Private ruling: Fringe benefits – Provision of discounted goods and services
Date of advice: 18 September 2017
Published: February 2018
Ruling period: 1 April 201X to 31 March 202X
Date scheme commenced: 1 April 201X

Ruling: Q1: Will the provision of discounted goods and services by the external supplier to employees of the Company give rise to a fringe benefit pursuant to subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes. | Q2: Will the payment for the access to the external supplier’s portal by the Company for its employees constitute a fringe benefit pursuant to subsection 136(1) of the FBTAA? | A2: No. | Q3: Do property fringe benefits arise pursuant to section 40 of the FBTAA? | A3: Yes. | Q4: Do residual fringe benefits arise pursuant to section 45 of the FBTAA? | A4: Yes.

Relevant facts and circumstances: 1. The Company wishes to undertake payment for a service to be provided by an external supplier. 2. The service will allow employees of the Company to access an external web portal/site, which allows employees of the Company to access a range of goods and services at a discounted price. 3. The Company wishes to pay for the access to the web portal and provide access to its employees free of charge. 4. Employees who choose to purchase discounted goods and services will deal directly with the external supplier in a personal capacity. 5. The Company does not negotiate any of the discounted rates and terms with the external supplier. 6. The Company does not receive any commission or other incentives from the supplier of the service. 7. Payment for access to the portal is based on a ‘per head’ charge (based on the number of employees of the Company) and is a single annual payment only. 8. The amount of the payment to the external supplier will be in the range of A$X to A$Y plus GST per employee. The Company has XX employees. 9. Once payment has been made by the Company, there is no obligation whatsoever upon employees to access or use the site. It is completely at the employees’ discretion. 10. The Company will not know or be involved with any decision by an employee to utilise the web portal/site. 11. The external supplier provides the same services to the general public/other employers as well as the Company. 12. None of the exempt benefits covered in Part III of the FBTAA will apply in the event an employee of the Company is provided with a good or service that the employee purchased on the external supplier’s portal at a discount. 13. The discounted goods and services are not provided under a salary sacrifice arrangement. 14. Once an employee of the Company ceases employment with the Company, that employee will no longer have access to the external web portal/site. Assumption Each discounted good and service on the external supplier’s portal are available for purchase on a standalone basis. That is, discounted goods and services available for purchase on the portal are not supplied together.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 40 | Fringe Benefits Tax Assessment Act 1986 Section 42 | Fringe Benefits Tax Assessment Act 1986 Section 43 | Fringe Benefits Tax Assessment Act 1986 Section 45 | Fringe Benefits Tax Assessment Act 1986 Section 48 | Fringe Benefits Tax Assessment Act 1986 Section 49 | Fringe Benefits Tax Assessment Act 1986 Section 50 | Fringe Benefits Tax Assessment Act 1986 Section 51 | Fringe Benefits Tax Assessment Act 1986 Section 58P | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 148(1) | Fringe Benefits Tax Assessment Act 1986 Section 149

Reasons for decision: Summary: The provision of discounted goods and services by the external supplier to employees of the Company will give rise to a fringe benefit pursuant to 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 discounted goods and services to employees of the Company constitutes a ‘fringe benefit’ as defined 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: 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’ is defined in subsection 136(1) as: (a) in relation to a benefit – includes allow, confer, give, grant or perform; and (b) in relation to property – means 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. As per the facts of the proposed scheme, upon payment by the Company of a fee to the external supplier, each employee of the Company will be able to access the external supplier’s portal/site. Once logged into the portal, each employee of the Company will be presented with a number of goods and services that are able to be purchased at a discount. Therefore, for the purposes of the FBTAA, a benefit will only be provided when an employee of the Company accesses the external supplier’s portal and purchases a discounted good and/or service. 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. Based on the facts provided, only employees of the Company are entitled to access the external supplier’s portal. 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 a benefit (being the receipt by an employee of a good or service that they purchased at a discount through the external supplier’s portal) is provided to an employee of the Company, the identity of that employee would be known. Therefore, as the benefit will be provided to certain (identifiable) employees of the Company, the second condition (i.e. a benefit is provided to an employee) 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. This element of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA would be satisfied if, as per paragraph (e) of the definition, the relevant benefit is provided by a person (the ‘arranger’) other than the employer or an associate of the employer under an arrangement between the employer (or an associate of the employer) and the arranger. For the purposes of paragraph (e) of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA, an ‘arrangement’ – as defined in paragraph (a) of the definition of an ‘arrangement’ in subsection 136(1) of the FBTAA – is: any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings… The agreement between the Company (the employer) and the external supplier (the ‘arranger’/third party) under the proposed scheme, whereby the external provider will provide access to their online portal for employees of the Company to purchase discounted goods/services in return for the payment by the Company of a fee to the external provider, would be an arrangement within the definition of an ‘arrangement’ in subsection 136(1) of the FBTAA. Therefore, as the benefit (being the receipt by an employee of a good or service that they purchased at a discount through the external supplier’s portal) would be provided by a third party (the external supplier) under an arrangement it entered into with the Company (the 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'. The connection between the benefit(s) that would be received by an employee of the Company (if they choose to exercise their right to access the external supplier’s portal and purchase a discounted good/service) and their employment would be material and sufficient, and not merely causal. If it were not for the employees’ employment with the Company and the arrangement between the Company and the external supplier, the employees of the Company would not be entitled to access any benefit (being the purchase of goods/services at a discount). On the basis of the above, a benefit provided to an employee of the Company 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 an excluded benefit: A benefit which comes within paragraphs (f) to (s) of the ‘fringe benefits’ definition in subsection 136(1) of the FBTAA is excluded from being a fringe benefit. Relevantly, paragraph (g) excludes a benefit that is an exempt benefit from being a fringe benefit. An ‘exempt benefit’ referred to in paragraph (g) of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA is a benefit that is specifically declared to be an exempt benefit by one of the provisions in Part III of the FBTAA. As per the facts of the proposed scheme, none of the exempt benefits covered in Part III of the FBTAA will apply in the event an employee of the Company is provided with a good or service that the employee purchases on the external supplier’s portal at a discount. As such, the fifth condition (i.e. the benefit provided is not an excluded benefit) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA is satisfied . Each of the conditions of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA are satisfied. Therefore, the provision of discounted goods and services by the external supplier to employees of the Company will give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA. | Summary: Payment by the Company of a fee to the external supplier to enable employees of the Company to access the external supplier’s portal will not constitute a fringe benefit pursuant to subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: The definition of a ‘fringe benefit’, as defined in subsection 136(1) of the FBTAA, is provided in the response to Question 1 above. In order to determine whether the relevant benefit (being the payment by the Company of a fee to the external supplier to enable the Company’s employees to access the external supplier’s portal/site) constitutes a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA, a discussion is provided below in respect of whether the final element of the definition is satisfied. The final element of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA is whether the benefit comes within paragraphs (f) to (s) of the ‘fringe benefits’ definition. Relevantly, paragraph (g) excludes a benefit that is an exempt benefit from being a fringe benefit. An ‘exempt benefit’ referred to in paragraph (g) of the definition of a ‘fringe benefit’ in subsection 136(1) of the FBTAA is a benefit that is specifically declared to be an exempt benefit by one of the provisions in Part III of the FBTAA. The relevant exempt benefit in Part III of the FBTAA that could potentially apply is the minor benefit exemption in section 58P of the FBTAA. In determining whether the minor benefit exemption applies, it is necessary to examine the nature of the benefit provided and consider each of the various criteria entailed in section 58P of the FBTAA. Such criteria pertain to value, frequency and regularity of provision, recording and valuation difficulties. The specific matters to be taken into consideration pursuant to section 58P of the FBTAA are: ● A minor benefit is a benefit which has a 'notional taxable value' of less than $300. The notional taxable value of a minor benefit is, broadly, the amount that would be the taxable value if the benefit was a fringe benefit. Where an employee is provided with separate benefits that are in connection with each other – for example, a meal; a night's accommodation; and taxi travel – it is necessary to look at each individual benefit provided to the employee to see if the notional taxable value of each benefit is less than $300. ● If the notional taxable value of a benefit is less than $300, it is then necessary to determine if it would be unreasonable to treat the minor benefit as a fringe benefit. There are five criteria under paragraph 58P(1)(f) of the FBTAA which need to be considered when deciding if it would be unreasonable to treat the minor benefit as a fringe benefit. If, after considering the five criteria, it is concluded that it would be unreasonable to treat the benefit as a fringe benefit, the benefit will be an exempt benefit. These criteria are: 1. The infrequency and irregularity with which associated benefits, being benefits that are identical or similar to the minor benefit and benefits given in connection with the minor benefit, are provided. ● The more frequently and regularly associated benefits are provided, the less likely that the minor benefit will qualify as an exempt benefit. 2. The total of the notional taxable values of the minor benefit and identical or similar benefits to the minor benefit. ● The greater the total value of the minor benefit and identical or similar benefits, the less likely it is the minor benefit will qualify as an exempt benefit. 3. The likely total of the notional taxable values of other associated benefits, that is, those provided in connection with the minor benefit. ● For example, where a meal, which is a minor benefit, is provided in connection with a night's accommodation and taxi travel, which themselves may or may not be a minor benefit, the total of their taxable values must be considered. The greater the total value of other associated benefits, in this case being the accommodation and the taxi travel, the less likely it is that the minor benefit will qualify as an exempt benefit. 4. The practical difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits. ● This would include consideration of the difficulty for you in keeping the necessary records in relation to the benefits. 5. The circumstances in which the minor benefit and any associated benefits were provided. ● This would include consideration as to whether the benefit was provided as a result of an unexpected event, and whether or not it could be considered principally as being in the nature of remuneration. Each of the above five criteria is discussed further below. | Detailed Reasoning - Infrequency and irregularity: The terms 'infrequency', 'irregularity', 'identical' and 'similar' are not defined and therefore take their ordinary meanings. The Macquarie Dictionary defines 'infrequent' as: 1. happening or occurring at long intervals or not often 2. not constant, habitual or regular Also, 'identical' is defined as: 1. corresponding exactly in nature, appearance, manner, etc 2. the very same The more frequently and regularly small benefits of a similar kind are provided, the less likely they are to qualify as minor benefits. If the minor benefits are confined to a few special occasions like Christmas and other special occasions, this would be a factor in favour of the unreasonableness test criterion being satisfied. As per the facts of the proposed scheme, payment for access to the portal will be based on a ‘per head’ charge (based on the number of employees of the Company) and will be a single annual payment only. As such, it is reasonably concluded that the benefit is provided on an infrequent and irregular basis. This criterion is satisfied. | Detailed Reasoning - Value of the minor benefit and identical or similar associated benefits: Under this test, what must be considered is the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of the minor benefit and any associated benefits, being benefits that are identical or similar to the minor benefit. This criterion addresses the situation where there are multiple occasions where identical or similar benefits are provided to an employee. As per the facts of the proposed scheme, the taxable value of the benefit (the payment by the Company of a fee to the external supplier to enable the Company’s employees to access the external supplier’s portal/site) to be provided is clearly stated as being in the range of A$X to A$Y plus GST per employee, and the Company has XX employees. Furthermore, this benefit is not provided as an ongoing entitlement in connection with identical or similar associated benefits in the year of tax. This criterion is satisfied. | Detailed Reasoning - Value of benefits connected with the minor benefit: This test addresses the situation where other benefits are provided in conjunction with or to facilitate the provision of the minor benefit. The notional taxable value of the associated benefits in the current year as well as in any other year must be taken into account when determining the total value of benefits for the purposes of this criterion. Example A meal, which is a minor benefit, is provided in connection with a night's accommodation and taxi travel. Each benefit under these circumstances is a separate benefit. The total of the taxable values of the night's accommodation and taxi travel, and any other accommodation or taxi travel provided in the current year, in a previous year and those that are reasonably expected to be provided in the future must be considered. In summary, regard must be had to the likely taxable values of the minor benefit and benefits that are provided in connection with the provision of the minor benefit. The smaller the cumulative value of the other associated benefits, the more likely that this unreasonableness criterion will be satisfied. In this case, the benefit (the payment by the Company of a fee to the external supplier to enable the Company’s employees to access the external supplier’s portal/site) is only one type of benefit, which has a specific value, and is not connected to the values of any other benefits. This criterion is satisfied. | Detailed Reasoning - Practical difficulty: This test considers the practical difficulty for the employer in determining the notional taxable values of the minor benefit (if it is not a car benefit) and any associated benefits. An employer must keep records that record and explain all transactions and acts that are relevant for the purposes of ascertaining the employer's liability under the FBTAA (section 132 of the FBTAA). In summary, regard must be had to the practical difficulty an employer might encounter in determining what would be the taxable value of the minor benefit and any associated benefits. This includes the difficulty of keeping the necessary records and of assigning a mathematical value to something which may not be easily quantifiable. The greater the difficulty that the employer will suffer in monitoring the minor benefits, the more likely that this unreasonableness criterion will be satisfied. In this case, the benefit (the payment by the Company of a fee to the external supplier to enable the Company’s employees to access the external supplier’s portal/site) to be provided is identifiable, has a specific total value and can be accounted for. The Company would not be able to claim that it is practically difficult to determine the value of the benefits. However, it is not reasonable to apply this test/criterion alone to exclude the benefit from being an excluded minor benefit. | Detailed Reasoning - Circumstances in which the benefit is provided: Under this test, it is necessary to consider the circumstances surrounding the provision of the benefit and any associated benefits including, without limiting the other four criteria, whether the benefit concerned was provided: a. to assist an employee to deal with an unexpected event; and b. otherwise than wholly or principally by way of a reward for services rendered, or to be rendered, by an employee (paragraph 58P(1)(v) of the FBTAA). The circumstances in the proposed scheme under which the benefit is provided do not relate to (a) or (b) above. This criterion is satisfied. | Detailed Reasoning - Overall conclusion: The benefit provided under this arrangement will be treated as an exempt minor benefit because its notional taxable value is less than $300 for the relevant FBT years of tax and most of the criteria in paragraph 58P(1)(f) of the FBTAA are satisfied. As such, the fifth condition (i.e. the benefit provided is not an excluded benefit) of the definition of a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA is not satisfied . Therefore, the payment of the fee under the proposed scheme will not give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA. | Summary: If and when an employee of the Company exercises their right to purchase a good at a discount from the external supplier’s portal, a property fringe benefit will arise pursuant to section 40 of the FBTAA. | Detailed Reasoning - Detailed reasoning: As per the response to Question 1, the provision of discounted goods and services by the external supplier to employees of the Company will give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA. Under section 40 of the FBTAA, a ‘property fringe benefit’ will arise when a person provides property to another person. The term ‘provide’ is defined in subsection 136(1) of the FBTAA in relation to property 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. According to the Fringe benefits tax – a guide for employers publication, a property fringe benefit arises when an employer provide an employee with free or discounted property. It further states the ‘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. As goods (not services) constitute tangible property for the purposes of the FBTAA, only the provision of discounted goods by the external supplier to employees of the Company constitute the provision of property benefits for the purposes of section 40 of the FBTAA. Valuation of property fringe benefits The methods used to value a property fringe benefit are contained in sections 42 and 43 of the FBTAA. Section 42 applies if the property fringe benefit is an ‘in-house’ property fringe benefit and section 43 applies if the property fringe benefit is an ‘external’ property fringe benefit. 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 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. ‘Provider’ is defined in subsection 136(1) of the FBTAA as ‘the person who provides the benefit’. The provider in the proposed scheme is therefore the external supplier and as such paragraph (a) of the definition of ‘in-house property fringe benefit’ in subsection 136(1) of the FBTAA is not satisfied. Paragraph (b) of the definition of ‘in-house property fringe benefit’ in subsection 136(1) of the FBTAA is also not satisfied as the property will not be acquired by the provider (the external supplier) from the employer (the Company). The provision of the property is therefore not an ‘in-house property fringe benefit’. An ‘external property fringe benefit’ is defined in subsection 136(1) as: in relation to an employer, means a property fringe benefit in relation to the employer other than an in-house property fringe benefit. Therefore, the taxable value of the property fringe benefit that would arise from the provision of a good/product to an employee of the Company who purchases that good/product at a discount through the external supplier’s online portal will be determined in accordance with section 43 of the FBTAA. Section 43 of the FBTAA provides three alternate valuation methods. The appropriate valuation method depends upon whether the provider is the employer or an associate of the employer and whether the employer incurs expenditure in relation to the provision of the property. Section 43 of the FBTAA states: Subject to this Part, the taxable value of an external property fringe benefit in relation to an employer in relation to a year of tax is: (a) where the provider was the employer or an associate of the employer and the recipients property was purchased by the provider under an arm’s length transaction at or about the provision time – the cost price of the recipients property to the provider; (b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm’s length transaction in respect of the provision of the property – the amount of that expenditure; or (c) in any other case – the notional value of the recipients property at the provision time; reduced by the amount of the recipients contribution. Paragraph (a) in section 43 of the FBTAA would not apply in the proposed scheme, as the provider – being the external supplier – is not the employer or an associate of the employer. Further, paragraph (b) in section 43 of the FBTAA would not apply as the employer (the Company) would not incur expenditure to the provider (the external supplier) in relation to the provision of a good/product to an employee of the Company. Therefore, the taxable value of property fringe benefits provided to employees of the Company would be determined under paragraph (c) in section 43 of the FBTAA. ‘Notional value’ is defined in subsection 136(1) of the FBTAA to mean: 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. Therefore, the notional value of an external property fringe benefit that arises from the provision of a good/product to an employee of the Company who purchases that good/product at a discount through the external supplier’s online portal will be the amount that the employee could reasonably be expected to have been required to pay the external supplier for that good/product. As the external supplier’s discounted goods/products are available for sale and will be available to all employees of the Company, the notional value of the external property fringe benefit would therefore be the amount an employee of the Company would pay for a good(s)/product(s), after taking into account the discount. ‘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… Therefore, under the proposed scheme, the taxable value of an external property fringe benefit would be nil as the employee of the Company will make a recipient’s contribution equal to the taxable value of the discounted good/product. | Summary: If and when an employee of the Company exercises their right to purchase a service at a discount from the external supplier’s portal, a residual fringe benefit will arise pursuant to section 45 of the FBTAA. | Detailed Reasoning - Detailed reasoning: As per the response to Question 1, the provision of discounted goods and services by the external supplier to employees of the Company will give rise to a ‘fringe benefit’ as defined in subsection 136(1) of the FBTAA. In particular, as per the response to Question 3, the provision of discounted goods by the external supplier to employees of the Company constitutes the provision of property benefits for the purposes of section 40 of the FBTAA. With respect to the provision of discounted services by the external supplier, the most relevant type of benefit is a residual fringe benefit. Section 45 of the FBTAA states: A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive). According to the Fringe benefits tax – a guide for employers publication, a residual fringe benefit could include the provision of services (such as travel or professional or manual work). As the provision of discounted services (not goods) by the external supplier to employees of the Company are not benefits pursuant to Divisions 2 to 11 of the FBTAA, they constitute the provision of residual fringe benefits pursuant to section 45 of the FBTAA. Valuation of residual fringe benefits The taxable value of a residual fringe benefit that arises under the proposed scheme will be calculated in accordance with the valuation rules provided by sections 48 to 51 of the FBTAA. These sections provide different valuation rules depending upon whether the residual benefit is: (a) in-house non-period residual fringe benefit (section 48 of the FBTAA) (b) in-house period residual fringe benefit (section 49 of the FBTAA) (c) external non-period residual fringe benefit (section 50 of the FBTAA), or (d) external period residual fringe benefit (section 51 of the FBTAA). Broadly, an ‘in-house residual fringe benefit’ is a residual benefit provided by an employer or associate of the employer as part of their business activities. An ‘external residual fringe benefit’ is a benefit that is not an in-house residual fringe benefit. The distinction between a ‘period’ and a ‘non-period’ residual fringe benefit depends on the definition of ‘period residual fringe benefit’ in subsection 136(1) and section 149 of the FBTAA. A ‘period residual fringe benefit’ is defined as a residual fringe benefit that is provided during a period. Under subsection 149(1) of the FBTAA, a benefit is taken to be provided during a period if, and only if, it is provided and subsists during a period of more than one day and is not deemed to be provided at a particular time or on a particular day. The effect of this is that, generally, where a residual fringe benefit is provided and subsists for more than one day, it is a period residual fringe benefit. Based on the facts of the proposed scheme, the relevant benefit (being the provision of a discounted service(s) by the external supplier to employees of the Company) would constitute an external residual fringe benefit, as the benefit is not provided by the Company or an associate of the Company as part of its business activities. Therefore, sections 48 and 49 of the FBTAA would not apply in the proposed scheme. Sections 50 and 51 of the FBTAA each provide different valuation rules depending on whether the external residual benefit was: (a) purchased by an employer or associate under an arm's length transaction (b) provided by a third party compensated under an arm's length transaction, or (c) provided in any other circumstance. In circumstances where an external residual benefit is provided ‘in any other circumstance’ – as would be the case in the proposed scheme – the external residual benefit would be calculated under both sections 50 and 51 of the FBTAA as the notional value of the recipient’s current benefit reduced by the amount of the recipient’s contribution insofar as it relates to the recipient’s current benefit. Therefore, while there is insufficient information in the facts to determine whether the external residual benefit is a ‘period’ or ‘non-period’ external residual benefit, the valuation of the benefit would yield the same result regardless of whether section 50 or section 51 of the FBTAA applies. As mentioned above, ‘notional value’ is defined in subsection 136(1) to mean: 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. The notional value of an external residual benefit that would arise from the provision of a service to an employee of the Company who purchases that service at a discount through the external supplier’s online portal will be the amount that the employee could reasonably be expected to have been required to pay the external supplier for that service. As the external supplier’s discounted services are available for sale and will be available to all employees of the Company, the notional value of the external residual benefit would therefore be the amount an employee of the Company would pay for the service, after taking into account the discount. ‘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… Therefore, under the proposed scheme, the taxable value of an external period residual fringe benefit or an external non-period residual fringe benefit would be nil as the employee of the Company will make a recipient’s contribution equal to the taxable value of the discounted service.