Private ruling: Fringe benefits tax
Published: September 2011
Ruling period: Year ended 31 March 2012
Date scheme commenced: 1 April 2011

Ruling: Q1: Is the employer able to use the otherwise deductible rule under section 24 of the Fringe Benefits Tax Assessment Act 1986 to reduce the taxable value of expense payment benefit provided to an employee being the reimbursement of 50% of the employee's airfare to nil? | A1: Yes | Q2: Is employer able to use the otherwise deductible rule under section 24 of the Fringe Benefits Tax Assessment Act 1986 to reduce the taxable value of expense payment benefit to be provided to an employee being the reimbursement of 100% of the employee's airfare to nil? | A2: No

Relevant facts and circumstances: The employer requests its employees to travel overseas for a variety of reasons including professional development. In respect of professional development the employer is committed to providing career development opportunities for staff to expand their knowledge and experience via attending courses both locally and abroad. The employer only financially supports conferences that it considers to be of benefit to both the employee and itself. In a number of cases employees request that annual leave be utilised either at the beginning, during or at the end of their employer approved conference. The current employer policy is that employees must keep travel diaries for overseas travel and domestic travel greater than X days. The employer pays the cost of domestic and international air travel and accommodation on behalf of its employees only for the period of the conference. Where any additional time is taken, the costs are paid by the employee. As part of expanding the employee's knowledge, the employee attended a conference for X days overseas. The spouse did not accompany the employee. The details of the employee's trip are as follows: Day 1 is spent travelling overseas Days 2 - 8 are taken as personal annual leave in conference country Days 9 - 14 are spent attending the business related conference Days 15- 20 are taken as personal annual leave in conference country and another nearby country Days 21 - 22 are spent travelling back to Australia The topic of the conference is related to the work the employee undertakes for the employer. The conference is held on a regular basis in different parts of the world and the employer financially supports the employee's attendance at this conference. The employer paid for the conference registration and accommodation during the conference. The employee paid for the airfares and then the employer reimbursed 50% of the airfares. The only incidental expense reimbursed by the employer was for the taxi fare from the employee's home to airport. The employer did not pay or reimburse the employee for any additional private travel or other private expenses. The employee maintained a travel diary.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 20, | Fringe Benefits Tax Assessment Act 1986 Section 23, | Fringe Benefits Tax Assessment Act 1986 Section 24, | Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: The employer is able to use the otherwise deductible rule under section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to reduce the taxable value of expense payment benefit provided to the employee being the reimbursement of fifty percent of the airfare to nil. | Detailed Reasoning - Detailed reasoning: The reimbursement of 50% of the airfare expense incurred by an employee of the employer in travelling overseas is an expense payment benefit. Since the employer has provided it to its employee in respect of employment it is an expense payment fringe benefit. The taxable value of the expense payment fringe benefit under section 23 of the FBTAA is the amount of the reimbursement. Subsection 24(1) of the FBTAA permits a reduction of the taxable value of an expense payment fringe benefit under the 'otherwise deductible rule' (ODR) where all the necessary conditions of that section are met. As the employee's expense is incurred for travel outside Australia for more than X consecutive nights the employer must obtain a 'travel diary' from the employee. This condition has been satisfied as the employee maintained a travel diary as required by the employer. The taxable value of the fringe benefit may be reduced by the hypothetical income tax deduction to which the employee would have been entitled had the employee incurred the expense. The extent to which an overseas travel expense would be an allowable income tax deduction if incurred by an employee is determined under the general deduction provisions in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Taxation Ruling TR 95/33 considers the decision in the Full High Court of Australia in Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613 and in particular considers the availability of an income tax deduction under 51(1) of the ITAA 1936. The general deduction provisions allow a deduction for all losses and outgoings to the extent which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. As stated in TR95/33, expenditure will generally be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income. The essential character of an expense is a question of fact to be determined by reference to all the circumstances. Apportionment of an expense is required if it has both an income producing purpose and another purpose. In Federal Court Case Ronpibon Tin v FC of T (1949) 78 CLR 47; 4 AITR 236 the Court expressed the view that there are generally two kinds of items of expenditure that require apportionment: those items that are capable of dissection; and those that cannot be dissected but should be apportioned on the basis that they serve more than one objective. The latter would clearly apply to an airfare purchased for both work and private purposes. In Case R13 84 ATC 168, the taxpayer, a dentist, spent six weeks overseas, five days of which were spent at a Dental Congress in Paris and the rest of the time was spent sightseeing. The trip was undertaken by the taxpayer with two objects in mind - attending the Dental Congress, which is what he firstly decided to do, and having a holiday which he subsequently decided to incorporate. The airfare served both objects, however only the first object qualified the expense for a deduction. The Commissioner apportioned the expenditure on the airfares on a time basis and allowed the taxpayer a deduction of 5/40ths of the air fare which represented the five days spent at the Congress. However, the Administrative Appeals Tribunal held that the proper method of apportioning the expense was to determine the degree of predominance attached to each object. In this case, each object was of equal weight and therefore, one-half of the airfare was allowed as a deduction. Taxation Ruling TR 98/9 sets out the circumstances in which self education expenses are allowable deductions. Paragraphs 63-70 of TR 98/9 discuss the application of the general provisions to overseas travel expenses. As mentioned above, and reiterated in TR 98/9, the essential character of the expense is to be determined by an objective analysis of all the surrounding circumstances. If the purpose of a study tour or attendance at a work related conference or seminar is the gaining or producing of assessable income, the existence of an incidental private purpose does not affect the characterisation of the expenses as wholly incurred in gaining assessable income. An example of this is provided in paragraph 67 of TR 98/9: Glenn, a qualified architect, attends an eight-day work-related conference in Hawaii on trends in modern architecture. One day of the conference involves a sight-seeing tour of the island and a game of golf is held on the final afternoon of the conference. As the main purpose of attending the conference is the gaining or producing of assessable income, the total cost of the conference (air fares, accommodation and meals) is allowable. The existence of private pursuits, such as the island tour and the game of golf, is purely incidental to the main purpose and does not affect the characterisation of the conference expenses as wholly incurred in gaining assessable income. The following example in paragraph 70 of TR 98/9 is of a situation where there are two equal purposes for the travel: Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore to be followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and meal expenses at the conference. Only half of the return airfare ($500) is allowed as the expense was incurred for two equal purposes, one income-earning and the other private… It is accepted that the employee's attendance at the conference overseas was work related and that the employee had a purpose of gaining assessable income. Thus at least part of the expense incurred by the employee in travelling overseas would have been deductible. There are, however, indications that the existence of private pursuits was more than incidental. The employee spent significantly more time on leave compared to time at the conference. Also, the employee whilst on leave travelled not only in the country of the conference but also in a nearby country. This is quite different to an employee merely adding a few days to the trip to do some sightseeing locally. Whilst, the initial reason for the travel was to attend the conference, the fact that the employee then scheduled in leave for before and after the conference created an additional purpose for that travel. The employee's situation is not dissimilar to that mentioned above in paragraph 70 of TR98/9. In that situation there were two purposes for the travel and the employee was allowed a deduction for half of the airfare. It is considered that the employee's travel has two equal purposes. Therefore, the employee would be entitled to a deduction for fifty percent of the airfare expenses incurred. The taxable value of the expense payment fringe benefit will be the amount of the reimbursement reduced by the amount obtained at step 4 of the following calculation: 1. The amount spent by the employee before the employer reimbursed the expenditure. 2. If the employee had not been reimbursed by the employer, the amount of this expenditure that he would have been entitled to claim as a deduction. 3. As the employer reimbursed all or part of the business component of the employee's expenditure, the employee's income tax deduction is calculated as follows: the amount of the expenditure is multiplied by the business percentage. This result is then reduced by the amount of the reimbursement. The resulting amount is their income tax deduction. 4. The actual deductible amount from step 3 is subtracted from the hypothetical deductible amount in step 2. The resulting figure is the amount by which the taxable value of the fringe benefit may be reduced. Since the employer reimbursed all of what it believed to be the business component, the amount at step 4 will be the amount of airfare that it reimbursed. Therefore the employer will be able to use the ODR to reduce the taxable value of the fringe benefit to nil. | Summary: The employer would not able to use the otherwise deductible rule under section 24 of the FBTAA to reduce to nil the taxable value of the expense payment benefit that it proposes to provide to the employee being the reimbursement of 100 percent of the airfare. | Detailed Reasoning - Detailed reasoning: As explained in the reasons for decision for question one, the employee would only be entitled to a deduction for fifty percent of the expense incurred for airfares. If the employer reimbursed all of the expense incurred for the airfares, the employer would be able to reduce the taxable value of the fringe benefit, only to the extent that is deductible to the employee, that is, fifty percent. Consequently, the employer will not be able to reduce the taxable value of the fringe benefit to nil.

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