Private ruling: FBT - tuition costs
Date of advice: 14 December 2023
Published: 5 February 2024
Ruling period: Fringe Benefits Tax (FBT) year ending 31 March 20XX | FBT year ending 31 March 20XX | FBT year ending 31 March 20XX | FBT year ending 31 March 20XX
Date scheme commenced: 1 April 20XX

Ruling: Q1: Will payment of the final 50% of a Trainee Teacher's tuition costs by the Company give rise to an expense payment fringe benefit for the Employer under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes. | Q2: If the answer to Question 1 is 'yes', will the taxable value of the expense payment fringe benefit be reduced to nil pursuant to the otherwise deductible rule in section 24 of the FBTAA? | A2: Yes.

Relevant facts and circumstances: The Company is an income tax exempt entity and is a not-for-profit charity registered with the Australian Charities and Not-for-profits Commission (ACNC). The Company is the sole member/shareholder of a school ('the Employer'). The Employer is an income tax exempt entity and a not-for-profit entity registered with the ACNC. The Employer employs Trainee Teachers who have recently left school, are part way through their teaching degrees, or are converting other qualifications to teaching qualifications through the required tertiary bridging courses. In all cases, the Trainee Teachers are typically employed on a permanent part-time basis, and work alongside assigned mentors in a classroom setting. Essentially this is an 'apprenticeship model' of initial teacher education which allows the Trainee Teacher to work as a teacher while they undertake their studies (they lead classes, assist their mentor teacher, participate in student supervision, and all other aspects of school life). The Trainee Teachers typically work 1 day per week in their first year of university, 2 days per week in their second and third year and are often provisionally/conditionally accredited teachers in their fourth year of study, such that they can and do work full-time. Until they are provisionally/conditionally accredited, the Trainee Teacher is remunerated as a teacher's aide under the relevant Award. Once provisionally/conditionally accredited, the Trainee Teacher is remunerated as a graduate teacher under the relevant Award. The Trainee Teachers undertake their studies through the University. The Trainee Teachers employed by the Employer are typically full fee-paying and therefore pay for their tuition through the Commonwealth's FEE-HELP loan scheme. The Company provides scholarships equal to 50% of the Trainee Teacher's tuition costs through payment of the final 50% of the Trainee Teacher's tuition costs. That is, for a Trainee Teacher who is awarded a scholarship in the first of their 4-year degree, the Trainee Teacher will fund the first 2 years of their tuition costs, and the Company will fund the tuition costs in years 3 and 4. In those years, the Company meets the tuition cost through direct payment to the University, and no amount is funded through FEE-HELP.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 20 | Fringe Benefits Tax Assessment Act 1986 Section 23 | Fringe Benefits Tax Assessment Act 1986 Section 24 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 Section 148(1) | Income Tax Assessment Act 1936 Section 318 | Income Tax Assessment Act 1997 Section 8-1 | Taxation Administration Act 1953 Schedule 1

Reasons for decision: Summary: The payment by the Company - being an associate of the Employer - of the final 50% of the tuition costs of a Trainee Teacher (the employee) is a payment in discharge of the Trainee Teacher's obligation to pay an amount to the University (third party) during years 3 and 4 of the Trainee Teacher's course. Such a payment by the Company will give rise to an 'expense payment fringe benefit' (as defined in subsection 136(1) of the FBTAA) for the Employer. | Detailed Reasoning - Expense Payment Fringe Benefits: An 'expense payment fringe benefit' is defined in subsection 136(1) of the FBTAA to mean 'a fringe benefit that is an expense payment benefit'. The terms 'fringe benefit' and 'expense payment benefit' are considered below. | Detailed Reasoning - 'Fringe benefit': The definition of a 'fringe benefit' in subsection 136(1) of the FBTAA provides that a fringe benefit will arise where the following conditions are all 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. A discussion is provided below in respect of whether each element or condition of the definition of a fringe benefit is satisfied. | Detailed Reasoning - A benefit is provided: A 'benefit' is defined within subsection 136(1) of the FBTAA to include: 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; ... ii. Where an employer pays a third party on behalf of an employee or reimburses an employee in relation to expenses in respect of the employees' employment then a fringe benefit would be provided. In this case, a benefit is provided to a Trainee Teacher in the form of the payment of tuition costs to obtain teacher qualification. This falls with the definition of a 'benefit' as defined in subsection 136(1) of the FBTAA. As such, the first condition is satisfied. | Detailed Reasoning - The benefit is provided by the employer or an associate of the employer: For the purposes of the FBTAA, the term 'associate' has the same meaning as under section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). The Company is the sole member of the Employer and is therefore a 'controlling entity' for the purposes of paragraph 318(2)(d) of the ITAA 1936. Therefore, the Company is considered to be an 'associate' of the Employer. As the tuition costs were paid directly by the Company to the third party (the University), a benefit was provided by an associate of the Employer. As such, this element 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. The definition of a 'current employee' in subsection 136(1) of the FBTAA includes a person who receives 'salary or wages'. 'Salary or wages' is defined in subsection 136(1) of the FBTAA to mean: (a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; and.... Amounts withheld under Schedule 1 to the Taxation Administration Act 1953 (TAA) are referred to as Pay As You Go (PAYG) withholding amounts. Depending upon their provisional/conditional accreditation, the Trainee Teachers are remunerated under the relevant award. As the benefit (payment of tuition costs) is provided to the Trainee Teachers, a current employee, this condition has been met. | Detailed Reasoning - The benefit is provided in respect of the employment of the employee: Subsection 136(1) of the FBTAA defines the term 'in respect of' in relation to the employment of an employee as including '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: the provision of a benefit to a person in respect of the employment of an employee is a reference to the provision of such a benefit: (a) whether or not the benefit is also provided in respect of, by reason of, by virtue of, or for or in relation directly or indirectly to, any other matter or thing; (b) whether the employment will occur, is occurring, or has occurred; (c) whether or not the benefit is surplus to the needs or wants of the recipient; (d) whether or not the benefit is also provided to another person; (e) whether or not the benefit is, to any extent, offset by any inconvenience or disadvantage; (f) whether or not the benefit is provided or used, or required to be provided or used, in connection with that employment; (g) whether or not the provision of the benefit is, or is in the nature of, income; and (h) 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, 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'. Based on the facts, the benefits received by Trainee Teachers (the payment of tuition costs) to obtain the teacher qualification has a substantial connection to their employment as Trainee Teachers, being an employee for the purposes of the FBTAA. As such, this condition of the definition of a 'fringe benefit' as defined in subsection 136(1) of the FBTAA is satisfied. | Detailed Reasoning - The benefit is not specifically excluded from the definition of a fringe benefit: With respect to paragraphs (f) to (s) of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA, the relevant paragraph to consider is paragraph (g) which provides that an exempt benefit will not be a fringe benefit. The benefit (payment of tuition costs) 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. As such, this condition is satisfied. As each of the above conditions of the definition of a 'fringe benefit' in subsection 136(1) of the FBTAA are satisfied, a 'fringe benefit' will therefore arise when the Company pays the final 50% of Trainee Teachers' tuition costs, as it is a 'benefit' provided to an employee by an associate of the employer by reason of the employee's employment. | Detailed Reasoning - 'Expense payment benefit': Section 20 of the FBTAA sets out the circumstances in which a payment or reimbursement will be an 'expense payment benefit'. Paragraphs 20(a) and 20(b) state: 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; the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient. In this case, during years 3 and 4 of the Trainee Teachers' course, the Company (the provider) makes the payment in discharge of an obligation of the Trainee Teachers (the recipient) to pay an amount to the University (third party). As such, the payment is considered to be an 'expense payment benefit' under section 20 of FBTAA. Based on the above discussion, the definitions of a 'fringe benefit' and an 'expense payment benefit' are satisfied, which in turn satisfies the definition of an 'expense payment fringe benefit' as defined in subsection 136(1) of the FBTAA. Therefore, the payment by the Company of the final 50% of the tuition costs of a Trainee Teacher gives rise to an 'expense payment fringe benefit' (as defined in subsection 136(1) of the FBTAA) for the Employer. | Detailed Reasoning - Question 2: If the answer to Question 1 is 'yes', will the taxable value of the expense payment fringe benefit be reduced to nil pursuant to the otherwise deductible rule (ODR) in section 24 of the FBTAA? | Summary: It is considered that the ODR would apply to reduce the taxable value of the expense payment fringe benefits for the Employer to nil under section 24 of the FBTAA. The Employer is therefore not liable for FBT. | Detailed Reasoning - Taxable value of expense payment fringe benefits: The taxable value of an external expense payment fringe benefit is determined under section 23 of the FBTAA which states: Subject to this Part, the taxable value in relation to a year of tax of an external expense payment fringe benefit provided during the year of tax is the amount of the payment referred to in paragraph 20(a), ...reduced, in a case to which paragraph 20(a) applies, by the amount of the recipient's contribution. In simple terms, where paragraph 20(a) of the FBTAA applies, the taxable value of an expense payment fringe benefit is the amount of payment made by the 'provider' (in this case, the Company as the associate of the Employer) on behalf of the employee (the 'recipient') in discharge of the employee's obligation, reduced by the recipient's contribution. Therefore, the taxable value of the expense payment fringe benefit under section 23 of the FBTAA will be the amount paid by the 'provider' (the Company) to the third party (the University) for the Trainee Teachers' tuition costs, unless the ODR (as described below) applies. | Detailed Reasoning - Otherwise deductible rule: The taxable value of an expense payment benefit can be reduced in certain circumstances by the ODR if the employee would have been entitled to claim an income tax deduction for the expense if they had not been reimbursed by the employer. The requirements for the ODR to apply to expense payment benefits are set out in section 24 of the FBTAA, which states: (1) Where: (a) the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and (b) if the recipient had, at the time when the recipients expenditure was incurred, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure ), in respect of the same matter in respect of which the recipients expenditure was incurred, equal to: i. in the case of an in-house expense payment fringe benefit - the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the expense payment fringe benefit in relation to the year of tax; or ii. in the case of an external expense payment - the amount of the recipients expenditure a once-only deduction (in this subsection called the gross deduction ) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997 , have been allowable to the recipient under that Act or the Income Tax Assessment Act 1936 in respect of the gross expenditure; ... A '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. | Detailed Reasoning - Was an expense payment benefit provided to an employee?: As established above, the recipient (a Trainee Teacher) of an expense payment fringe benefit in relation to an employer (the Employer) in relation to a year of tax is an employee of the Employer. Would a Trainee Teacher who received the benefit have been entitled to a once-only deduction for the expense had the Employer not reimbursed them for the expense incurred? The deductibility of self-education expenses is discussed in Taxation Ruling 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business which has now been withdrawn and replaced by Draft Ruling TR 2023/D1 Income tax: deductibility of self-education expenses incurred by an individual . Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature or relate to the earning of exempt income. Taxation Ruling 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997 (TR 2020/1) sets out when an employee can deduct a work expense under section 8-1 of the ITAA 1997. The pivotal element of section 8-1 of the ITAA 1997 for work expenses is the requirement that expenses be incurred 'in gaining or producing assessable income'. Paragraph 22 of TR 2020/1 states: The requirement that expenses be incurred in the course of producing assessable income means that it is not enough to show only that there is some general link or causal connection between expenditure and the production of income. The expenditure must have a sufficiently close connection to performance of the employment duties and activities through which the employee earns income. The High Court majority in Commissioner of Taxation v Payne [2001] HCA 3 said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income. Paragraph 22 of TR 2023/D1 states that the Commissioner considers self-education expenses to be incurred in gaining or producing your assessable income if either or both of the following apply: (a) Your income-earning activities are based on the exercise of a skill or some specific knowledge and the self-education enables you to maintain or improve that skill or knowledge. (b) The self-education objectively leads to, or is likely to lead to, an increase in your income from your current income-earning activities in the future. Paragraph 23 of TR 2023/D1 states: Self-education expenses are not incurred in gaining or producing your assessable income if any of the following applies: (a) The self-education will enable you to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in your current employment). This includes studies relating to a particular profession, occupation or field of employment in which you are not yet engaged. These expenses are incurred at a point too soon to be regarded as incurred in gaining or producing your assessable income. (b) You are not undertaking income-earning activities to derive assessable income at the time you incurred the expenses. These expenses are not connected to any income-earning activity at the time they are incurred. The following court cases have established the principles in determining the deductibility of self-education claims. In FC of T v. Finn (1961) 106 CLR 60 , the High Court held that expenditure incurred by a senior government architect on an overseas tour devoted to the study of architecture was allowable under section 8-1. All three Judges recognised that the tour expenses were relevant to the activities by which Mr Finn was currently producing income. Kitto J found that the tour was incidental to the proper execution of the duties of Mr Finn's office because: Its professional status implied an obligation of progressive acquaintance with a living and developing art. It was, therefore, I think, plainly incidental to the office that the respondent should avail himself of such opportunities as might arise to add... to his knowledge and understanding of architectural achievements and trends overseas... Windeyer J was of a similar view, stating that: ... a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling.' (106 CLR at 70) In FC of T v. Studdert (1991) 22 ATR 762 the taxpayer, a flight engineer, sought a deduction for expenses incurred on light aircraft flying lessons leading to a private pilot's licence. On appeal, Hill J found that the expenses were relevant and incidental to the activities as flight engineer that directly produced Mr Studdert's income. This finding was based on the facts that undertaking the lessons made him better equipped to perform his skilled job and better proficiency were a motivation for undertaking the lessons. Paragraph 30 of TR 2023/D1 describes the example of Barry, a trainee accountant, who is studying commerce part-time at university. He is allowed a deduction for the costs associated with the course because the course enables Barry to maintain or increase the specific knowledge required in his current position and to carry out his duties more effectively. Paragraph 28(a) of TR 2023/D1 goes on to say that if a course of study is too general in terms of the taxpayer's income-earning activities, the necessary connection between the self-education expense and the income-earning activity does not exist meaning that no deduction for self-education expenses would be allowable under section 8-1 of the ITAA 1997. In Case Z42 92 ATC 381 ; AAT Case 8419 (1992) 24 ATR 1183 , a senior newspaper journalist, whose duties involved interviewing people for feature articles and making presentations to potential advertisers, was allowed a deduction for the cost of a speech course because it was incurred in maintaining or increasing his ability in his current employment and therefore was necessarily incurred in carrying on that employment. To determine whether circumstances exist that support a Trainee Teacher's self-education deductions, it is necessary to determine whether there is a sufficient connection between Trainee Teachers incurring tuition costs and their current income earning activities. Whether such a connection exists is a question of fact and is to be determined by reference to all the facts of the case. In considering the principles set out in TR 2023/D1, the employee (Trainee Teacher) would have been entitled to claim a once-only deduction for their tuition costs. As in AAT Case Z1 , for expenses to be deductible they must be incurred in gaining assessable income and must be incidental and appropriate to the office. The taxpayer must show that there was an explicit or implicit condition that the expenses be incurred. To satisfy that nexus between the college expenses and the gaining of assessable income, in other words to show that the expenses were in relation to an activity incidental and appropriate to the office, the applicant must show that there is an explicit or implicit condition of the office that the expenses be incurred. At all relevant times, the applicant was in the employ of the Department of Consumer Affairs where qualifications as a solicitor were not necessary, although the gaining of such qualifications was encouraged. It seems to me that the course pursued by the applicant during the relevant financial year was of her own choice and for her own self-improvement. It could not be said to be "part and parcel" of her employment. It is not sufficient to say that the payment of the college expenses enhanced her ability to perform the duties of her employment. The authorities indicate that the nexus must be much more direct. Trainee Teachers who are offered employment along with a scholarship through the Company has a condition in their employment contract which states that they comply with the requirements of their scholarship, including maintaining their engagement with the Teacher Training School and enrolment with the University. It is clear that there is an explicit condition that the relevant course of self-education be undertaken, which is sufficient to satisfy the condition of deductibility in section 8-1 of the ITAA 1997. In this case, the relevant connection has been established between the Trainee Teacher's tuition costs and their current role. Also, the minor deduction limitation rule of $250 under section 82A of the ITAA 1936 for self-education expenses is disregarded and is not relevant to the ODR as in paragraph 24(1)(b) of the FBTAA. Therefore, the ODR can be applied to reduce the FBT liability on the payment of the 50% Trainee Teachers' tuition costs under section 24 of the FBTAA. | Detailed Reasoning - Reduction of taxable value: Paragraph 24(1)(ba) of the FBTAA provides for the determination of the 'notional deduction' which is used to calculate the reduction of the taxable value under the ODR. Applying this provision, the notional deduction equals: • GD ('gross deduction') which is the amount of the expenses that an employee would be entitled to under section 8-1 of the ITAA 1997 if they incurred the expenses (in this case, being the entire amount of tuition fees paid in respect of years 3 and 4 which is the final 50% of the tuition costs), minus • RD which in the present case is nil as there is no recipient's portion in relation to the expense payment. The notional deduction is the amount to which the taxable value of the expense payment fringe benefit will be reduced pursuant to the formula that appears beneath paragraph 24(1)(f) to which paragraph (g) will apply. Under subparagraph 24(1)(e)(i) of the FBTAA, the requirement to provide a declaration does not apply where the expense payment fringe benefit is an 'exclusive employee expense payment benefit'. Under subsection 136(1) of the FBTAA, an 'exclusive employee expense payment benefit' means an expense payment fringe benefit where the recipient's expenditure is exclusively incurred in gaining or producing salary or wages of the recipient in respect of the employment to which the fringe benefit relates and is not expenditure in respect of interest. The expenses incurred in relation to the tuition costs are wholly work related. That is, the courses are undertaken exclusively in gaining or producing Trainee Teacher's salary or wages and therefore, an employee declaration is not required. Therefore, it is considered that the ODR would apply to reduce the taxable value of the expense payment fringe benefits for the Employer to nil under section 24 of the FBTAA.