Any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) Any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The provision of the discounted corporate health cover (the benefit) is a benefit provided by the Provider. The offer/proposal made by the Provider to the Entity in relation to the discount health cover falls within the definition of an arrangement. Accordingly, as the benefit is provided to employees of the Entity during the year of tax by an independent third party under an arrangement with the employer (the Entity) in respect of the employment of the employee, the benefit is a fringe benefit pursuant to subsection 136(1) of the FBTAA. In considering whether the benefit is a residual benefit section 45 of the FBTAA states: "A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive)." The provision of corporate health insurance cover at a discounted premium is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 of the FBTAA. Therefore the provision of the benefit to employees of the Entity by the Provider as described in the arrangement will give rise to a residual fringe benefit as defined in subsection 45 of the FBTAA. | Detailed Reasoning - Question 2: Where a residual benefit does arise from the arrangement described in question 1, is the taxable value of the fringe benefit nil? | Summary: The taxable value of the residual fringe benefit provided to an employee of the Entity would be nil pursuant to Subsection 50(c) of the FBTAA as the notional value of the benefit is fully offset by the recipients' contribution. Consequently, there is no FBT liability to the Entity in respect of the discounted corporate health benefit. | Detailed Reasoning - Taxable value: Section 46 of the FBTAA provides for the year of tax in which a residual benefit will be taxed. The Entity's employees who take up the offer will pay their discounted health insurance premiums in regular billing periods under their own arrangement with Provider. Subsection 46(2) of the FBTAA states that where certain conditions are met a residual benefit provided by way of regular billing periods in the ordinary course of business by the provider, is deemed to be a non-period residual benefit. The conditions required to be satisfied for subsection 46(2) of the FBTAA to apply are that: · The residual benefit is not a lease or licence in respect of property. · The benefit requires a payment to be made at regular intervals. · Identical benefits are provided to the public in the ordinary course of the providers business. The residual benefit provided by way of the discounted health insurance premium is not a lease or licence in respect of property. The benefit will require payments at regular intervals and Provider advertises similar health benefits to the public in the ordinary course of its business. As the intended residual benefit satisfies the requirements of subsection 46(2) of the FBTAA the benefit received by the Entity's employees is considered a non-period residual benefit. As a non-period residual benefit the following provisions of subsection 46(2) (c) and (d) have effect: (a) The provision of the eligible benefit during each billing period shall be taken to constitute a separate benefit; (b) Each such separate residual benefit shall be deemed to have been provided at the time at which the payment in respect of the billing period concerned is due and payable, and not otherwise. In order to determine the taxable value of the non-period residual benefit consideration is then required of the provisions within Subdivision B of the FBTAA to determine whether the benefit is an in-house or an external non-period residual fringe benefit The definition of external non-period residual fringe benefit in subsection 136(1) of the FBTAA states that an external non-period residual fringe benefit means a non-period residual fringe benefit other than an in-house residual fringe benefit. The distinction between an in-house residual fringe benefit and an external residual fringe benefit depends on the definition of in-house residual fringe benefit in subsection 136(1) of the FBTAA. Subsection 136(1) states a benefit is an in-house residual fringe benefit as follows: (a) where both of the following conditions are satisfied: i. if the provider of the benefit is the employer or an associate of the employer; ii. at or about the comparison time the provider must have carried on a business consisting of, or including, the provision of identical or similar benefits principally to outsiders; or (b) where all of the following conditions are satisfied: i. if the provider is not the employer (or an associate); ii. the provider must have purchased the benefit from the employer (or associate); iii. at or about the comparison time both the provider and the seller must have carried on a business consisting of, or including, the provision of identical or similar property principally to outsiders. In the present case, the Provider is not the Entity or associate of the Entity. The provider has not purchased the benefit from the Entity or an associate of Entity. Provider and the Entity are not carrying on identical or similar business in any manner or form. We conclude that Provider cannot meet the in-house residual fringe benefit requirements as defined, therefore the benefit is an external non-period residual fringe benefit. Section 50 of the FBTAA prescribes the valuation rules that are to apply to external non-period residual fringe benefits. Section 50 of the FBTAA states: Subject to this Part, the taxable value of an external non-period residual fringe benefit in relation to an employer in relation to a year of tax is: (a) where the provider was the employer or an associate of the employer and the benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider for the benefit; (b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the benefit - the amount of that expenditure; or (c) in any other case - the notional value of the benefit at the comparison time; reduced by the amount of the recipients contribution. For the purpose of determining the taxable value, the benefit is valued under subsection 50(c) of the FBTAA as the rules in subsections 50(a) and 50(b) do not apply in these circumstances because: (a) the provider is not the employer or an associate of the employer; and (b) the employer or an associate of the employer does not incur expenditure to the provider in respect of the provision of the benefit. Subsection 50(c) of the FBTAA provides that the taxable value of the residual fringe benefit is the notional value of the benefit at the comparison time, less the recipients' (the employees) contribution. The notional value is defined in subsection 136(1) of the FBTAA to mean the amount that the recipient could reasonably be expected to have been required to pay to obtain the benefit from the provider under an arms length transaction. The comparison time in relation to a residual fringe benefit to which subsection 46(2) applies (as per this case) is defined in subsection 136(1) of the FBTAA as being the commencement of the billing period referred to subsection 46(2) in relation to the benefit. Therefore under the rule in subsection 50(c) of the FBTAA, the taxable value is the amount the employee could be reasonably expected to pay for a period of health insurance at each billing period under an arms length transaction reduced by the amount the employee actually pays. The term 'arms length transaction' is defined in subsection 136(1) of the FBTAA as follows: means a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction. An ATO view on the meaning of 'parties are dealing with each other at arm's length' is provided in paragraphs 59-61 of Taxation Ruling TR 2005/19 Income tax: scrip for scrip roll-over arrangements - application of Subdivision 124-M of the Income Tax Assessment Act 1997 - Part IVA of the Income Tax Assessment Act 1936, which states that: 59. The question whether the parties are dealing with each other at arm's length is not decided by asking whether the parties were at arm's length to each other. Subsection 995-1(1) of the ITAA 1997 provides: arm's length : in determining whether parties deal at arm's length , consider any connection between them and any other relevant circumstance. 60. The fact that there is no ownership connection between the parties is not determinative, on its own, of whether the parties deal with each other at arm's length. The question is whether the parties dealt with each other at arm's length; The Trustee for the Estate of the late AW Furse No. 5 Will Trust v. FC of T 91 ATC 4007 at 4014-4015; (1990) 21 ATR 1123 at 1132. This will be determined by considering the terms of the dealing and any other relevant consideration... 61. In Granby Pty Ltd v. FC of T 95 ATC 4240 at 4243; (1995) 30 ATR 400 at 403 Lee J stated that the provision 'dealing with each other at arm's length' invited an analysis of the manner in which the parties conduct themselves in forming the transaction. The question is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs and the expression means, at least, that the parties have acted severally and independently in forming their bargain. Accordingly in considering whether the parties are dealing with each other at arm's length any connection between them and any other relevant circumstance must be taken into account including the terms of the deal and whether the parties have acted severally and independently in forming their bargain. Other relevant circumstances include what independent parties acting in their own commercial interests in situations comparable to those of the relevant parties to the transaction would have negotiated. This takes into account whether the transaction is commercially realistic. The Provider is an independent party to the Entity entering into a corporate agreement with the Entity. The corporate health cover agreement is merely a marketing tool operated by suppliers of health insurance policies, to encourage customers to take out personal health insurance policies with them. The action required by the Entity under the agreement between Provider and the Entity is limited to the Entity advising their employees of the offer from the Provider. The Entity: · does not incur any costs to the Provider nor provide any incentive to them to obtain lower insurance premiums for their employees. · plays no other part in the purchase of personal corporate health cover by their employees from the Provider other than to notify their employees of the discount offered by Provider. · requires that their employees must contact Provider themselves to access the benefit. · did not engage in any negotiations with the providers to obtain the corporate discounts. Accordingly the Entity is no more than a conduit through which the personal corporate health cover is advertised/promoted to Entity's employees. Another factor to be considered is whether the corporate rates applying to the premium cover are at commercial rates. By their nature, commercial rates for health insurance premiums will be peculiar to the targeted market. The Provider has set the corporate rates for the products offered in the cover for the commercial purpose of promoting and selling their health insurance products to employees of corporations to increase their market share. Marketing corporate rates to corporations is a reasonable and profitable business approach. Possible lower business costs of selling services to such corporate clients would also enable corporate rates to be provided. Providing the corporate health cover at a discount of up to 10% to employees of corporations would be in the Provider's commercial interests in terms of increasing sales and would also be in the employees' personal interests to take advantage of the cover. In regard to the corporate health cover premium rates, under the discount offered by Provider, employees of the Entity can have a maximum discount of 10%. The Provider's website has a page advertising its corporate health policies to the public, with discounts similar to that offered to the Entity. The benefits received by employees of the Entity must also be considered against the background of the general practices and normal commercial corporate operations of the insurance business sector. Since the Provider readily provides its health insurance cover to many Australian corporate entities and businesses as part of its business operations and for the reasons stated above, the corporate insurance premium rates charged reflect commercial reality. They are also the rates offered to their other corporate customers for similar sales marketing arrangements. It is reasonable to conclude that the discounted corporate health cover made available to employees of the Entity is a matter of real bargaining. The Providers and Entity have acted severally and independently. Further when an Entity employee purchases a private discounted health insurance cover from the Provider under the corporate health cover agreement, the employee is dealing with Provider in a personal capacity, that is, in accordance with a normal commercial relationship that exists between consumers and suppliers. In conclusion it is considered that the corporate rates of policies offered by the Provider to the Entity employees can be said to be a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction. Accordingly, the price paid by the employees for their choice of personal health insurance cover would be the price the employees could reasonably be expected to have been required to pay to obtain the benefit from the provider under an arm's length transaction. Therefore in applying this to the rule in subsection 50(c) of the FBTAA, the amount the employee could be reasonably expected to pay for a period of health insurance at each billing period under an arms length transaction reduced by the amount the employee actually pays, being the same, would give a taxable value of nil. | Detailed Reasoning - Conclusion: The taxable value of the benefit is the notional value reduced by the amount of any recipients (employees) contribution. The notional value would equate to the amount paid by the employees as the employees and Provider are dealing with each other at arm's length in relation to the transaction. The taxable value of the residual fringe benefit provided to an employee of the Entity would be nil pursuant to Subsection 50(c) of the FBTAA as the notional value of the benefit is fully offset by the recipients contribution. Consequently, there is no FBT liability to the Entity in respect of the discounted corporate health benefit. The above conclusion is in accordance with appendix 9 question 1 of Miscellaneous Tax Ruling MT 2021. This question being is there any fringe benefit tax liability in respect of corporate discounts for private expenses without any payment being made by the employer company?