Private ruling: Fringe benefits tax
Date of advice: 24 February 2016
Published: April 2016
Ruling period: Year ended 31 March 2011 | Year ended 31 March 2012 | Year ended 31 March 2013 | Year ended 31 March 2014 | Year ended 31 March 2015
Date scheme commenced: The scheme has commenced

Ruling: Q1: Is FBT payable on the use of the relevant company assets by person 1? | A1: Yes | Q2: Is FBT payable on the use of the relevant company asset by person 2? | A2: No | Q3: Is FBT payable on the use of the relevant company assets by person 3? | A3: No | Q4: Is FBT payable on the use of the relevant company assets by person 4? | A4: No | Q5: Is FBT payable on the use of the relevant company assets by the Caretaker? | A5: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Person 1 was the sole shareholder and a director of the Company. Person 6 was appointed a director of the Company in recent years. Following the death of Person 1 Person 6 became the sole director of the Company, was appointed the secretary of the Company and is now sole shareholder. A history of the shareholding of the Company has been provided. Person 6 has never received a wage, salary, allowance or any form of income from the Company. The Company owned land on which the Farm operated. There are four dwellings on the Farm which have been occupied by Persons 1, 2, 4 and the Caretaker during the relevant period. Person 3 was permitted to use sheds on the farm rent free for Person 3's business at the invitation of Person 1. Details of the income producing activities of the Company have been provided. From a certain time it appears that the Company paid no wages or director's fees to Person 1. However for a number of years recently the Company's financial statements include an allowance as having been paid for which the Company claimed deductions. It appears that Person 1 did not have a bank account. The financial statements for the Company also do not show any wages being paid to the Caretaker. The Company owned several cars, two of which were provided to Person 1. No log books or odometer records were kept for these vehicles. The company claimed full deductions for the vehicles for depreciation, repairs, insurance, registration and fuel. The Company paid for the electricity supply to all of the dwellings and the sheds. The Company claimed deductions for the electricity expenses. There is one water meter for the Farm and the Company paid for that expense. It cannot be determined whether the Company claimed deductions for the water expenses from the available records. The cost price of the cars and date of purchase has been provided. Person 1 did not have any separate, private contents insurance or other types of property insurance for any personal possessions. The Company has maintained insurance for the farm land, the four dwellings, the vehicles and the various pieces of plant and equipment still located on the Farm land. The insurance expenses in relation to the dwellings were claimed as deductions. Person 2 was not related to Person 1. Person 3 was previously employed by the Company and is related to Person 6. Person 6 and Person 3 were friends, not relations, of Person 1. Person 4 is not related to Person 1 but was a friend and is related to Person 6 and Person 3.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 8, | Fringe Benefits Tax Assessment Act 1986 section 9, | Fringe Benefits Tax Assessment Act 1986 section 10, | Fringe Benefits Tax Assessment Act 1986 section 25, | Fringe Benefits Tax Assessment Act 1986 section 26, | Fringe Benefits Tax Assessment Act 1986 section 58ZC, | Fringe Benefits Tax Assessment Act 1986 subsection 47(5), | Fringe Benefits Tax Assessment Act 1986 subsection 136(1), | Fringe Benefits Tax Assessment Act 1986 section 137, | Fringe Benefits Tax Assessment Act 1986 subsection 148(1) and | Fringe Benefits Tax Assessment Act 1986 subsection 148(2).

Reasons for decision: Summary: Person 1's use of the company assets being a dwelling and cars is a fringe benefit and as the taxable value of the fringe benefits will be greater than nil FBT will be payable. | Detailed Reasoning - Detailed reasoning: FBT will be payable on the use of those company assets by Person 1 if they are fringe benefits and the taxable value of the fringe benefits is greater than nil. A fringe benefit is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to mean a benefit provided by • an employer • an associate of an employer or • a third party in arrangement with the employer to an employee or an associate of an employee in respect of the employee's employment and that is not covered by any of the exclusions in paragraphs (f) to (s). An employee as defined in subsection 136(1) of the FBTAA may include a company director. Subsection 136(1) of the FBTAA defines an employee as a current employee, a future employee or a former employee. A former employee is a person who has been a current employee. A current employee is defined to mean 'a person who receives, or is entitled to receive, salary or wages'. The definition of salary or wages in subsection 136(1) of the FBTAA includes: a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income… Payments to a company director are included in that table therefore a company director may be an employee. There is some doubt surrounding the amounts recorded as allowances paid to Person 1 and it appears that apart from those allowances Person 1 was not paid wages or directors fees. However, even if we accept that Person 1 was not paid the 'allowances' section 137 of the FBTAA applies. It further expands who may be an employee to include a person who receives non-cash remuneration in circumstances where the person would have been treated as an employee if the non-cash remuneration had been received by way of a cash payment. Subsection 137(1) of the FBTAA states: For the purpose only of ascertaining whether a person is an employee or an employer within the meaning of this Act, where: (a) a benefit is provided by a person (in this subsection referred to as the first person ) to, or to an associate of, another person (in this subsection referred to as the second person ); (b) but for this subsection, the benefit would not be regarded as having been provided in respect of the employment of the second person; and (c) either of the following conditions is satisfied: (i) if the benefit were provided by the first person by way of a cash payment to the second person, the payment would constitute salary or wages paid by the first person to the second person; (ii) all of the following conditions are satisfied: (A) subparagraph (i) does not apply in relation to the benefit; (B) the first person is an associate of a third person or the benefit is provided under an arrangement between the first person and a third person; (C) if the benefit were provided by the third person by way of a cash payment to the second person, the payment would constitute salary or wages paid by the third person to the second person; a definition in subsection 136(1) applies as if the benefit were salary or wages paid to the second person by: (d) in a case to which subparagraph (c)(i) applies - the first person; or (e) in a case to which subparagraph (c)(ii) applies - the third person. Person 1 lived in one of the dwellings owned by the Company and had private use of Company owned cars. These are 'benefits' as defined in subsection 136(1) of the FBTAA. If these benefits were cash payments by the Company to Person 1, they would have constituted salary or wages. Therefore Person 1 was an employee of the Company. The phrase 'in respect of' in relation to the employment of an employee is defined in subsection 136(1) of the FBTAA to include 'by reason of, by virtue of, for or in relation directly or indirectly to, that employment'. In addition to this definition being provided by the FBTAA, paragraph 148(1)(a) of the FBTAA, further states that where a benefit that has been provided in respect of both the employee's employment and their shareholding, the benefit will be taken to be provided in respect of their employment. J&G Knowles & Associates v FC of T (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 ( Knowles) considered the issue of in respect of employment. After considering Smith v FC of T 87 ATC 4883; (1987) CLR 513 the full Federal Court noted: The differences in approach in Smith show how difficult it is to state a test to determine whether the requisite relationship or connection exists. In the case of 26(e) the question was said to be resolved by asking any one of the following questions: • is the benefit a "product or incident of the employment"? (Wilson J at ATC 4886; CLR 519); • is some aspect of the employment a substantial reason for the benefit? (Brennan J at ATC 4890; CLR 526); • is "in a very real sense the payment…a consequence of the existing relationship of employer and employee"? (Toohey J at ATC 4894; CLR 533); or • is the employment one of the "proximate causes" of the payment? (Gaudron J at ATC 4896; CLR 537). Whatever the question is to be asked, it must be remembered 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… …While the width of the definition of "fringe benefit" was designed to capture benefits that, in truth, were other than remuneration, the stated purpose suggests that asking whether the benefit is a product or incident of employment will be helpful. In order to establish whether there is a sufficient or material connection between Person 1's employment as a director and use of company assets we need to consider the facts and what they indicate about the basis upon which the benefit was provided. Miscellaneous Taxation Ruling MT 2016 Fringe benefits tax: benefits not taxable unless provided in respect of employment , considers the application of subsection 148(1) of the FBTAA and the requirement that a benefit be provided in respect of employment. Paragraph 7 of MT 2016 provides an example of a situation that is similar to that of the Company and Person 1: (f) the rental value of a farm homestead occupied by a family whose private company conducts the farming business in which they work and holds the title to the homestead. Paragraph 14 of MT 2016 says that in order to determine whether the benefit has been provided in respect of employment the situation needs to be considered in some detail: If the arrangement under which title to the homestead lies in the private company has been treated as a family arrangement rather than as a business one for income tax purposes this will be an indication that the occupancy did not arise in respect of the family members by the company. The arrangement may, for example, owe its existence to previous death duty considerations. In that case it would be expected that expenditures in relation to the homestead, e.g., repairs, fuel, would be met by the occupants and, being private expenses, not claimed as income tax deductions. If, on the other hand, the homestead was being treated by the company as a business asset and income tax deductions were being claimed for expenses incurred by the company in respect of the homestead it would generally be concluded that the occupancy of the homestead was a fringe benefit arising in respect of employment by the company. The claiming or non-claiming of deductions provides an indication of the way that the home is being treated by the company and will affect the conclusion made about family's occupancy. Further guidance is provided in Miscellaneous Taxation Ruling MT 2019 Fringe Benefits Tax: shareholder employees of family private companies and directors of corporate trustees , which deals with the application of FBT to benefits provided by a family company to a shareholder of the company who is a past or current employee or an associate of such an employee. As noted paragraph 8 of MT 2019, a benefit provided to a shareholder/employee in connection with the performance of his or her duties as an employee, for example a car used in the course of employment, is considered to be provided in respect of employment. For benefits that are not expressly linked to the carrying out of the employee's duties paragraph 9 of MT 2019 lists a number of factors that may be relevant in concluding whether a non-cash benefit was provided as remuneration for services or in the person's capacity of the shareholder. Those factors include: • nature of the benefit • any cash remuneration paid • the nature and extent of any trading activities of the company • the extent of any services rendered by the shareholder director, and • the extent of his or her shareholding. At paragraphs 10 and 11, MT 2019 goes on to say that: Where a family company incurs expenditure in respect of the provision of a benefit to a shareholder/employee and claims an income tax deduction in respect of that expenditure, the company is, in effect, contending that the benefit was provided by way of remuneration. Where the remuneration (including non-cash remuneration) claimed to have been paid to the shareholder/employee is reasonable having regard to the services rendered, it would generally be accepted that the company is entitled to a deduction for the cost of providing the benefit. In those circumstances, it follows that the benefit is provided in respect of employment and thus subject to FBT. … The treatment outlined in the preceding paragraph would apply, for example, where a company carrying on a business of primary production has claimed deductions in respect of the 'homestead' dwelling on the basis that it is occupied by an employee, usually the principal shareholder director. However it is noted in paragraph 12 that: The true position may be, however, that a family company permits shareholder/employees to occupy a dwelling owned by the company in their capacity as shareholders. For example, where a family home is owned by a company which has not carried on a business and the dwelling is occupied rent-free by shareholder directors who have performed only nominal duties for the company, the strong inference would be that the benefit was granted because of something other than employment. If, in these circumstances, the company has not claimed deductions relating to the dwelling, it would be accepted that the free occupancy was not provided in respect of employment. In relation to the use of the dwelling and the cars, there are a number of facts which provide an indication of the basis upon which the benefits were provided to Person 1. That is whether it was remuneration for services or because of shareholding. Person 1 performed duties as a director and did not receive a salary or directors fees. This lends weight to the conclusion that any benefits provided were in respect of employment as director as they may be viewed as remuneration. The fact that Person 1 does not appear to have had a bank account and used the Company cheque account to pay all expenses, lends weight to the argument that any benefits provided to Person 1 were in respect of shareholding. However, if the benefits were provided in respect of shareholding the Company would not have any basis for claiming deductions for the expenses incurred in providing the benefits. The fact that the Company claimed deductions for expenses incurred in relation to the dwelling and the cars is consistent with the conclusion that they were provided to Person 1 in respect of employment. Also, Person 1 used one of the cars as a Farm vehicle and, as noted in MT 2019, a car used in the course of employment is considered to be provided in respect of employment. Therefore we consider that the benefits consisting of the use of the dwelling and the cars were provided in respect of Person 1's employment. We have also considered whether the benefits may be excluded from being fringe benefits by any of paragraphs (f) to (s) of the definition in subsection 136(1) of the FBTAA. In particular paragraph (g) excludes a benefit that is an exempt benefit in relation to a year of tax: • the provision of the accommodation is not an exempt benefit in accordance with section 58ZC of the FBTAA, which applies to accommodation in remote areas, as the Farm is in a location which is adjacent to an eligible urban area as defined in subsection 140(1) of the FBTAA. • in section 8 of the FBTAA, there are certain situations where car benefits may be exempt benefits. Neither of the cars used by Person 1 qualifies under the provisions of section 8 of the FBTAA. As there are no other provisions under which the accommodation and car benefits would be exempt benefits, they are not excluded from the definition of a fringe benefit by paragraph (g). Consequently, the use of the dwelling and cars are fringe benefits provided to Person 1 by the Company. In order to determine whether FBT will be payable we must consider whether they will have a taxable value greater than nil. The use of the main residence is a housing fringe benefit in accordance with section 25 of the FBTAA. The taxable value of housing fringe benefits is calculated in accordance with section 26 of the FBTAA. As is relevant, the taxable value of the housing fringe benefits will be the market rental value of the accommodation, reduced by any rental payments made by the employee. The market rental value is calculated by reference to the period during the FBT year when Person 1 had the right to use the accommodation. The market rental value may be determined for each year or an inflation factor may be applied to the first year's market rental value for each of the subsequent years up to a maximum of nine consecutive years. The market rental value of the main residence is unlikely to have been nil and there is nothing to indicate that Person 1 paid any rent. Therefore the taxable value of the housing fringe benefits for each year during the relevant period will be greater than nil. The use of the cars, are car fringe benefits and the taxable value of car fringe benefits in relation to a car must be calculated under section 9 of the FBTAA, the statutory formula method, unless the employer elects under to use the operating cost method under section 10 of the FBTAA. Regardless of which method is used, the taxable value for the car fringe benefits will be greater than nil. This is based on the following: The taxable value using statutory formula is calculated as follows: Taxable value = (A x B x C) - E D Where: • A = the base value of the car • B = the applicable statutory percentage • C = the number of days in the FBT year when the car was used or was available for private use of the employee. The day on which a car is garaged at or near an employee's place of residence is a day on which it is available for private use. • D = the number of days in the FBT year • E = the employee contribution. The base value of a car that is owned is the original cost price paid (excluding registration and stamp duty) plus the cost of any fitted non-business accessories and dealer delivery charges. The base value of a car is reduced by one-third in the FBT year that starts after it has been owned or leased for four years. That is, the reduction applies from 1 April after the fourth anniversary of the date on which the Company first owned or leased the car. The reduction applies only once for a particular car and it can then be used for subsequent years. For both cars the base value will be substantially greater than nil. As there are no odometer records, the relevant statutory percentage for the relevant period will be either 26% or 20%. Consequently, using the statutory formula method, the taxable value of car fringe benefits for each of the years ended 31 March 2011 to 2015 will be greater than nil. Using the operating cost method, the taxable value of car fringe benefits is: (total operating costs x percentage of private use) - employee contribution The total of operating costs includes both actual operating costs and for cars that are owned deemed operating costs. The actual operating costs (including GST) are those expenses incurred for repairs, maintenance, fuel, registration and insurance. Deemed operating costs are those expenses deemed to be incurred for depreciation and interest. The percentage of private use may be reduced where sufficient records have been kept to determine the business use of the car. Those records include appropriate logbook records, odometer records for each year and the estimates of business kilometres for each year. The Company has no log book or odometer records for either car therefore there can be no reduction to the percentage of private use in the above formula. As a result the taxable value will be greater than nil using this method. The use of the dwelling and the cars by Person 1 is a fringe benefit. The taxable value of the fringe benefits will be greater than nil therefore FBT will be payable by the Company. | Summary: The use of the relevant Company asset by Person 2 is not a fringe benefit as the benefit was not provided in respect of Person 1's employment, therefore no FBT will be payable. | Detailed Reasoning - Detailed reasoning: As stated in the reasons for decision to question one, for a benefit to be a fringe benefit it must be provided to either an employee or an associate of an employee. In subsection 136(1) of the FBTAA associate has the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). Based on that definition Person 2 is not an associate of Person 1 as Person 2 was not a relative. However, subsection 148(2) of the FBTAA provides an additional class or category of 'associate' by way of a deeming provision which also needs to be considered. Subsection 148(2) of the FBTAA deems a third party to be an associate of an employee where the third party receives a benefit provided under an 'arrangement' between the employer and the employee. An arrangement is defined in subsection 136(1) of the FBTAA and includes agreements, arrangements and promises. Person 1 is an employee of the Company and in an arrangement between Person 1 and the Company Person 2 was provided with the use of the dwelling. Therefore Person 2 is an associate of an employee. The next question to be considered is whether the use of the dwelling was provided by the Company in respect of Person 1's employment. The Company claimed deductions in relation to the electricity and insurance expenses for the Dwelling which, as previously mentioned, indicates that it considered it to be an asset of the business. Whilst the use of the main residence is considered to be a form of remuneration for Person 1, the connection between Person 1's employment and the use of the dwelling by Person 2 is not sufficient or material. Therefore we do not consider it to have been provided in respect of employment. As the benefit was not provided in respect of employment, the use of the Company asset by Person 2 is not a fringe benefit and FBT is not payable. | Summary: The use of the Company asset, being the sheds, by Person 3 is not a fringe benefit as the benefit was not provided in respect of either Person 3's or Person 1's employment, therefore no FBT will be payable. | Detailed Reasoning - Detailed reasoning: Person 3 is a former employee of the Company and therefore falls within the definition of an employee. At the time that Person 3 was given use of the shed Person 3 had not been employed by the Company for a number of years. Any connection between the provision of the benefit by the Company and Person 3's employment would be merely causal. Therefore it is considered that the benefit was not provided in respect of employment. Person 3 is an associate of Person 1 due to subsection 148(2) of the FBTAA. Person 1 is an employee of the Company and in an arrangement between Person 1 and the Company the sheds were provided for use in the business of Person 3. The next question to be considered is whether the use of the sheds was provided by the Company in respect of Person 1's employment. The Company claimed deductions in relation to the electricity and insurance expenses for the sheds which, as previously mentioned, indicates that it considered it to be an asset of the business. Whilst the use of the main residence is considered to be a form of remuneration for Person 1, the connection between Person 1's employment and the use of the sheds by Person 3 is not sufficient or material. Therefore we do not consider it to have been provided in respect of employment. As the provision of the benefit is not in respect of the employment of Person 3 or Person 1, the use of the Company assets, the sheds, by Person 3 is not a fringe benefit and FBT is not payable. | Summary: The use of the Company asset, being a dwelling, by Person 4 is not a fringe benefit as the benefit was not provided in respect of Person 1's employment, therefore no FBT will be payable. | Detailed Reasoning - Detailed reasoning: Although not related Person 1's relationship with Person 4 was similar to family. It is thought that the provision of the benefit is a result of this relationship. As explained in relation to question two, subsection 148(2) of the FBTAA deems a third party to be an associate of an employee where the third party receives a benefit provided under an 'arrangement' between the employer and the employee. Person 4 is deemed to be an associate of Person 1 as Person 4 received the use of the dwelling under an arrangement between Person 1 and the Company. Person 4 may have been provided with the use of the dwelling either because of Person 1's shareholding or employment as director. We must consider whether the facts provide sufficient evidence of either. As with other assets, the Company has claimed deductions for electricity and insurance expenses in relation to the dwelling. As noted in previous questions, this indicates that the Company treated the dwelling as a business asset. Whilst the use of the main residence is considered to be a form of remuneration for Person 1, the connection between Person 1's employment and the use of the dwelling by Person 4 is not sufficient or material. Therefore we do not consider it to have been provided in respect of employment. As the benefit was not provided in respect of employment, the use of the Company asset by Person 4 is not a fringe benefit and FBT is not payable. | Summary: The use of the Company asset being a dwelling by the Caretaker was a fringe benefit in the relevant years. The taxable value of the housing fringe benefits will be greater than nil, therefore FBT will be payable. | Detailed Reasoning - Detailed reasoning: The Caretaker did odd jobs on the Farm. The Farm was the Company's business. Although the Caretaker may not have received a salary or wage, based on the application of section 137 of the FBTAA the Caretaker was an employee as defined in subsection 136(1) of the FBTAA. The Caretaker undertook duties on the Farm and the accommodation was on the Farm. Given that this appears to be the only form of remuneration provided to the Caretaker, then there is a sufficient or material, rather than just a causal connection between the Caretaker's use of the dwelling and the Caretaker's employment. Consequently, the benefit was provided in respect of the Caretaker's employment and is a fringe benefit if it is not excluded by any of paragraphs (f) to (s) of the definition in subsection 136(1) of the FBTAA. Of those paragraphs, only paragraph (g) 'a benefit that is an exempt benefit in relation to the year of tax' might exclude the benefit. The provision of the accommodation is not an exempt benefit in accordance with either of the following provisions: • section 58ZC of the FBTAA, the Farm is in a location which is adjacent to an eligible urban area as defined in subsection 140(1) of the FBTAA • subsection 47(5) of the FBTAA, which applies to employees living away from their usual place of residence, the caretaker lived in the dwelling for a substantial period therefore it was the Caretaker's usual place of residence for that period. As there are no other provisions which would allow for the accommodation to be an exempt benefit, the benefit is not excluded from the definition of a fringe benefit by paragraph (g). Consequently, the use of the dwelling by the caretaker was a fringe benefit for the relevant years. The use of the dwelling is a housing fringe benefit. The taxable value of housing fringe benefits is calculated in accordance with section 26 of the FBTAA. As explained in question one, the taxable value of the housing fringe benefits will be the market rental value of the accommodation, reduced by any rental payments made by the employee. The market rental value must be calculated by reference to the period during the FBT year when the caretaker had the right to use the accommodation. The market rental value of the dwelling is unlikely to have been nil and there is no indication that the Caretaker paid any rent. Therefore the taxable value of the housing fringe benefits for the relevant years will be greater than nil. Consequently FBT will be payable on the use of the Company asset by the Caretaker.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.