Fringe benefits tax
Modules 1 – 5
Copyright notice
Copyright © CPA Australia Ltd (ABN 64 008 392 452), 2011. All rights reserved.
Save and except for third party content, all content in these materials is owned or licensed by CPA
Australia Ltd under enforceable agreement.
Other than for the purposes of and subject to the conditions prescribed under the Copyright Act
1968 (Cth) (or any other applicable legislation throughout the world), or as otherwise provided for
in this copyright notice, no part of these materials may in any manner or any medium whether now
existing or created in the future, (including but not limited to electronic, mechanical, microcopying,
photocopying or recording) be reproduced, adapted, stored in a retrieval system or transmitted
without the prior written permission of the copyright owner.
Modification of the materials for any other purpose than provided under this notice is a violation of
CPA Australia Ltd’s copyright and other proprietary rights. All trademarks, service marks and trade
names are proprietary to CPA Australia Ltd. For permission to reproduce any material, a request in
writing is to be made to the Legal Business Unit, CPA Australia Ltd, Level 20, 28 Freshwater Place,
Southbank, Victoria 3006.
Disclaimer
CPA Australia Ltd has used reasonable care and skill in compiling the content of this material.
However, CPA Australia Ltd makes no warranty as to the accuracy or completeness of any
information in these materials.
These materials accompany the CPA Australia Ltd material ‘Fringe Benefit Tax’ and are intended
to be a guide only. No part of these materials or any other materials comprising the ‘Fringe Benefit
Tax’ course are intended to be advice, whether legal or professional. All names, figures, solutions
and scenarios are fictitious and have been established for training purposes only. You should not
act solely on the basis of the information contained in these materials as parts may be generalised
and the application of exercises, examples and case studies may vary from organisation to
organisation and may apply differently to different people and circumstances.
Further, as laws change frequently, all practitioners, readers, viewers and users are advised to
undertake their own research or to seek professional advice to keep abreast of any reforms and
developments in the law.
Limitation of liability
To the extent permitted by applicable law, CPA Australia Ltd, its employees, agents and consultants
exclude all liability for any loss or damage claims and expenses including but not limited to legal
costs, indirect special or consequential loss or damage (including but not limited to, negligence)
arising out of the information in the materials.
Where any law prohibits the exclusion of such liability, CPA Australia Ltd limits its liability to the
resupply of the information.
Module 1
FBT fundamentals
Contents
Program overview ............................................................................................................................................ 1 Learning objectives................................................................................................................................................................1 Benefits..................................................................................................................................................................................1 Benefits for the organisation ............................................................................................................................... 1 Benefits for the individual .................................................................................................................................... 1 Evaluation of the program......................................................................................................................................................2 Topic 1 – Introduction to fringe benefits tax ................................................................................................. 3 1 Background.........................................................................................................................................................................3 1.1 Legislation...............................................................................................................................................................3 1.2 Outline of the FBT system ......................................................................................................................................4 1.3 Key learning points .................................................................................................................................................4 Topic 2 – Key provisions................................................................................................................................. 5 2 Outline of the FBT provisions .............................................................................................................................................5 2.1 Definition of ‘benefit’ ...............................................................................................................................................5 2.1.1 Exercise 1 .................................................................................................................................................. 6 2.2 Definition of fringe benefit .......................................................................................................................................6 2.2.1 ‘in relation to ...’ .......................................................................................................................................... 9 2.2.2 ‘provided during or in respect of a year of tax’ ........................................................................................... 9 2.2.3 ‘provided to an employee or to an associate of the employee’ ................................................................ 10 2.2.4 ‘provided by the employer or an associate of the employer, or another person’...................................... 14 2.2.5 ‘in respect of employment’ ....................................................................................................................... 16 2.2.6 Exercise 2 ................................................................................................................................................ 19 2.2.7 The exclusions ......................................................................................................................................... 20 2.3 Fringe benefits taxable amount ............................................................................................................................23 2.3.1 Aggregate fringe benefits amounts .......................................................................................................... 23 2.3.2 Employee’s share..................................................................................................................................... 24 2.3.3 What is a ‘GST creditable benefit’?.......................................................................................................... 24 2.3.4 Fringe benefits amounts........................................................................................................................... 24 2.3.5 Excluded fringe benefits........................................................................................................................... 24 2.3.6 The rationale for grossing-up ................................................................................................................... 28 2.3.7 Calculation of the gross-up factors........................................................................................................... 29 2.4 Employer’s FBT payable.......................................................................................................................................30 2.4.1 Increase for exempt employers (‘capping’ of exempt benefits)................................................................ 30 2.4.2 Rebatable employers (‘capping of rebate’) .............................................................................................. 33 2.5 Calculation example .............................................................................................................................................36 2.6 Key learning points ...............................................................................................................................................38 Topic 3 – Benefit categories ......................................................................................................................... 39 3 Benefit categories and taxable value................................................................................................................................39 3.1 Car benefits ..........................................................................................................................................................39 3.1.1 Taxable value........................................................................................................................................... 39 3.1.2 Exempt benefits ....................................................................................................................................... 40 3.1.3 Road and bridge tolls ............................................................................................................................... 40 3.1.4 Reduction in taxable value ....................................................................................................................... 40 3.2 Debt waiver fringe benefits ...................................................................................................................................40 3.2.1 Taxable value........................................................................................................................................... 40 3.2.2 Reduction in taxable value ....................................................................................................................... 41 3.3 Loan fringe benefits ..............................................................................................................................................41 3.3.1 Taxable value........................................................................................................................................... 41 3.3.2 Exempt loans ........................................................................................................................................... 41 3.3.3 Reduction in taxable value ....................................................................................................................... 42 3.3.4 Substantiation .......................................................................................................................................... 42 3.4 Expense payment fringe benefits .........................................................................................................................44 3.4.1 Taxable value........................................................................................................................................... 44 3.4.2 Exempt benefits ....................................................................................................................................... 44 3.4.3 Reduction in taxable value ....................................................................................................................... 45 3.4.4 Substantiation requirements .................................................................................................................... 47 3.5 Housing fringe benefits .........................................................................................................................................48 3.5.1 Taxable value........................................................................................................................................... 48 3.5.2 Exempt housing benefits.......................................................................................................................... 48 3.6 Living-away-from-home fringe benefits.................................................................................................................48 3.6.1 Taxable value........................................................................................................................................... 48 3.6.2 Declaration ............................................................................................................................................... 49 3.7 Airline transport fringe benefits .............................................................................................................................49 3.7.1 Taxable value........................................................................................................................................... 49 3.7.2 Reduction in taxable value ....................................................................................................................... 49 3.7.3 Substantiation requirements .................................................................................................................... 50 3.8 Board fringe benefits.............................................................................................................................................50 3.8.1 Taxable value........................................................................................................................................... 50 3.8.2 Reduction in taxable value ....................................................................................................................... 50 3.9 Meal entertainment ...............................................................................................................................................51 3.10 Tax-exempt body entertainment fringe benefits .................................................................................................51 3.10.1 Taxable value......................................................................................................................................... 51 3.11 Car parking fringe benefits..................................................................................................................................51 3.12 Property fringe benefits.......................................................................................................................................51 3.12.1 Exempt benefits ..................................................................................................................................... 53 3.12.2 Reductions in taxable value ................................................................................................................... 53 3.12.3 Substantiation requirements .................................................................................................................. 54 3.12.4 Reduction in taxable value – property provided in respect of car .......................................................... 54 3.13 Residual fringe benefits ......................................................................................................................................54 3.13.1 Taxable value – in-house residual fringe benefits.................................................................................. 54 3.13.2 Taxable value – external residual fringe benefits................................................................................... 55 3.13.3 Motor vehicles other than cars ............................................................................................................... 55 3.13.4 Reduction in taxable value under the ‘otherwise deductible’ rule .......................................................... 55 3.13.5 Substantiation requirements .................................................................................................................. 55 3.14 Key learning points .............................................................................................................................................56 Topic 4 – Exemptions from FBT ................................................................................................................... 57 4 Exemptions from FBT introduction ...................................................................................................................................57 4.1 Religious institutions .............................................................................................................................................57 4.2 Public benevolent institutions and hospitals .........................................................................................................58 4.3 Minor benefits .......................................................................................................................................................58 4.3.1 Exclusions ................................................................................................................................................ 60 4.3.2 Christmas gifts ......................................................................................................................................... 61 4.4 Work-related items................................................................................................................................................61 4.4.1 Mobile phones.......................................................................................................................................... 61 4.4.2 Laptops, notebooks and similar computers.............................................................................................. 61 4.5 Long-service awards.............................................................................................................................................62 4.6 Safety awards .......................................................................................................................................................63 4.7 Trainees engaged under the Australian Traineeship Scheme..............................................................................63 4.8 Membership fees and subscriptions .....................................................................................................................63 4.9 Taxi travel .............................................................................................................................................................63 4.10 Other miscellaneous benefits .............................................................................................................................64 4.10.1 Provision of food or drink in conjunction with a ‘board benefit’ .............................................................. 64 4.10.2 International organisations, diplomatic and consular privileges ............................................................. 64 4.10.3 Accommodation, fuel, food and drink provided to live-in residential care workers................................. 64 4.10.4 Travel expenses in respect of employment interviews and selection tests............................................ 64 4.10.5 Relocation costs..................................................................................................................................... 64 4.10.6 Newspapers and periodicals for business purposes.............................................................................. 65 4.10.7 Benefits provided in respect of compensable work-related trauma ....................................................... 65 4.10.8 In-house health care facilities................................................................................................................. 65 4.10.9 Certain travel to obtain medical treatment ............................................................................................. 65 4.10.10 Compassionate travel .......................................................................................................................... 66 4.10.11 Work-related medical examination, medical screening, preventative health care, counselling or
migrant language training.................................................................................................................................. 66 4.10.12 Emergency assistance (health care).................................................................................................... 67 4.10.13 Live-in domestic employees – religious institutions ............................................................................. 67 4.10.14 Live-in help – elderly or disadvantaged persons.................................................................................. 68 4.10.15 Non-live-in domestic employees .......................................................................................................... 68 4.10.16 Deposits under the Small Superannuation Accounts Act 1955............................................................ 68 4.10.17 Approved student exchange programs ................................................................................................ 69 4.10.18 Recreational and child care facilities.................................................................................................... 69 4.10.19 worker entitlement funds ...................................................................................................................... 69 4.10.20 Workers compensation ........................................................................................................................ 69 4.11 Key learning points .............................................................................................................................................70 Topic 5 – Reductions in taxable value ......................................................................................................... 71 5 Reductions in taxable value introduction ..........................................................................................................................71 5.1 Remote area residential fuel.................................................................................................................................71 5.2 Remote area housing assistance .........................................................................................................................72 5.3 Remote area holiday transport – not subject to ceiling.........................................................................................72 5.4 Remote area holiday transport – subject to ceiling...............................................................................................73 5.5 Overseas employment holiday transport ..............................................................................................................73 5.6 Relocation – where transport is by employee’s car ..............................................................................................73 5.7 Relocation – temporary accommodation ..............................................................................................................74 5.8 Relocation – meals ...............................................................................................................................................74 5.9 Employment interviews and selection tests – where transport is by employee’s car ...........................................74 5.10 Occupational health and migrant language training – where transport is by employee’s car.............................75 5.11 In-house fringe benefits – tax-free threshold ......................................................................................................75 5.12 Living-away-from-home – food provided ............................................................................................................76 5.13 Entertainment expense payment benefits ..........................................................................................................76 5.14 Overseas employees – education of children.....................................................................................................76 5.15 Remote area home ownership schemes ............................................................................................................77 5.16 Key learning points .............................................................................................................................................78 Topic 6 – Other matters ................................................................................................................................. 79 6.1 GST and fringe benefits.................................................................................................................................................79 6.1.1 Supplies that consist of providing a fringe benefit .............................................................................................79 6.1.2 GST input tax credits .........................................................................................................................................80 6.2 Reportable fringe benefits..............................................................................................................................................82 6.2.1 Calculating grossed-up individual fringe benefits amounts................................................................................85 6.2.2 Illustration of calculation of FBT and reportable fringe benefits amount............................................................87 6.3 Reporting and payment of FBT......................................................................................................................................88 6.3.1 Annual FBT return .............................................................................................................................................88 6.3.2 Instalments of FBT.............................................................................................................................................89 6.3.3 Payment of FBT.................................................................................................................................................89 6.4 General substantiation requirements.............................................................................................................................89 6.5 Double counting of benefits ...........................................................................................................................................90 6.5.1 Employee of employer and employer’s associate .............................................................................................90 6.5.2 Two or more employers .....................................................................................................................................90 6.5.3 Benefit provided to employee and associate jointly...........................................................................................90 6.5.4 Benefit provided jointly to two or more associates of employee ........................................................................91 6.6 Key learning points ........................................................................................................................................................91 Topic 7 – Exercise on calculating FBT and reportable fringe benefits..................................................... 92 7.1 Instructions ....................................................................................................................................................................92 7.2 Exercise 3 ......................................................................................................................................................................92 7.3 Exercise answer template..............................................................................................................................................93 Appendices..................................................................................................................................................... 95 Appendix 1: Employer’s FBT flowchart................................................................................................................................95 Appendix 2: Loan fringe benefit declaration ........................................................................................................................96 Appendix 3: Expense payment benefit declaration..............................................................................................................97 Appendix 4: Living-away-from-home declaration.................................................................................................................98 Appendix 5: Airline transport benefit declaration .................................................................................................................99 Appendix 6: Property benefit declaration...........................................................................................................................100 Appendix 7: Residual benefit declaration ..........................................................................................................................101 Appendix 8: Remote area holiday transport declaration....................................................................................................102 Appendix 9: Relocation transport declaration ....................................................................................................................104 Appendix 10: Employment interview or selection test declaration.....................................................................................105 Appendix 11: Migrant language training declaration..........................................................................................................106 Suggested answers ..................................................................................................................................... 107 FBT module 1: FBT fundamentals
Topic 1 – Introduction to fringe benefits tax
1 Background
Fringe benefits tax (FBT) was introduced on 1 July 1986. It broadly taxes employers in respect
of (mostly) non-cash benefits provided to employees in addition to, or in place of, cash salary. It
was introduced to overcome the real or perceived unfairness and loss to the revenue from the
practice of providing (tax-free) fringe benefits rather than salary.
However, not all benefits caught by the legislation are in the nature of a replacement for salary.
The legislation also covers benefits provided:
•
to associates of employees
•
by an associate of an employer or another person acting on behalf of the employer.
FBT also applies to Commonwealth and State Government departments and instrumentalities.
One of the great difficulties the FBT legislation has to come to terms with is the valuation of
particular benefits. As a result, the legislation establishes many categories of fringe benefits,
each with its own valuation provisions. It is necessary to determine which category a particular
benefit falls into before it is possible to say what the taxable value of that benefit is.
1.1 Legislation
The FBT system is implemented by the following Acts:
•
Fringe Benefits Tax Assessment Act 1986 (FBTAA) which outlines the machinery for
assessment and collection of tax.
•
Fringe Benefits Tax Act 1986 which simply imposes the tax.
•
Fringe Benefits Tax (Application to the Commonwealth) Act 1986 which provides for FBT
to apply to Commonwealth Government employers.
The FBT year is not the same as the income tax year. The FBT year begins on 1 April and ends
on 31 March.
© CPA Australia Ltd 2011
3
FBT module 1: FBT fundamentals
1.2 Outline of the FBT system
The FBT system is set out in the FBTAA:
•
Part IIA (sections 5A to 5F) sets out how employers calculate their FBT liability, from the
individual amounts of fringe benefits provided.
•
Part III sets out:
– each of the 13 types of (taxable) fringe benefit and the method for calculating the taxable
values.
– the exempt benefits and the conditions and requirements that must be met.
– the circumstances and amount of any reduction in taxable value for specific benefits.
•
Part IIIA sets out the rebate of FBT available for certain employers.
•
The rest of the Act deals with liability to pay tax, returns and assessments, and other
administrative provisions.
1.3 Key learning points
Before we move on to the next topic, check that you can:
KEY POINT
4
•
Explain the purpose of FBT.
•
Broadly outline the FBT legislation.
•
Define fringe benefits, exempt benefits, taxable value and reductions in
taxable value.
© CPA Australia Ltd 2011
FBT module 1: FBT fundamentals
Topic 2 – Key provisions
2 Outline of the FBT provisions
In Topic 2 you will start by gaining an understanding of the key provisions and how they relate
to each other by considering the flowchart in Appendix 1. The flowchart outlines the framework
of the legislative provisions and the key concepts and definitions you will need to understand.
This will allow you to see the amount on which the employer must pay FBT, how this is
calculated, and what definitions and concepts you will need to understand in detail.
Refer to Appendix 1 at the back of the learning materials.
APPENDIX
2.1 Definition of ‘benefit’
‘Benefit’ is defined in the FBTAA with an ‘inclusive’ definition which expands its general or
dictionary meaning. The Macquarie Dictionary defines benefit to mean ‘anything that is for the
good of a person or thing’.
The FBTAA has the following definition of ‘benefit’:
benefit includes any right (including a right in relation to, and an interest in, real or personal
property), privilege, service or facility and, without limiting the generality of the foregoing,
includes a right, benefit, privilege, service or facility that is, or is to be, provided under:
(a) an arrangement for or in relation to:
i.
the performance of work (including work of a professional nature), whether with
or without the provision of property;
ii. the provision of, or of the use of facilities for, entertainment, recreation or
instruction; or
iii. the conferring of rights, benefits or privileges for which remuneration is payable in the
form of a royalty, tribute, levy or similar exaction;
(b) a contract of insurance; or
(c) an arrangement for or in relation to the lending of money.
It should be noted that a benefit is not ‘provided’ if it is obtained through the employee’s
fraudulent activity that is not condoned by the employer (ID 2003/458).
In Slade Bloodstock Pty Ltd v FC of T 2007 ATC 5276, the Full Federal Court held that there
was real doubt as to whether the repayment of a loan was a ‘benefit’, as distinct from the
discharge of a pre-existing right, and that it would not seem to be encompassed by the terms of
para (c) of the definition.
© CPA Australia Ltd 2011
5
FBT module 1: FBT fundamentals
2.1.1 Exercise 1
Exercise 1
Consider the following situations. Which are ‘benefits’ according to the definition of ‘benefit’ for
FBT purposes?
Circumstances
Benefit?
Yes
No
An employer provides a car to an employee for private use.
An employer pays an employee his weekly wages.
An employer provides a loan to an employee for investment purposes.
An employer provides the use of desks, chairs and computers for work
purposes.
Check your answer against the suggested answer at the end of this module.
SUGGESTED
ANSWERS
2.2 Definition of fringe benefit
Once we have determined if a benefit has been received, we need to determine if it is a ‘fringe
benefit’.
Only fringe benefits are taxable under the fringe benefits tax legislation.
Not all benefits are fringe benefits. Consider the elements required to amount to a fringe benefit
in the definition below.
‘Fringe benefit’ is defined in the FBTAA to mean:
fringe benefit, in relation to an employee, in relation to the employer of the employee, in
relation to a year of tax, means a benefit:
(a)
provided at any time during the year of tax; or
(b)
provided in respect of the year of tax;
being a benefit provided to the employee or to an associate of the employee by:
6
(c)
the employer; or
(d)
an associate of the employer; or
© CPA Australia Ltd 2011
FBT module 1: FBT fundamentals
(e) a person (in this paragraph referred to as the arranger) other than the employer or an
associate of the employer under an arrangement covered by paragraph (a) of the
definition of arrangement between:
(i)
the employer or an associate of the employer; and
(ii)
the arranger or another person; or
(ea) a person other than the employer or an associate of the employer, if the employer or
an associate of the employer:
(i)
participates in or facilitates the provision or receipt of the benefit; or
(ii)
participates in, facilitates or promotes a scheme or plan involving the provision of
the benefit;
and the employer or associate knows, or ought reasonably to know, that the employer
or associate is doing so;
in respect of the employment of the employee, but does not include:
(f)
a payment of salary or wages or a payment that would be salary or wages if salary or
wages included exempt income for the purposes of the Income Tax Assessment Act
1936; or
(g)
a benefit that is an exempt benefit in relation to the year of tax; or
(h)
a benefit constituted by the acquisition by the employee, or by a relative of the
employee, of a share in a company, or of a right to acquire a share in a company,
under a scheme for the acquisition of shares by employees, where section 26AAC of
the Income Tax Assessment Act 1936 applies in relation to the acquisition; or
(ha) a benefit constituted by the acquisition by a person of a share or right under an
employee share scheme (within the meaning of Division 13A of Part III of the Income
Tax Assessment Act 1936); or
(hb) a benefit constituted by the acquisition by a trust of money or other property where the
sole activities of the trust are obtaining shares, or rights to acquire shares, in a
company (the employer), or a holding company (within the meaning of the
Corporations Act 2001) of the employer, and providing those shares or rights to
employees of the employer; or
(j)
a benefit constituted by:
(i)
the making of a payment of money to a superannuation fund (as defined by
subsection 6(1) of the Income Tax Assessment Act 1936) that the person making
the payment had reasonable grounds for believing was a complying
superannuation fund (as defined by subsection 267(1) of the Income Tax
Assessment Act 1936) for the purpose of making provision for superannuation
benefits for the employee (whether or not the benefits are payable to a dependant
of the employee if the employee dies before or after becoming entitled to receive
the benefits); or
(ii)
the making of a payment of money to a non-resident superannuation fund (within
the meaning of section 6E of the Income Tax Assessment Act 1936) where:
(iii)
(A)
the payment is for the purpose of making provision for superannuation
benefits for the employee (whether or not the benefits are payable to a
dependant of the employee if the employee dies before or after becoming
entitled to receive the benefits); and
(B)
the employee is an exempt visitor to Australia for the purposes of
section 517 of that Act in relation to the year of income in which the
payment is made; or
the making of a payment of money to an RSA (within the meaning of the
Retirement Savings Accounts Act 1997) that is held by the employee; or
© CPA Australia Ltd 2011
7
FBT module 1: FBT fundamentals
(k)
a payment within the meaning of Subdivision AA of Division 2 of Part III of the Income
Tax Assessment Act 1936 that would be an employment termination payment within
the meaning of that Subdivision if:
(i)
subparagraphs (a)(ii), (iii), (iiia) and (iv) of the definition of employment
termination payment in subsection 27A(1) of that Act were omitted;
(ii)
a reference in paragraph (b) of that definition to a superannuation fund included a
reference to a fund of the kind referred to in subparagraph (a)(iii) or (iiia) of that
definition;
(iii)
subparagraphs (b)(I), (ii) and (iii) of that definition were omitted; and
(iv) paragraph (k) of that definition were omitted; or
(ka) an exempt resident foreign termination payment, or an exempt non-resident
foreign termination payment, as defined by subsection 27A(1) of the Income Tax
Assessment Act 1936; or
(kb) a payment to which section 27CAA or 27CE of the Income Tax Assessment Act 1936
applies; or
(m) consideration of a capital nature for, or in respect of:
(i)
a legally enforceable contract in restraint of trade by a person; or
(ii)
personal injury to a person; or
(n)
a payment of an amount that, under any provision of the Income Tax Assessment Act
1936, is deemed to be a dividend paid to the recipient; or
(p)
a payment made, or liability incurred, to a person to the extent that the payment or
liability is, by virtue of subsection 65(1A) of the Income Tax Assessment Act 1936,
deemed not be income of the person for the purposes of that Act; or
(q)
a benefit constituted by the conferral of a present entitlement to, or a distribution of,
income or capital to the extent that subsection 271-105(1) of Schedule 2F to the
Income Tax Assessment Act 1936 would prevent the inclusion of the amount or value
of the income or capital in assessable income, assuming that it would otherwise be so
included; or
(r)
anything done in relation to a shareholder in a private company (as those terms are
defined in section 6 of the Income Tax Assessment Act 1936), or an associate of such
a shareholder, that causes (or will cause) the private company to be taken under
Division 7A of Part III of that Act to pay the shareholder or associate a dividend; or
(s)
a loan (within the meaning of section 109D of the Income Tax Assessment Act 1936),
if:
(i)
a dividend is not taken to be paid under that section in relation to the loan, but
would be if section 109N of that Act were disregarded; or
(ii)
an amount is not included, as if it were a dividend, in the assessable income of an
entity under section 109XB of that Act in relation to the loan, but would be if
section 109N of that Act were disregarded.
Some benefits are expressly excluded as fringe benefits and do not give rise to any FBT
liability. From the above definition one discern the following key exclusions:
•
exempt benefits
•
salary or wages
•
most superannuation fund contributions (see below)
•
payments from certain superannuation funds
8
© CPA Australia Ltd 2011
FBT module 1: FBT fundamentals
•
benefits under employee share schemes or trusts, including in respect of individuals
engaged in foreign service, and including certain stapled securities acquired under such
schemes and indeterminate rights
•
payments on termination of employment
•
capital payments for enforceable contracts in restraint of trade
•
capital payments for personal injury
•
payments deemed to be dividends for income tax purposes and loans that comply with the
deemed dividend provisions in Div 7A of ITAA36
•
payments to an associated person to the extent that they are not considered by the
Commissioner to be deductible
•
amounts that have been subject to family trust distribution tax
•
certain distribution entitlements of individual venture capital managers.
The following amounts have been held to be salary and wages (rather than fringe benefits):
•
an allowance paid to employees in place of medical benefits insurance (Tubemakers of
Australia v FCT 93 ATC 4207)
•
payments made to employees for the cost of fares to and from work, regardless of whether
public transport was used (Roads and Traffic Authority of NSW v FCT 93 ATC 4508)
•
retention payments made to a person in consideration of the person providing services for
12 months and paid in addition to normal periodic salary (Dean v FCT 97 ATC 4762).
Benefits provided under an ‘effective’ salary sacrifice arrangement are not salary and wages
and conversely benefits provided under ‘ineffective’ arrangements are salary and wages and
not subject to FBT (TR 2001/10). Also, costs incurred by an employer in administering such
arrangements do not give rise to a fringe benefit (ID 2001/333).
Where a person is being paid their parental leave pay by an employer in accordance with the
Paid Parental Leave Act 2010, the employee can salary sacrifice their parental leave pay for
non-cash remuneration as parental leave pay is salary and wages as defined for FBT purposes
when paid by the person’s employer.
The fundamental elements of the definition of ‘fringe benefit’ are further explained below.
2.2.1 ‘in relation to ...’
The definition of fringe benefit relates to a relationship between an employee and his or her
employer for a particular FBT year.
While benefits can be provided to people other than the employee, or by someone other than
the employer, the concept of fringe benefit requires that there be a relationship of
employer/employee. It is in this context that the rest of the definition has application.
2.2.2 ‘provided during or in respect of a year of tax’
Fringe benefits liability is calculated over a year (the FBT year). A fringe benefit for a particular
year means a fringe benefit provided during that year or in respect of that year of tax. The FBT
year runs from 1 April to 31 March.
© CPA Australia Ltd 2011
9
FBT module 1: FBT fundamentals
2.2.3 ‘provided to an employee or to an associate of the employee’
Very often benefits are provided to the employee, but a fringe benefit can also arise if a benefit
is provided to an associate of the employee.
An employee
There have been a number of recent cases that challenged the ATO’s interpretation of this
component of the definition. The most important decision was that of the Federal Court in
Indooroopilly Children Services (Qld) Pty Ltd v Commissioner of Taxation (subsequently
confirmed by the Full Federal Court) which was considered a test case for the principle
contained in the decision of Essenbourne v Federal Commissioner of Taxation.
In Essenbourne’s case it was noted that for a fringe benefit to arise, there is a requirement
under the FBTAA that the particular employee to whom the benefit is provided be identified.
This may not be possible where benefits are provided indirectly to a group of employees
through a discretionary trust.
The Indooroopilly case was concerned with employee benefit trusts and the ATO’s position that
fringe benefits tax applied to the amount contributed by the employer to the trust. The argument
that was made against this position was that the failure to identify ‘an employee’ that will benefit
from the trust, which is a necessary element of the requirement of a fringe benefit, results in no
fringe benefit arising.
The Federal Court (affirmed by the Full Federal Court on appeal) upheld the position in
Essenbourne that no fringe benefit arises unless a particular employee can be identified in
connection with the benefit.
Subsequent to the Indooroopilly decision, the ATO withdrew their position on the application of
FBT to employee entitlement funds (benefit trusts).
In Cameron Brae Pty Ltd v FCT (2006) 63 ATR 488, it was also held that contributions to a nonresident superannuation fund on behalf of 2 employees were not made in respect of their
employment as the contributions provided only an expectancy of a favourable exercise of the
trustee's discretion in their favour.
On the other hand, in Caelli Constructions (Vic) Pty Ltd v FCT (2005) 60 ATR 542 where the
taxpayer paid contributions to an industry redundancy fund on behalf of its employees, the
Federal Court held that each employee to whom a benefit was provided was identified. This was
because the amount of a contribution was fixed by reference to the actual employment of each
employee and the contributions were credited to each employee's ‘Worker's Account’ in the
fund.
In 2007 the ATO released Taxpayer Alert TA 2007/2 to counter the increased marketing of tax
avoidance schemes following the Indooroopilly decision. In TA 2007/2, the ATO note that these
undesirable funds commonly have the following characteristics:
•
The employer agrees to participate in a domestic or offshore entitlement fund, controlled by
a trustee associated with those who market the arrangement.
•
The employer pays contributions to the entitlement fund on the basis that the contributions
are to be set aside to meet entitlements that may arise in the future for employees.
•
The arrangement may be marketed with the claim that the contributions are financed through
a promissory note or loan, or that there may be cash or in-specie payments.
•
The entitlement fund purportedly invests the contributions on behalf of the employees, or
their nominees, for the purpose of meeting entitlements that may arise in the future.
10
© CPA Australia Ltd 2011
FBT module 1: FBT fundamentals
•
The arrangement may be marketed with the claim that the contributions to the entitlement
fund are to be invested in tax-free offshore life insurance bonds. In practice an employer’s
contribution may be returned to the employer via associates.
The Commissioner considers that contributions to such employee entitlement funds may be
non-deductible, or in the case that they are ruled to be deductible, that Part IVA will apply to the
arrangement.
Submissions have been made to the NTLG FBT subcommittee that employer contributions to
staff social clubs should not be subject to FBT as a particular employee cannot be identified in
connection with the benefits. In ATO ID 2007/208 the Commissioner confirms that with respect
to contributions relating to a ‘social club’, at the time the benefit is provided by the employer to
the ‘social club’, the identity of employees is not known with ‘sufficient particularity’, despite the
fact that the social club has been established solely for the benefit of employees of the
employer. It cannot be ascertained at that point in time that there has been a benefit provided in
respect of any particular individual employee. Thus employer contributions to a social club do
not constitute a fringe benefit as they do not relate to a particular employee.
However the Commissioner noted in Taxation Ruling 2010/6 that the issue of bonus units to
employees as part of an employee benefit trust arrangement is a fringe benefit at the time of
issue or transfer, provided the issue of the bonus unit does not create a right to receive salary or
wages (a right to receive salary or wages or bonus income is not a fringe benefit).
The actual term ‘employee’ is defined in the FBTAA to mean a current, future or former
employee. Consequently, a benefit provided to a newly recruited employee, who has not yet
begun work, would be a ‘fringe benefit’. Similarly, a benefit provided to an ex-employee can be
a fringe benefit.
The term ‘current employee’ is defined in section 136 to mean ‘a person who receives, or is
entitled to receive, salary or wages’.
‘Salary or wages’ is defined to mean:
(a)
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; and
(b)
a payment from which an amount must be withheld (even if the amount is not withheld)
under section 12-47 in Schedule 1 to the Taxation Administration Act 1953 where:
(i)
the payment is made to a religious practitioner by a religious institution; and
(ii)
the activity or series of activities for which the payment is made is done by the
religious practitioner as a member of the religious institution.
© CPA Australia Ltd 2011
11
FBT module 1: FBT fundamentals
Table 2.1:
Withholding payments covered
Item
Provision
Subject matter
1
Section 12-35
Payment to employee
2
Section 12-40
Payment to company director
3
Section 12-45
Payment to office holder
4
Section 12-115
Commonwealth education or training payment
5
Section 12-120
Compensation, sickness or accident payment
Essentially then, a current employee is someone who receives assessable income in the form
of payments liable to PAYG withholding under the particular sections indicated above.
A person who does not receive, and is not entitled to receive, salary or wages, but is instead
provided only with non-cash benefits is treated as an employee if, had any benefit been in the
form of cash, that cash would have been salary or wages and that person would have been an
employee.
EXAMPLE
Bill is employed by US Company Inc. (a non-resident), but works in an
Australian office of a subsidiary of that company. ‘Wages’ are paid to Bill into
his account in the USA by US Company Inc. Bill is a resident of Australia for
tax purposes and receives the use of a car for private purposes while he is in
Australia.
Issue
Is Bill an ‘employee’ for FBT purposes?
Answer
Yes. The payments are assessable income to Bill and are subject to
withholding as a payment to an employee under section 12-35. As Bill is in
receipt of a specified withholding payment, he is a current employee for FBT
purposes.
Consequently, the car benefit is provided to an employee, in respect of
employment.
EXAMPLE
Jenny is employed by an international aid organisation in their Singapore
office (she has never worked for this organisation in Australia). Her income is
exempt under section 23AG (income earned in overseas employment). She
receives a number of benefits from her employer.
Issue
Is Jenny an ‘employee’ for FBT purposes?
Answer
No. Although she receives payments of salary and wages, section 12-1(1)
provides an exception from withholding under section 12-35 where the
income is exempt income of the recipient.
12
© CPA Australia Ltd 2011
FBT module 1: FBT fundamentals
(continued)
EXAMPLE
Consequently, the payments are not subject to withholding under any of the
specified provisions and are therefore not ‘salary or wages’ for FBT
purposes. Since Jenny is not receiving salary and wages as defined, she is
not a ‘current employee’ for FBT purposes.
Consequently, the benefits are not provided to an employee, in respect of
employment.
It should be noted that Tax Laws Amendment (2009 Budget Measures No.1) Bill 2009 received
royal assent on 29 June 2009 as Tax Laws Amendment (2009 Budget Measures No.1) Act –
Act No .62 of 2009.
The Bill amends section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), to limit its
scope to foreign employment income derived by Australian resident individuals only in specific
circumstances. It has always been the case and remains so that for the section 23AG
exemption to apply is that the taxpayer be engaged in ‘foreign service’ for a continuous period
of at least 91 days. The term ‘foreign service’ means service in a foreign country as the holder
of an office or in the capacity of an employee. For the purposes of section 23AG an ‘employee’
has its ordinary meaning but specifically includes a person employed by a government,
government authority or international organisation or a member of a disciplined force (which is
intended as a reference to a defence force or peacekeeping force).
The effect of the new amendments are that with effect from the 2009–10 income year, the
section 23AG exemption is restricted to certain aid workers, charitable workers and government
employees as the amended section now specifically provides that foreign earnings are only
exempt under s 23AG if the foreign service is directly attributable to:
•
the delivery of Australia's overseas aid program by the individual's employer;
•
the activities of the individual's employer in operating a developing country relief fund or an
overseas public disaster relief fund;
•
the activities of the individual's employer, where the employer is a prescribed religious or
charitable institution located or pursuing objectives outside Australia which is exempt from
Australian income;
•
the individual's deployment outside Australia by an Australian government (or an authority
thereof) as a member of a disciplined force (i.e. a defence force, including a peacekeeping
force, and a police force); or
•
an activity of a kind specified in regulations.
Therefore employers of individuals whose foreign employment income is not exempt under
s23AG (see above) will be required to comply with the Pay-As-You-Go (PAYG) withholding
rules. Accordingly, employers of individuals whose foreign employment income is not exempt
will be required to comply with the FBTAA in relation to any fringe benefits provided to those
employees.
© CPA Australia Ltd 2011
13
Module 2
Cars and car parking
Contents
Program overview ............................................................................................................................................ 1 Learning objectives................................................................................................................................................................1 Benefits..................................................................................................................................................................................1 Benefits for the organisation ............................................................................................................................... 1 Benefits for the individual .................................................................................................................................... 1 Evaluation of the program......................................................................................................................................................2 Topic 1 – Car benefits...................................................................................................................................... 3 1 Definition of car benefit .......................................................................................................................................................3 1.1 What is a ‘car’? .......................................................................................................................................................3 1.2 When is a car ‘held’? ..............................................................................................................................................4 1.3 What is ‘private use’?..............................................................................................................................................5 1.3.1 Travel on stand-by duty.............................................................................................................................. 6 1.3.2 Travel between two places of business ..................................................................................................... 6 1.3.3 Travel by itinerant workers ......................................................................................................................... 6 1.3.4 Business trips on the way to or from work ................................................................................................. 6 1.4 What does ‘made available’ mean?........................................................................................................................7 1.4.1 Car garaged at employee’s residence ....................................................................................................... 7 1.4.2 Car not at employer’s place of business .................................................................................................... 8 1.4.3 Employee is entitled to use the car for private purposes ........................................................................... 8 1.4.4 Employee is in control of the car and not performing duties ...................................................................... 8 1.4.5 Associate has control of the car or a right to use the car ........................................................................... 8 1.5 Interaction of actual private use and availability for private use .............................................................................9 1.6 Exempt and non-reportable car benefits...............................................................................................................10 1.6.1 Work vehicles........................................................................................................................................... 10 1.6.2 Unregistered cars..................................................................................................................................... 12 1.6.3 No deduction due to PSI provisions ......................................................................................................... 12 1.6.4 No reporting for pooled cars..................................................................................................................... 12 2 Statutory formula method of calculating taxable value .....................................................................................................13 2.1 Statutory formula ..................................................................................................................................................13 2.1.1 Base value ............................................................................................................................................... 13 2.1.2 Statutory percentage................................................................................................................................ 16 2.1.3 Recipient’s payment................................................................................................................................. 18 2.2 Example calculation..............................................................................................................................................20 2.3 Exercise 1 .............................................................................................................................................................22 3 Operating cost method of calculating taxable value .........................................................................................................24 3.1 Operating cost formula .........................................................................................................................................24 3.1.1 Operating costs ........................................................................................................................................ 24 3.1.2 Business use percentage......................................................................................................................... 29 3.2 Example calculation..............................................................................................................................................32 3.3 Exercise 2 .............................................................................................................................................................34 4 Operating cost v statutory formula....................................................................................................................................38 5 Luxury car leases..............................................................................................................................................................39 5.1 Treatment of luxury car leases .............................................................................................................................40 6 Novated leases .................................................................................................................................................................41 7 Associate leases...............................................................................................................................................................43 Car leasing scheme .......................................................................................................................................... 44 8 Exercise 3 .........................................................................................................................................................................46 Topic 2 – Car parking benefits...................................................................................................................... 53 1 Car parking fringe benefits................................................................................................................................................53 1.1 Required elements................................................................................................................................................53 1.1.1 Commercial parking station...................................................................................................................... 53 1.1.2 All-day parking ......................................................................................................................................... 54 1.1.3 One-kilometre radius................................................................................................................................ 54 1.1.4 Primary place of employment................................................................................................................... 54 1.1.5 Car parking threshold............................................................................................................................... 54 1.1.6 Representative fee ................................................................................................................................... 54 1.2 Exercise 4 .............................................................................................................................................................54 1.3 Taxable value .......................................................................................................................................................55 1.3.1 Valuing individual car parking fringe benefits........................................................................................... 55 1.3.2 Methods for calculating the number of car parking benefits provided...................................................... 57 1.4 Exempt benefits ....................................................................................................................................................62 1.5 Car parking expense payment fringe benefits ......................................................................................................63 1.6 Taxable value .......................................................................................................................................................63 2 Exercise 5 .........................................................................................................................................................................64 Appendix......................................................................................................................................................... 66 Appendix 1: Fuel expenses declaration...............................................................................................................................66 Suggested answers ....................................................................................................................................... 67 FBT module 2: Cars and car parking
Topic 1 – Car benefits
1 Definition of car benefit
Individual car benefits arise on a particular day, where a car is held by an employer or an
associate of an employer (or provided under an arrangement between the provider and a third
party) and the car is either:
•
actually used for private purposes by an employee (or an associate of the employee)
on that day or
•
is taken to be available for private use by a particular employee (or associate of the
employee) on that day.
Thus, for each employee, an employer can provide anywhere between zero and 365 ‘car
benefits’ each FBT year.
This raises some important questions:
•
What is a ‘car’?
•
In what circumstances is a car ‘held’ by an employer or associate of an employer?
•
What is private use?
•
What does ‘made available’ mean?
1.1 What is a ‘car’?
Only benefits provided in respect of a ‘car’ are covered by this category of benefit.
‘Car’ is defined in the FBT Act as:
a motor vehicle (including a vehicle known as a four wheel drive vehicle), being:
(a)
a motor car, station wagon, panel van, utility truck or similar vehicle, designed to carry
a load of less than 1 tonne; or
(b)
any other road vehicle designed to carry a load of less than 1 tonne or fewer than 9
passengers;
but does not include a motor cycle or similar vehicle.
A car does not include a motor cycle or a four-wheeled motor cycle of the sort used on farms
(MT 2021).
Also, a car that has been destroyed as a result of a natural disaster is not considered to be a
‘car’ for purposes of s 136 from the date of the natural disaster (ATO Interpretative Decision
ID 2011/28).
© CPA Australia Ltd 2011
3
FBT module 2: Cars and car parking
WARNING
If a benefit is provided in respect of a vehicle that is not a ‘car’ as defined, a
car benefit cannot arise, but a residual benefit may arise. This would apply to
goods-carrying vehicles of more than one tonne capacity and vehicles such
as buses with a capacity of nine or more passengers.
‘Panel van’ refers to vehicles with a front like a normal car and an enclosed goods-carrying
compartment at the rear. Few of these are made now. Note that vans such as a Toyota Hi-Ace
and a Ford Transit Van are not ‘panel vans’, but may be ‘cars’ if they are designed to carry a
load of less than one tonne or fewer than nine passengers.
The Minutes of the NTLG FBT Subcommittee meeting on 13 August 2009 note that it is not
uncommon for employers to purchase a cab/chassis utility truck designed to carry a load of
one tonne or more and fit that cab/chassis with a work specific tray. In some cases these work
specific trays and/or other specifications reduce the carrying capacity of the vehicle to less than
one tonne. This raises the question as to whether the private use of that vehicle results in the
provision of a car fringe benefit or a residual fringe benefit and if a car fringe benefit whether the
work specific tray constitutes part of the cost price of the car.
In response to these questions the Tax Office acknowledged that where work specific trays are
fitted to vehicles, then as stated at paragraph 12 of MT 2024, the vehicle’s design as expressed
through its designed load capacity is only ascertained after the body has been fitted to the
vehicle. The ATO stated that where, after fitting of specific trays/body, the load capacity is found
to be less than one tonne in accordance with the methodology set out in MT 2024, the vehicle
would be classed as a ‘car’. Accordingly, an employer could use the statutory formula method.
However, the Tax Office reminded members of the NTLG FBT Subcommittee that the deeming
provisions contained in the statutory formula method would operate where the ‘car’ was
garaged or kept at or near the employee’s residence so that, notwithstanding there may be
significant business use during the day, there will nonetheless be a car fringe benefit, for
example, on each day the car is garaged or parked at the employee’s home.
The ATO outlined in Taxation Ruling MT 2024 that the carrying capacity of a vehicle is
determined by taking the gross vehicle weight as specified in the compliance plate by the
manufacturer (essentially the maximum all-up loaded weight), and reducing it by the basic kerb
weight of the vehicle. ‘Basic kerb weight’ refers to the weight of the vehicle with a full tank of
fuel, oil and coolant, together with spare wheel, tools and installed options (it does not include
the weight of goods or occupants).
1.2 When is a car ‘held’?
For a car benefit to arise, the car must be ‘held’ by the provider of the benefit. This will usually
be the employer, but it can be an associate or a third party under an agreement with the
employer or associate.
A car is ‘held’ by a person if the car is:
•
owned by the person
•
leased by the person
•
otherwise made available to the person.
4
© CPA Australia Ltd 2011
FBT module 2: Cars and car parking
A car held under a hire-purchase arrangement would be regarded as owned by the purchaser
from the time the contract is entered into.
A car could also be held if it was acquired under a hire agreement from a hire company for a
period of time.
Cars hired under short-term arrangements are not ‘held’. As a result, the hiring of a taxi, for
example, would not result in the taxi being ‘held’. In the ATO’s view, short-term hire represents
a period that does not exceed 12 weeks where the vehicle is not subject to any successive hire
arrangements.
A car can be ‘held’ by more than one person. However, a car benefit only arises when the other
requirements are met. That is, when the car is provided to an employee for his or her private
use.
XYZ Manufacturing Pty Ltd leases a car from a finance company. The
company lends the car to XYZ Retail Pty Ltd which provides the car to the
spouse of an employee for private use.
EXAMPLE
Issue
Is the car held by either company and does either company provide a car
benefit?
Answer
As XYZ Manufacturing leases the car, it is ‘held’ by that company. As the car
is otherwise made available to XYZ Retail, the car is also ‘held’ by that
company.
However, as XYZ Manufacturing does not provide the car to an employee or
associate for private use, no car benefit is provided by that company. XYZ
Retail does provide the car to an associate of an employee, so that company
provides a car benefit.
1.3 What is ‘private use’?
A car benefit can arise if there is private use of the vehicle by an employee or associate of an
employee.
‘Private use’ is defined in the FBT Act to mean:
… in relation to a motor vehicle, in relation to an employee or an associate of an employee,
means any use of the motor vehicle by the employee or associate, as the case may be, that
is not exclusively in the course of producing assessable income of the employee.
‘Producing assessable income’ includes:
(a)
gaining assessable income; or
(b)
carrying on a business for the purpose of gaining or producing assessable income.
Consequently, use of a car by an employee in carrying out his or her employer’s business is not
private use. In addition, use of the car by the employee in carrying on a business in his or her
spare time would not be private use as the car will be used in producing assessable income of
the employee.
© CPA Australia Ltd 2011
5
FBT module 2: Cars and car parking
As a general rule, travel from work to home is regarded as private use. In its Ruling MT 2027
the ATO has outlined certain exceptions to this rule.
1.3.1 Travel on stand-by duty
Travel to work which is required of an employee on stand-by duty may not be private use of a
vehicle. It will not be private if the employee is effectively required to start work prior to leaving
home for the place of work. For example, an on-call computer technician who is required to
provide advice to other workers over the phone, and who needs to travel to work as a result,
has commenced work before travelling to work. This trip to and from the place of work is not
private use.
On the other hand, travel by a stand-by pilot, who does not commence work before arriving at
the place of work, would be undertaking private use of a car in travelling to work.
1.3.2 Travel between two places of business
Generally, travel between two places of business will not be private use, provided one of the
places is not the home of the employee.
If one of the places is the home of the employee, the matter is not entirely clear. Travel to and
from the home may be accepted as business-related if the home is a place of business. That is,
if the home amounts to business premises rather than merely containing a home office. While a
home would rarely, if ever, be a place of employment, it may be a ‘base of business operations’
– such as the home of a painter, plumber or electrician. Such workers who travel directly to the
job may be regarded as undertaking business travel where that is part and parcel of the incomeproducing activities.
1.3.3 Travel by itinerant workers
Travel from an employee’s home may constitute business travel where the nature of the office
or employment is inherently itinerant. The travel may be regarded as business travel where the
nature of the office or employment is such that:
(a)
it is inherently itinerant;
(b)
travel is a fundamental part of the employee’s work;
(c)
it is impractical for the employee to perform the duties without the use of a car;
(d)
the terms of employment require the employee to perform duties at more than one
place of employment;
(e)
the nature of the job itself makes travel in the performance of duties essential; and
(f)
it can be said of the employee that he or she is travelling in the performance of the
employment duties from the time of leaving home.
This would include commercial travellers, government inspectors and teachers engaged in
assisting pupils at a number of different schools. In these cases, occasional trips to the office
(say, once a week) would be regarded as incidental to the itinerant travel.
1.3.4 Business trips on the way to or from work
Office workers such as doctors, solicitors and accountants may travel to a client’s place of
business on the way to work. Whether this is business travel or not is a matter of some doubt.
6
© CPA Australia Ltd 2011
FBT module 2: Cars and car parking
However, the ATO has accepted that:
the total journey from the employee’s home to the client’s premises and on to the office
should be accepted as business travel. This approach can be adopted where:
•
the employee has a regular place of employment to which he or she travels habitually;
•
in the performance of his or her duties as an employee, travel is undertaken to an
alternative destination which is not itself a regular place of employment (that is, this
approach would not apply, for example, to a plant operator who ordinarily travels
directly to the job site rather than calling first at the depot, or to an employee of a
consultancy firm who is placed on assignment for a period with a client firm); and
•
the journey is undertaken to a location at which the employee performs substantial
employment duties.
Where an employer keeps a ‘pool’ of cars for business use and on rare
occasions staff take a car home in order to proceed on a business trip in the
morning, the ATO will accept that all the use is business-related where an
appropriate policy on private travel exists in respect of the ‘pool’ of cars.
TIP
1.4 What does ‘made available’ mean?
There are two provisions which deem a car to be available for private use by an employee if
certain conditions are met. These provisions deal with cars which are garaged at an employee’s
residence and cars which are not located at the employer’s place of business.
1.4.1 Car garaged at employee’s residence
Where a car, held by a provider, is garaged at the employee’s residence, it is automatically
taken to be available for private use by the employee or associate, regardless of whether it
actually is used for private purposes.
EXAMPLE
AB Consulting Pty Ltd leases a car which is used by one of its mobile
consultants, Jim, who travels in the course of his work day. The car is
garaged each night at Jim’s home. Jim does not actually use the car for
private use.
Issue
Is the car taken to be available for private use?
Answer
As the vehicle is garaged at Jim’s residence, it is taken to be available for
private use.
This provision does not apply to emergency service vehicles – ambulances, police vehicles
and firefighting service vehicles – provided they are visibly marked as such and are fitted with:
•
a flashing warning light; and
•
a horn, bell or alarm for audible warning of the approach of an emergency service
vehicle, which makes sounds of varying amplitude, tone or frequency (an ordinary car
horn will not satisfy this requirement).
© CPA Australia Ltd 2011
7
FBT module 2: Cars and car parking
1.4.2 Car not at employer’s place of business
A car is taken to be available for the private use of an employee or associate when it is not at
the business premises of the employer or associate of the employer (or a third party, under an
arrangement with the employer or associate of the employer) in certain circumstances. These
circumstances are outlined below.
1.4.3 Employee is entitled to use the car for private purposes
If the employee is entitled to use the car for private purposes, it will be taken to be available for
private use by the employee. This can be negated by a prohibition by the employer on private
use of the vehicle. However, this will be ignored, and the car taken to be available for private
use, if the employer does not ‘consistently enforce’ the prohibition.
A consistently enforced prohibition would require a situation where an express prohibition had
been made by the employer in clear and unequivocal terms. Employees would also need to be
made aware that the prohibition was genuine and would be reinforced, if necessary, by
disciplinary measures for its breach. Consistent enforcement could comprise regular checks of
odometer readings against business kilometres claimed to have been travelled by employees.
In short, it would not be sufficient for an employer to issue the instruction either on the general
understanding that it would be honoured or without a system of review to detect and deter
breaches (however, see 1.4.1).
If the car is in fact used for private use, there will be a car benefit despite any prohibition on
private use.
1.4.4 Employee is in control of the car and not performing duties
If the employee has custody or control of a car, and is not at that time performing the duties of
his or her employment, the car is taken to be available for private use of that employee.
Consequently, if the employee drives the car at any time, and is not undertaking his or her
duties, the car is taken to be available on that day for private use.
Usually, an employee would be regarded as having custody and control even if he or she is not
physically with the car. For example, if an employee leaves the car at an airport car park while
travelling interstate, this person would still be regarded as being in custody and control.
It seems that, essentially, the custody and control is with the person who is in possession of the
keys. If an employee were to go away on an overseas holiday, a car benefit would not arise if
the employer collected the keys before the employee went away and kept them until the
employee’s return – provided the car was not garaged at the employee’s residence.
It is possible that the employee may not have custody and control while the car is being
repaired at a car repair workshop.
1.4.5 Associate has control of the car or a right to use the car
If an employee is entitled to use the car, or has custody or control of the car, it is automatically
taken to be available for private use.
Consequently, any use of the car by an associate, or entitlement to do so, automatically gives
rise to private use and a car benefit will arise.
8
© CPA Australia Ltd 2011
FBT module 2: Cars and car parking
When measuring the availability for private use of a car, two critical aspects
are where the car is garaged, and who holds the keys to the car. Both
aspects will determine availability for private use.
TIP
Recently in the case Jetto Industrial Pty Ltd v. Federal Commissioner of Taxation [2009]
AATA 374, the AAT found that the car provided to the director was garaged near the
employee’s residence. In such circumstances a fringe benefit arises whether or not the vehicle
is actually applied to private use by the employee. The garaging of the car at the employee’s
place of residence and its availability for their private use are determinative factors.
In this case the applicant purchased a new Lexus LX470 sedan (the car) on 7 June 2004,
paying a total price of $119,000. The car has at all material times been garaged or kept at or
near 22 Bungoona Avenue, Elanora Heights, New South Wales (22 Bungoona Avenue), the
applicant's principal place of business.
The residential address of Mr Ian Hunter, who has been the sole director of the applicant since
its registration, has also at all material times been 22 Bungoona Avenue, Elanora Heights.
The AAT noted that the availability of a car for private use of the employee is taken by s 7(1) of
the FBTA Act to constitute a benefit. Furthermore where a car is ‘garaged or kept at or near a
place of residence of the employee’, s 7(2) deems the car to be available at that time for the
private use of the employee.
The AAT accepted that 22 Bungoona Avenue was at all relevant times Mr Hunter's place of
residence and that the car was garaged at that address. The applicant submitted that it was
garaged or kept in a garage attached to suite 1, which is separate from Mr Hunter's place of
residence and shares only a dividing wall with it.
The AAT acknowledged that based on this argument it might be concluded that the car was not
kept ‘at’ the place of residence. However the AAT considered it equally plain that it was garaged
‘near’ Mr Hunter's residence. The requirements for the activation of the deeming provision in
s 7(2) was therefore viewed by the AAT as having been satisfied and that the deemed
availability of the car for Mr Hunter's private use should be taken to constitute a benefit within
the meaning of s 7(1).
© CPA Australia Ltd 2011
9
Module 3
Entertainment
Contents
Program overview ............................................................................................................................................ 1 Learning objectives................................................................................................................................................................1 Benefits..................................................................................................................................................................................1 Benefits for the organisation
1 Benefits for the individual
1 Evaluation of the program......................................................................................................................................................2 Topic 1 – Entertainment .................................................................................................................................. 3 1 Introduction .........................................................................................................................................................................3 1.1 Entertainment .........................................................................................................................................................3 Topic 2 – What is not entertainment? ............................................................................................................ 7 2 What is not entertainment?.................................................................................................................................................7 2.1 Sustenance v Entertainment...................................................................................................................................7 2.2 Travelling employees..............................................................................................................................................8 Note – Overtime meals
10 2.3 Promotional events ...............................................................................................................................................10 2.4 Seminar expenses ................................................................................................................................................12 2.4.1 Exercise 1
15 2.5 In-house dining facilities .......................................................................................................................................17 2.6 Exercise 2 .............................................................................................................................................................18 Topic 3 – FBT concepts................................................................................................................................. 20 3 Concept for FBT purposes................................................................................................................................................20 3.1 Meal entertainment ...............................................................................................................................................21 3.1.1 Provision of alcohol
21 3.1.2 Social events
22 3.1.3 Sponsorship
22 3.2 Entertainment facility leasing expenses................................................................................................................23 3.3 Tax-exempt meal entertainment ...........................................................................................................................24 3.3.1 Salary packaging opportunities
24 Topic 4 – FBT valuation................................................................................................................................. 26 4 Valuation concepts ...........................................................................................................................................................26 4.1 Entertainment that is not ‘meal entertainment’ .....................................................................................................26 4.2 Property consumed on business premises...........................................................................................................27 4.3 Minor benefits .......................................................................................................................................................27 4.4 Application of exemptions to Christmas parties....................................................................................................30 4.4.1 Christmas parties on the employer’s premises
30 4.4.2 Christmas parties off the employer’s premises
32 4.5 Taxable value of meal entertainment....................................................................................................................34 4.5.1 ‘Actual’ method of calculating taxable value
34 4.5.2 50/50 split method of calculating taxable value
35 4.5.3 12 week register method of calculating taxable value
36 4.6 Taxable value of entertainment facility leasing expenses.....................................................................................39 4.6.1 ATO Interpretative Decision...............................................................................................................................39 ATO ID 2009/45
39 4.7 Taxable value of tax-exempt body entertainment.................................................................................................45 4.8 Exercise 3 .............................................................................................................................................................46 Topic 5 – Income tax, GST and other matters ............................................................................................. 48 5.1 Income tax .....................................................................................................................................................................48 5.1.1 Cost of providing fringe benefits ........................................................................................................................48 5.1.2 Cost of providing certain specified and exempt benefits ...................................................................................48 5.2 GST credits for entertainment expenses .......................................................................................................................49 5.3 Disclosure on the FBT return and other matters............................................................................................................50 Topic 6 – Exercise 4....................................................................................................................................... 53 Appendices..................................................................................................................................................... 54 Appendix 1: Entertainment Matrix........................................................................................................................................54 Appendix 2: Taxation Ruling TR 97/17 ................................................................................................................................56 Appendix 3: Taxation Ruling TR 97/17A – Addendum ........................................................................................................80 Suggested answers ....................................................................................................................................... 86 FBT module 3: Entertainment
Topic 1 – Entertainment
1 Introduction
The provision of entertainment to employees, associates and third parties has implications for
income tax, fringe benefits tax (FBT) and goods and services tax (GST). The concept of
entertainment is defined in the income tax system and entertainment itself is not a separate
benefit category in the FBT system.
The first step to determine the tax implications of expenditure is to identify whether or not that
expenditure constitutes entertainment. Once this has been identified, the income tax, FBT and
GST implications can be determined.
Prima facie, entertainment is not deductible for income tax purposes; however, there are some
exemptions to this rule which are outlined in Topic 2 of this module. The main exemption is
where FBT has been paid on the value of the entertainment and, in this instance, the
expenditure becomes deductible. Both the income tax deductibility implications and any
entitlement to input tax credits are discussed in Topic 5 of this module.
For FBT purposes, benefits provided to employees or associates of employees that satisfy the
definition of a ‘fringe benefit’ contained in section 136 of the Fringe Benefits Tax Assessment
Act (1986) (FBT Act) may fall into one of several different categories of fringe benefits and be
taxed according to the rules for that particular benefit category.
However, where the entertainment is ‘meal entertainment’, an employer can elect to calculate
the taxable value under one of two methods prescribed for meal entertainment. The valuation
methods for FBT purposes are outlined in Topic 4 of this module and are dependent on the
category of benefit that arises.
1.1 Entertainment
‘Entertainment’ is defined according to its meaning in the Income Tax Assessment Act 1997
(ITAA 1997) as follows:
Entertainment means:
•
Entertainment by way of food, drink or recreation; or
•
Accommodation or travel to do with providing entertainment by way of food, drink or
recreation.
The mere provision of food and drink does not necessarily constitute entertainment. The ATO
set out its views in TR 97/17 that an objective analysis of all the circumstances surrounding the
provision of the food or drink is necessary when determining entertainment.
This Ruling has been included in full in Appendix 2 for your reference.
APPENDIX
© CPA Australia Ltd 2011
3
FBT module 3: Entertainment
‘Recreation’ includes participation in sports or pastimes, leisure pursuits such as watching a
play in a theatre or movie in a cinema, harbour cruises, and hiring of entertainers such as
singers and comedians.
Recreation would include recreation and amusement in vehicles, vessels or aircraft (e.g.
joyflights, sightseeing tours; ID 2009/45).
The term ‘entertainment’ itself is not a defined term in the legislation and thus it takes on its
ordinary meaning.
The ATO discusses the need to identify what is ‘entertainment’ and refers to the Macquarie
Dictionary definition which defines it to mean:
a) Agreeable occupation for the mind, diversion or amusement; or
b) Something affording diversion or amusement; or
c) Hospitable provision for the wants of a guest.
In addition the ATO refers to the following quotes of the English decision in Bow and Others v
Heatly (1960) where Lord Justice-Clerk (Lord Thomson) stated that:
entertainment is the gathering together of a number of people to carry out some activity or to
be present at some activity presumably with a view of enjoying themselves.
In the same case, Lord Patrick stated that:
Parliament … left the term ‘entertainment’ to receive its meaning in ordinary language, and
that meaning in this connection is ‘amusement’.
The ATO takes the view in TR 97/17 that the above interpretations represent a good view of the
law on what the ordinary meaning of the word ‘entertainment’ is. In determining whether or not
the provision of food and drink will amount to entertainment the decision should be made after
objective analyses of all the circumstances. In particular, the Ruling considers that there are
four critical questions when determining whether entertainment has been provided or not:
Why is the food and drink provided?
For example, food or drink provided for the purposes of refreshment does not generally have
the character of entertainment, whereas food or drink provided in a social situation where the
purpose of the function is for employees to enjoy themselves has the character of
entertainment.
What food and drink is being provided?
For example, when an employer provides morning or afternoon teas or light meals, that food or
drink does not usually confer entertainment on the employee. By contrast, a three-course meal
provided to an employee during a working lunch has the characteristics of entertainment. The
nature of the food itself confers entertainment on the employee.
The existence of alcohol does not automatically result in the provision of entertainment.
However, the ATO’s position is that there would be a very narrow category of circumstances
that would arise where the provision of alcohol is incidental to a larger event or work-related
activity of an employee. This is due to the consumption of alcohol having social connotations
and providing amusement.
An example of when the existence of alcohol would not result in entertainment automatically
would be if an employee is travelling overnight for work purposes and consumes a meal and a
4
© CPA Australia Ltd 2011
FBT module 3: Entertainment
glass of wine at dinner. However, if clients or non-travelling employees were involved, their
portion would more than likely amount to entertainment.
When is the food and drink being provided?
Food or drink provided during work time, during overtime or while an employee is travelling is
less likely to have the character of entertainment. This is because in the majority of these
cases food provided is for a work-related purpose rather than an entertainment purpose. This,
however, depends upon whether the entertainment of the recipient is the expected outcome of
the provision of the food or drink. For example, a staff social function held during work time still
has the character of entertainment.
Where is the food and drink being provided?
Food or drink provided on the employer’s business premises or at the usual place of work of the
employee is less likely to have the character of entertainment. However, food or drink provided
in a function room, hotel, restaurant, café, coffee shop or consumed with other forms of
entertainment is more likely to have the character of entertainment. This is because the
provision of the food or drink is less likely to have a work-related purpose.
Where property is provided to an employee or associate, entertainment will normally only arise
if entertainment occurs soon after the provision of the property and is directly connected with
the provision of the property.
The ATO indicates that while no one of the above four factors is dominant in determining
whether entertainment exists or not, the questions of why and what are generally the most
important.
An employer provides a bottle of whisky to an employee.
Issue
EXAMPLE
Does this amount to entertainment?
Answer
While the provision of alcohol is often entertainment, when unopened bottles
of alcohol are provided to employees, any entertainment will not occur soon
after it is provided but at some later time when it is opened and consumed.
This will not be ‘entertainment’.
However, it will be a property benefit.
The ATO advised in TD 94/55 that the provision of property will not always constitute the
provision of entertainment and that it must be decided on a case by case basis: ‘In particular,
regard should be given to the character of the entertainment to be derived from the item of
property provided.’
In practice, the ATO advised that the timeliness and the connection between the property and
entertainment should be considered, noting the following:
•
Timeliness:
–
entertainment occurs soon after provision of the item of property;
–
the usefulness of the item of property expires after consumption; or
–
the item of property is returned at the completion of use.
© CPA Australia Ltd 2011
5
FBT module 3: Entertainment
•
Direct connection:
There should be a direct connection between the item of property and the entertainment:
–
the entertainment should arise from the use of the item of property;
–
the entertainment is the expected outcome of the provision of the property.
The ATO ruled that entertainment is not provided when an employer provides:
•
bottled spirits
•
groceries
•
games
•
televisions
•
VCRs
•
computers
•
crockery
•
swimming pools
•
gardening equipment.
However, entertainment is provided when an employer provides:
•
theatre tickets
•
hot meals
•
glasses of champagne
•
holiday accommodation
•
hired entertainers
•
hired sporting equipment.
Note that the ATO also regards a voluntary tip provided at a restaurant, café or similar
establishment when paying for the cost of food and drink as entertainment. In these
circumstances, the ATO’s position is that the tip takes on the same character as the food and
drink.
As outlined, the test for determining whether expenditure amounts to entertainment or not is an
objective test that is dependent on a number of factors. Indicators that a level of entertainment
exists are: a social element, amusement for the recipient and people enjoying themselves. The
provision of food and drink in itself does not necessarily result in entertainment being provided.
However, if alcohol is also provided, the ATO view is that there are only rare circumstances
where this would not be considered entertainment.
Before we move on to the next topic, check that you can:
KEY POINTS
6
•
Determine when entertainment is provided.
•
Recognise that the concept of entertainment involves an objective test
that is determined on the facts.
•
Recognise the four questions the ATO reviews when determining whether
or not entertainment has arisen.
© CPA Australia Ltd 2011
FBT module 3: Entertainment
Topic 2 – What is not entertainment?
2 What is not entertainment?
Entertainment can arise where expenditure is purely for social purposes, or for mixed/dual
purposes. For example, entertainment is still taken to have been provided even if business
discussions or transactions occur.
However, there are some important exclusions to the concept of entertainment, where the
existence of a social element may not result in entertainment arising. These are outlined below.
2.1 Sustenance v Entertainment
It is important to remember that there is a difference between something that is sustenance and
something that is beyond sustenance and is entertainment. While entertainment includes food
and drink, there needs to be something more substantial than the provision of sustenance in
order for that food and drink to amount to entertainment.
The ATO advised in IT 2675 that the provision of morning and afternoon tea, both to employees
and visitors to the employer’s premises, does not amount to entertainment. Examples given of
what constitutes morning and afternoon tea include tea, coffee, fruit drinks, cakes and biscuits.
The provision of light meals such as sandwiches and salads also does not amount to
entertainment. However, the more elaborate the meal, the more likely it will be that the
characteristics of entertainment arise. The ATO has distinguished between hot and cold food,
as well as ‘hand food’ or ‘non-hand’ food.
There is no particular point at which a light meal becomes so elaborate that it will become
entertainment. However, in the ATO’s opinion, once alcohol is provided in connection with a
light meal or refreshments, entertainment would generally arise. IT 2675 states that:
Providing alcohol, whether or not it is provided with morning or afternoon tea or at a light
meal, is the provision of entertainment because the consumption of alcohol has social
connotations and therefore provides or affords diversion or amusement.
An employer provides, on their premises, cut sandwiches and orange juice to
employees.
EXAMPLE
This does not amount to entertainment and would constitute sustenance.
© CPA Australia Ltd 2011
7
FBT module 3: Entertainment
2.2 Travelling employees
Generally speaking, food and drink provided to an employee while travelling on business does
not have the character of entertainment and a deduction is available for such expenses. For
FBT purposes, the taxable value of the benefit, whether an expense payment benefit or a
property benefit, would be reduced to nil under the ‘otherwise deductible’ rule.
However, when an employee travelling for work purposes entertains a client, the client portion
can be entertainment. For example, if an employee takes a client out for dinner while travelling
for business purposes, the cost of the meal would need to be apportioned and the employee
portion would not amount to entertainment but the client portion would.
In the FBT States and Territories Industry Partnership meeting on 20 March 2007 the ATO was
asked for guidance regarding the classification of certain expenditure as entertainment in the
following circumstance. The deductibility of the expenditure is required in order to determine
whether the ‘otherwise deductible’ rule would operate to reduce the taxable value of the fringe
benefit to nil.
An employee attended a work conference overseas. The itinerary:
Tuesday – depart Australia
Wednesday – arrive overseas country
Thursday – free day
Friday – conference starts
Saturday – conference finishes
Sunday – free day
Monday – free day
Tuesday – depart overseas country
Wednesday – arrive Australia
Return airfare $1,500, accommodation $1,400, meals etc. $700.
During the ‘free days’ the employee is at liberty to undertake private activities.
The ATO stated that the facts of the case would be relevant and would need to be dealt with in
a Private Binding Ruling. However, the ATO stated that guidance was provided in TR 98/9:
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 expense as wholly incurred in gaining assessable
income.
The following examples from this Taxation Ruling were also provided by the ATO.
EXAMPLE 1
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 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.
8
© CPA Australia Ltd 2011
FBT module 3: Entertainment
EXAMPLE 2
EXAMPLE 3
Jenny, a doctor, was holidaying in Cairns when she became aware of a workrelated seminar on the current treatment of cancer patients. The cost of the
half-day seminar was $200. Jenny is able to claim a deduction for the cost of
the seminar because it is directly attributable to an income-earning purpose.
However, no part of her airfare to Cairns or her holiday accommodation is an
allowable deduction.
Francesco, a paediatrician, has two 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
paid another $2,000 for accommodation, meals and car hire for the sevenday holiday in Thailand.
Francesco is allowed a deduction of $1,500 for the conference cost and the
accommodation and meals expenses at the conference. Only half of the
return air fare ($500) is allowed as the expense was incurred for two equal
purposes, one income-earning and the other private. The other expenditure
of $2,000 relating to the holiday in Thailand is private in nature and not
allowable as a deduction.
The ATO in TR 97/17 also considers numerous circumstances where an employee consumes
food or drinks while travelling for work. A number of these examples are included below.
EXAMPLE
An employee of an advertising agency located in Perth has travelled to
Melbourne to finalise a campaign. While staying overnight in Melbourne, the
employee dines with a Sydney client who is also in Melbourne for business
purposes.
As both the employee and the Sydney client are travelling, the meals do not
amount to meal entertainment. This is the case irrespective of who pays for
the meals. The employer is entitled to a deduction under section 8-1 of the
ITAA for the cost of the meal or meals, as section 32-5 is not applicable. No
FBT is payable as the ‘otherwise deductible’ rule applies to reduce the
taxable value of the employee’s meal to nil. No fringe benefit is provided to a
client where the employer pays for that client’s meal.
© CPA Australia Ltd 2011
9
Module 4
Smart solutions for
salary packaging
Contents
Program overview ............................................................................................................................................ 1 Learning objectives................................................................................................................................................................1 Benefits..................................................................................................................................................................................1 Evaluation of the program......................................................................................................................................................2 Topic 1 – Introduction to salary packaging ................................................................................................... 3 1.1 Background to salary packaging......................................................................................................................................3 1.2 What is salary packaging?...............................................................................................................................................3 1.2.1 How is the package determined? ........................................................................................................................3 1.3 What are the benefits of salary packaging?.....................................................................................................................4 1.4 Exempt benefits ...............................................................................................................................................................6 1.4.1 Superannuation ...................................................................................................................................................6 1.4.2 Laptop computers ................................................................................................................................................8 1.4.3 Mobile phones ...................................................................................................................................................10 1.4.4 Briefcases, protective clothing, calculators, tools of trade or electronic diaries.................................................10 1.4.5 Subscriptions to trade and professional journals, airport lounge memberships,
membership of corporate credit card scheme ...................................................................................................11 1.4.6 Taxi travel ..........................................................................................................................................................11 1.4.7 Parking on employer’s premises (small business).............................................................................................11 1.4.8 Recreational facilities or child care facilities on employer’s premises ...............................................................11 1.4.9 Package example – exempt benefits.................................................................................................................11 1.5 Concessionally taxed benefits .......................................................................................................................................12 1.5.1 Motor vehicles....................................................................................................................................................12 1.5.2 Meal entertainment ............................................................................................................................................13 1.5.3 In-house benefits ...............................................................................................................................................14 1.5.4 Example package – concessional benefits........................................................................................................14 1.6 Fully taxed benefits........................................................................................................................................................16 1.6.1 Home mortgage .................................................................................................................................................16 1.6.2 Exercise 1 ..........................................................................................................................................................17 1.6.3 Employee contributions .....................................................................................................................................18 1.7 ‘Otherwise deductible’ benefits ......................................................................................................................................20 1.8 Exempt employers .........................................................................................................................................................21 1.9 Rebatable employers.....................................................................................................................................................23 1.10 Packaging living-away-from-home allowance..............................................................................................................24 1.11 Superannuation guarantee ..........................................................................................................................................30 1.12 Payroll tax and workers compensation premiums .......................................................................................................30 1.13 End-of-year review and adjustments ...........................................................................................................................31 Topic 2 – Effective salary sacrifice arrangements...................................................................................... 34 2.1 Income or benefit ...........................................................................................................................................................34 2.2 Benefits for associates of the employee ........................................................................................................................35 2.3 Objections to salary packaging......................................................................................................................................36 2.3.1 Exercise 2 ..........................................................................................................................................................36 2.4 The ATO ruling ..............................................................................................................................................................37 2.4.1 Derivation of income ..........................................................................................................................................37 2.4.2 Ineffective SSA ..................................................................................................................................................37 2.4.3 Effective SSA.....................................................................................................................................................38 2.4.4 Contracts ...........................................................................................................................................................39 2.4.5 Awards and industrial instruments.....................................................................................................................39 2.4.6 Residual entitlement to salary or benefits..........................................................................................................39 2.4.7 Examples ...........................................................................................................................................................40 2.4.8 Bonuses.............................................................................................................................................................41 2.4.9 Dealing with leave..............................................................................................................................................42 2.4.10 Salary packaging long-service awards ............................................................................................................44 2.5 Requirements for effective salary packaging.................................................................................................................44 Topic 3 – Packaging example ....................................................................................................................... 46 3.1 Packaging example .......................................................................................................................................................46 Topic 4 – Exercise 3....................................................................................................................................... 48 4.1 Exercise 3 ......................................................................................................................................................................48 Appendices..................................................................................................................................................... 50 Appendix 1...........................................................................................................................................................................50 TR 2001/10 .................................................................................................................................................................50 TR 2001/10A – Addendum .........................................................................................................................................73 Appendix 2...........................................................................................................................................................................75 Suggested answers ....................................................................................................................................... 76 FBT module 4: Smart solutions for salary packaging
Topic 1 – Introduction to salary packaging
1.1 Background to salary packaging
Fringe benefits tax (FBT) was introduced on 1 July 1986. It broadly taxes employers in respect
of (mostly) non-cash benefits provided to employees in addition to, or in place of, cash salary. It
was introduced to overcome the real or perceived unfairness and loss to the revenue from the
practice of providing (tax-free) fringe benefits rather than salary.
The ability to provide tax-free benefits was driving a process of conversion of cash salary
(subject to marginal rates) to benefits that were not salary and wages (largely tax-free prior
to FBT).
Since the advent of FBT, there remains an attraction in packaging certain benefits which are
taxed less heavily than cash salary. In addition, employees of exempt employers may be able to
access substantial benefits in packaging most benefits, whether concessionally taxed or not.
In dealing with benefits, the Fringe Benefits Tax Assessment Act 1986 (FBT Act) will take
precedence over the income tax system in respect of fringe benefits and exempt benefits. This
is achieved by specifically providing that if any fringe benefit or exempt benefit gives rise to
assessable income, that income will be exempt under section 23L or paragraphs 26(e)(iv) or
26(e)(v) of the Income Tax Assessment Act 1936 (ITAA 1936).
1.2 What is salary packaging?
Salary packaging is an approach to remuneration that involves the provision of both cash salary
and non-cash benefits, typically with considerable flexibility for the employee to choose the
inclusions in the package.
1.2.1 How is the package determined?
Typically, the parameters of the package will be set by reference to a ‘total cost of employment’
(TEC). That is, the total cost to the employer of the remuneration package is set at a certain
amount. The employee is then free, within certain bounds, to take benefits which may be
concessionally taxed, thus reducing the amount of cash salary that is taxed at marginal rates.
The reduction in cash salary for a given benefit will depend on the cost of that benefit to the
employer, including any FBT liability, thus maintaining the TEC.
Where cash salary varies, payroll tax and workers compensation premiums may vary. Often this
is excluded from the package calculation.
For benefits that involve acquisitions that are GST creditable, the employer is entitled to a GST
credit. Many employers pass this on to the employee in the package. This ensures an equitable
outcome for the employee as the higher FBT gross-up rate effectively recoups the GST credit.
© CPA Australia Ltd 2011
3
FBT module 4: Smart solutions for salary packaging
EXAMPLE
Greg is offered employment with a firm that allows benefits to be packaged.
His package represents a TEC of $140,000 plus 9% superannuation
($12,600). Greg is considering packaging a car and topping up the super
contributions to $20,000.
Issue
How will Greg’s decision affect his remuneration?
Answer
Cash salary
Superannuation
Car (novated lease)
FBT (say)
GST credit
Total cost
Salary only
$140,000
$12,600
$152,600
Salary and benefits
$114,563
$20,000
$15,000 (operating costs)
$4,400
($1,363)
$152,600
This analysis is called a ‘remuneration summary’.
1.3 What are the benefits of salary packaging?
There can be considerable financial incentives to package non-cash benefits, even where the
FBT cost is deducted from salary. Where benefits are exempt or concessionally taxed (so that
the effective tax rate is less than 46.5%), employees on the highest marginal rate would realise
a benefit in packaging an item, compared with purchasing an item from after-tax salary.
The lower resulting salary level may increase the employee’s entitlement to means tested
benefits such as Family Tax Assistance. Liability to charges such as the Child Support levy may
likewise be reduced by taking exempt benefits in preference to cash salary. (Although
reportable fringe benefits amounts are added to salary for most means test and liability
purposes, exempt benefits are not included in reportable fringe benefits.)
By putting the decision of what benefits and how much salary to take in the hands of
employees, you may add to employee satisfaction and motivation.
As a result of the changes to the individual marginal tax rates over recent financial years,
including the changes with effect from 1 July 2008, the attractiveness of salary packaging for a
large number of employees has diminished. The income level at which the top marginal tax rate
for individuals applies increased from $95,000 to $150,000 on 1 July 2006, which resulted in
many existing salary packages ceasing to be effective. From 1 July 2008, the increased income
level at which the top marginal tax rate applies is $180,000, creating a further gap between the
amount of FBT which applies to all fringe benefits and the number of individuals who incur this
level of tax on their personal income.
The top marginal tax rate, and accordingly the FBT rate, also decreased from 48.5% to 46.5%.
With the threshold change to $180,000, approximately 2% of Australia’s population is now
subject to a rate of income tax as high as the FBT rate.
4
© CPA Australia Ltd 2011
FBT module 4: Smart solutions for salary packaging
The changes do not remove the effectiveness of salary packaging, but they do create the need
for salary packages to be reviewed, both by employees and employers. It is important for
employers to ensure that no additional costs are being incurred unnecessarily, due to the
changes to the income tax and FBT rates. For employees, it is important to ensure that an
existing salary package is not resulting in a higher tax position than necessary.
The benefits of salary packaging remain for arrangements that involve the following:
•
An exempt or rebatable employer for FBT purposes.
•
The packaging of exempt fringe benefits.
•
The packaging of concessionally taxed benefits, for certain employees only.
EXAMPLE
Greg is offered employment with a firm that allows benefits to be packaged.
His package represents a TEC of $140,000 plus 9% superannuation
($12,600). Greg is considering packaging a car and topping up the super
contributions to $20,000.
Issue
How will Greg’s decision affect his overall after-tax situation?
Answer
Salary only
Package
$152,600
Employer super
$12,600
Additional super
Car benefit
FBT (say)
GST credit
Cash salary
$140,000
Tax on salary
($41,850)
(including Medicare levy)
After-tax outlays $22,400 = ($15,000 + 7,400)
Net after-tax salary
$75,750
Salary and benefits
$152,600
$12,600
$7,400
$15,000 (operating costs)
$4,400
($1,363)
$114,563
($32,056)
$82,507
Compared with paying for the car lease and paying the additional super
out of after-tax salary, Greg is $6,803 better off packaging these benefits.
Note that the additional super contribution of $7,400 will be subject to a
15% superannuation contributions tax.
This analysis is called a ‘package comparison’.
The amounts deducted from the package for each benefit equals the
actual outlays by the employer in providing that benefit. These amounts
are called the ‘charge to the package’ for that benefit.
© CPA Australia Ltd 2011
5
FBT module 4: Smart solutions for salary packaging
1.4 Exempt benefits
Clearly, exempt benefits are the most tax-effective benefits to package where the employer is
liable to pay FBT. See the section below for exempt employers.
Where a benefit is exempt from FBT, sacrificing salary will have the effect of saving income tax
on the salary foregone, which will not be offset by FBT.
Where the exempt benefit would be deductible to the employee, packaging does not provide a
further tax benefit, but may provide a cash flow benefit. The following examples assume that the
benefit is not deductible.
1.4.1 Superannuation
Superannuation is an attractive benefit to package as it is excluded from the definition of ‘fringe
benefit’ so there is no FBT payable on superannuation contributions made by the employer to a
complying superannuation fund for the benefit of an employee under a salary package.
However, since 7 September 2000, superannuation contributions made for the benefit of an
associate of an employee are subject to FBT; consequently, there would be no tax benefit in
sacrificing salary for superannuation contributions for a spouse.
Salary sacrificed superannuation contributions are subject to superannuation contributions tax
(15%) up to a concessional contributions cap that applies to each individual. This is
considerably less than the maximum 46.5% payable on salary.
By way of comparison, personal non-concessional (previously undeducted) contributions are
not subject to contributions tax as they are contributed from after-tax funds.
The Government has introduced some significant changes to the way superannuation is taxed
in Australia. Outlined below are some of the more significant changes that affect salary
packaging for employees and employers:
•
From 1 July 2007, deductions are no longer limited by age or the amount contributed. An
employer can claim a deduction for the full amount contributed for an employee in a financial
year. The same now applies for self-employed persons and other eligible persons.
•
Deductible contributions can now be made up to the age of 75, whereas previously this
applied to the age of 70. Superannuation guarantee remains up to the age of 70 but older
employees are now able to salary package superannuation benefits between the ages of
70 and 75. In both instances the employee must satisfy a work test, i.e. be gainfully
employed for at least 40 hours over 30 consecutive days during the financial year in which
contributions are made.
•
As of 1 July 2009, the first $25,000 of concessional contributions per individual per annum
under the age of 50 is taxed by the superannuation fund at 15%. Any excess is effectively
taxed at the top marginal rate for individuals (15% in the superannuation fund and 31.5%
in the hands of the individual). A transitional measure applies for individuals over the age
of 50, with $50,000 applying as the cap from 2009–10 through to 2011–12, instead of the
$25,000.
•
Non-concessional contributions are limited to $150,000, which can be averaged over a
three-year period; that is, in one year a non-concessional contribution of $450,000 can be
made but no further non-concessional contributions can be made for the next two income
years.
6
© CPA Australia Ltd 2011
FBT module 4: Smart solutions for salary packaging
•
As of 1 July 2007, benefits paid from taxed superannuation funds to members aged 60 or
over are tax-free and are non-assessable, non-exempt income.
•
For individuals under 60, the pre-July 1983 component forms part of the tax-free or exempt
component of their superannuation balance.
•
The definition of ‘fringe benefit’ has changed so that in specie contributions to
superannuation are not subject to FBT if made on or after 1 July 2007.
•
From 1 July 2009, concessional taxation of employer eligible termination payments (‘ETPs’)
ETPs is capped with the first $150,000 per ETP taxed at concessional rates (depending on
the individual’s age) with the excess subject to the top marginal tax rate for individuals. The
ETP can not be rolled over into superannuation.
EXAMPLE
Brian is subject to the top marginal rate of tax and is deciding whether to
salary sacrifice a superannuation contribution or simply make personal nonconcessional contributions from an amount of after-tax salary. He is looking
to make an additional $10,000 in superannuation contributions.
Issue
How will Brian’s decision affect his overall after-tax situation and the amount
of his after-tax investments?
Answer
Additional superannuation
Less income tax
Contributions tax
Net amount invested
Salary only
$10,000
$4,650
$5,350
Salary sacrificed
$10,000
–
$1,500
$8,500
If Brian makes the contribution after tax, there is no contributions tax and the
contributions are non-concessional contributions (undeducted) in the fund.
WARNING
Due to the large changes to superannuation and the possibility of an
employee paying excess tax at a higher rate if concessional contributions
made from all sources exceed $25,000, many employees may ask you to
review their salary packaging circumstances.
Employers must not provide financial advice in respect of superannuation to
their employees. All salary packaging documents and policies should include
a general recommendation that employees seek independent financial
advice.
A more recent impact on the salary packaging landscape particularly in the way it affects the
salary packaging of superannuation contributions is the concept of Adjusted Taxable Income.
In particular, the income definition used for dependant rebates under the Australian income tax
system for 2009–10 and later income years is ‘adjusted taxable income’.
© CPA Australia Ltd 2011
7
FBT module 4: Smart solutions for salary packaging
‘Adjusted taxable income’ is calculated by the total of the following amounts:
•
taxable income
•
reportable superannuation contributions
•
total net investment loss, i.e. from financial investments (shares, interests in managed
investment schemes (including forestry schemes), rights and options, and like investments),
and from rental properties
•
adjusted fringe benefits, i.e. reportable fringe benefits adjusted down for FBT paid by the
employer
•
income from certain tax-free pensions and benefits from Centrelink or Veterans’ Affairs
•
target foreign income, i.e. any income, payment or benefit received from a foreign source
that is tax exempt in Australia.
minus the annual amount of any child support/child maintenance the taxpayer pays.
Adjusted taxable income is also used as the basis for testing entitlement to family assistance
and social welfare payments from Centrelink
It is therefore important for recipients of tax rebates and government payments to keep their
Adjusted taxable income as low as possible in order to retain such entitlements at their pre2009 levels.
WARNING
Note that the ATO has issued a warning regarding employee entitlement
funds. The marketing of these funds appears to have increased after the
rulings in the cases of Essenbourne and Indooroopilly where it was confirmed
that contributions made were not subject to FBT.
The ATO considers that contributions to such employee entitlement funds
may be non-deductible or, in the case that they are ruled to be deductible,
that Part IVA will apply to the arrangement.
1.4.2 Laptop computers
As notebook, laptop and other similar portable computers can be provided exempt from FBT,
they are very effective to include in a salary package.
There is a limit of one laptop per employee per FBT year. ID 2005/149 confirms that if an
employer reimburses an employee over a two-year period for the cost of a laptop computer, the
provision of another laptop in that second year would not be treated as an exempt benefit. This
is because there has already been an expense payment benefit in relation to a laptop computer
in that second year.
Prior to 13 May 2008 it was also possible for employees to claim a decline in value deduction
for depreciation in respect of salary-packaged laptops. However, in terms of Tax Laws
Amendment (Budget Measures) Act 2008, the law has been changed to deny employees
depreciation deductions for FBT-exempt items, including laptops that are purchased from
7.30 pm (AEST) on 13 May 2008. For items purchased before that time, employees will be
denied depreciation deductions for the 2009 and later income years. This measure will
effectively rule out the ability to claim ‘double deductions’.
8
© CPA Australia Ltd 2011
FBT module 4: Smart solutions for salary packaging
In addition, the FBT rules have been changed so that the FBT exemption for certain
work-related items (including laptop computers, personal digital assistants and tools of trade)
only applies where these items are used primarily for work purposes. This was not a
requirement previously. However, these changes, which apply to items purchased after
7.30 pm (AEST) on 13 May 2008, bring the rules for these work-related items into line with the
rules for mobile phones which were always subject to the primary work purpose requirement.
In addition to laptops, the ATO will also accept that personal digital assistants (PDAs),
electronic diaries or similar items are also exempt from FBT. The Commissioner has stated in
ID 2006/44 that the primary characteristics of notebook and laptop computers are that they:
•
are easily portable and designed primarily for use away from an office environment;
•
are smaller and lighter than even the most compact desktop computer;
•
can operate without an external power supply; and
•
are designed as one complete unit.
In addition, the ATO will accept any internal devices as part of the computer. Generally, external
devices (other than a mouse) are separate and not subject to the exemption. However,
legislation was implemented that allows portable printers to satisfy the exemption from FBT as
of 1 April 2006.
Notwithstanding the changes introduced under Tax Laws Amendment (Budget Measures) Act
2008 (see above), the packaging of a laptop computer as an expense payment benefit can still
be a very beneficial benefit for an employee with limited administrative impact for the employer.
However, an employer should have a policy that outlines the various aspects of the laptop that
can be packaged and those that cannot. As not all components of a computer are included in
the exemption, it is recommended that the employer limit the reimbursement (or packaging) to
exempt items only. For example, the following items are commonly purchased by an employee
when purchasing a laptop which would be seen as fully taxable items for FBT purposes:
•
an extended warranty;
•
a carry bag (that involves an additional payment);
•
an external modem;
•
an external keyboard;
•
a laptop stand; and
•
an external hard-drive.
EXAMPLE
Marianne purchases a laptop computer primarily for work purposes for
$5,000 and now arranges a tax-effective salary package whereby she
receives an expense payment reimbursement from her employer as part of
her salary package. She also wishes to maintain the same level of
superannuation contributions.
Issue
How will Marianne be affected by this decision?
© CPA Australia Ltd 2011
9
FBT module 4: Smart solutions for salary packaging
(continued)
Answer
EXAMPLE
Package
Total Super
Laptop reimbursement
Salary only
$113,360
$9,360
FBT
Salary and benefits
$113,360
$9,360
$5,000
$0
GST credit
Cash salary
$104,000
($455)
$99,455
Tax on salary less deduction
$(27,990)
$(26,240)
(including Medicare levy)
Purchase of laptop
$(5,000)
Net after-tax salary
$71,010
$73,215
Marianne is $2,205 better off by packaging the computer. Note that Marianne
pays $5,000 for the computer and then receives that amount as a
reimbursement. The charge to the package is a deduction from gross salary
representing this reimbursement less the GST of $455, i.e. only $4,545.
10
© CPA Australia Ltd 2011
Module 5
Relocation of employees
and living-away-from-home
allowance
Contents
Program overview ............................................................................................................................................ 1 Learning objectives................................................................................................................................................................1 Benefits..................................................................................................................................................................................1 Benefits for the organisation ............................................................................................................................... 1 Benefits for the individual .................................................................................................................................... 1 Evaluation of the program......................................................................................................................................................2 Topic 1 – Introduction to living-away-from-home allowance and relocation ............................................. 3 1 Introduction .........................................................................................................................................................................3 1.1 Outline of concessions............................................................................................................................................3 1.2 Usual place of residence ........................................................................................................................................4 1.2.1 Expatriate and domestic transfers.............................................................................................................. 5 1.2.2 Exercise 1 .................................................................................................................................................. 7 1.2.3 Changing usual place of residence ............................................................................................................ 8 1.2.4 Travelling distinguished from living away from home................................................................................. 9 1.2.5 Exercise 2 ................................................................................................................................................ 13 1.2.6 Exercise 3 ................................................................................................................................................ 14 1.3 Expatriate employees ...........................................................................................................................................14 1.3.1 Tests for determining residency ............................................................................................................... 15 1.3.2 Australian tax implications........................................................................................................................ 17 1.3.3 Recent developments .............................................................................................................................. 19 Topic 2 – Living-away-from-home allowances............................................................................................ 20 2 Living-away-from-home allowances .................................................................................................................................20 2.1 Requirements for LAFHA......................................................................................................................................20 2.1.1 Allowance for additional expenses........................................................................................................... 20 2.1.2 Deductible expenses................................................................................................................................ 21 2.1.3 Additional disadvantages ......................................................................................................................... 22 2.1.4 Required to live away from his or her usual place of residence............................................................... 23 2.1.5 Offshore oil and gas rig workers .............................................................................................................. 27 2.2 Valuation of a LAFHA ...........................................................................................................................................27 2.2.1 Valuation of an ‘ordinary’ LAFHA ............................................................................................................. 28 2.2.2 Valuation of a LAFHA for oil and gas rig workers .................................................................................... 33 2.2.3 Current ATO position ............................................................................................................................... 34 2.2.4 Example calculation ................................................................................................................................. 35 2.3 Provision of food while living away from home .....................................................................................................36 2.4 Provision of accommodation while living away from home...................................................................................36 2.5 Exercise 4 .............................................................................................................................................................37 Topic 3 – Relocation expenses..................................................................................................................... 39 3 Introduction .......................................................................................................................................................................39 3.1 Exemptions ...........................................................................................................................................................40 3.1.1 Relocation transport ................................................................................................................................. 40 3.1.2 Removal and storage of household effects.............................................................................................. 41 3.1.3 Connection or reconnection of certain utilities ......................................................................................... 41 3.1.4 Sale and purchase costs of dwellings ...................................................................................................... 42 3.1.5 Leasing of household goods .................................................................................................................... 44 3.1.6 Relocation consultant costs ..................................................................................................................... 45 3.2 Reductions in taxable value..................................................................................................................................45 3.2.1 Relocation – transport by employee’s car (reduced by ATO rate) ........................................................... 45 3.2.2 Relocation – temporary accommodation (100% reduction) ..................................................................... 46 3.2.3 Relocation – meals (reduced to $2 or $1) ................................................................................................ 47 3.2.4 Remote area housing assistance (50% reduction) .................................................................................. 47 3.2.5 Remote area holiday transport (50% reduction) ...................................................................................... 50 3.2.6 Overseas employment holiday transport (50% reduction) ....................................................................... 50 3.2.7 Education of children of overseas employees (100% reduction) ............................................................. 51 3.3 Example................................................................................................................................................................52 3.4 Exercise 5 .............................................................................................................................................................53 Topic 4 – Exercise 6....................................................................................................................................... 55 4.1 Exercise 6 ......................................................................................................................................................................55 Appendices..................................................................................................................................................... 57 Appendix 1...........................................................................................................................................................................57 Appendix 2...........................................................................................................................................................................65 Appendix 3...........................................................................................................................................................................66 Appendix 4...........................................................................................................................................................................67 Appendix 5...........................................................................................................................................................................68 Appendix 6...........................................................................................................................................................................70 Suggested answers ....................................................................................................................................... 72 FBT module 5: Relocation and living-away-from-home allowance
Topic 1 – Introduction to living-away-fromhome allowance and relocation
1 Introduction
This module deals with a range of exemptions and concessions that relate to benefits provided
to employees who are required to live away from their usual place of residence, or who receive
benefits in relation to being relocated to a new employment location.
Many of the benefits that arise are exempted or are taxed on a reduced basis. The rationale
appears to be that the benefits are very much work-related and are not usually provided in the
form of remuneration, so it would be inappropriate to tax the benefits.
1.1 Outline of concessions
The first of the benefits we will look at, in topic 2, is a living-away-from-home allowance
(LAFHA). This is the only cash allowance that can amount to a fringe benefit rather than
assessable income. It is a taxable benefit, but is usually taxed concessionally. This benefit is
dependent on the employee being required to live away from his or her ‘usual place of
residence’.
There are also concessions available for many benefits provided to employees who change
their ‘usual place of residence’ or, in some cases, if they are required to live away from their
usual place of residence or to return to their usual place of residence.
The range of benefits that are concessionally treated includes:
•
Travel to relocate.
•
Removal and storage of household effects.
•
Incidental costs of selling a house at the old location and purchasing a new house at the new
location.
•
Costs of connecting utilities.
•
Costs of flights from remote areas, back to the capital city of origin.
•
Costs of temporary accommodation.
The concept of ‘usual place of residence’ is important in all cases.
© CPA Australia Ltd 2011
3
FBT module 5: Relocation and living-away-from-home allowance
1.2 Usual place of residence
It is important for the purposes of this module to understand the meaning of ‘usual place of
residence’ and the ATO’s views on that term.
‘Place of residence’ is defined in the Fringe Benefits Tax Assessment Act 1986 (FBT Act, to
mean, in relation to a person:
(a)
a place at which the person resides; or
(b)
a place at which the person has sleeping accommodation
whether on a permanent or temporary basis and whether or not on a shared basis.
‘Usual’ is not defined in the FBT Act, so it would take on its dictionary meaning of ‘customary’ or
‘habitual’. It is the place where the employee would ordinarily live.
The word ‘residence’ implies that the place will be a house or apartment or some similar
dwelling.
It is a question of fact as to what is a person’s ‘usual place of residence’. Some of the important
factors in determining a person’s usual place of residence are:
•
Where the person maintains an abode or residence.
•
Where the person’s family is located (the ATO considers that this particularly applies to
married male employees).
The ATO has outlined its views in Ruling MT 2030.
A copy of MT 2030 is included in Appendix 1.
APPENDIX
The ATO considers that:
•
A person’s usual place of residence is normally near where he or she is permanently
employed.
•
A person’s usual place of residence is the place where he or she would have continued to
live, but for having to change residence to work temporarily.
•
It is important that the employee have an intention to return to that residence after the
temporary period is over.
•
A fixed-term transfer is likely to indicate that the person is living away from his or her usual
place of residence.
•
Younger employees, particularly if students or apprentices, may be able to show that their
parents’ residence is their usual place of residence when required to live away from it.
4
© CPA Australia Ltd 2011
FBT module 5: Relocation and living-away-from-home allowance
The ATO accepts that the following types of workers are living away from their usual place of
residence:
•
Construction workers living in camps, barracks or huts.
•
Construction workers operating in outback areas.
•
Oil industry employees living on offshore oil rigs.
•
Marine industry employees living on board vessels.
•
Trainee employees (for example, trainee teachers) living away from home in order to
undergo training courses of extended duration.
However, where the career structure of an occupation necessarily involves regular transfers
from one locality to another (such as police officers, school teachers, members of the defence
forces and bank employees), they will not be regarded as living away from their usual place of
residence. It would not matter whether the person continued to own a home in the former place.
‘Residence’ and ‘residency’ do not raise the same issue as ‘usual place of
residence’. A person may change residency (that is, become a tax resident)
but may still have a usual place of residence outside Australia.
TIP
1.2.1 Expatriate and domestic transfers
The ATO is likely to accept that an expatriate employee who moves to Australia maintains a
usual place of residence other than his or her current place of residence. However, if a domestic
employee moves residence, the ATO is more likely to regard it as a change in usual place of
residence.
In MT 2030 the ATO states that they will treat foreign nationals working in Australia and
Australian residents working overseas as living away from their usual place of residence
provided:
the appointment is for a limited period and the employee can be expected in the normal
course to return to the same city or district of the home country to live.
On the other hand, a transferee from one place in Australia to another will only be accepted by
the ATO as living away from his or her usual place of residence where transferring:
to a new locality within Australia on an appointment of fixed duration provided the
permanent job location does not change, e.g. under an arrangement where an employee
transfers to a branch office of the employer in another State for a two or three year term on
the basis of return to the permanent position at the end of that time.
In other words, where a person moves overseas to take up work with a new employer for a
limited duration, he or she would be accepted as living away from the usual place of residence.
But if the transfer is within Australia the transfer must be with the same employer, for a fixed
duration, and the person’s permanent job location must not change.
© CPA Australia Ltd 2011
5
FBT module 5: Relocation and living-away-from-home allowance
ABC Corporation Ltd recruits John from the USA to take up a position as
CEO for a period of two years at the head office in Sydney. John expects to
return to the USA after that time.
EXAMPLE
At the same time they recruit Jill from Perth, to take up the position of
financial controller. She is given a fixed-term position of two years, after
which she expects to return to WA.
Issue
Are John and Jill living away from their usual places of residence?
Answer
John is living away from his usual place of residence as he is here for a
limited period and is a foreign national.
Jill is not regarded as living away from her usual place of residence as she
has not transferred and does not maintain the same job location.
The different treatment by the ATO of domestic and international
transferees is subject to some doubt. The ATO gave no authority for this view
in MT 2030.
WARNING
The following examples illustrate the ATO application of the factors that determine whether a
person is living away from his or her usual place of residence or has changed his or her usual
place of residence.
A journalist is compulsorily transferred to another capital city, and takes his
wife and children with him.
EXAMPLE
Issue
Has there been a change in usual place of residence?
Answer
The journalist has changed his usual place of residence and so is not living
away from home. The critical factor may be that his family accompanied him.
However, if he is transferred for a term and intends to return, he may be
regarded as living away from home.
6
© CPA Australia Ltd 2011
FBT module 5: Relocation and living-away-from-home allowance
An employee works in a town 130 miles from Perth, living in hotel
accommodation and returning on weekends to his home in Perth, where his
wife continues to reside.
EXAMPLE
Issue
Has there been a change in usual place of residence?
Answer
No, the employee has a more permanent residence or abode in Perth and is
regarded as living away from home.
An employee is transferred to Sydney from Perth for a period of two years.
After a period of one year, he sells his Perth home and decides to stay
permanently in Sydney.
EXAMPLE
Issue
Is the employee living away from his usual place of residence?
Answer
Yes, initially the employee could be taken to be living away from home, but
once he has sold his house and abandoned the intention to return to Perth,
his home in Sydney will be his usual place of residence.
1.2.2 Exercise 1
Exercise 1
DISCUSSION
Fred is a factory worker in the southern suburbs of Adelaide. His employer
closes the factory and opens up a new factory in the northern suburbs.
Rather than travel from his home in the southern suburbs, Fred moves to a
northern suburb, closer to the factory.
Issue
Is Fred living away from his usual place of residence?
Answer
© CPA Australia Ltd 2011
7
FBT module 5: Relocation and living-away-from-home allowance
Check your answer against the suggested answers at the back of the
learning material.
SUGGESTED
ANSWERS
1.2.3 Changing usual place of residence
A person who is living away from home may then change his or her usual place of residence to
the new location. From that time, the person will no longer be living away from home.
The critical issue is that the former place be the usual place of residence and that there is an
intention to return there after a temporary period. Any actions that are incompatible with an
intention to return to the former place would indicate a change in usual place of residence.
EXAMPLE
Sven is transferred by his company for a term of three years to Australia on
1 January 2010. He enters Australia on a temporary work visa, intending to
return to Sweden at the end of the term. He maintains a residence in
Sweden, which he rents out while he is away. On 30 April 2010 he applies to
the Immigration Department for permanent residency and asks his employer
to make the transfer permanent.
Issue
Has there been a change in usual place of residence?
Answer
Sven will initially be regarded as living away from his usual place of
residence in Sweden. However, it is likely that the application for permanent
residency marks a change in intention on the part of Sven and from that time
he will be regarded as having his usual place of residence in Australia.
EXAMPLE
Catherine is transferred in her employment from Brisbane to Melbourne. The
transfer is for a fixed term, but there is a likelihood that if Catherine finds
Melbourne to her liking, she will stay permanently. Catherine sells her home
in Brisbane and buys a home in Melbourne.
Issue
Has there been a change in usual place of residence?
Answer
Yes. There is a presumption that people reside near where they work. Taken
with the fact that Catherine has sold her house in Brisbane and bought a
house in Melbourne, it is difficult to say that Catherine has an intention to
return to Brisbane. Her usual place of residence is now Melbourne.
8
© CPA Australia Ltd 2011