Private ruling: Salary sacrifice arrangements
Date of advice: 2 March 2018
Published: June 2018
Ruling period: DD MMM YYYY to DD MMM YYYY.
Date scheme commenced: DD MMM YYYY.

Ruling: Q1: Would the provision of accommodation owned by the Local Council to an employee, whereby 100% of the employee’s rental payments are made from their pre-tax salary under an effective salary sacrifice arrangement (SSA), constitute an exempt remote area housing benefit pursuant to section 58ZC of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes. Issue 2: Accommodation – Employee’s Private Rental | Q2: Where an employee of the Local Council rents premises not owned by the Local Council (private rental), would the payment by the Local Council of the employee’s rent under an effective SSA constitute an expense payment fringe benefit pursuant to section 20 of the FBTAA, reducible in accordance with subsection 60(2A) of the FBTAA? | A2: Yes. Issue 3: Accommodation – Owned by the Employee | Q3: Where an employee of the Local Council is the recipient of a remote area housing loan, would the payment by the Local Council of the employee’s (interest only) mortgage repayments under an effective SSA constitute an expense payment fringe benefit pursuant to section 20 of the FBTAA, reducible in accorda nce with subsection 60(2) of the FBTAA? | A3: Yes. Issue 4: Motor Vehicles | Q4: Would the provision by the Local Council of a motor vehicle to an employee under an effective SSA (through either a novated lease or an associate lease) for the employee’s private use constitute a car fringe benefit pursuant to section 7 of the FBTAA? | A4: Yes.

Relevant facts and circumstances: The Local Council’s current Enterprise Bargaining Agreement provides that, while all employees are entitled to a salary sacrifice arrangement (SSA), the costs of any outgoings that might be incurred by the Local Council in respect of a particular employee’s SSA must be borne by the employee. The Local Council and a salary packaging provider (the SPP) currently have an agreement in place (the SPP Agreement) for the SPP to provide the Local Council with salary packaging services. The Local Council is the primary place of employment for its employees to whom benefits may be provided under a SSA. The Local Council is in a designated remote area, and is not an area situated in or adjacent to any eligible urban areas. Only current employees of the Local Council are entitled to enter into a SSA. A SSA between the Local Council and an employee is an ‘effective SSA’ as per the definition of ‘effective SSA’ in Taxation Ruling TR 2001/10 . As per Taxation Ruling TR 2001/10, an 'effective SSA' is where an employee agrees to receive part of his or her total remuneration as benefits before the employee has earned the entitlement to receive that amount as salary and wages. All employees of the Local Council are permanently based and employed in the Local Council’s shire, although the CEO of the Local Council and two Directors are employed on a fixed term contract basis. Local Council-owned premises rented to employees Under the SPP Agreement, employees can choose to be provided with accommodation (a house or unit) owned by the Local Council, located within the Local Council’s shire, which will be the employee's usual place of residence for the full duration of the employee’s employment. Employees pay rent to the Local Council, whereby 100% of these rental payments can be salary-sacrificed from the employee’s pre-tax salary. Employee rent is at or near market value. It is customary for local government bodies/Councils in remote areas to provide housing assistance to employees (including circumstances where an employee rents Local Council-owned premises). A housing right granted to the Local Council's employees in such circumstances will be under an arm's length arrangement. Employee rental of premises not owned by the Local Council (private rental) Under the SPP Agreement, employees can choose to salary-sacrifice rental payments in respect of accommodation they rent privately (i.e. accommodation that is not owned by the Local Council) within the Local Council’s shire, which will be their usual place of residence. It is customary for local government bodies/Councils in remote areas to provide housing assistance to employees (including circumstances where an employee rents premises not owned by the Local Council (private rental)). The benefit is provided under an arm's length arrangement. Mortgage repayments for premises owned by employees The SPP Agreement provides that employees who are in receipt of a remote area housing loan can choose to salary-sacrifice the interest component of mortgage repayments in respect of dwellings they purchase. The mortgage repayments (interest only) will be in respect of dwellings occupied by employees as their usual place of residence during the period in which interest accrues. Such dwellings will be located within the Local Council’s shire. It is customary for local government bodies/Councils in remote areas to provide housing assistance to employees (including circumstances where a payment is made by the Local Council in discharging an employee’s obligation to pay interest incurred on a housing loan in respect of premises owned by the employee). The benefit is provided under an arm's length arrangement. The mortgage repayments (interest only) are made to the employee's mortgage account and not a mortgage offset facility. Motor vehicles The Local Council’s employees are able to salary-sacrifice the costs associated with a private motor vehicle under either a novated lease or an associate lease. Cars are the only type of motor vehicle that can be salary-sacrificed. The SPP only offer certain types/models of cars that may be salary-sacrificed. The salary-sacrificed expenses associated with an employee's car will be in respect of the employee's use being 100% private use. There will not be any days where the car will not be available for private use. Employees will make 'employee contributions' out of their after-tax salary. Employees may choose to enter into either a novated lease or an associate lease with the Local Council. Where an employee chooses to enter into a novated lease, it will be a full novated lease. Where an employee salary-sacrifices expenses associated with their private car under either a novated or associate lease, the car will be garaged at the employee's usual place of residence. One employee has entered into an associate lease with the Local Council under the SPP Agreement in respect of a private motor vehicle. An associate of the employee is entitled to use and has custody of that car. The car is not garaged at or near the employee’s place of residence but is garaged at or near the place of residence of an associate of the employee.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 7 | Fringe Benefits Tax Assessment Act 1986 Section 9 | Fringe Benefits Tax Assessment Act 1986 Section 10 | Fringe Benefits Tax Assessment Act 1986 Section 20 | Fringe Benefits Tax Assessment Act 1986 Section 25 | Fringe Benefits Tax Assessment Act 1986 Section 58ZC | Fringe Benefits Tax Assessment Act 1986 Subsection 60(2) | Fringe Benefits Tax Assessment Act 1986 Subsection 60(2A) | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 140(1) | Fringe Benefits Tax Assessment Act 1986 Section 142 | Fringe Benefits Tax Assessment Act 1986 Subsection 148(1) | Fringe Benefits Tax Assessment Act 1986 Subsection 162(1) | Fringe Benefits Tax Assessment Act 1986 Section 162C

Reasons for decision: Detailed Reasoning - Question 1: Would the provision of accommodation owned by the Local Council to an employee, whereby 100% of the employee’s rental payments are made from their pre-tax salary under an effective salary sacrifice arrangement (SSA), constitute an exempt remote area housing benefit pursuant to section 58ZC of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | Detailed Reasoning - Is a housing benefit provided?: Section 25 of the FBTAA defines a ‘housing benefit’ as being a housing right granted by a person to another person. A ‘housing right’ is defined by subsection 136(1) of the FBTAA to mean a lease or license granted to a person to occupy or use a unit of accommodation to the extent that the lease or license subsists at a time when the unit of accommodation is the person’s usual place of residence. Subsection 136(1) of the FBTAA defines a ‘unit of accommodation’ to include a house, flat or home unit, and accommodation in house, flat or home unit’. The terms ‘lease’ and ‘licence’ are not defined in the FBTAA. On their ordinary meaning, these terms would include the granting of a right to use the specified land for accommodation purposes. The Act does not specify what is meant by a ‘usual place of residence’. The definition of ‘housing right’ contemplates that a person can only have one ‘usual place of residence’ at any one time. A ‘place of residence’ of a person is defined in subsection 136(1) of the FBTAA to mean: (a) a place at which the person resides, or (b) a place at which the person has sleeping accommodation, whether on a permanent or temporary basis and whether or not on a shared basis. Although the Act does not specify what amounts to a ‘usual place of residence’, it is an important concept. In the context of the definition of ‘place of residence’, it can be taken as meaning habitual or customary. While there may be generally no problem in establishing an employee's ‘usual place of residence’, problems can arise in establishing ‘usual place’ where there is a choice between two places of residence. The Local Council may provide residential accommodation (a house or unit) that it owns for an employee to occupy or use, which will be the employee's usual place of residence for the full duration of the employee’s employment. This arrangement therefore satisfies the definition of a ‘housing benefit’ as defined in section 25 of the FBTAA. | Detailed Reasoning - Is the housing benefit provided exempt from FBT?: Under subsection 58ZC(1) of the FBTAA, a housing benefit that is a ‘remote area housing benefit’ is exempt from fringe benefits tax (FBT). The conditions for a housing benefit to be a ‘remote area housing benefit’ are set out in subsection 58ZC(2) of the FBTAA, as stipulated below. A housing benefit in relation to an employer for a year of tax and for a unit of accommodation, being a benefit provided to an employee of the employer in respect of the employee's employment, is a remote area housing benefit if: (a) during the whole of the tenancy period, the unit of accommodation was located in a State or internal Territory and was not at a location in, or adjacent to, an eligible urban area; and (b) during the whole of the tenancy period, the recipient was a current employee of the employer and the usual place of employment of the recipient was not at a location in, or adjacent to, an eligible urban area; and (c) (Repealed by No 77 of 2005) (d) it would be concluded that it was necessary for the employer, during the year of tax, to provide, or to arrange for the provision of, residential accommodation for employees of the employer because: (i) the nature of the employer's business was such that employees of the employer were liable to be frequently required to change their places of residence; or (ii) there was not, at or near the place or places at which the employees of the employer were employed, sufficient suitable residential accommodation for those employees (other than residential accommodation provided by or on behalf of the employer); or (iii) it is customary for employers in the industry in which the recipient was employed during the tenancy period to provide residential accommodation for their employees free of charge or for a rent or other consideration that is less than the market value of the right to occupy or use the accommodation concerned; and (e) the recipients overall housing right was not granted to the recipient under: (i) a non-arm's length arrangement; or (ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of this section. The term ‘in respect of the employment of the employee’ was considered 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 Knowles – 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 Pty Ltd v FC of T 2002 ATC 5201 and Starrim Pty Ltd v FCT (2000) 102 FCR 194; [2000] FCA 952; 2000 ATC 4460; (2000) 44 ATR 487. 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'. To establish whether a sufficient or material connection exists between the provision of the accommodation and the employment of an employee, it is necessary to consider the circumstances in which it is provided. An employee is provided with residential accommodation in the Local Council’s shire to allow the employee to perform work for the Local Council. Given this connection between the accommodation provided and the employee's duties, it is clear that the accommodation is provided in respect of employment. Therefore, the connection between the benefit received by the employee and the employee’s employment is material and sufficient, and not merely causal. If it were not for the employee’s employment, the employee would not have received the accommodation benefit. On this basis, the benefit (the provision of residential premises owned by the Local Council to an employee to occupy/use) provided by the Local Council (employer) to an employee would be considered to be ‘in respect of the employee’s employment’. In order to determine whether the housing benefit provided to the employee constitutes a remote area housing benefit, a discussion is provided below in respect of whether each element or condition in subsection 58ZC(2) of the FBTAA is satisfied. Paragraph 58ZC(2)(a) of the FBTAA A unit of accommodation will be treated as being in a remote area if it is not located in, or adjacent to, an eligible urban area. Pursuant to paragraph 140(1)(a) of the FBTAA, an ‘eligible urban area’ is an area that is either: ● situated in Zone A or Zone B for income tax purposes (as described in Parts I and II respectively in Schedule 2 to the Income Tax Assessment Act 1936 (ITAA 1936)) and is an urban centre with a 1981 census population of not less than 28,000, or ● not situated in Zone A or Zone B for income tax purposes and is an urban centre with a 1981 census population of not less than 14,000. According to paragraph 140(1)(b) of the FBTAA, an area that is ‘adjacent to an eligible urban area’ is an area that is situated either: ● less than 40 kilometres by the shortest practicable surface route from the centre of an eligible urban area with a 1981 census population of less than 130,000, or ● less than 100 kilometres by the shortest practicable surface route from the centre of an eligible urban area with a 1981 census population of 130,000 or more. To provide guidance on the application of subsections 58ZC(2) and 140(1) of the FBTAA, the ATO maintains a list of ‘eligible urban areas’, ‘remote areas’ and ‘non-remote areas’ on its website. The Local Council is within an ATO-designated remote area, and is not in an area situated in or adjacent to an eligible urban area. Therefore, the condition in paragraph 58ZC(2)(a) of the FBTAA is satisfied. Paragraph 58ZC(2)(b) of the FBTAA During the whole of the tenancy period, an employee who occupies the unit of accommodation owned by the Local Council is a current employee of the Local Council (employer), and the usual place of employment is not located within or adjacent to an eligible urban area. Therefore, the condition in paragraph 58ZC(2)(b) of the FBTAA is satisfied. Paragraph 58ZC(2)(d) of the FBTAA Taxation Determination TD 94/97 Fringe benefits tax: what does the phrase ‘customary for employers in the industry’ mean in relation to the provision of fringe benefits to employees? explains what is meant by the phrase ‘customary for employers in the industry’ in subparagraph 58ZC(2)(d)(iii). Paragraph 2 of TD 94/97 states: A benefit will be accepted as being customary where it is normal or common for employees of that class or job description in that industry to be provided with the same or similar benefits. It is not necessary that all or even the majority of employees in the industry receive the benefit. Where the provision of the benefit is unique, rare or unusual within an industry it would not be accepted as being customary. It is customary for local government bodies/Councils in remote areas to provide residential accommodation for employees free of charge or for a rent less than market value in order to attract and retain skilled and qualified employees. This is particularly customary because the Local Council is in a remote area, where there is very limited availability of private housing available. Therefore, the condition in paragraph 58ZC(2)(d) of the FBTAA is satisfied. Subparagraph 58ZC(2)(e)(i) of the FBTAA Subsection 136(1) defines a ‘non-arm’s length arrangement’ to mean an arrangement other than an arm’s length arrangement. As the term ‘arm’s length arrangement’ is not defined in the FBTAA, the Commissioner determined the term’s meaning in ATO Interpretative Decision ATO ID 2005/156 Exempt benefits: remote area housing – non-arm’s length arrangement (ATO ID 2005/156) for the purposes of subparagraph 58ZC(2)(e)(i) as follows: ● Subsection 136(1) defines ‘arm’s length transaction’ to mean a transaction where the parties to the transaction are dealing with each other at arm’s length in relation to the transaction. ● Parties will be dealing with each other ‘at arm’s length’ in relation to the transaction, where: n they are not connected in such a way as to bring into question the ability of one to act independently of the other, and n they have behaved in the manner in which parties at arm’s length would be expected to behave in conducting their affairs. In Granby Pty Ltd v. FCT (1995) 30 ATR 400; 95 ATC 4240, where the expression 'dealing with each other at arm's length' in section 160ZH of the ITAA 1936 was in question, Lee J said (at ATR 403; ATC 4243): The expression "dealing with each other at arm's length" involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length the inference may be drawn that they did not deal with each other at arm's length. A housing right granted by the Local Council to an employee – in circumstances where residential accommodation owned by the Local Council is provided to an employee to use/occupy – will be under an arm's length arrangement. As such, the condition in subparagraph 58ZC(2)(e)(i) of the FBTAA is satisfied. Subparagraph 58ZC(2)(e)(ii) of the FBTAA Subparagraph 58ZC(2)(e)(ii) of the FBTAA requires consideration of whether an arrangement – whereby the Local Council provides Local Council-owned premises to an employee for the employee to use/occupy – is entered into by the Local Council (employer) and an employee for the purpose of enabling the Local Council to obtain the benefit of the application of section 58ZC of the FBTAA. In Newton v. Federal Commissioner of Taxation (1958) 98 CLR 1; (1958) 11 ATD 442; (1958) 7 AITR 298, the Privy Council examined the meaning of the word 'purpose'. Lord Denning said at page number CLR 8; ATD 445; AITR 304: The word "purpose" means, not motive, but the effect which is sought to achieve - the end in view. Lord Denning also said (at the same page): In order to bring an arrangement within the section, you must be able to predicate by looking at the overt acts by which it was implemented that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. The Commissioner considers that there are no overt acts by which one could predicate that the arrangement has been implemented by any of the relevant parties for the purpose of allowing the Local Council to enjoy the benefits of the tax exemption. The arrangement can be explained as being one of ordinary dealings as is customary for local Councils in remote areas. Therefore, the Commissioner accepts that any such arrangements to be entered into by the Local Council and an employee would not be for the purpose of obtaining the benefit of section 58ZC of the FBTAA. As such, the condition in subparagraph 58ZC(2)(e)(ii) of the FBTAA is satisfied. | Detailed Reasoning - Conclusion: In circumstances where the Local Council provides residential accommodation owned by the Local Council to an employee to use/occupy as their usual place of residence for the duration of the employee’s employment, a ‘housing benefit’ is provided pursuant to section 25 of the FBTAA. As per the discussion above, each of the conditions for such a housing benefit to constitute a ‘remote area housing benefit’ are satisfied. Therefore, such a remote area housing benefit provided by the Local Council is exempt from FBT pursuant to subsection 58ZC(1) of the FBTAA. | Detailed Reasoning - Question 2: Where an employee of the Local Council rents premises not owned by the Local Council (private rental), would the payment by the Local Council of the employee’s rent under an effective SSA constitute an expense payment fringe benefit pursuant to section 20 of the FBTAA, reducible in accordance with subsection 60(2A) of the FBTAA? | Detailed Reasoning - Is an expense payment benefit provided?: Expense payment benefits are defined in section 20 of the FBTAA as follows: 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. A payment of an employee’s rent (private rental) by the Local Council to an unrelated third party under a SSA constitutes an expense payment benefit pursuant to subsection 20(a) of the FBTAA. | Detailed Reasoning - Is the taxable value of an expense payment benefit (in relation to rent) reducible?: Subsection 60(2A) of the FBTAA states: 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; (b) the recipient’s expenditure is in respect of remote area housing rent connected with a unit of accommodation; (c) the recipient occupied or used the unit of accommodation as his or her usual place of residence during a period (in this subsection called the “occupation period”) during which the rent accrued; and (d) the fringe benefit was not provided under: (i) a non-arm's length arrangement; or (ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of this section; the amount that, but for this subsection, would be the taxable value of the fringe benefit in relation to the year of tax shall be reduced by 50% of so much of the recipient’s expenditure as relates to the occupation period. The effect of subsection 60(2A) of the FBTAA is to reduce what would otherwise be the taxable value of the expense payment fringe benefit for rent assistance during the “occupation period” by 50% of the recipient’s expenditure that relates to that period. The recipient’s expenditure is the amount of rent actually paid by an employee, the reimbursement of the whole or part of which gives rise to the fringe benefit. All relevant rent paid by an employee is recipient’s expenditure, even though only part of it might be reimbursed by their employer. This is the effect of the definition of “recipient’s expenditure” in subsection 136(1) of the FBTAA. In order to determine whether the payment of an employee’s rent by the Local Council to an unrelated third party under a SSA is reducible, a discussion is provided below in respect of whether each element or condition in subsection 60(2A) of the FBTAA is satisfied. Paragraph 60(2A)(a) of the FBTAA Based on the facts provided, the recipient of an expense payment benefit (as provided by the Local Council) will be an employee of the Local Council. Therefore, the condition in paragraph 60(2A)(a) of the FBTAA is satisfied. Paragraph 60(2A)(b) of the FBTAA In determining whether the payment of an employee’s rent by the Local Council to an unrelated third party under a SSA is ‘in respect of remote area housing rent’, it is necessary to consider subsection 142(1A) of the FBTAA which sets out the conditions for remote area housing rent. Subsection 142(1A) of the FBTAA is set out below: In this Act, a reference, in relation to a year of tax in relation to an employee of an employer, to remote area housing rent connected with a unit of accommodation is a reference to rent or other consideration payable in respect of the subsistence of a lease or licence in respect of the unit of accommodation where: (a) during the whole of the period (in this subsection referred to as the “occupation period”) in the year of tax when the employee occupied or used the unit of accommodation as his or her usual place of residence: (i) the unit of accommodation was situated in a State or internal Territory and was not at a location in, or adjacent to, an eligible urban area; and (ii) the employee was a current employee of the employer and the usual place of employment of the employee was not at a location in, or adjacent to, an eligible urban area; (b) the common conditions set out in subsection (2E) are satisfied in relation to the occupation period; and (c) (Omitted by No 95 of 1988) (d) the lease or licence was not granted under: (i) a non-arm's length arrangement; or (ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of section 60. Paragraph 142(1A)(a) of the FBTAA Based on the facts provided, an employee who rents their accommodation directly (which is their usual place of residence) via a third party, where rent to the unrelated third party is paid by the Local Council on the employee’s behalf under an effective SSA, is an employee of the Local Council. The accommodation rented by the Local Council’s employees will be situated within the Local Council’s shire, which is an ATO-designated remote area, and is not an area situated in or adjacent to an eligible urban area. Therefore, the condition in paragraph 142(1A)(a) of the FBTAA is satisfied. Paragraph 142(1A)(b) of the FBTAA The ‘common conditions’ as set out in subsection 142(2E) of the FBTAA are iterated below: For the purposes of the application of this section to a fringe benefit in relation to a year of tax in relation to an employee of an employer, the common conditions in relation to a particular period or in relation to a particular time are as follows: (a) it is customary for employers in the industry in which the employee was employed during that period or at that time, as the case may be, to provide housing assistance for their employees; (b) it would be concluded that it was necessary for the employer, during the year of tax, to provide or arrange for the provision of housing assistance for employees of the employer because: (i) the nature of the employer's business was such that employees of the employer were liable to be frequently required to change their places of residence; (ii) there was not, at or near the place or places at which the employees of the employer were employed, sufficient suitable residential accommodation for those employees (other than residential accommodation provided by or on behalf of the employer); or (iii) it is customary for employers in the industry in which the employee was employed during that period or at that time, as the case may be, to provide housing assistance for their employees. It is customary for local government bodies/Councils in remote areas to provide housing assistance to employees (including circumstances where an employee rents premises not owned by the Local Council (private rental)) in order to attract and retain skilled and qualified employees. This is particularly customary because the Local Council is in a remote area, where there is very limited availability of private housing available. It is therefore necessary for the Local Council to provide such residential accommodation for employees as it is customary for local government bodies/Councils in remote areas to do so. The ‘common conditions’ in subsection 142(2E) of the FBTAA are satisfied. As such, paragraph 142(1A)(b) of the FBTAA is satisfied. Paragraph 142(1A)(d) of the FBTAA A discussion surrounding the definition of a ‘non-arm’s length arrangement’ and an ‘arm’s length transaction’ is provided in the response to Question 1 above (with specific regard to paragraph 58ZC(2)(e) of the FBTAA). As per the facts, in circumstances where an employee of the Local Council rents premises not owned by the Local Council (private rental) and the Local Council pays the employee’s rent pursuant to an effective SSA, such a benefit is provided under an arm's length arrangement. The response to Question 1 above discussed – pursuant to paragraph 58ZC(2)(e) of the FBTAA – whether an arrangement whereby Local Council-owned premises provided to an employee was entered into by the Local Council and its employee for the purpose of enabling the Local Council to obtain the benefit of the application of this section 58ZC of the FBTAA. With respect to an arrangement whereby the Local Council pays an employee’s rent (private rental) to an unrelated third party under a SSA, it is similarly necessary to consider whether such an arrangement is entered into by the Local Council and an employee for the purpose of enabling the Local Council to obtain the benefit of the application of section 60 of the FBTAA (which pertains to the reduction in taxable value of fringe benefits associated with remote area housing). The Commissioner considers that there are no overt acts by which one could predicate that this arrangement has been implemented by any of the parties for the purpose of allowing the Local Council to enjoy the benefits of the tax reduction under section 60 of the FBTAA. The arrangement can be explained as being one of ordinary business dealings as is customary in the Local Council's industry in remote areas. In particular, where the Local Council and certain employees enter into this type of arrangement, it is entered into by each of the relevant parties for the purpose of enabling the Local Council to provide the benefit of housing to its employee whilst the employee remains currently employed. Therefore, it is accepted that when such an arrangement is entered into by the Local Council and an employee, it is not entered into for the purpose of obtaining the benefit of section 60 of the FBTAA. As such, the condition in paragraph 142(1A)(d) of the FBTAA is satisfied. Based on the above discussion, the conditions in subsection 142(1A) of the FBTAA are satisfied, which means that the payment of an employee’s rent by the Local Council to an unrelated third party under a SSA is ‘in respect of remote area housing rent’. As such, the condition in paragraph 60(2A)(b) of the FBTAA is satisfied. Paragraph 60(2A)(c) of the FBTAA The Commissioner’s view on what is meant by ‘usual place of residence’ is considered in the response to Question 1 above. Accommodation that is privately rented by an employee (i.e. accommodation that is not owned by the Local Council) within the Local Council’s shire will be the employee’s ‘usual place of residence’. Therefore, the condition in paragraph 60(2A)(c) of the FBTAA is satisfied. Paragraph 60(2A)(d) of the FBTAA The same principles/reasons underlying the conclusion formed above in respect of paragraph 142(1A)(d) of the FBTAA are also applicable to paragraph 60(2A)(d) of the FBTAA. Further, in ATO Interpretative Decision ATO ID 2003/159 Remote area housing: reduction of taxable value – remote area housing rent , the Commissioner considered that paragraph 60(2A)(d) of the FBTAA did not apply to an arrangement similar to the current arrangement. Therefore, the condition in paragraph 60(2A)(d) of the FBTAA is satisfied. | Detailed Reasoning - Conclusion: In circumstances where the Local Council and certain employees enter into a housing arrangement whereby the Local Council pays an employee’s rent (private rental) to an unrelated third party under a SSA, an ‘expense payment benefit’ is provided pursuant to subsection 20(a) of the FBTAA. As each of the conditions in subsection 60(2A) of the FBTAA are satisfied, the taxable value of the applicable expense payment benefit under this arrangement is reducible by 50% of the actual rent paid by the employee in respect of the ‘occupation period’ (regardless of any amount reimbursed by the Local Council) pursuant to subsection 60(2A) of the FBTAA. | Detailed Reasoning - Question 3: Where an employee of the Local Council is the recipient of a remote area housing loan, would the payment by the Local Council of the employee’s (interest only) mortgage repayments under an effective SSA constitute an expense payment fringe benefit pursuant to section 20 of the FBTAA, reducible in accordance with subsection 60(2) of the FBTAA? | Detailed Reasoning - Is an expense payment benefit provided?: Expense payment benefits are defined in section 20 of the FBTAA as iterated in the response to Question 2 above. In circumstances where, under a SSA, the Local Council makes a payment to a third party lender in discharge of an employee’s obligation to pay interest that employee has incurred on a housing loan, an expense payment benefit is provided pursuant to paragraph 20(a) of the FBTAA. | Detailed Reasoning - Is the taxable value of an expense payment benefit (in relation to interest on a loan) reducible?: Subsection 60(2) of the FBTAA states: 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; (b) the recipients expenditure is in respect of interest in respect of a remote area housing loan connected with a dwelling; (c) the recipient occupied or used the dwelling as his or her usual place of residence during a period (in this subsection called the “occupation period”) during which the interest accrued; and (d) the fringe benefit was not provided under: (i) a non-arm's length arrangement; or (ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of this section; the amount that, but for this subsection, would be the taxable value of the fringe benefit in relation to the year of tax shall be reduced by 50% of so much of that amount as relates to the occupation period. The effect of subsection 60(2) of the FBTAA is to reduce what would otherwise be the taxable value of the expense payment fringe benefit for interest on a loan during the “occupation period” by 50%. If the occupation period does not cover the whole tax year, then the “recipient’s expenditure” for the period that it does cover must be separately identified and the reduction applies to that part. As provided in ATO Interpretative Decision ID 2003/157, the “recipient’s contribution” is taken into account in ascertaining the taxable value of the fringe benefit before applying the reduction amount. In order to determine whether a payment made by the Local Council in discharging an employee’s obligation to pay mortgage interest incurred on a housing loan under a SSA is reducible, a discussion is provided below in respect of whether each element or condition in subsection 60(2) of the FBTAA is satisfied. Paragraph 60(2)(a) of the FBTAA Based on the facts, the recipient of an expense payment benefit (in relation to interest on a loan), as provided by the Local Council, is an employee of the Local Council. Therefore, the condition in paragraph 60(2)(a) of the FBTAA is satisfied. Paragraph 60(2)(b) of the FBTAA In determining whether the payment of an employee’s mortgage interest by the Local Council to an unrelated third party under a SSA is ‘in respect of a remote area housing loan’, it is necessary to consider subsection 142(1) of the FBTAA which sets out the conditions for a remote area housing loan. Subsection 142(1) of the FBTAA is set out below: In this Act, a reference, in relation to a year of tax in relation to an employee of an employer, to a remote area housing loan connected with a dwelling is a reference to a housing loan relating to the dwelling where: (a) during the whole of the period (in this subsection referred to as the “occupation period”) in the year of tax when the employee occupied or used the dwelling as his or her usual place of residence: (i) the dwelling was situated in a State or internal Territory and was not at a location in, or adjacent to, an eligible urban area; and (ii) the employee was a current employee of the employer and the usual place of employment of the employee was not at a location in, or adjacent to, an eligible urban area; (b) the common conditions set out in subsection (2E) are satisfied in relation to the occupation period; and (c) (Omitted by No 95 of 1988) (d) the loan was not made to the employee pursuant to: (i) a non-arm's length arrangement; or (ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of section 60. Paragraph 142(1)(a) of the FBTAA An employee who owns their own accommodation (which is their usual place of residence), where mortgage interest incurred by the employee is paid by the Local Council on the employee’s behalf under an effective SSA, is an employee of the Local Council. The accommodation owned by the Local Council’s employees will be situated within the Local Council’s shire, which is an ATO-designated remote area, and is not an area situated in or adjacent to an eligible urban area. Therefore, the condition in paragraph 142(1)(a) of the FBTAA is satisfied. Paragraph 142(1)(b) of the FBTAA The ‘common conditions’ as set out in subsection 142(2E) of the FBTAA are iterated in the response to Question 2 above. It is customary for local government bodies/Councils in remote areas to provide housing assistance to employees (including circumstances where a payment is made by the Local Council in discharging an employee’s obligation to pay interest incurred on a housing loan in respect of premises owned by the employee) in order to attract and retain skilled and qualified employees. This is particularly customary because the Local Council is in a remote area, where there is very limited availability of private housing available. It is therefore necessary for the Local Council to provide such residential accommodation for employees as it is customary for local government bodies/Councils in remote areas to do so. The ‘common conditions’ in subsection 142(2E) of the FBTAA are satisfied. As such, paragraph 142(1)(b) of the FBTAA is satisfied. Paragraph 142(1)(d) of the FBTAA A discussion surrounding the definition of a ‘non-arm’s length arrangement’ and an ‘arm’s length transaction’ is provided in the response to Question 1 above (with specific regard to paragraph 58ZC(2)(e) of the FBTAA). In circumstances where an employee of the Local Council is the recipient of a remote area housing loan and the Local Council discharges the employee’s obligation to pay mortgage interest pursuant to an effective SSA, such a benefit is provided under an arm's length arrangement. It is also necessary in these circumstances to consider whether such an arrangement is entered into by the Local Council and an employee for the purpose of enabling the Local Council to obtain the benefit of the application of section 60 of the FBTAA (which pertains to the reduction in taxable value of fringe benefits associated with remote area housing). The Commissioner considers that there are no overt acts by which one could predicate that this arrangement has been implemented by any of the parties for the purpose of allowing the Local Council to enjoy the benefits of the tax reduction under section 60 of the FBTAA. The arrangement can be explained as being one of ordinary business dealings as is customary in the Local Council's industry in remote areas. In particular, where the Local Council and certain employees enter into this type of arrangement, it is entered into by each of the relevant parties for the purpose of enabling the Local Council to provide the benefit of housing to its employee whilst the employee remains currently employed. Therefore, it is accepted that when such an arrangement is entered into by the Local Council and an employee, it is not entered into for the purpose of obtaining the benefit of section 60 of the FBTAA. As such, the condition in paragraph 142(1)(d) of the FBTAA is satisfied. The conditions in subsection 142(1) of the FBTAA are satisfied, which means that circumstances where the Local Council discharges an employee’s obligation to pay mortgage interest pursuant to an effective SSA would be ‘in respect of a remote area housing loan’. As such, the condition in paragraph 60(2)(b) of the FBTAA is satisfied. Paragraph 60(2)(c) of the FBTAA The Commissioner’s view on what is meant by ‘usual place of residence’ is considered in the response to Question 1 above. Accommodation that is owned by an employee within the Local Council’s shire will be the employee’s ‘usual place of residence’. Therefore, the condition in paragraph 60(2)(c) of the FBTAA is satisfied. Paragraph 60(2)(d) of the FBTAA The same principles/reasons underlying the conclusion formed above in respect of paragraph 142(1)(d) of the FBTAA are also applicable to paragraph 60(2)(d) of the FBTAA. Further, in ATO Interpretative Decision ATO ID 2003/157 Remote area housing: reduction of taxable value – remote area housing loan interest , the Commissioner considered that paragraph 60(2)(d) of the FBTAA did not apply to an arrangement similar to the current arrangement. Therefore, the condition in paragraph 60(2)(d) of the FBTAA is satisfied. | Detailed Reasoning - Conclusion: In circumstances where, under a SSA, the Local Council makes a payment to a third party lender in discharge of an employee’s obligation to pay interest that employee has incurred on a housing loan, an expense payment benefit is provided pursuant to paragraph 20(a) of the FBTAA. However, as per the discussion above, each of the conditions in subsection 60(2) of the FBTAA – which assist in determining whether the taxable amount of such an expense payment fringe benefit in these circumstances is reducible – are satisfied. Therefore, the taxable value of the expense payment benefit is reducible by 50% pursuant to subsection 60(2) of the FBTAA. | Detailed Reasoning - Question 4: Would the provision by the Local Council of a motor vehicle to an employee under an effective SSA (through either a novated lease or an associate lease) for the employee’s private use constitute a car fringe benefit pursuant to section 7 of the FBTAA? | Detailed Reasoning - Car fringe benefits: Section 7 of the FBTAA sets out the circumstances in which the use of a car will be a fringe benefit. Subsection 7(1) of the FBTAA describes what constitutes a car fringe benefit. 7(1) [Car applied to, available for employee's private use] Where: (a) at any time on a day, in respect of the employment of an employee, a car held by a person (in this subsection referred to as the “provider”): (i) is applied to a private use by the employee or an associate of the employee; or (ii) is taken to be available for the private use of the employee or an associate of the employee; and (b) either of the following conditions is satisfied: (i) the provider is the employer, or an associate of the employer, of the employee; (ii) the car is so applied or available, as the case may be, under an arrangement between: (A) the provider or another person; and (B) the employer, or an associate of the employer, of the employee; that application or availability of the car shall be taken to constitute a benefit provided on that day by the provider to the employee or associate in respect of the employment of the employee. Subsection 7(2) of the FBTAA deals with the availability of a car for an employee's private use when the car is garaged at or near an employee's residence. 7(2) [Car garaged at employee's residence] Where, at a particular time, the following conditions are satisfied in relation to an employee of an employer: (a) a car is held by a person, being: (i) the employer; (ii) an associate of the employer; or (iii) a person (other than the employer or an associate of the employer) with whom, or in respect of whom, the employer or an associate of the employer has an arrangement relating to the use or availability of the car; (b) the car is garaged or kept at or near a place of residence of the employee or of an associate of the employee; the car shall be taken, for the purposes of this Act, to be available at that time for the private use of the employee or associate, as the case may be. Under subsection 162(1) of the FBTAA, a car is ‘held’ by a person if the car is owned by the person; leased to the person; or otherwise made available to the person by another person. Subsection 7(3) of the FBTAA deals with the availability of a car for an employee's private use when the car is not at the employer’s business premises. 7(3) [Car not at employer's business premises] Where, at a particular time, the following conditions are satisfied in relation to an employee of an employer: (a) a car is held by a person, being: (i) the employer; (ii) an associate of the employer; or (iii) a person (other than the employer or an associate of the employer) with whom, or in respect of whom, the employer or an associate of the employer has an arrangement relating to the use or availability of the car; (b) the car is not at business premises of: (i) the employer; (ii) an associate of the employer; or (iii) a person (other than the employer or an associate of the employer) with whom, or in respect of whom, the employer or an associate of the employer has an arrangement relating to the use or availability of the car; (c) any of the following conditions is satisfied: (i) the employee is entitled to apply the car to a private use; (ii) the employee is not performing the duties of his or her employment and has custody or control of the car; (iii) an associate of the employee is entitled to use, or has custody or control of, the car; the car shall be taken, for the purposes of this Act, to be available at that time for the private use of the employee or associate, as the case may be. Certain cars are excluded for the purposes of section 7 of the FBTAA, such as emergency vehicles. Taxation Determination TD 94/16 Fringe benefits tax: where an employee is provided with a car by the employer and the car is kept in safe storage (e.g. in a commercial garage) while the employee is travelling, under what circumstances is that car taken to be available for private use under section 7 of the Fringe Benefits Tax Assessment Act 1986 (TD 94/16) states that where an employer's car is kept in safe storage at or near the employee's place of residence, it will be taken to be available for the employee's private use regardless of any prohibition on the use of the car. | Detailed Reasoning - Novated leases: A novated lease is generally a three-way arrangement between an employer, employee and a finance (or lease) company. Under a novated lease arrangement, the employer assumes all or part of the lessee's rights and obligations under the lease. This transfer of rights and obligations is agreed to in a deed of novation between the employer, the finance company and the lessee. The lessee is usually the employee, or an associate of the employee. Under a full novation arrangement in respect of a motor vehicle, an employer is responsible for making the lease payments and guaranteeing the residual value of the vehicle at the end of the lease. Vehicles under a full novated lease are subject to the same car fringe benefit valuation rules as other cars an employer may lease. | Detailed Reasoning - Associate leases: Essentially, an associate lease is similar to a novated lease agreement except that the employee's associate is the lessor of the car rather than a financial institution. | Detailed Reasoning - Taxable value of car fringe benefits: The FBT value of a car can be determined under either the statutory formula method or the operating cost method. In general, where there is minimal business use, the statutory formula method (as outlined in section 9 of the FBTAA) will be used to value the car for FBT purposes because it will typically produce a lower taxable value. On the other hand, where there is high business use, typically the cost basis method (as outlined in section 10 of the FBTAA) will produce a lower taxable value. | Detailed Reasoning - Has a car fringe benefit been provided in the current circumstances?: In considering whether a car fringe benefit has been provided in the current circumstances, under either a novated lease or an associate lease, each of the conditions as provided in subsections 7(1), 7(2) and 7(3) of the FBTAA are discussed below. Will the motor vehicle be ‘held’ by the provider (the Local Council)? The Local Council’s employees are able to salary-sacrifice the costs associated with a private motor vehicle under either a novated lease or an associate lease. Where the Local Council (as the employer), an employee of the Local Council (as the lessee) and a finance provider (under a novated lease)/an associate of the employee (under an associate lease) enter into a novated lease agreement or an associate lease agreement, this has the effect of transferring all the rights and obligations of the motor vehicle finance lease to the employer (the Local Council). The Local Council is obligated to make the lease payments to the finance provider/associate. Therefore, the motor vehicle will be held by the provider, who is the Local Council. Is the Local Council’s motor vehicle a ‘car’? Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a ‘car’ has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 . That provision defines a ‘car’ as: ...a * motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers. The motor vehicles to be provided by the Local Council will meet the definition of a ‘car’ for the purposes of the FBTAA. Is the car provided in respect of the Employee’s employment? As per subsection 136(1) of the FBTAA, the term ‘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 Pty Ltd v FC of T 2002 ATC 5201 and Starrim Pty Ltd v FCT (2000) 102 FCR 194; [2000] FCA 952; 2000 ATC 4460; (2000) 44 ATR 487. To establish whether a sufficient or material connection will exist between the provision of a car by the Local Council and the employment of its employee, it is necessary to consider the circumstances in which the car will be provided. The Local Council will provide a car to an employee under an effective SSA. As such, it is clear that the provision by the Local Council of a car to an employee would be considered to be ‘in respect of an employee’s employment’. Is the car applied or taken to be available for the private use of the Employee? ‘Private use’ is defined in subsection 136(1) of the FBTAA to mean any use that is not exclusively in the course of producing assessable income of an employee. Car garaged at an employee’s place of residence As per the principles embodied in TD 94/16 and the Fringe benefits tax - a guide for employers publication , a car that is garaged at an employee’s home is treated as being available for private use of the employee regardless of whether they have permission to use it for private purposes. Where an employee salary-sacrifices expenses associated with their private car under either a novated or associate lease, the car will be garaged at the employee's place of residence. Therefore, a car that is salary-sacrificed by an employee of the Local Council (under either a novated lease or an associate lease) will be deemed for the purposes of subsection 7(2) of the FBTAA to be available for the private use of the employee whilst the car is garaged at the employee’s place of residence. No exclusions under section 7 of the FBTAA apply in the current circumstances. Car not garaged at an employee’s place of residence or the employer’s business premises In the case of the one car provided under an associate lease, the car would be taken to be available for private use under subsection 7(2) and subsection 7(3) of the FBTAA. | Detailed Reasoning - Conclusion: A car fringe benefit arises in respect of a car provided by the Local Council to an employee of the Local Council under an effective SSA (through either a novated lease or an associate lease). On this basis, such a benefit will be subject to FBT, the taxable value of which can be determined through application of either the statutory formula method or the operating cost method.