Private ruling: Residual Benefits: Otherwise Deductible Rule
Date of advice: 14 March 2017
Published: August 2017
Ruling period: ● FBT year ending 31 March 2017 | ● FBT year ending 31 March 2018 | ● Income Year ended 30 June 2016 | ● Income Year ended 30 June 2017
Date scheme commenced: 1 October 2016

Ruling: Q1: Is the provision of the accommodation a fringe benefit? | A1: Yes | Q2: Is the provision of the travel to and from the Country A a fringe benefit? | A2: Yes | Q3: If the provision of accommodation is a fringe benefit, does the otherwise deductible rule in section 52 of the FBTAA 1986 reduce the taxable value of the benefit to nil? | A3: Yes, to the extent that the benefit is not private or domestic in nature, the otherwise deductible rule in section 52 will apply to reduce the taxable value of the benefit to nil. | Q4: If the provision of travel to and from Country A is a fringe benefit, does the otherwise deductible rule in section 52 of the FBTAA 1986 reduce the taxable value of the benefit to nil? | A4: Yes, to the extent that the benefit is not private or domestic in nature, the otherwise deductible rule in section 52 will apply to reduce the taxable value of the benefit to nil.

Relevant facts and circumstances: The employer (a company) has various offices located worldwide including Australia. The employer is in the process of implementing a new Enterprise Resource Planning (ERP) system. The employee An employee of the employer is required to travel to Country A from time to time to work with the ERP Project Team. Extensive travel is a requirement of the employee's current role Travel requirements of the employee The employee's physical presence in Country A is required for successful completion of the employee's role and the successful completion of the employer's project. The employee will be required to travel, as needed, during the period to which this ruling applies. The employee's family is not permitted to accompany the employee to Country A on travel, and as such will remain at the family home in Australia. Employee remuneration and terms of employment Whilst travelling, the employee will be covered by the employer's “Global Travel Policy”, a policy that “sets forth the Company's standards and procedures for arranging and purchasing business travel”. Under the Global Travel Policy, it is a requirement that the employee books their accommodation and travel through the Company's travel management agency. Under the Policy, all flights must be pre-approved, booked through the Travel management agency and centrally paid for by the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1, | Fringe Benefits Assessment Act 1986 Division 12 | Fringe Benefits Assessment Act 1986 section 45. | Fringe Benefits Assessment Act 1986 section 47. | Fringe Benefits Assessment Act 1986 section 52. | Fringe Benefits Assessment Act 1986 section 132. | Fringe Benefits Assessment Act 1986 section 136

Reasons for decision: Summary: Is the provision of the accommodation a fringe benefit? In general terms, the definition of 'fringe benefit' in subsection 136(1) of the FBTAA provides that a fringe benefit will arise when the following conditions are satisfied: (i) a benefit is provided to an employee (or an associate of an employer); (ii) the benefit is provided by the employer, an associate of the employer, or in a situation that comes within either paragraph (e), or (ea) of the fringe benefit definition; (iii) the benefit is provided in respect of the employment of the employee; and (iv) the benefit is not one of the benefits specifically excluded from being a fringe benefit by virtue of paragraphs (f) to (s) of the fringe benefit definition. The provision of the accommodation meets the criteria of a fringe benefit for the purposes of the FBTAA 1986. Specifically, the accommodation will constitute a residual benefit under section 45 of the FBTAA as it does not come within Subdivision A of Divisions 2 to 11 (inclusive). Is the provision of the travel to and from the Country A a fringe benefit? In general terms, the definition of 'fringe benefit' in subsection 136(1) of the FBTAA provides that a fringe benefit will arise when the following conditions are satisfied: (i) a benefit is provided to an employee (or an associate of an employer); (ii) the benefit is provided by the employer, an associate of the employer, or in a situation that comes within either paragraph (e), or (ea) of the fringe benefit definition; (iii) the benefit is provided in respect of the employment of the employee; and (iv) the benefit is not one of the benefits specifically excluded from being a fringe benefit by virtue of paragraphs (f) to (s) of the fringe benefit definition. The provision of the flights for travel to and from the COUNTRY A meets the criteria of a fringe benefit for the purposes of the FBTAA 1986. Specifically, the flights will constitute a residual benefit under section 45 of the FBTAA as it does not come within Subdivision A of Divisions 2 to 11 (inclusive). If the provision of accommodation is a fringe benefit, does the otherwise deductible rule in section 52 of the FBTAA 1986 reduce the taxable value of the benefit to nil? Yes, to the extent that the benefit is not private or domestic in nature, the otherwise deductible rule in section 52 will apply to reduce the taxable value of the benefit to nil. Section 52 of the FBTAA 1986 may operate to reduce the taxable value of the benefit, as the benefit constitutes a residual benefit under Division 12 of the FBTAA to which section 52 applies. Where an employee receives a residual benefit, and would have been entitled to an income tax deduction for expenditure on the benefit if the employee had provided the benefit, then the taxable value of the benefit is reduced by the amount of that notional deduction. The reduction is available in respect of residual fringe benefits per section 52 of the FBTAA 1986, for example, where accommodation (at a remote site) and meals are provided to an employee travelling in the course of employment: see Taxation Determination TD 96/7. The reduction is available regardless of whether the employer would have been entitled to a deduction for the expenditure: see Taxation Determination TD 93/20. The reduction is not available to reduce the taxable value of benefits provided to associates of employees: see Taxation Determination TD 93/90. Paragraphs 35 to 43 of Miscellaneous Taxation Ruling MT 2030 provides guidance on the deductibility of accommodation and travel expenditure, and relevantly states at paragraphs 35-36: … appropriate deductions may be allowed for the cost of meals, accommodation and incidental expenses incurred while the employee is travelling in the course of carrying out the duties of employment. 36. When an employee is travelling on business on behalf of an employer, expenses of travel are incidental to the proper carrying out of the employment function and do not have the character of being private or domestic expenses. As it was stated in Case No. B 84, 2 TBRD 390, " ... where the employment actually involves the duty of travelling and therefore staying away from home, the extra expenses of living at hotels, etc., together with costs of conveyance, etc., are deductible as, to that extent, they cease to be of a private or domestic nature." Accordingly, to the extent that the expenditure is deductible to the employee under section 8-1 of the ITAA 1997, section 52 of the FBTAA 1986 will reduce the taxable value of the benefit. In determining the amount of the employee's notional deduction, substantiation requirements (such as an employee declaration, provision of receipts, petty cash book entries, a travel diary or car odometer and logbook records) are generally imposed. Pursuant to sub-paragraph 52(1)(c)(i) of the FBTAA 1986, employees will not be required to provide a declaration to their employer where the fringe benefit is “an exclusive employee residual benefit”. An "exclusive employee residual benefit'' is defined in sec 136(1) to mean a residual benefit where, had the recipient incurred expenditure in respect of the provision of the benefit concerned, that expenditure would have been exclusively incurred in gaining or producing salary or wages of the recipient from the employment to which the benefit relates . Effectively, this means that the declaration requirement does not apply where the employer claims a reduction in the taxable value of a residual fringe benefit under section 52, for the entire amount of the expenditure. That is, in respect of the benefit concerned, had the employee incurred and paid expenditure in respect of it, the employee would have been entitled to a 100% deduction for it. In determining the deductibility of the benefit expenditure under section 8-1 of the ITAA 1997, we considered the following relevant factors: 1. The employee's employment location did not change. The employee ordinarily works in Australia, however, as a requirement of their employment they were required to spend short periods of time in Country A; 2. Whilst travelling to and residing in Country A, the employee was not accompanied by their spouse or family; 3. The employee's usual place of residence continues to be in Australia; 4. When travelling to Country A, the employee spends 21 days or less in the Country A to fulfil their employment duties; 5. The travel to Country A, relates to a project undertaken by the employer, which requires the employee to be present in Country A for a specified period of time; 6. The employee continues to be employed by the Australian employer. The employee's pay and superannuation contributions continue to be provided by the Australian employer, and the employee continues to be subject to the terms and conditions of their employment with the Australian employer; 7. The expenditure is, prima facie, not private or domestic in nature; 8. The expenditure relates to a benefit provided to the employee only; 9. The expenditure is incurred and paid for by the employer, and or an associate of the employer, to a third party, to enable the employee to fulfil their employment duties; 10. The expenditure is incurred in gaining or producing the employee's salary and wage income provided by the employer; 11. The employee is required to undertake the travel to Country A, in order to fulfil their employment obligations; and, 12. The employee adheres to a travel policy established by the employer for the purpose of work related travel. In consideration of the above, a deduction will be available to the employee pursuant to section 8-1 of the ITAA 1997, as the expenditure has the requisite nexus with the employee's gaining of assessable salary or wage income. To the extent that the expenditure is private or domestic in nature, the expenditure will be deductible in its entirety. Consequently, where the entirety of the expenditure is considered deductible under section 8-1 of the ITAA 1997, the expenditure will satisfy the definition of an 'exclusive employee residual benefit'. In that circumstance, the taxable value of the benefit would be reduced to nil pursuant to subsection 52(1) of the FBTAA 1986 and there would be no requirement for a declaration pursuant to paragraph 52(1)(c) of the FBTAA 1986. Further to the above, subsection 132(1) of the FBTAA states : An employer shall: (a) keep records that record and explain all transactions and other acts engaged in by the employer or any other person that are relevant for the purpose of ascertaining the employer's liability under this Act; Accordingly, while it may not be necessary for you to obtain a declaration from the employee, you still need to have a basis for applying the 'otherwise deductible' rule and treating a particular item as an 'exclusive employee residual benefit'. As set out in subsection 132(1) of the FBTAA, you are still required to keep records that record and explain all transactions and other acts that are relevant for the purpose of ascertaining your liability to tax under the FBTAA 1986: see also Miscellaneous Taxation Ruling MT 2038 which explains the operation and application of the FBT travel diary requirements. Where the entirety of the benefit is not deductible, the benefit will otherwise constitute an 'extended travel residual benefit' for the purpose of paragraph 52(1)(c) of the FBTAA 1986, where the employee is outside of Australia and away from their usual place of residence for a continuous period including more than five nights. In such a case an employee declaration is, as above, not required. For example, 100% of the benefit may not be deductible, where an employee postpones the return date of business travel to undertake private travel it may be necessary to apportion the airfare between the business and private components. While it may be difficult to provide a precise arithmetical division in such cases, there must be a fair and reasonable division based on the facts of each case. For example, if a work-related conference or seminar is undertaken equally for income-earning purposes and private purposes, it would be appropriate to apportion the expenses equally between the purposes. If the provision of travel to and from Country A is a fringe benefit, does the otherwise deductible rule in section 52 of the FBTAA 1986 reduce the taxable value of the benefit to nil? Yes, to the extent that the benefit is not private or domestic in nature, the otherwise deductible rule in section 52 will apply to reduce the taxable value of the benefit to nil. Section 52 of the FBTAA 1986 may operate to reduce the taxable value of the benefit, as the benefit constitutes a residual benefit under Division 12 of the FBTAA to which section 52 applies. In determining the amount of the employee's notional deduction, substantiation requirements (such as an employee declaration, provision of receipts, petty cash book entries, a travel diary or car odometer and logbook records) are generally imposed. Pursuant to sub-paragraph 52(1)(c)(i) of the FBTAA 1986, employees will not be required to provide a declaration to their employer where the fringe benefit is “an exclusive employee residual benefit”. A deduction will be available to the employee pursuant to section 8-1 of the ITAA 1997, as the expenditure has the requisite nexus with the employee's gaining of assessable salary or wage income. To the extent that the expenditure is private or domestic in nature, the expenditure will be deductible in its entirety. Consequently, where the entirety of the expenditure is considered deductible under section 8-1 of the ITAA 1997, the expenditure will satisfy the definition of an 'exclusive employee residual benefit'. In that circumstance, the taxable value of the benefit would be reduced to nil pursuant to subsection 52(1) of the FBTAA 1986 and there would be no requirement for a declaration pursuant to paragraph 52(1)(c) of the FBTAA 1986. Further to the above, subsection 132(1) of the FBTAA states An employer shall: (a) keep records that record and explain all transactions and other acts engaged in by the employer or any other person that are relevant for the purpose of ascertaining the employer's liability under this Act; Accordingly, while it may not be necessary for you to obtain a declaration from the employee, you still need to have a basis for applying the 'otherwise deductible' rule and treating a particular item as an 'exclusive employee residual benefit'. As set out in subsection 132(1) of the FBTAA, you are still required to keep records that record and explain all transactions and other acts that are relevant for the purpose of ascertaining your liability to tax under the FBTAA 1986: see also Miscellaneous Taxation Ruling MT 2038 which explains the operation and application of the FBT travel diary requirements. Where the entirety of the benefit is not deductible, the benefit will otherwise constitute an 'extended travel residual benefit' for the purpose of paragraph 52(1)(c) of the FBTAA 1986, where the employee is outside of Australia and away from their usual place of residence for a continuous period including more than five nights. In such a case an employee declaration is, as above, not required.

Other Relevant Facts: 1. The employer is not in the business of providing identical or similar benefits to members of the public as regards travel and accommodation. | Assumptions: 1. The employee is a resident of Australia for income tax purposes; | 2. The employee will maintain their usual place of residence in Australia during the period the employee is in Country A, and will return to their usual place of residence when they return to Australia; | 3. The employee's usual place of employment was not in, or adjacent to, an eligible urban area within Australia or a remote location that is not in Australia; | 4. The employee will give the employer, before the declaration date, a travel diary, where the accommodation provided is in respect of travel away from the employee's usual place of residence for a continuous period of 5 nights or more; and, | 5. The accommodation in the Country A is provided by a third party under an arm's length agreement between the employer and the third party.