Private ruling: Life and total and permanent disablement insurance coverage
Published: May 2012
Ruling period: Year ended 31 March 2008 | Year ended 31 March 2009 | Year ended 31 March 2010 | Year ended 31 March 2011 | Year ended 31 March 2012 | Year ended 31 March 2013
Date scheme commenced: 1 April 2007

Ruling: Q1: Are the premiums paid in respect of the insurance taken out by the employer fringe benefits as defined under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | A1: No

Relevant facts and circumstances: Under the terms of every employment contract the employer provides life and total permanent disability (TPD) cover equal to Y times their annual salary for its employees up to the age of 65. To fund this the employer has taken out a commercial group life policy over all of its employees. A copy of this policy was provided. The beneficiary under the policy is the employer and Employees have no rights of claim under the policy. The employment agreement does not make the payment under the employment agreement contingent on a payment under the insurance policy. There are differences in what can be paid to the employer under the policy to what can be paid to the employees under the employment agreement.

Relevant legislative provisions: FBTAA subsection 136(1)

Reasons for decision: Summary: A fringe benefit does not arise from the insurance cover taken out by the employer as the recipient of any benefit under the policy is not the employee. Note: a fringe benefit could arise from a TPD Benefit payment made to the employee. Whether a fringe benefit would arise depends on the reason for making the payment. | Detailed Reasoning - Detailed reasoning: The term benefit is defined in subsection 136(1) of the FBTAA and includes 'a contract of insurance'. Therefore the contact of insurance entered into between the employer and the insurer constitutes a benefit as defined. The term fringe benefit is defined in subsection 136(1) of the FBTAA and that definition states in part: in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit: (a) Provided at any time during the year of tax; or (b) Provided in respect of the year of tax; being a benefit provided to the employee or to an associate of the employee by: (c) The employer; or (d) An associate of the employer; or (e) A person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between: (i) The employer or an associate of the employer, and (ii) The arranger or another person; or (ea) a person 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; In respect of the employment of the employee. In applying the above definition of a fringe benefit in respect of payments into the policy (as a benefit) the payment does not satisfy paragraph (b) because any benefit received from the insurance contract is received by the employer not the employee. In other words the beneficiary (or the recipient of the benefit) is the employer (even though the lives insured are those of the employees). The employer separately has an agreement with the employees to pay them Y times their salary should they die or become TPD. Although the benefit received by the employer under the policy and the payment received by the employee from the employer have similar triggers, the payment under the employment agreement is not contingent on the employer receiving a payout from the insurer, nor is the employer required to pass any payment they receive under the policy onto the employee. There are additional clauses which trigger a payment under the policy which are not listed in the employment agreement. This means the employer can receive a payout under the insurance contact and not have to pass that onto the employee until later. Therefore the benefit (being the insurance policy) is not a benefit being provided to the employee. However the payment under the employment agreement is being made to the employee and paragraph (b) of the definition of a fringe benefit in subsection 136(1) of the FBTAA would be satisfied. However this does not mean that a fringe benefit will arise in respect of the payment under the employment agreement. Whether a fringe benefit arises will depend on the circumstances behind the payment to the employee and can only be determined at the time the payment is being made. For example, the FBTAA does not apply to benefits provided in respect of a deceased employee. This is because the definition of employee is no longer satisfied when an employee dies (for more details see ATO Interpretative Decision ATO ID 2006/159 Fringe Benefits Tax Residual fringe benefit: funeral expenses of deceased employee ). So any benefits provided to the estate of the employee after their death are not fringe benefits. Another example is the exclusion in paragraph (m) of the definition of a fringe benefit in section 136(1) of the FBTAA which states: consideration of a capital nature for, or in respect of: (i) a legally enforceable contract in restraint of trade by a person; or (ii) personal injury to a person Injury and disease are separately defined term under subsection 136(1) of the FBTAA. As both have different meanings under the FBTAA the reference to an injury in paragraph (m) of the definition of a fringe benefit does not extend to capital payments in respect of a disease.

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