Private ruling: Discounted school fees
Published: May 2017
Ruling period: 1 April 2014 to 31 March 2015

Ruling: Q3: Does paragraph 49(a) of the Fringe Benefits Tax Assessment Act 1986 apply to make the discount provided to an employee a taxable fringe benefit to the school to the extent to which it exceeds 75% of the lowest amount paid or payable by any member of the public? No.

Relevant facts and circumstances: The school provides education to members of the public from year 3 to year 12. The school charges fees for education services provided to enrolled students. From 1 April 2014 the school is considering providing a discount to members of staff who enrol their children at the school, valued in excess of 75% of the annual arm's length price ordinarily offered to members of the public. The employees will pay the full discounted amount from their post-tax income by way of a direct contribution to the school. Where this arrangement results in a fringe benefits tax (FBT) liability to the school, the employee will be required to package the FBT liability. That is, the employee will meet the employer's FBT liability by way of a reduction in their pre-tax income.

Relevant legislative provisions: Section 49 of the Fringe Benefits Tax Assessment Act 1986 | Paragraph 49(aa) of the Fringe Benefits Tax Assessment Act 1986 | Paragraph 49(a) of the Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision: Summary: Subsection 136(1) of the FBTAA defines a salary packaging arrangement as an arrangement under which a benefit is provided to an employee if: (a) the benefit is provided in return for the employee agreeing to a reduction in the employee's salary or wages that would not have happened apart from the arrangement; or (b) the arrangement is part of the employee's remuneration package, and the benefit is provided in circumstances where it is reasonable to conclude that the employee's salary or wages would be greater if the benefit were not provided. In this case the school is proposing an arrangement whereby the benefit (education) is provided at a discounted rate of school fees to employees, paid for with their post-tax income. That is, there will be no reduction in the employee's salary or wages in paying the school fees. However, the employee will be required to package the school's resulting FBT liability. That is, the employee will meet the employer's FBT liability by way of a reduction in their pre-tax salary or wages. Consequently, paragraph (a) above will apply to the arrangement when viewed as an entirety. Although there is no reduction in salary or wages at the time the benefit is provided by way of a discount, the employees are in effect agreeing to a reduction in salary or wages in order to cover the school's FBT liability. That is, a reduction in salary or wages occurs as part of the arrangement. The reduction in salary or wages cannot be separated from, or seen as distinct from, the benefit. The arrangement must be viewed as a whole. Alternatively, paragraph (b) is applicable. If an employee chooses not to enter the arrangement, their salary or wages would be higher since they would not be agreeing to salary sacrifice an amount equal to the school's FBT liability. In short, the arrangement meets the definition of a salary packaging arrangement under subsection 136(1) of the FBTAA. Since the benefit being provided is available to employees under a salary packaging arrangement, paragraph 49(aa) of the FBTAA is applicable. That is, it is a condition of paragraph 49(aa) that the benefit be provided to the recipient under a salary packaging arrangement. This condition has been met under the proposed arrangement. The taxable value of the in-house period residual fringe benefit is therefore calculated in accordance with paragraph 49(aa) of the FBTAA. Paragraph 49(a) of the FBTAA is only applicable if neither paragraph (aa) or paragraph (ab) applies. Since it has been established that paragraph 49(aa) of the FBTAA applies to the proposed arrangement, it follows that paragraph 49(a) of the FBTAA does not. As per the reasoning in question 1, the ATO considers that the discount provided to employees forms part of an overall salary packaging arrangement and does not sit outside of it. As per the reasoning in question 2, since it has been established that paragraph 49(aa) of the FBTAA applies to the proposed arrangement, paragraph 49(a) of the FBTAA has no effect on the proposed arrangement.

Does paragraph 49(aa) of the Fringe Benefits Tax Assessment Act 1986 apply when calculating the taxable value of discounted school fees provided by the school to its employees? | Does paragraph 49(a) of the Fringe Benefits Tax Assessment Act 1986 apply when calculating the taxable value of discounted school fees provided by the school to its employees? | Reasons for decision: These reasons for decision accompany the Notice of private ruling for the relevant school. | The provision of education to the children of the school's employees is considered to be a residual benefit. Since the school is providing it to employees' children in respect of the employees' employment the residual benefit will be a fringe benefit. | The taxable value of a residual fringe benefit is determined under section 49 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) if it is an 'in-house period residual fringe benefit'. | An 'in-house residual fringe benefit' is a residual benefit where the employer carries on a business that consists of or includes the provision of identical or similar benefits principally to outsiders (Subsection 136(1) of the FBTAA). | Identical benefits is defined in subsection 136(1) of the FBTAA to mean 'another benefit that is the same in all respects, except for differences (if any) that are minimal or insignificant and do not affect the value of the other benefit.' | An outsider is also defined in subsection 136(1) of the FBTAA: | in relation to the employment of an employee of an employer, means a person not being: | (a) an employee of the employer; | (b) an employee of an associate of the employer; | (c) an employee of a person (in this definition referred to as the “provider”) other than the employer or an associate of the employer who provides benefits to, or to associates of, employees of the employer or an associate of the employer under an arrangement between: | (i) the employer or an associate of the employer; and | (ii) the provider or another person; or | (d) an associate of an employee to whom any of the preceding paragraphs apply. | As the school is providing education to many more children who are not the children of employees the school is carrying on a business that consists of the provision of identical benefits to outsiders. Therefore the taxable value of the benefits will be calculated in accordance with section 49 of the FBTAA. | Section 49 of the FBTAA states: | 49 Subject to this Part, the taxable value of an in-house period residual fringe benefit in relation to a year of tax is | (aa) if the benefit was provided to the recipient under a salary packaging arrangement - an amount equal to the notional value of the benefit at the comparison 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 comparison time; or | (a) if neither paragraph (aa) nor (ab) applies, and at or about the comparison time, identical overall benefits were provided by the provider: | (i) in the ordinary course of business to members of the public under an arm's length transaction or arm's length transactions; and | (ii) 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 recipients overall benefit; | an amount equal to 75% of the lowest amount paid or payable by any such member of the public in respect of the current identical benefit in relation to an identical overall benefit so provided; or | (b) in any other case - an amount equal to 75% of the notional value of the recipients current benefit; | reduced by the amount of the recipients contribution insofar as it relates to the recipients current benefit.