Private ruling: Airfares - otherwise deductible rule
Date of advice: 23 December 2015
Published: March 2016
Ruling period: Fringe benefits tax year ending 31 March 2015 | Fringe benefits tax year ending 31 March 2016
Date scheme commenced: 1 April 2014

Ruling: Q1: Is the provision of air fares to the employees a fringe benefit under section 136 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: Yes | Q2: Is the type of fringe benefit being provided a residual fringe benefit under section 45 of the FBTAA? | A2: Yes | Q3: Does the otherwise deductible rule in section 52 of the FBTAA apply to reduce the taxable value of the fringe benefit provided in the scenarios? | A3: Yes - scenarios 1 &2; Yes, in part - scenarios 3, 4, 5, 6, 7, 8 & 9.

Relevant facts and circumstances: The employer is a not-for-profit entity and a tax exempt body. As part of the employer's operations it regularly sends employees to overseas institutions for work related activities. At times, the employees embark on dual purpose travel. In other words, there are times when the employees travel to a location for work related purposes but also remain in the location as an extended stay for private purposes. The airfares are invoiced to, and paid by, the employer. The employees do not make any contributions to paying the expense unless otherwise stated. Travel diaries are kept by the employees. The arrangements of the employees vary. Such events include the following scenarios: Scenario 1 An employee is travelling overseas unaccompanied to perform research. The trip is for 24 days and includes eight days for private purposes. Scenario 2 An employee is travelling overseas unaccompanied to attend and present at a conference and perform research relevant to their field. The trip is for 41 days and includes 24 days for business purposes. Scenario 3 An employee is travelling overseas unaccompanied to attend a conference. The trip is for 30 days and includes 13 days for business purposes. The employer incurs half of the flight costs. The remaining half of the flight costs were paid by the employee directly to the travel agent. Scenario 4 An employee is travelling overseas for 14 days for a conference accompanied by their spouse. The conference is for one week and this is followed by one week of private time in another location. Scenario 5 An employee is travelling overseas unaccompanied for a work related conference. Prior to the conference, the employee travels to a European country for private purposes and then travels to another European country for business purposes. The trip is for 16 days and includes eight days for private purposes. The invoice is not itemised by leg of travel. Scenario 6 An employee is travelling overseas accompanied by their spouse to attend a work related conference. Also, the employee is travelling back via another country to attend a board meeting, present at a workshop and attend research meetings with other specialist employees in their field. The employee decides to take private time prior to undertaking the business purpose of the trip in other locations. The trip is for 25 days and includes 11 days for private purposes. Scenario 7 An employee is travelling overseas to attend a work related conference accompanied by their spouse and dependent. On the way to the conference, the employee decides to take some private time in a location on the way to the conference. In addition, at the conclusion of the conference, the employee decides to take private time in another city. The trip is for 18 days and includes nine days for private purposes. Scenario 8 An employee is travelling unaccompanied to a European city to attend a work related course. After travelling to the course, the employee is travelling to another city solely for private purposes. The trip is for 33 days and includes 21 days for private purposes. The employer incurs one round-the-world ticket flight. Scenario 9 An employee is travelling unaccompanied overseas to attend a work related conference. The employee is then travelling to another destination for another work related conference. On the way to the first conference the employee takes some private time in a different European city for 22 days followed by four days of collaborative research related to their field. The trip is for 48 days and includes 22 days for private purposes.

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 subsection 136(1) | Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Detailed Reasoning - Detailed reasoning: The definition of 'fringe benefit' in subsection 136(1) of the FBTAA provides that an employer will be liable to pay fringe benefits tax when: (a) a benefit is provided; (b) to an employee or an associate of an employee (c) by: • the employer • an associate of the employer • another person under an arrangement with the employer or an associate of the employer • another person in circumstances that come within paragraph (ea) of the fringe benefit definition (d) the benefit is provided in respect of the employment of the employee (e) the benefit does not come within paragraphs (f) to (s) of the fringe benefit definition. The term 'in respect of' is defined in subsection 136(1) of the FBTAA as follows: • in respect of, in relation to the employment of an employee, includes by reason of, by virtue of, or for in relation directly or indirectly to, that employment. As the purpose of the travel for the employees in all of the scenarios is related to work in their specific field the payment of the airfares is made by the employer, the flights are a benefit provided in respect of your employees' employment and are therefore a fringe benefit to the employee by the employer. | Detailed Reasoning - Question 2: Is the type of fringe benefit being provided a residual fringe benefit under section 45 of the FBTAA? | Detailed Reasoning - Detailed reasoning: A residual benefit is defined in section 45 of the FBTAA as: A benefit is a residual benefit for the purposes of this Act if the benefit is not by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive). Residual fringe benefits are essentially the fringe benefits that remain or are left over because they are not one of the more specific categories of fringe benefits. As the flights are not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 of the FBTAA they are a residual fringe benefit according to section 45 of the FBTAA. | Detailed Reasoning - Question 3: Does the otherwise deductible rule in section 52 of the FBTAA apply to reduce the taxable value of the fringe benefit provided in the scenarios? | Detailed Reasoning - Detailed reasoning: Subject to various conditions, section 52 of the FBTAA reduces the taxable value of a residual fringe benefit by the amount the employee would have been entitled to claim as an income tax deduction if they had incurred and paid (without reimbursement) the expense in respect of the provision of the benefit themselves. Taxation Ruling TR 2001/2 Fringe benefits tax: the operation of the new fringe benefits tax gross-up formula to apply from 1 April 2000 (TR 2001/2) summaries the operation of the otherwise deductible rule. TR 2001/2 states: The taxable value of certain fringe benefits may be reduced to the extent that the employee would have been able to claim an income tax deduction had the employee themselves incurred the expense. The otherwise deductible rule applies to reduce the taxable value of either an airline transport fringe benefit, a board fringe benefit, an expense payment fringe benefit, a loan fringe benefit, a property fringe benefit or a residual fringe benefit. The taxable value is reduced by the hypothetical income tax deduction to which the employee would have been entitled had the employee incurred the expense… Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction against assessable income where the incurred expenditure relates to the gaining or producing of assessable income or is necessarily incurred in carrying on a business. Where expenditure is a capital outgoing or private or domestic in nature, section 8-1 of the ITAA 1997 specifically denies a deduction. In circumstances where expenditure solely relates to the employee gaining or producing assessable income they would be able to claim the full amount as an income tax deduction. Guidelines for determining whether the employee would have been able to claim an income tax deduction for the costs incurred in travel are provided by Taxation Ruling TR 98/9 Income tax: deductibility of self education expenses (TR 98/9). The general rule that applies in relation to expenses incurred in attending work related conference or seminar is set out in paragraph 17 which states: An expense is deductible under section 8-1 when it has the essential character of an income-producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate. An expense is deductible under section 8-1 of the ITAA 1997 when it has the essential character of an income-producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances. Airfares incurred on overseas study tours or sabbatical, on work related conferences or seminars or attending an educational institution are deductible under section 8-1. They are part of the necessary cost of participating in the tour or attending the conference or seminar or the educational institution. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate. Appropriate methods for apportioning expenditure are not specified in section 8-1 ITAA 1997. Guidelines as to the approach to be adopted where only part of the travel is work related are provided by paragraphs 63 to 70 of TR 98/9. Paragraph 64 provides the general rule that is to be applied where the private purpose is incidental to the work related purpose. It states: If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. Where the private purpose is more than incidental to the business purpose the general rules to be used are set out in paragraphs 65 and 66. These paragraphs state: 65. Both Ronpibon Tin NL (78 CLR at 59; 8ATD at 437) and Fletcher & Ors (173 CLR at 16; 91 ATC at 4957; 22 ATR at 621) recognise there are at least two kinds of expenditure that require apportionment under section 8-1. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. If a study tour or work-related conference or seminar was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable. 66. The second kind of apportionable expenditure is a single outlay that serves both an income-earning purpose and some other purpose indifferently. While the High Court recognised that there can be no precise arithmetical division in such cases. For example, if a study tour or 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. The effect of the additional private days on the characterisation of the expenses depends upon whether the private purpose is merely incidental to the business purpose. In each scenario, your employee travels overseas to attend a conference directly related to the employee's employment duties. In each scenario you have approved the employee's attendance and have paid for the conference expenses. These factors indicate the travel expenses have a business purpose. However, the employee in each scenario took additional private days and in some instances was accompanied by their spouse. The effect of the additional private days on the characterisation of the expenses depends upon whether the private purpose is merely incidental to the business purpose. Factors which may assist in determining whether the private purpose is incidental to business purpose include the time spent away, the presence of accompanying persons and whether there is travel to other destinations. All these factors need to be considered before deciding whether the essential nature of the expense can be characterised as an allowable deduction under section 8-1 of the ITAA 1997. Where none of these factors indicate that the private purpose was more than incidental to the business purpose, we will accept that the main purpose for the overseas travel is work-related. In such a situation, the employee would have been entitled to an income tax deduction had they incurred and paid the air fares themselves. However, where the facts indicate that the private purpose was more than incidental to the business purpose, the expenditure will need to be apportioned. In such a situation, the application of the otherwise deductible rule will only apply to the extent that the expenditure would have been income tax deductible. The employees are travelling as part of their employment. Had they simply travelled and performed their duties and returned the amount of deduction would be 100%. In these scenarios, the employee has made a decision to also include a private purpose to their travel at the point they leave home. If that private portion is 'incidental' then could still claim the entire amount. If not, the fares must be apportioned. Use of the otherwise deductible rule must be supported by documentation as substantiation. A travel diary has been used in each of these scenarios. Scenario 1 In this first scenario the employee is travelling overseas unaccompanied for a total of 24 days of which 16 were for business purposes. In applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario, and given that only eight of the 24 days relate to a private purpose and there was no travel to other destinations, the private purpose is incidental to the business purpose. Therefore, the entire amount incurred would be otherwise deductible. Scenario 2 In this scenario the employee is travelling overseas unaccompanied for a total of 41 days of which 24 of the days were for business purposes. In applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario and given that only 17 of the 41 days relate to a private purpose and there was no travel to other destinations, the private purpose is incidental to the business purpose. Therefore, the entire amount incurred would be otherwise deductible. Scenario 3 In this scenario the employee is travelling overseas unaccompanied for a total of 30 days of which 13 were for business purposes. The employee has contributed 50% the total airfare. Applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario, although there was no travel to other destinations, given that 17 of the 30 days relate to a private purpose, it would be fair and reasonable to apportion the expenses equally between the dual purposes. Scenario 4 In this scenario the employee is travelling overseas accompanied by their spouse for a total of 14 days. In applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario, only five of the days were for a private purpose however, these were in another destination. Therefore the travel has a dual purpose. As the private purpose of the trip is not incidental to the business purpose and as set out in paragraph 66 of TR 98/9 where a work-related conference is undertaken equally for income-earning purposes and private purposes, it is appropriate to apportion the remaining travel expenses between the purposes. Scenario 5 In this scenario the employee is travelling overseas alone for a total of 16 days. In applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario, eight of the days were for business purposes. The remaining eight days relate to a private purpose in another destination, therefore the travel has a dual purpose. The private purpose is not incidental to the business purpose and as set out in paragraph 66 of TR 98/9 where a work-related conference is undertaken equally for income-earning purposes and private purposes it is appropriate to apportion the expenses between the purposes. Scenario 6 In this scenario the employee is travelling overseas accompanied by their spouse for a total of 25 days. In applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario, only 11 of the days were for private purposes however, these were in mainly in another destination. Although the purpose of employee's stay in the first city was private, an airfare to Europe was necessary in order to attend the conference. Although the purpose of the European part of the trip was to attend a conference, flights were made solely for private purposes and the taxable value of it is not deductible. Another where necessary to attend the conference, but it still relates to the private purpose of the journey. As each destination of this trip is not directly attributable to a business purpose, the travel has a dual purpose. The flights to the next country were primarily for business purposes as they were necessary in order to attend the conference. As the private purpose of the trip is not incidental to the business purpose and as set out in paragraph 66 of TR 98/9 where a work-related conference is undertaken equally for income-earning purposes and private purposes, it is appropriate to apportion the remaining travel expenses between the purposes. Scenario 7 In this scenario the employee is travelling overseas accompanied by their spouse and a dependent for a total of 18 days. In applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario, nine were for a business purpose. Although the flights to and from the other country are necessary to attend the conference, the other flights were only necessary due to private purposes. The distinct and severable expenses are therefore a taxable benefit and not deductible. Although the return flight was necessary for the business purpose of the trip to attend the conference, it still relates to the private purpose of the journey as the departure is from a city to which the travel is solely for private purposes. As each destination of this trip is not directly attributable to a business purpose, the travel has a dual purpose. As the private purpose of the trip is not incidental to the business purpose and as set out in paragraph 66 of TR 98/9 where a work-related conference is undertaken equally for income-earning purposes and private purposes, it is appropriate to apportion the remaining travel expenses between the purposes. Scenario 8 In this scenario the employee is travelling overseas unaccompanied for a total of 33 days. In applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario, the trip had a dual purpose as 21 of the days were for a private purpose and included another destination. As there are two equal purposes, a 50% reduction of the taxable value would be a fair and reasonable apportionment. Scenario 9 In this scenario the employee is travelling overseas unaccompanied for a total of 48 days. In applying the principles set out in paragraphs 64 to 66 of TR 98/9 to this scenario, 26 of the total days were for a business purpose. Each destination of this trip is directly attributable to a business purpose. The trip the first city had a dual purpose as only five of the days were for a business purpose and the first 22 days were for private purposes and as such, the taxable value should be reduced to 50%. The remainder of the trip was solely for business purposes and therefore entire amount for this portion of the trip is otherwise deductible.

Question 1: Is the provision of air fares to employees a fringe benefit under section 136 of the FBTAA?