Private ruling: FBT - exempt benefits - public transport
Ruling period: Year ended 31 March 2012 | Year ended 31 March 2013 | Year ended 31 March 2014
Date scheme commenced: 1 April 2011

Ruling: Q1: Will the taxable value of the reimbursement of transport costs be reduced by the amount specified under section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) if the travel comes within the definition of entertainment in subsection 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the taxable value of the reimbursement of transport costs be reduced by the amount specified under section 62 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) if the travel does not come within the definition of entertainment in subsection 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes

Relevant facts and circumstances: You provide public transport. Recently a card has been introduced which can be used to travel on public transport. To use a card the cardholder touches the card on a card reader at the start and end of a journey. When the card is touched on a card reader at the start of the journey a fixed amount will be deducted from the cards balance. When the card is touched off at the end of the journey the correct fare is calculated and the balance is adjusted accordingly. If the cardholder fails to touch off at the end of a journey the fixed amount will remain deducted from the balance and the cardholder will forfeit any right to have the balance adjusted to reflect the correct fare for that journey. To obtain a card a refundable deposit is required to be paid. This deposit is like a safety net which allows the cardholder to finish their journey even if there are insufficient funds on the card (provided the balance is positive at the start of the journey). The available balance for the card can be topped-up as required. A passenger is able to protect the balance of their card against theft or loss by registering their card with the transport authority. If a registered card is lost, stolen, damaged or faulty the card can be blocked so no one else can use it. A new card can be arranged with the deposit and balance on the original card transferred to the new card. The transaction history of any card can be viewed using fare machines at train stations or at card retailers. In addition, the transaction history for registered cards can be obtained using the internet. The holder of a registered card is able to obtain a refund of the balance of the card. You intend to offer employees the opportunity to participate in a salary sacrifice arrangement for the reimbursement of the cost of travel on public transport. The travel under this arrangement can be for any purpose. Employees will purchase and register a card in their own name and pay the initial deposit. The employee will predetermine an amount to be salary sacrificed. This amount will be paid to the remuneration service provider. The employee will travel on the relevant transport service. To claim a reimbursement of the cost of the travel the employee will be required to submit a statement showing the trips undertaken. Employees will not be eligible for a reimbursement for transport provided by an unrelated operator.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 20. | Fringe Benefits Tax Assessment Act 1986 Subsection 22A(2). | Fringe Benefits Tax Assessment Act 1986 Section 40. | Fringe Benefits Tax Assessment Act 1986 Subsection 47(1). | Fringe Benefits Tax Assessment Act 1986 Subsection 47(6). | Fringe Benefits Tax Assessment Act 1986 Section 48. | Fringe Benefits Tax Assessment Act 1986 Subsection 62(1). | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1). | Fringe Benefits Tax Assessment Act 1986 Section 149. | Fringe Benefits Tax Assessment Act 1986 Subsection 159(2). | Income Tax Assessment Act 1936 Section 317. | Income Tax Assessment Act 1936 Section 318. | Income Tax Assessment Act 1997 Subsection 32-10. | Income Tax Assessment Act 1997 Section 995-1. | Acts Interpretation Act 1901 Section 22.

Reasons for decision: Detailed Reasoning - Will the taxable value of the reimbursement of transport costs be reduced by the amount specified under section 62 of the FBTAA?: Subsection 62(1) of the FBTAA enables the taxable value of certain fringe benefits to be reduced by up to $1,000. Subsection 62(1) states: Where one or more eligible 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 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. The fringe benefits that are eligible for the reduction are defined in sub section 62(2) of the FBTAA to be an in-house fringe benefit or an airline transport fringe benefit. Therefore, as the payment will not be an airline transport fringe benefit, it is necessary to determine whether it will be an 'in-house fringe benefit'. An 'in-house fringe benefit' is defined under subsection 136(1) to mean: (a) an in-house expense payment fringe benefit; (b) an in-house property fringe benefit; or (c) an in-house residual fringe benefit. Therefore, the concessions will not apply unless the payment is an expense payment benefit or a property benefit or a residual benefit. The concessions will not apply if the payment is a tax-exempt body entertainment benefit. | Detailed Reasoning - Is the payment an expense payment benefit?: Section 20 of the FBTAA provides that an expense payment benefit will arise: Where a person (in this section referred to as the provider ): (a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient ) to pay an amount to a third person in respect of expenditure incurred by the recipient; or (b) reimburses another person (in this section also referred to as the recipient ), in whole or in part, in respect of an amount of expenditure incurred by the recipient; Under the arrangement you will make a payment to an employee. This payment will not come within paragraph (a) as it is not a payment to discharge an obligation of the employee to pay an amount to a third person. Therefore, the benefit will only be an expense payment fringe benefit if it is a reimbursement of an amount of expenditure incurred by the employee or associate. Guidance as to the circumstances in which a payment will be a reimbursement is provided in Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement. In explaining what a reimbursement is paragraphs 3, 9 and 10 of TR 92/15 state: 3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption. 9. The word "reimburse" is defined under subsection 136(1) of the FBTAA to include any act having the effect or result, direct or indirect, of a reimbursement. Since neither the FBTAA nor the ITAA provides a more descriptive definition beyond that, the ordinary meaning of the word applies. The Macquarie dictionary defines the word "reimburse" as a repayment for expense or loss incurred, or a refund. 10. The ordinary meaning of the word "reimburse" implies that the recipient is to be compensated exactly for an expense already incurred although not necessarily disbursed. The definition of "reimburse" under subsection 136(1) of the FBTAA is wide enough to include payments made before expenses are incurred. However, whether payment is made before or after expenses are incurred by the recipient, it qualifies as a reimbursement when the provider considers the expense to be its own and the recipient incurs the expense on behalf of the provider. As a result, a requirement that the recipient vouch or substantiate expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A further indication of a reimbursement is where the recipient is required to refund unexpended amounts to the provider. In applying these guidelines, a payment will not be a reimbursement where it relates to credit put onto the card by the employee or associate. When the employee tops up the card balance he or she will not incur an expense. Rather he or she will be transferring funds or depositing money into a card account held in the name of the employee. In this regard, it is noted that it is possible for an employee to obtain a refund of the card balance. The expense is incurred when the employee actually travels. Therefore, it is only the cost of the travel that can be a fringe benefit. Although the reimbursement of an employee's (or associates) travel costs may be an expense payment benefit, it can also result in a tax-exempt body entertainment benefit. The ATO publication Fringe benefits tax: a guide for employers NAT 1054-08.2006, provides the following example in part 15.7: Two employees of a tax-exempt body have dinner together while travelling on business overnight. They see a show at the casino in the city they are staying, and the fee to the show includes dinner. Their employer reimburses them for the cost of the show entry (which includes meals). This expenditure is entertainment, and is therefore tax-exempt body entertainment. The expense payment fringe benefit valuation rules could not apply in this circumstance as this is a tax-exempt body entertainment fringe benefit. This example demonstrates that in determining what kind of benefit is being provided it is necessary to consider the specific provision (tax-exempt body entertainment) before the general (expense payment) provision. This is further supported by paragraph 9 in Taxation Ruling TR 97/17 Income tax and fringe benefits tax; entertainment by way of food or drink. Paragraph 9 states: Where a meal falls within a specific FBT provision (e.g., as a board fringe benefit or a tax-exempt body entertainment fringe benefit) then, in absence of an election made under Division 9A, the taxable value of the benefit is determined under that specific provision rather than the more general sections dealing with expense payment and property fringe benefits…. As you are exempt from income tax it is therefore necessary to determine whether the transport trips come within the meaning of entertainment. | Detailed Reasoning - What is entertainment?: Subsection 136(1) of the FBTAA states that 'entertainment' has the meaning given by section 32-10 of the Income Tax Assessment Act 1997 ' (ITAA 1997). Section 32-10 of the ITAA 1997 defines 'entertainment' as: (a) entertainment by way of food, drink or recreation, or (b) accommodation or travel to do with providing entertainment by way of food, drink or recreation. | Detailed Reasoning - What is recreation?: 'Recreation' is defined under subsection 136(1) of the FBTAA as; (a) amusement; (b) sport or similar leisure-time pursuits; and (c) recreation or amusement provided on, or by means of, a vehicle, ship, vessel or aircraft. The Macquarie Dictionary provides the following definition of amusement: 1. the state of being amused; enjoyment. 2. that which amuses; pastime; entertainment 3. a mechanical entertainment, as a merry-go-round at a fair. In applying these definitions it is possible for the travel to constitute the provision of entertainment where it is to do with the provision of entertainment to the employee or an associate. For example, travel to a sporting event or a restaurant. If the travel constitutes the provision of entertainment it may be a tax-exempt body entertainment fringe benefit. If it is a tax-exempt body entertainment benefit it will not be an in-house fringe benefit that comes within section 62. | Detailed Reasoning - Is the entertainment tax-exempt body entertainment?: Tax-exempt body entertainment benefits are defined in section 38 of the FBTAA, which states: Where, at a particular time, a person (in this section referred to as the "provider") incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision, in respect of the employment of an employee, of entertainment to a person (in this section referred to as the "recipient") being the employee or an associate of the employee, the incurring of the expenditure shall be taken to constitute a benefit provided by the provider to the recipient at that time in respect of that employment. In deciding whether the benefit is a tax-exempt body entertainment benefit it is necessary to determine the following: · Who is the provider? · What is non-deductible exempt entertainment expenditure? · Does the provider incur non-deductible exempt entertainment expenditure/ Who is the provider? In accordance with the section 38 definition the provider is the person who incurs non-deductible exempt entertainment expenditure. In the arrangement being considered this will be the employer who reimburses the expenses incurred by the employee. What is non-deductible exempt entertainment expenditure? Subsection 136(1) of the FBTAA provides the definition of non-deductible exempt entertainment expenditure as: non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income. Non-deductible entertainment expenditure is also defined in subsection 136(1) as: a loss or outgoing to the extent to which: (a) section 32-5 of the Income Tax Assessment Act 1997 applies to it, or would apply if it were incurred in producing assessable income; and (b) apart from that section, it would be deductible under section 8-1 of that Act, or would be if it were incurred in producing assessable income; Section 32-5 of the ITAA 1997 states: To the extent that you incur a loss or outgoing in respect of providing * entertainment, you cannot deduct it under section 8-1. However, there are exceptions, which are set out in Subdivision 32-B. In considering the exceptions listed in subdivision 32-B of the ITAA 1997 it should be noted that the provider is the employer who pays the reimbursement. As none of the exceptions listed in subdivision 32-B of the ITAA 1997 are likely to apply to the expenditure the reimbursement of the employee's (or associate's) travel will be non-deductible exempt entertainment expenditure where it comes within the entertainment definition. Therefore, as the employers are not liable to pay income tax, the travel will be a tax-exempt body entertainment benefit where it comes within the definition of entertainment. Where this occurs a reimbursement of the travel expenses will not be an in-house benefit that comes within section 62. In all other situations, the reimbursement will be an expense payment benefit. | Detailed Reasoning - Will the expense payment fringe benefit be an in-house expense payment fringe benefit?: Subsection 136(1) of the FBTAA defines an in-house expense payment fringe benefit as: (a) an in-house property expense payment fringe benefit; or (b) an in-house residual expense payment fringe benefit. Both of these terms are also defined in subsection 136(1) of the FBTAA. In broad terms: · an in-house property expense payment fringe benefit refers to an expense payment fringe benefit where the expenditure incurred by the employee was in respect of the purchase of goods of a kind sold by the employer in the ordinary course of business; and · an in-house residual expense payment fringe benefit refers to an expense payment fringe benefit where the expenditure incurred by the employee was in respect of the purchase of a service or other residual benefit of a kind supplied by the employer to members of the public in the ordinary course of business. As the expenditure is in respect of the provision of transport rather than for the purchase of property the benefit will not be an in-house property expense payment fringe benefit. For the benefit to be an in-house residual expense payment fringe benefit the expenditure must relate to a residual benefit which is defined in section 45 of the FBTAA to be a benefit that is not a benefit by virtue of any provision of Subdivision A of Divisions 2 to 11 inclusive of the FBTAA. As the provision of transport does not fall within Divisions 2 to 11 of the FBTAA the expenditure incurred by the employees is in respect of a residual benefit. | Detailed Reasoning - What is an in-house residual expense payment fringe benefit?: Subsection 136(1) of the FBTAA defines an in-house residual expense payment fringe benefit, in relation to an employer to mean: an expense payment fringe benefit in relation to an employer where: (a) the recipients expenditure was incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance) by a person (in this definition called the " residual benefit provider "); (b) if the residual benefit provider is the employer or an associate of the employer at or about the time that, if the residual benefit had been a residual fringe benefit, would have been the comparison time, the residual benefit provider carried on a business that consisted of or included the provision of identical or similar benefits principally to outsiders; (c) if the residual benefit provider is not the employer or an associate of the employer: (i) the residual benefit provider purchased the benefit from the employer or associate of the employer (which employer or associate is in this definition called the seller) ; and (ii) at or about the time that, if the residual benefit had been a residual fringe benefit, would have been the comparison time, both the residual benefit provider and the seller carried on business that consisted of or included the provision of identical or similar benefits principally to outsiders: and (d) documentary evidence of the recipients expenditure is obtained by the recipient and that documentary evidence, or a copy, is given to the employer before the declaration date. As discussed above, the employee's expenditure is incurred on the provision of a residual benefit. Therefore, if the provider of the transport is the employer, or an associate of the provider the reimbursement will be an in-house residual expense payment fringe benefit if: · the provider at the relevant time carried on a business that consisted of, or included, the provision of identical or similar benefits principally to outsiders; and · the required documentary evidence is given to the employer at the required time. Although paragraph (c) of the in-house residual expense payment fringe benefit enables a benefit that is not provided by either the employer, or an associate of the employer to be an in-house residual expense payment fringe benefit it is not necessary to consider this definition as the provider does not purchase the transport from either the employer or an associate of the employer. | Detailed Reasoning - Is the provider of the residual benefit the employer or an associate of the employer?: The provider of the transport will be the employer or an associate. | Detailed Reasoning - Did you and the provider carry on a business that consisted of the provision of identical or similar benefits principally to outsiders?: Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides guidance for determining whether the nature, extent and manner of the activities being undertaken amount to the carrying on of a business. Paragraph 13 of TR 97/11 lists the following indicators that are relevant in determining whether the activities constitute the carrying on of a business: · whether the activity has a significant commercial purpose or character; this indicator comprises may aspects of the other indicators; · whether the taxpayer has more than just an intention to engage in business; · whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; · whether there is repetition and regularity of the activity; · whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; · whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit; · the size, scale and permanency of the activity; and · whether the activity is better described as a hobby, a form of recreation or a sporting activity. In applying these factors it is accepted that you and the provider carry on a business that consisted of the provision of identical or similar benefits principally to outsiders. | Detailed Reasoning - Will documentary evidence of the employees' expenditure be obtained from the employee?: Subsection 136(1) of the FBTAA provides that the term documentary evidence means: a document that would constitute written evidence of the expense obtained in a way described in Subdivision 900-E of the Income Tax Assessment Act 1997 if the expense were a work expense, and Division 900 of that Act applied to that person. You advise that employees will be required to submit periodic internet statement in order to make a reimbursement claim. Therefore, as all of the conditions will be satisfied the reimbursement of an employees public transport expenses under the arrangement will be an in-house residual expense payment fringe benefit where the travel does not come within the definition of entertainment.

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