Private ruling: In-house property fringe benefits – redemption of value pre-loaded onto benefits card for In-house goods
Date of advice: 7 December 2017
Published: April 2018
Ruling period: 1 April 2015 to 31 March 2023.
Date scheme commenced: 1 April 2015.

Ruling: Q1: Does the provision by the Company of in - house goods to an employee or a relative of the employee under the Company’s Employee Benefits Program give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes. | Q2: If the answer to Question 1 is ‘Yes’, is the benefit provided by the Company an ‘in-house property fringe benefit’ as defined in subsection 136(1) of the FBTAA? | A2: Yes. | Q3: If the answer to Question 2 is ‘Yes’, is the taxable value of the in-house property fringe benefit calculated under sub-subparagraph 42(1)(a)(ii) of the FBTAA (for in-house goods manufactured, produced or processed by the Company) and/or paragraph 42(1)(b) of the FBTAA (for in-house goods acquired by the Company and not manufactured, produced or processed by the Company), less the reduction amount as specified in section 62 of the FBTAA? | A3: Yes.

Relevant facts and circumstances: The Company has a number of stores which offer customers a wide range of in-house goods. Employee Benefits Program The Company had previously introduced an annual incentive program to reward and recognise certain employees on achieving sales targets. The program details were as follows: ● subject to management sign-off, employees may receive certain goods sold in stores, to the value of a percentage of sales based on sales increasing from the prior year. ● the employee’s portion is based on the number of hours worked by the employee. ● the percentage of sales allocated is calculated on a six-monthly basis, up to an aggregated value of $X per store employee per Fringe Benefits Tax (FBT) year. With effect from 1 April 2015, the Company replaced this annual incentive program with a new Employee Benefits Program to reward and recognise certain employees on achieving sales targets. The new program details are as follows: ● Subject to management sign-off, employees may receive certain goods sold in stores to the value of a percentage of sales based on sales increasing from the prior year. ● The employee’s portion is based on the number of hours worked by the employee. ● The percentage of sales allocated is calculated and awarded on a quarterly basis, up to an aggregated value of $X. Such goods consist of the in-house goods that are sold by the Company to the public in its retail outlets. In-house goods may be provided to either the employee or a relative of the employee. Employee Benefits Card To facilitate the practical distribution of in-house goods to certain employees (and/or their relatives) under the Employee Benefits Program, the Company provides each of these employees with an Employee Benefits Card (the ‘Benefits Card’). The Benefits Card has specific terms and conditions, which are summarised as follows: ● The Benefits Card is only provided to current full-time, part-time and casual employees of the Company. It is not available to retired employees. ● The Benefits Card is pre-loaded with the value that the employee is eligible for as determined under the Employee Benefits Program (up to an aggregated value of $X per FBT year). ● Part or all of the pre-loaded value/available balance on each employee’s Benefits Card may be redeemed for in-house goods during the applicable FBT year. ● Any unused balance on each employee’s Benefits Card as at the end of the relevant FBT year expires and does not carry over to the next FBT year. ● The Benefits Card itself has no value other than being the means by which an employee can obtain in-house goods. ● The value/available balance on each employee’s Benefits Card can only be redeemed for in-house goods sold by the Company to the general public within one of the Company’s stores. ● The value/available balance on each employee’s Benefits Card can only be redeemed at the point of sale. ● The Benefits Card cannot be exchanged for cash. ● The Benefits Card cannot be transferred to, or used by, any person other than the employee of the Company to whom the Benefits Card was provided. The only exception is that an immediate family member (a relative) of an employee may use that employee’s Benefits Card (to redeem the value/available balance on the Benefits Card for the Company’s in-house goods). The non-transferability of the Benefits Card is enforced by the employee or immediate family member being required to display a valid identification card at the point of sale. Such an identification card is issued to each of the Company’s employees, with a second card issued in the employee’s name to an immediate family member of the employee. ● Failure to comply with, or abuse of, the Benefits Card may result in the loss of access to the Company’s Employee Benefits Program, and possible disciplinary action up to and including termination of employment. Non-compliance or abuse at the point of sale will result in the cancellation of the Benefits Card. These benefits will not be provided under a salary packaging arrangement. The in-house products provided by the Company will always be tangible property. The majority of the Company’s in-house goods are acquired by the Company and are not manufactured, produced, processed or treated by the Company. However, the Company does also manufacture, produce, process or treat some goods, which are items branded by the Company. In-house goods obtained by the Company’s employees (and/or their associates) through redeeming the value/available balance on their Benefits Card will not be consumed on the premises of the Company’s stores or a company related to the Company. The in-house goods that will be provided to each employee (and/or their associate) in the relevant FBT year under the Company’s Employee Benefits Program will have a collective taxable value equal to, or greater than, $X. For the purpose of calculating the taxable value of in-house goods acquired (and not manufactured, produced, processed or treated) by the Company which are provided to the Company’s employees or their associates upon redemption of the value/available balance on their Benefits Card, the arm’s length price in respect of the Company’s acquisition of such goods will be less than the notional value (in relation to the provision of property or another benefit to a person) of those goods. Assumption It is assumed for the purposes of this Private Ruling that the benefit(s) provided to an employee of the Company (and/or an immediate family member of the employee) is not a benefit that is specifically excluded as per paragraphs (f) to (s) of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 40 | Fringe Benefits Tax Assessment Act 1986 Section 41 | Fringe Benefits Tax Assessment Act 1986 Subparagraph 42(1)(a)(ii) | Fringe Benefits Tax Assessment Act 1986 Paragraph 42(1)(b) | Fringe Benefits Tax Assessment Act 1986 Section 58P | Fringe Benefits Tax Assessment Act 1986 Section 62 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision: Summary: The provision by the Company of in-house goods to an employee or a relative of the employee under the Company’s Employee Benefits Program will give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: A ‘fringe benefit’ is defined in subsection 136(1) of the FBTAA, which holds that the following conditions must be satisfied: 1. A benefit is provided at any time during the year of tax. 2. The benefit is provided to an employee or an associate of the employee. 3. The benefit is provided by: a. their employer; or b. an associate of the employer; or c. a third party other than the employer or an associate under an arrangement between the employer or associate of the employer and the third party; or d. a third party other than the employer or an associate of the employer, if the employer or an associate of the employer: i. participates in or facilitates the provision or receipt of the benefit; or ii. participates in, facilitates or promotes a scheme or plan involving the provision of the benefit; and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so; 4. The benefit is provided in respect of the employment of the employee. 5. The benefit is not one that is specifically excluded as per paragraphs (f) to (s) of the definition of a fringe benefit in subsection 136(1) of the FBTAA. In order to determine whether the provision of in-house goods to employees of the Company under the Company’s Employee Benefits Program constitutes a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA, a discussion is provided below in respect of whether each element of the definition of a fringe benefit is satisfied. | Detailed Reasoning - A benefit is provided: Subsection 136(1) of the FBTAA provides a broad definition of a ‘benefit’ as including: any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under: (a) an arrangement for or in relation to: (i) the performance of work (including work of a professional nature), whether with or without the provision of property; … ‘Provide’ in relation to a benefit is defined in subsection 136(1) of the FBTAA as allow, confer, give, grant or perform. The provision by the Company of in-house goods to an employee (and/or their immediate family member) upon redemption of part or all of the pre-loaded value/available balance on the employee’s Benefits Card constitutes a privilege, and therefore meets the definition of a ‘benefit’ for the purposes of the FBTAA. As such, the first condition (i.e. the provision of a ‘benefit’) of the definition of a ‘fringe benefit’ – as defined in subsection 136(1) of the FBTAA – is satisfied . | Detailed Reasoning - The benefit is provided to an employee or an associate of the employee: An ‘employee’ is defined in subsection 136(1) of the FBTAA to mean a current, future or former employee. An ‘associate’ is defined in subsection 136(1) of the FBTAA to have the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 318(1) of the ITAA 1936 states that an associate of a natural person includes a relative of that person. Based on the facts provided, only certain employees of the Company (and/or an immediate family member of those employees) are entitled to receive in-house goods upon redemption of part or all of the pre-loaded value/available balance on the relevant employee’s Benefits Card. In FC of T v Indooroopilly Children Services (QLD) Pty Ltd [2007] FCAFC 16, it was held that references to ‘the employee’ throughout the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA were to a particular employee, the identity of whom is known with sufficient particularity at the time a benefit is provided to that employee. This principle was also held in Essenbourne Pty Ltd v FC of T 2002 ATC 5201 ( Essenbourne ). At the time the benefit(s) is provided to an employee of the Company or an immediate family member of that employee (who is an associate of the employee), the identity of the employee and/or their associate would be known (through presenting their valid identification card at the point of sale). Therefore, as the benefit will be provided to certain (identifiable) employees of the Company and their associates, the second condition (i.e. a benefit is provided to an employee and/or associate) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA is satisfied . | Detailed Reasoning - The benefit is provided by an employer, an associate of the employer or a third party: ‘Employer’ is defined in subsection 136(1) of the FBTAA to mean a current, future or former employer. As the benefit is provided by the Company as an employer, the third condition (i.e. a benefit is provided by an employer, an associate of the employer or a third party under an arrangement with an employer) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA is satisfied . | Detailed Reasoning - The benefit is provided in respect of the employment of the employee: As per subsection 136(1) of the FBTAA, ‘in respect of’ in relation to the employment of an employee includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. Subsection 148(1) of the FBTAA stipulates that a benefit will be provided in respect of the employment of an employee: ● whether or not the benefit also relates to some other matter or thing ● whether the employment is past, present or future ● whether or not the benefit is surplus to the recipient's requirements ● whether or not the benefit is also provided to another person ● whether or not the benefit is offset by any inconvenience or disadvantage ● whether or not the benefit is provided or used, or required to be provided or used, in connection with any employment ● whether or not the provision of the benefit is in the nature of income, and ● whether or not the benefit is provided as a reward for services rendered, or to be rendered, by the employee. In J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 ( Knowles ), the full Federal Court – in examining the meaning of ‘in respect of’ an employee’s employment – held that the phrase required a ‘nexus, some discernible and rational link, between the benefit and employment’, though noted that ‘what must be established is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment’. A similar view was also held in Essenbourne . The full Federal Court in Knowles also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'. In the current circumstances, the connection between the benefit(s) that would be received by an employee (and/or their associate) of the Company (if they choose to redeem part or all of the pre-loaded value on their Benefits Card for in-house goods) and their employment would be material and sufficient, and not merely causal. The benefits will be provided to the Company’s employees (and/or their associates) as part of the Company’s Employee Benefits Program. If it were not for an employee’s employment with the Company, the employee (and/or their associate) would not be entitled to access any benefit (being in-house goods received through redemption of part or all of the pre-loaded value on the employee’s Benefits Card). On the basis of the above, a benefit provided to an employee of the Company (and/or their associate) would be considered to be ‘in respect of the employee’s employment’. As such, the fourth condition (i.e. a benefit is provided in respect of the employment of the employee) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA is satisfied . | Detailed Reasoning - The benefit is not excluded from the definition of a fringe benefit: A benefit which comes within paragraphs (f) to (s) of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA is excluded from being a fringe benefit. It is assumed for the purposes of this Private Ruling that the benefit(s) provided to an employee of the Company (and/or an associate of the employee) is not a benefit that is specifically excluded as per paragraphs (f) to (s) of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA. As such, the fifth condition of the definition of a ‘fringe benefit’ (i.e. the benefit provided is not excluded from the definition of a ‘fringe benefit’) as defined in subsection 136(1) of the FBTAA is satisfied . | Detailed Reasoning - Conclusion: Each of the conditions of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA are satisfied. Therefore, under the Company’s Employee Benefits Program, the provision of in-house goods by the Company to an employee (and/or an associate of that employee) upon redemption of part or all of the value on the employee’s Benefits Card will give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA. | Detailed Reasoning - Question 2: If the answer to Question 1 is ‘Yes’, is the benefit provided by the Company an ‘in-house property fringe benefit’ as defined in subsection 136(1) of the FBTAA? | Summary: The provision of in-house goods by the Company to an employee (and/or an associate of the employee) upon redemption of part or all of the value loaded onto the employee’s Benefits Card under the Company’s Employee Benefits Program is an ‘in-house property fringe benefit’ as defined in subsection 136(1) of the FBTAA. | Detailed Reasoning - Property fringe benefit: As per the response to Question 1, the provision of in-house goods by the Company to an employee (and/or an associate of the employee) upon redemption of the value/available balance on the employee’s Benefits Card will give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA. Section 40 of the FBTAA in respect of ‘property benefits’ states: Where, at a particular time, a person (in this section referred to as the provider ) provides property to another person (in this section referred to as the recipient ), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time. Subsection 136(1) of the FBTAA defines ‘provider’ as ‘the person who provides the benefit’, and defines ‘recipient’ in relation to a benefit to mean the person to whom the benefit is provided. The term ‘provide’ in relation to property is defined in subsection 136(1) of the FBTAA to mean: dispose of (whether by sale, gift, declaration of trust or otherwise): (i) if the property is a beneficial interest in property but does not include legal ownership – the beneficial interest; or (ii) in any other case – the legal ownership of the property. ‘Property’ is defined in subsection 136(1) of the FBTAA to mean intangible property and tangible property. ‘Tangible property’ is defined in subsection 136(1) of the FBTAA to mean goods. According to the Fringe benefits tax – a guide for employers publication, a property fringe benefit arises when an employer provides an employee with free or discounted property. It further states that ‘property’ includes: ● goods (including gas and electricity, unless provided through a reticulation system) and animals ● real property, such as land and buildings, and ● rights to property, such as shares or bonds. The term ‘goods’ is not defined in the FBTAA and therefore takes on its ordinary meaning. ‘Goods’ is defined in the Macquarie Dictionary (online) as: 1. possessions, especially movable effects or personal belongings. 2. articles of trade; wares; merchandise, especially that which is transported by land. | Detailed Reasoning - The Company’s Benefits Card versus a Gift Card/Voucher: Whilst the Benefits Card issued by the Company to its employees has characteristics similar to that of a ‘gift card’ or ‘gift voucher’ that is sold by the Company to the general public, Benefits Cards can be distinguished in that they cannot be transferred to any person. Benefits Cards can only be used by the employee or an associate to obtain goods which are also sold by the Company to the general public. Two distinct actions but one integrated arrangement In ATO Interpretative Decision (ID) ATO ID 2014/17 ‘ Property fringe benefits: redemption of voucher /coupon by a retail store employee for merchandise retailed by their employer’ (ATO ID 2014/17), the provision of a voucher/coupon and the later redemption of that voucher/coupon to obtain merchandise were considered to involve two distinct actions. The issue of the voucher/coupon was an administrative aid in facilitating the later provision of merchandise to the employee. The ‘benefit’ as defined in subsection 136(1) of the FBTAA was therefore the provision of the merchandise by the employer. The employer provides the benefit when the employee redeems the voucher/coupon for the merchandise. The same principle was applied in Class Ruling (CR) CR 2014/56 ‘Fringe benefits tax: Corporate clients of Dell Australia Pty Ltd (Dell Australia) who participate in the Dell Australia employee purchase program’ (CR 2014/56). The view held in both ATO ID 2014/17 and CR 2014/56 as referenced above is supported by Taxation Ruling (TR) TR 1999/10 ‘ Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments’ (TR 1999/10). In TR 1999/10, where retired Federal Members of Parliament are provided with travel entitlements or ‘passes’, the issuing of such passes are not considered to attract any income tax implications, however travel benefits received in relation to each use of these passes will be taxed as a residual benefit within the meaning of section 45 of Division 12 of the FBTAA. Similarly, in the current circumstances, the provision of the Company’s Benefits Card to certain employees and the later use of these cards to obtain goods involve two distinct separate actions. However, the following facts indicate that the provision of a Benefits Card and the consequent provision of in-house goods upon redemption of the value/available balance on the Benefits Card should be considered to be part of the one seamlessly integrated arrangement to provide the merchandise and apparel to the relevant employee: (a) the value/available balance on the employee’s Benefits Card can only be redeemed by the employee and an immediate family member (a relative) of the employee on presentation of a valid identification card at the point of sale (b) the Benefits Card is non-transferable (c) the value loaded onto the relevant employee’s Benefits Card can only be redeemed to obtain in-house goods to the amount determined by the rewards and recognition program (d) the value loaded onto the relevant employee’s Benefits Card can only be redeemed at the point of sale at the Company’s stores, and (e) fraudulent use of a Benefits Card may result in loss of access to the Company’s Employee Benefits Program. The provision of the Benefits Card should be viewed as being merely the most convenient way of facilitating the provision of in-house goods by the Company to its employees (and/or their immediate family members). It is thus the provision of the in-house goods to the employee (and/or their immediate family member) at the time of redemption of the value/available balance on the employee’s Benefits Card – and not the provision of the Benefits Card itself – that should be treated as the sole relevant benefit in the current circumstances for the purposes of the FBTAA. On the basis of the above definitions and the principles encapsulated in ATO ID 2014/17, CR 2014/56 and TR 1999/10, the provision of (tangible) in-house goods (or ‘property’) by the Company (the ‘provider’) to an employee and/or an immediate family member of that employee (the ‘recipient’) upon redemption of the value/available balance on the employee’s Benefits Card under the Company’s Employee Benefits Program therefore constitutes the provision of ‘property benefits’ for the purposes of section 40 of the FBTAA. | Detailed Reasoning - In-house property fringe benefit: Under the FBTAA, property fringe benefits can be ‘in-house’ or ‘external’. An ‘in-house property fringe benefit’ is defined in subsection 136(1) of the FBTAA as follows: in-house property fringe benefit , in relation to an employer, means a property fringe benefit in relation to the employer in respect of tangible property; (a) where both of the following conditions are satisfied: (i) the provider is the employer or an associate of the employer; and (ii) at or about the provision time, the provider carried on a business that consisted of or included the provision of identical or similar property principally to outsiders; or (b) where all of the following conditions are satisfied: (i) the provider is not the employer or an associate of the employer; (ii) the property was acquired by the provider from the employer or an associate of the employer (which employer or associate is in this definition called the seller ); and (iii) at or about the provision time, both the provider and the seller carried on a business that consisted of or included the provision of identical or similar property principally to outsiders. An ‘external property fringe benefit’ is defined in subsection 136(1) of the FBTAA to mean, in relation to an employer, a property fringe benefit other than an in-house property fringe benefit. As established above, the provision of (tangible) in-house goods (or ‘property’) by the Company to an employee or an immediate family member of the employee upon redemption of the value/available balance on the employee’s Benefits Card constitutes the provision of a property fringe benefit. Further, as per the facts, the provider of the property fringe benefit is the employer (the Company), and the provider carries on a business that consists of the provision of identical or similar property (in-house goods) principally to outsiders. Therefore, the benefit is an in-house property fringe benefit pursuant to paragraph (a) of the definition of ‘in-house property fringe benefit’ in subsection 136(1) of the FBTAA. | Detailed Reasoning - Question 3: If the answer to Question 2 is ‘Yes’, is the taxable value of the in-house property fringe benefit calculated under sub-subparagraph 42(1)(a)(ii) of the FBTAA (for in-house goods manufactured, produced or processed by the Company) and/or paragraph 42(1)(b) of the FBTAA (for in-house goods acquired by the Company and not manufactured, produced or processed by the Company), less the reduction amount as specified in section 62 of the FBTAA? | Summary: The taxable value of the in-house property fringe benefit will be calculated under: 1. sub-subparagraph 42(1)(a)(ii) of the FBTAA where the benefit pertains to in-house goods manufactured, produced or processed by the Company, and/or 2. paragraph 42(1)(b) of the FBTAA where the benefit pertains to in-house goods acquired by the Company and not manufactured, produced or processed by the Company. The taxable value will then be reduced by the reduction amount as specified in section 62 of the FBTAA. | Detailed Reasoning - Detailed reasoning: The taxable value of the property fringe benefit depends upon whether the benefit is an in-house property fringe benefit or an external property fringe benefit. As discussed in the response to Question 2 above, the benefit (being the provision of in-house goods by the Company to an employee and/or an associate of the employee upon redemption of the value/available balance on the employee’s Benefits Card) is an in-house property fringe benefit. The taxable value of an in-house property fringe benefit is calculated under section 42 of the FBTAA. Subsection 42(1) of the FBTAA provides that: 42(1) Subject to this Part, the taxable value of an in-house property fringe benefit in relation to an employer in relation to a year of tax, is: (aa) if the recipient’s property was provided to the recipient under a salary packaging arrangement – an amount equal to the notional value of the recipient’s property at the provision time; or (ab) if paragraph (aa) does not apply and the benefit is an airline transport fringe benefit – an amount equal to 75% of the stand-by airline travel value of the benefit at the time the transport starts; or (a) if neither paragraph (aa) nor (ab) applies and the recipient’s property was manufactured, produced, processed or treated by the provider: (i) if identical property that was manufactured, produced, processed or treated, as the case may be, by the provider was, at or about the provision time, sold by the provider in the ordinary course of business to purchasers being manufacturers, wholesalers or retailers – an amount equal to: (A) if any of that identical property was, at or about the provision time, sold by the provider under an arm’s length transaction or arm’s length transactions – the lowest price at which it was sold under such a transaction; or (B) if sub-subparagraph (A) does not apply – the lowest price at which any of that identical property could reasonably be expected to have been sold by the provider at or about the provision time under an arm’s length transaction; or (ii) if subparagraph (i) does not apply but identical property that was manufactured, produced, processed or treated, as the case may be, by the provider was, at or about the provision time, sold by the provider: (A) in the ordinary course of business to members of the public under an arm’s length transaction or arm’s length transactions; and (B) in similar circumstances and subject to identical terms and conditions (other than as to price) as those that applied in relation to the provision of the recipient’s property to the recipient; an amount equal to 75% of the lowest price at which that property was so sold to a member of the public; or (iii) in any other case – an amount equal to 75% of the notional value of the recipient’s property at the provision time; or (b) if none of the above paragraphs applies and the property was acquired by the provider – an amount equal to the lesser of: (i) the arm’s length price in respect of the acquisition of the recipient’s property by the provider; or (ii) the notional value of the recipient’s property at the provision time; or (c) in any other case – an amount equal to 75% of the notional value of the recipient’s property at the provision time; reduced by the amount of the recipient’s contribution. The FBTAA does not define the meaning of ‘acquired’. Its ordinary meaning must therefore be considered. The Macquarie Dictionary (online) defines 'acquire’ as: 1. to come into possession of; get as one’s own. Subsection 136(1) defines ‘notional value’ as: notional value , in relation to the provision of property or another benefit to a person, means the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm’s length transaction. Guidance for determining this amount is provided by Taxation Determination TD 93/231 Fringe benefits tax: what is an acceptable method for determining the ‘notional value’ of a property fringe benefit for the purposes of sections 42 and 43 of the Fringe Benefits Tax Assessment Act 1986? (TD 93/231). Paragraphs two to five of TD 93/231 state: 2. To ascertain the ‘notional value’ of a property fringe benefit the employer must determine the amount the employee would have to pay for a comparable (on the basis of age, type and condition) benefit under an arm’s length transaction. 3. This Office will accept a number of ways of obtaining the notional value including: ● the price of comparable goods advertised in local newspapers and/or relevant magazines or similar publications, ● the price paid for comparable goods at a public auction, ● the price of comparable goods at a second-hand store, or ● the market value of the goods determined by a qualified valuer. 4. The lowest value obtained using any of these methods will be acceptable. 5. Valuation methods which are not acceptable to this Office include the lease residual value, the tax written value or the ‘best offer’ made by an employee. In Walstern v. Federal Commissioner of Taxation [2003] FCA 1428; (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, Hill J in discussing notional value stated at ATC 5092: As already noted, the valuation formula depends upon the ‘notional value’ in relation to the provision whether of property or of a benefit to each of the Medichs. From the definition it follows that the question to be asked is what is the amount that each of the Medichs could reasonably be expected to have been required to pay to obtain the benefit from the provider under an arm’s length transaction. The provider in the present case is Walstern. Hence the question in relation to Mr Ronald Medich, is how much he could reasonably be expected to have been required (i.e., by Walstern) to pay to Walstern to obtain the interest obtained by him in the fund, assuming the transaction between Walstern and him to be at arm’s length. ‘Recipient’s contribution’ is defined in subsection 136(1) of the FBTAA as: (a) in relation to a car parking fringe benefit, a property fringe benefit, a residual fringe benefit or a board fringe benefit, being a fringe benefit provided in respect of the employment of an employee of an employer, means the amount of any consideration paid to the provider or to the employer by the recipient or by the employee in respect of the provision of the recipients parking, the recipients property, the recipients benefit or the recipients meal, as the case may be, reduced by the amount of any reimbursement paid to the recipient in respect of that consideration; and… In the current circumstances, paragraphs (aa) and (ab) of subsection 42(1) of the FBTAA do not apply, as the benefits are not provided under a salary packaging arrangement, nor are they airline transport benefits. As per the facts, the majority of the Company’s in-house goods are acquired by the Company and are not manufactured, produced, processed or treated by the Company. However, the Company does also manufacture, produce, process or treat some goods (branded by the Company). The taxable value of in-house goods that have been manufactured, produced, processed or treated by the Company (that is, the Company’s branded goods) is therefore calculated under sub-subparagraph 42(1)(a)(ii) of the FBTAA. That is, the taxable value of these goods will be 75% of the lowest price that the goods were sold to the public, less any recipient’s contribution. Where the in-house goods were acquired (and not manufactured, produced, processed or treated) by the Company, the taxable value is calculated as per paragraph 42(1)(b) of the FBTAA. That is, the taxable value will be the lessor of the arm’s length price in respect of the Company’s acquisition of the in-house goods that was provided to their employees (or their associates) under the Company’s Employee Benefits Program, or the notional value of those goods. As per the facts, the notional value will not apply in respect of the goods provided to employees (and/or their associates) under the Company’s Employee Benefits Program, as it will be a higher value than the arm’s length price in respect of the acquisition of the employee’s (and/or their associate’s) property by the Company. The taxable value will thus be the arm’s length price in respect of the acquisition of the goods by the Company, less any recipient’s contribution. Where an employer provides one or more in-house fringe benefits to a particular employee, the aggregate taxable value of those in-house fringe benefits may be reduced under section 62 of the FBTAA. Section 62 states: 62(1) Where one or more in-house fringe benefits in relation to an employer in relation to a year of tax relate to a particular employee of the employer, the taxable value of that fringe benefit, or the sum of the taxable values of those fringe benefits, as the case may be, in relation to that year shall be reduced by: (a) if the taxable value or the sum of the taxable values does not exceed $1,000 – an amount equal to the taxable value or the sum of the taxable values; or (b) in any other case – $1,000. 62(2) Subsection (1) does not apply to an in-house fringe benefit provided under a salary packaging arrangement. As per the responses to Questions 1 and 2 above, the applicable benefit – being the (tangible) in-house goods that the Company provides to its employees (and/or their associates) under the Company’s Employee Benefits Program upon redemption of the value that has been pre-loaded onto a Benefits Card – is an ‘in-house property fringe benefit’. As such, subsection 62(1) of the FBTAA will apply so that the aggregate taxable value of the in-house property fringe benefits for each employee (and their associate) is reduced by up to $1,000. Subsection 62(1) of the FBTAA is applicable only in relation to ‘a particular employee’. In terms of whether benefits provided to an associate of an employee of the Company will also be eligible for the reduction in taxable value under subsection 62(1), paragraph 5 of Miscellaneous Taxation Ruling MT 2044 Fringe benefits tax: reduction of aggregate taxable value of fringe benefits – application to associates (MT 2044) states: Section 62 applies to benefits which "relate to a particular employee". The word "relate" is not specifically defined in the Act and therefore has its ordinary meaning. The Concise Oxford Dictionary defines "relate" to mean "...establish relation between; connected; allied". The Macquarie Dictionary, in so far as is relevant, defines "relate" to mean "to bring into or establish association, connection, or relation". It is therefore considered that a benefit will "relate" to an employee if the provision of that benefit is connected to or associated with the employee. As a benefit provided to an associate of an employee must be in respect of the employment of the employee, the provision of the benefit is therefore connected to or associated with the employee. In other words it relates to the employee. Therefore, MT 2044 makes it clear that benefits provided to an associate of an employee of the Company fall within the requirements of subsection 62(1) of the FBTAA such that each employee and their associate is grouped with the relevant employee for accessing the employee’s $1,000 reduction amount. As the Company’s Employee Benefits Program is not a salary packaging arrangement, subsection 62(2) of the FBTAA does not have application. Accordingly, section 62 of the FBTAA will apply to reduce the taxable value of all in-house property fringe benefits for each the Company’s employees and their associates (calculated under sub-subparagraph 42(1)(a)(ii) and/or paragraph 42(1)(b) of the FBTAA) up to an amount of $1,000. Therefore, for each employee (and/or their associate) who receives one or more in-house property fringe benefit under the Company’s Employee Benefits Program, the taxable value will be calculated as follows: 1. Calculate the taxable value of each individual in-house property fringe benefit provided to that employee (and/or their associate): ● for an in-house property benefit provided to an employee of the Company (and/or their associate) that has been manufactured, produced, processed or treated by the Company, the taxable value will be 75% of the lowest price that the goods were sold to the public, less any recipient’s contribution, pursuant to sub-subparagraph 42(1)(a)(ii) of the FBTAA. ● for an in-house property benefit provided to an employee of the Company (and/or their associate) that was acquired (and not manufactured, produced, processed or treated) by the Company, the taxable value will be the arm’s length price in respect of the Company’s acquisition of those goods, less any recipient’s contribution, pursuant to paragraph 42(1)(b) of the FBTAA. 2. The taxable value, or the sum of the taxable values where the employee has received more than one in-house property benefit, is then reduced by the amount specified in subsection 62(1) of the FBTAA.