Private ruling: Contributions to Approved Worker Entitlement Fund
Published: November 2012
Ruling period: I April 2011 to 31 March 2012 | I April 2012 to 31 March 2013 | I April 2013 to 31 March 2014
Date scheme commenced: 1 April 2011

Ruling: Q1: Is a contribution in respect of severance and redundancy made by the employer to the A Trust in relation to an employee exempt from fringe benefits tax (FBT) under section 58PA of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes | Q2: Is a contribution in respect of the premium for income protection insurance made by the employer to the A Trust in relation to an employee exempt from FBT under section 58PA of the FBTAA? | A2: No | Q3: If the answer to Question 1 is 'no', is a contribution in respect of severance and redundancy made by the employer to the A Trust in relation to an employee exempt from FBT under any other section of the FBTAA? | A3: Not applicable | Q4: If the answer to Question 2 is 'no', is a contribution in respect of the premium for income protection insurance made by the employer to the A Trust in relation to an employee exempt from FBT under any other section of the FBTAA? | A4: No | Q5: If the answer to Question 3 is 'no', what type of fringe benefit will arise? | A5: Not applicable | Q6: If the answer to Question 4 is 'no', what type of fringe benefit will arise? | A6: Residual fringe benefit | Q7: Will the taxable value of the type of fringe benefit determined under Question 5 be reduced to 'nil' under the 'otherwise deductible rule' (ODR)? | A7: Not applicable | Q8: Will the taxable value of the type of fringe benefit determined under Question 6 be reduced to 'nil' under the 'otherwise deductible rule' (ODR)? | A8: Yes

Relevant facts and circumstances: The employer makes contributions in relation to severance and redundancy and also for premiums for income protection insurance to the A Trust in respect of each of its employees. The A Trust is an 'approved worker entitlement fund' for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The employer is an entity covered by an industrial award (Award) The Award imposes an obligation on the employer to make severance and/ or redundancy payments to eligible employees when those employees cease employment. The Award makes no mention of a requirement for income protection insurance to be provided for employees covered by the Award. The employer entered into an enterprise agreement (Enterprise Agreement) with the relevant industrial union whereby the employer will join an approved worker entitlement fund nominated by the relevant industry union (union). The Enterprise Agreement contains clauses specifying the quantum of contributions to be made by the employer to an approved worker entitlement fund for the purposes of meeting employee severance and redundancy pay. The Enterprise Agreement also states that the employer is required to make contributions, calculated on a percentage of the gross salary paid, to the approved worker entitlement fund in respect of premiums for employee income protection insurance. Under the terms of a Deed of Adherence, entered into between the employer and the union, the employer will utilise the A Trust to meet the employer's severance and redundancy liabilities.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 45 | Fringe Benefits Tax Assessment Act 1986 Section 51 | Fringe Benefits Tax Assessment Act 1986 Section 52 | Fringe Benefits Tax Assessment Act 1986 Section 58P | Fringe Benefits Tax Assessment Act 1986 Section 58PA | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 149(1) | Income Tax Assessment Act 1987 Section 8-1

Reasons for decision: Detailed Reasoning - Detailed reasoning: 1. Section 58PA of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides exemption for contributions made to an approved worker entitlement fund provided certain conditions are met. Section 58PA of the FBTAA states: | Detailed Reasoning - SECTION 58PA: 58PA EXEMPT BENEFITS - WORKER ENTITLEMENT CONTRIBUTIONS If: (a) a person makes a contribution to an approved worker entitlement fund; and (b) the contribution is made under an industrial instrument; and (c) the contribution is either: (i) made for the purposes of ensuring that an obligation under the industrial instrument to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met; or (ii) for the reasonable administrative costs of the fund; the contribution is an exempt benefit. 2. Therefore, the following conditions must be met for exemption under section 58PA of the FBTAA: (a) the contribution is made to an approved worker entitlement fund; and (b) the contribution is made under an industrial instrument; and (c) the contribution is made for the prescribed purposes. | Detailed Reasoning - (a) is the contribution made to an approved worker entitlement fund?: 3. The contribution in respect of severance and redundancy is made to the A Trust which is an approved worker entitlement fund. 4. This condition is satisfied. | Detailed Reasoning - (b) is the contribution made under an industrial instrument?: 5. An 'industrial instrument' is defined in subsection 136(1) of the FBTAA as meaning 'a law of the Commonwealth or of a State or Territory or an award, order, determination or industrial agreement in force under any such law'. 6. The Award is, therefore, an 'industrial instrument' for the purposes of the FBTAA. 7. The Enterprise Agreement is, therefore, also an 'industrial instrument' for the purposes of the FBTAA. 8. The use of the A Trust by an employer to fund its employee severance and redundancy obligations is not specified within the terms of the Award. 9. However, employers can agree to utilise the A Trust for their severance and redundancy liabilities through the use of a Deed of Adherence and the employer has chosen to do this. 10. As provided for at paragraph 8.12 in Chapter 8 of the explanatory memorandum to the Tax Laws Amendment (2005 Measures No.2) Bill (EM), related legal instruments may be used to determine quantum as well as other relevant matters regarding contributions in terms of the relevant industrial instrument. 11. The Enterprise Agreement specifies the quantum of the contribution to be made by the employer to the A Trust in respect of severance and redundancy. 12. Therefore, any contribution made by the employer to the A Trust in respect of severance and redundancy arising through the application of the Award together with the Enterprise Agreement will satisfy the requirements of paragraph 58PA(b) of the FBTAA. | Detailed Reasoning - (c) is the contribution made for the prescribed purposes?: 13. The contribution is made for the purpose of severance and redundancy. 14. This condition is satisfied. | Detailed Reasoning - Conclusion on whether the contribution in respect of severance and redundancy is exempt under section 58PA: 15. The contribution made by the employer to the A Trust in respect of severance and redundancy will satisfy all the necessary conditions to be exempt under section 58PA of the FBTAA. | Detailed Reasoning - Detailed reasoning: 1. As stated above, at paragraph 2 of Question 1, the following conditions must be met for exemption under section 58PA of the FBTAA: (a) the contribution is made to an approved worker entitlement fund; and (b) the contribution is made under an industrial instrument; and (c) the contribution is made only for the prescribed purposes. | Detailed Reasoning - (a) is the contribution made to an approved worker entitlement fund?: 2. The contribution in respect of income protection insurance is made to the A Trust which is an approved worker entitlement fund. 3. This condition is satisfied. | Detailed Reasoning - (b) is the contribution made under an industrial instrument?: 4. The Enterprise Agreement specifies that the employer will make a contribution in respect of the premium for income protection insurance for each of its relevant employees. Therefore, the contribution in respect of the premium for income protection insurance is made under an industrial instrument. 5. This condition is satisfied. | Detailed Reasoning - (c) is the contribution made for the prescribed purposes?: 6. The contribution is made in respect of the premium for income protection insurance. 7. However, as stated above (at paragraph 1 of Question 1), section 58PA of the FBTAA is worded as follows: If: (a) a person makes a contribution to an approved worker entitlement fund; and (b) the contribution is made under an industrial instrument; and (c) the contribution is either: (i) made for the purposes of ensuring that an obligation under the industrial instrument to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met; or (ii) for the reasonable administrative costs of the fund (emphasis added). 8. In terms of the highlighted words in the previous paragraph, the initial assumption that could be made is that the 'industrial instrument' referred to in paragraph 58PA(b) of the FBTAA, is the same 'industrial instrument' referred to in subparagraph 58PA(c)(i) of the FBTAA. 9. However, in order to determine whether this section is referring to the possible existence of more than one industrial instrument, reference is, again, made to paragraph 8.12 in Chapter 8 of the EM which amended the intent of the original 2003 provision in the following way: Whilst an obligation to make contributions for the purposes of meeting employee leave or redundancy payments is made under the industrial instrument, the amendments allow related legal instruments to be used to determine the quantum and other relevant matters regarding the contributions. 10. The EM quoted above, therefore recognises the possible existence of more than one instrument in the form of a 'related legal instrument'. For such an instrument to exist however, it presupposes the existence of the main legal instrument in the form of an 'industrial instrument 'with the related legal instrument merely being used to determine quantum or other relevant matters in order to make leave payments or payments when the employee ceased employment. 11. To be 'related', reference is made to the Macquarie Dictionary [MultiMedia], version 5.0.0, 1/10/01 which defines the term as: 1. associated; connected. 12. Therefore, whilst such a connection could be inferred between two industrial instruments it must still be proven that in making the contribution under the Enterprise Agreement that it has been wholly for the purposes of the industrial instrument as per paragraph 58PA(b) of the FBTAA through meeting the requirements of subparagraph 58PA(c)(i) of the FBTAA. That is, by ensuring that an obligation is met under the industrial instrument to either make leave payments or payments when an employee ceases employment. 13. Whilst the Enterprise Agreement specifies the quantum of the contribution to be made for a redundancy payment which is associated with the industrial agreement's purpose in providing for income protection insurance, this is not in accordance with the stated purpose of the main industrial instrument of making a payment when an employee ceases employment. 14. In this respect, it can be concluded that the Enterprise Agreement has no overall association or connection to the industrial instrument but rather by providing for income protection insurance it is providing for a new purpose outside meeting the initial obligation imposed by the original award and as such does not constitute a related legal instrument. 15. The fact that part of the document could be viewed as being 'associated' to the industrial instrument is therefore not relevant in concluding whether the Enterprise Agreement is a related legal instrument for the purposes of section 58PA of the FBTAA as it provides for purposes outside of the industrial instrument and not in accordance with paragraph 58PA(c)(i) of the FBTAA. 16. As that necessary connection cannot be established, the Enterprise Agreement does not meet the requirements of subparagraph 58PA(c)(i) of the FBTAA and, accordingly, a contribution in respect of the premium for income protection insurance does not meet the requirements of subparagraph 58PA(c)(i) of the FBTAA. 17. It is also considered that a contribution in respect of the premium for income protection insurance does not meet the requirements of subparagraph 58PA(c)(ii) of the FBTAA. | Detailed Reasoning - Conclusion on whether the contribution in respect of income insurance is exempt under section 58PA: 18. The contribution in respect of the premium for income protection insurance does not satisfy all the necessary conditions for exemption under section 58PA of the FBTAA. | Detailed Reasoning - Detailed reasoning: Not applicable. | Detailed Reasoning - Question 4: Detailed reasoning 1. There are several sections in the FBTAA under which benefits provided may be exempt (other than section 58PA of the FBTAA). However, it is considered that the only other exemption provision that may have a possible application in this case is section 58P of the FBTAA concerning the exemption for 'minor benefits'. 2. Taxation Ruling TR 2007/12 provides the following guidance concerning 58P of the FBTAA: 8. A minor benefit is an exempt benefit under section 58P 3 where: · the notional taxable value of the minor benefit is less than $300; 4 and · it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f), to treat the minor benefit as a fringe benefit. | Detailed Reasoning - ...: 18. The value of a minor benefit must relate to the 'current year of tax'. Where a benefit is provided over a period which covers two or more FBT years, only the benefit provided in the current year of tax is considered in determining the notional taxable value. | Detailed Reasoning - ...: 186. In most cases...the notional taxable value of the minor benefit will be what the employer has incurred in obtaining the benefit. 3. It is noted that under the terms of the Enterprise Agreement the contribution made in respect of the premiums for the income protection insurance will be paid at a percentage of the gross salary paid. 4. It is also considered, therefore, that in any FBT year the notional taxable value of the contribution made in respect of the premium for the income protection insurance will be more than $300 and, therefore, exemption under section 58P of the FBTAA will not apply. 5. Consequently, no exemption provision of the FBTAA applies to the contribution made in respect of the premium for income protection insurance. | Detailed Reasoning - Detailed reasoning: Not applicable. | Detailed Reasoning - Detailed reasoning: 1. Section 45 of the FBTAA states that a residual benefit is one that is not a benefit by virtue of any provision of Subdivision A of Divisions 2 to 11 inclusive of the FBTAA. Therefore, in basic terms, a residual benefit is a benefit that does not fall within one of the other more specific benefit types contained in the FBTAA. 2. The 'Fringe benefits tax: a guide for employers' provides the following guidance on residual benefits: | Detailed Reasoning - 18.1 What is a residual fringe benefit?: The term fringe benefit has a very broad meaning. It includes any right, privilege, service or facility provided in respect of employment. ... A residual fringe benefit could include you (the employer) providing services... It could also include providing insurance cover... 3. It is considered, therefore, that the contribution made in respect of the premium for each of the employee's income protection insurance will constitute a residual benefit. 4. Again in basic terms, a fringe benefit, as defined in subsection 136(1) of the FBTAA, is a benefit provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and such benefit is not otherwise exempted. 5. It is also considered, therefore, that as the contribution made in respect of the premium for each of the employee's income protection insurance is made under the terms of the Enterprise Agreement such contribution is being made in respect of each of the relevant employee's employment. 6. Consequently, it is further considered that the contribution made in respect of the premium for each of the relevant employee's income protection insurance is a residual fringe benefit. | Detailed Reasoning - Detailed reasoning: Not applicable. | Detailed Reasoning - Question 8: Detailed reasoning 1. As determined above, in paragraph 6 of Question 6, the contribution made in respect of the premium for each of the relevant employees' income protection insurance is a residual fringe benefit. 2. Subsection 136(1) of the FBTAA provides the following definitions regarding residual fringe benefits: external period residual fringe benefit means a period residual fringe benefit other than an in-house residual fringe benefit. period residual fringe benefit means a residual fringe benefit that is provided during a period. 3. Subsection 149(1) of the FBTAA states that a benefit is provided during a 'period' for the purposes of the FBTAA where it is provided, or subsists, during a period of more than 1 day and is not deemed by a provision of the FBTAA to have been provided at a particular time or on a particular day. 4. It is considered, therefore, that the contribution made in respect of the premium for each of the relevant employees' income protection insurance is an 'external period residual fringe benefit'. 5. The taxable value of an external period residual fringe benefit is determined under section 51 of the FBTAA. 6. However, section 52 of the FBTAA provides for a reduction of the taxable value of a residual fringe benefit under the, so called, 'otherwise deductible rule' (ODR). 7. Broadly, the application of the ODR means that the taxable value of the residual fringe benefit is reduced by the amount the employee would have been entitled to claim as an income tax deduction (provided certain requirements are met). 8. The ODR only applies where the recipient of the benefit is the employee. This requirement is met in this case. 9. Also, the ODR only applies to a 'once-only deduction'. The term 'once only deduction' is defined in subsection 136(1) of the FBTAA as follows: once-only deduction , in relation to expenditure, means a deduction in a year of income in respect of a percentage of the expenditure where no deduction is allowable in respect of a percentage of the expenditure in any other year of income. 10. It is also considered the contribution made in respect of the premium for each of the relevant employees' income protection insurance will meet the requirement of being a 'once-only deduction'. 11. Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent they are incurred in gaining or producing assessable income and are not of a capital, private or domestic nature. 12. In applying this provision the courts have held that to be deductible the loss or outgoing must be incidental and relevant to the earning of assessable income ( Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236, Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; 81 ATC 4114; (1981) 11 ATR 538 ( Smith's Case )). 13. In Smith's Case the High Court considered the deductibility of premiums paid for a personal disability insurance policy. The policy provided the taxpayer with a monthly indemnity against any income loss arising from an inability to earn. 14. The Court held that the premium was deductible because it was incidental and relevant to the operations and activities carried on to produce assessable income. This decision was not made by reference to the certainty or likelihood of the premium generating income but by reference to its nature and character and its general connection with the taxpayer's activities which directly produced assessable income. 15. The majority also concluded at ATC 4117; ATR 542, that the premiums were not of a capital, private or domestic nature: Likewise the periodic nature of the payment and other provisions in the policy which contemplate its renewal from year to year militate against its characterisation as an outgoing of a capital nature. Nor is there any reason whereby it could assume a domestic or private nature. 16. The facts of the present case are similar to those in Smith's Case . It is accepted that the premium in respect of the income protection insurance is relevant and incidental to and, therefore, has a sufficient connection to the assessable income of the relevant employees, and that it is not of a capital, private or domestic nature. 17. For these reasons, it is concluded that each of the relevant employees would be entitled to a deduction under section 8-1 of the ITAA 1997 for the premium paid in respect of an income protection policy that provides for periodic benefits to protect the employee against loss of income, even if it does not actually produce such income. 18. Consequently, it is concluded that the ODR would reduce to 'nil' the taxable value of the residual fringe benefit arising from the contribution made in respect of the premium for each of the relevant employee's income protection insurance.

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