Private ruling: Fringe Benefits Tax - Otherwise Deductible Rule
Date of advice: 18 May 2016
Published: July 2016
Ruling period: 1 April 2014 to 31 March 2019
Date scheme commenced: 1 April 2014

Ruling: Q1: Is the uniform provided to employees by the entity a residual fringe benefit under section 45 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes | Q2: Is the provision of compulsory uniforms by the entity to employees eligible for reduction under section 52 of the FBTAA based on the 'otherwise deductible rule'? | A2: Yes

Relevant facts and circumstances: The entity is a company that is an Australian subsidiary of an overseas fashion brand (parent company). The parent company has a worldwide reputation for luxury and sophistication; specialising in the creation, production and sale of goods and other accessories for men and women, which are sold in the entity's retail stores. The entity implements a company retail staff uniform policy (uniform policy) that requires all retail staff to wear a compulsory uniform during the performance of their work. The uniform policy outlines that the main objective of the compulsory uniform is to ensure a homogeneous and unique image of the parent company's brand in all the directly operated stores in Australia. The uniform represents a significant part of the look required in the stores, as dictated by the parent company. It allows employees to be brand ambassadors and enhances the public image of the company as being a fashion organisation that produces high quality merchandise. The uniform policy includes each employee's entitlements to uniform items and refers employees to the entity's separate Dress Code and Grooming policy to ensure the staff member is groomed to a sufficient standard while wearing the uniform. It is specifically set out in the uniform policy that the uniform provided to employees is to be worn for official duties only and is not to be worn outside of working hours. In particular, the policy sets out that the parent company brand goods provided to staff are required to be left on the entity's premises each night; they cannot be taken home. Wearing the uniform, in its entirety, must be adhered to and this is strictly enforced. To work in the store, staff must be prepared to wear the full uniform and if they fail to do so they are in breach of their employment contract and dealt with accordingly. The uniform is provided at no cost to the employees. The entity retains ownership of the uniforms at all times. All items of uniform must be returned to the entity upon termination of the employee's employment or when a new uniform is provided and the existing uniforms are replaced. The compulsory uniform items have been specifically designed for the company uniform and are not for sale to the general public. The range of goods and accessories comprising the uniform is limited to one type of suit, shirt, shoes, belt and either a block coloured tie for men or a scarf for women (with limited number of styles/patterns, making them easily identifiable as a uniform item). The limited number of items provided to employees to wear leaves little, if any, possibility for variations. Customers entering the entity's stores easily identify the employees. The uniforms are distinctive and unique to the parent company brand. The uniform items are of the high quality and standard maintained for all items manufactured by the parent company. The uniform items, their colour and style are a classic combination allowing the uniform to withstand changing fashions and trends and last for a number of years, albeit with changes to the colour of the tie/scarf from time to time. Employees are provided with both a summer uniform and a winter uniform however the colours and styles are consistent. The high standard demanded by the entity in relation to their employee's grooming and professional image, in addition to the alternating of summer and winter uniforms each year, ensure the items worn by the employees never look worn or outdated. The fabric uniform items are made from the parent company's high quality fabrics. There is only a limited range of fabrics used in this uniform range, not exceeding three or four different fabrics at any particular time. The particulars of the uniforms provided to male and female employees: Male Uniform Full time and part time male staff are provided with more than one suit jacket, more than one pair of suit pants, less than five shirts, one pair of shoes, one belt and one suit tie. The shoes must be left at the entity's stores overnight and cannot be taken home. Casual male staff are provided with a suit jacket, a pair of suit pants, a shirt, one pair of shoes, one belt and one suit tie. The shoes must be left at the entity's stores overnight and cannot be taken home. Female Uniform Full time and part time female staff are provided with more than one knitwear jackets, one top, more than one collared shirt, more than one pair of suit pants, one pair of shoes, one belt and one scarf. The shoes must be left at the entity's stores overnight and cannot be taken home. Casual female staff are provided with a knitwear jacket, one top, one collared shirt, one pair of suit pants, one pair of shoes, one belt and one scarf. The shoes must be left at the entity's stores overnight and cannot be taken home.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 - section 45 | Fringe Benefits Tax Assessment Act 1986 - section 52 | Fringe Benefits Tax Assessment Act 1986 - section 136 | Income Tax Assessment Act 1997 - section 8-1

Reasons for decision: Summary: The uniform provided to employees by the entity is a residual fringe benefit under section 45 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). | Summary: The provision of compulsory uniforms by the entity to employees is eligible for reduction under section 52 of the FBTAA based on the 'otherwise deductible rule'. | Detailed Reasoning - Detailed reasoning: A 'benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). In the entity's case, the benefit is the use of a compulsory uniform provided at no cost to the employee. A 'fringe benefit' is also defined in subsection 136(1) of the FBTAA. A fringe benefit is a benefit (usually a non-cash benefit) provided to an employee, in respect of their employment. In the entity's case, employees are provided with a benefit, being the use of a compulsory uniform in respect of their employment. The uniform is therefore a fringe benefit. The next step is to categorise the fringe benefit. Section 45 of the FBTAA directs us to determine if the benefit is one by virtue of Subdivision A of Divisions 2 to 11 (inclusive). If it is not, the benefit is a residual fringe benefit. Division 11 is the only one of these divisions that may be relevant. Division 11 determines if a property benefit under section 40 of the FBTAA will arise. In the entity's case, a property benefit does not arise because the entity retains ownership of the uniforms at all times; they are never the property of the employees and all uniform items must be returned to the entity upon termination of employment or when a new uniform is provided. The provision of the compulsory uniform is therefore a residual fringe benefit. If the employee would have been entitled to an income tax deduction for the residual benefit provided by the employer, the taxable value is reduced under the 'otherwise deductible rule'. Expenditure on uniforms is deductible where the deductibility tests contained in section 8-1 of the ITAA 1997 are met. The expenditure is only deductible where there is a sufficient connection between the expense and the income earning activities, such that its essential character is work related and not private or domestic in nature. A deduction is allowable under section 8-1 of the ITAA 1997 for expenditure incurred by an employee on a compulsory and distinctive uniform. It is the compulsory and distinctive characteristics which provide the nexus between the expenditure and the income producing activity. Taxation Ruling TR 97/12 provides guidelines on the deductibility of several clothing categories and at paragraph 32 states: A compulsory uniform/wardrobe must be prescribed by the employer in an expressed policy which makes it a requirement for a particular class of employees to wear that uniform while at work and which identifies the relevant employer. The employer's compulsory uniform/wardrobe policy guidelines should stipulate the characteristics of colour, style and type of clothing and accessories that qualify them as being a distinctive part of a compulsory uniform/wardrobe. Also, the wearing of the uniform/wardrobe generally should be strictly enforced. To constitute a distinctive uniform it is not enough that there is a requirement to wear clothing of a particular colour or style at work. The uniform needs to be sufficiently distinctive so that the casual observer can clearly identify the employee as working for a particular employer, or identify the products or services provided by the employer (paragraph 79 of TR 97/12). In Case R55 84 ATC 411 at 416; 27 CTBR (NS) Case 109 at 874, the Administrative Appeals Tribunal said that: ...conventional clothing of a particular colour or style does not necessarily, because of those factors alone, assume the character of a uniform. Likewise, ordinary clothing is not converted into a uniform by the simple process of asserting that it fills that role or by wearing of a name plate, etc. attached to clothing. Taxation Determination TD 1999/62 sets out, in greater detail, the Commissioner's opinion on what criteria are to be considered in deciding whether clothing items constitute a compulsory corporate uniform/wardrobe. We applied the entity's circumstances to the criteria as follows: | Detailed Reasoning - • Objective: The entity implements a company uniform policy that requires all retail staff to wear a compulsory uniform during the performance of their work. The policy outlines that the main objective of the compulsory uniform is to ensure a homogeneous and unique image of the parent company's brand in all the directly operated stores in Australia. The uniform represents a significant part of the look required in the stores as dictated by the parent company. It allows employees to be brand ambassadors and enhances the public image of the company as being a fashion organisation that produces high quality clothing. | Detailed Reasoning - • Understanding on how the wardrobe is to be worn: The entity's uniform policy includes employee's entitlements to uniform items and refers employees to the entity's separate 'Dress Code and Grooming' policy to ensure the staff member is groomed to a sufficient standard whilst wearing the uniform. Together, these express policies guide employees on how the uniforms are to be worn. It is specifically set out that the uniform provided to employees is to be worn for official duties only and is not to be worn outside of working hours. In particular, the policy sets out that the parent company brand shoes provided to staff are required to be left on the entity's premises each night; they cannot be worn home. Wearing the uniform, in its entirety, must be adhered to and this is strictly enforced. To work in the store, staff must be prepared to wear the full uniform and if they fail to do so they are in breach of their employment contract. | Detailed Reasoning - • Fabric: The compulsory uniform items are made from the parent company's high quality fabrics. There is only a limited range of fabrics used in this uniform range, not exceeding three or four different fabrics at any particular time. | Detailed Reasoning - • Colours: The use of colours in the uniforms is limited to black suits, shoes and belts; white shirts; either a block coloured tie for men and a scarf for women. | Detailed Reasoning - • Style: Male and female employees are provided with only one style of suit, shirt, shoes, belt and either a tie or a scarf. | Detailed Reasoning - • Corporate Identifiers: Although items do not incorporate a logo, initials or insignias, the uniforms are distinctive and unique to the parent company brand. The fact that the shoes must be left on the entity's premises supports this and also supports that they are an integral part of the suit (as opposed to an accessory). All uniform items are designed and manufactured for the purpose of maintaining the parent company's global branding. The limited number of items provided to employees to wear leaves little, if any, possibility for variations in the uniforms. This consistency, the quality manufacturing and professional look of the uniform make staff easily recognisable by customers entering the stores. | Detailed Reasoning - • Durability: The uniform items are of the high quality and standard maintained for all items manufactured by the parent company. Their colour and style are a classic combination allowing the uniform to withstand changing fashions and trends and last for a number of years, albeit with changes to the colour of the tie/scarf from time to time. The high standard demanded by the entity in relation to their employee's grooming and professional image, in addition to the alternating of summer and winter uniforms each year, ensure the items worn by the employees never look worn or outdated. | Detailed Reasoning - • Range: The range of items comprising the uniform are limited to one type of black suit, white shirt, shoes, belt and either a block coloured tie for men or a scarf for women (with limited number of patterns). | Detailed Reasoning - • Accessories: Accessories provided are a belt, a tie for men and a scarf for women. These accessories worn by the retail staff are uniform items unique and distinctive to the parent company. None of these items can be purchased by the public, but rather have been specifically designed for the uniform and are an integral part of the uniform. All accessories remain the property of the entity and are required to be returned to the entity with the other uniform items upon the termination of an employee's employment. It is considered that the above criteria are sufficiently satisfied in respect of the suit jacket and pants, shirt, shoes, belt and either a tie or scarf provided to an employee of the entity so that those items constitute a compulsory corporate uniform. The cost of the uniform to the employee (if they had to pay for it) is therefore an allowable deduction under section 8-1 of the ITAA 1997. Accordingly, the otherwise deductible rule will apply to reduce the taxable value of the residual benefit provided to each retail staff member (the uniform) to nil. | Detailed Reasoning - Conclusion: The uniform provided to employees by the entity is a residual fringe benefit under section 45 of the FBTAA. The provision of compulsory uniforms by the entity to employees is eligible for reduction under section 52 of the FBTAA based on the otherwise deductible rule.