(3) Fringe Benefits Tax Assessment Act

The central provisions of the FBTAA are found in Pt III.  Divisions 2 to 12 currently identify 13 categories of fringe benefit.  The first 12 of these relate to specific fringe benefits, while the final category is a general one designed to catch any remaining benefits.  The respective categories are:
• car fringe benefits (Div 2, s7 to 13)
• debt waiver fringe benefits (Div 3, s14; 15)
• loan fringe benefits (Div 4, s16 to 19)
• expense payment fringe benefits (Div 5, s20 to 24)
• housing fringe benefits (Div 6, s25 to 29A)
• living-away-from-home allowance fringe benefits (Div 7, s30; 31)
• airline transport fringe benefits (Div 8, s32 to 34)
• board fringe benefits (Div 9, s35 to 37)
• meal entertainment fringe benefits (Div 9A, s37A to 37CF)
• tax-exempt body entertainment fringe benefits (Div 10, s38; 39)
• car parking fringe benefits (Div 10A, s39A to 39E)
• property fringe benefits (Div 11, s40 to 44), and
• residual fringe benefits (Div 12, s45 to 52)

Each Division in the FBTAA is divided into two or more Subdivisions.  Subdivision A defines the benefit to which the Division applies.  In most cases it is defined in broad terms without any particular reference to the employment relationship.  If that benefit is a fringe benefit, the its taxable value is determined by Subdiv B (as well as Subdiv C in the case of Div 9A and Subdiv C and D in the case of Div 10A).

The structure may be illustrated by examining Div 3, which deals with “debt waiver fringe benefits”. Subdivision A (s14) defined the benefit as follows:

“Where at a particular time, a person (…the ‘provider’) waives the obligation of another person (…the ‘recipient’) to pay or repay the provider an amount, the waiver shall be taken to constitute a benefit provided at that time by the provider to the recipient…”

As can be seen, the definition of the benefit does not contain any reference to the employment relationship. The definition of “fringe benefit” provides the necessary link with the employment relationship. There are two requirements of a debt waiver  it must be a debt waiver AND it must also be a fringe benefit.

Section 66(1) – Subject to the Act, tax imposed in respect of the fringe benefits taxable amount of an employer of a year of tax is payable by the employer.

Definition of “fringe benefit”

Step one - Is there a fringe benefit?

To come within the definition of “fringe benefits” in s136(1), there must be:
1. a benefit;
2. provided during the year of tax or in respect of the year of tax;
3. by an employer, associate, third party arranger or other relevant person;
4. to an employee or an associate, third party arranger or relevant person; this includes a current, future or former employer other than the Commonwealth or its exempt authorities.
5. in respect of the employment of the employee.

Benefit

“Benefit” is defined in broad terms in s136(1) and includes “any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility”.

Not all benefits are subject to FBT. Some benefits are treated as “exempt benefits” and as such are excluded from the definition of “fringe benefit” under para (g) of the definition of “fringe benefit”.

Benefit must be provided in respect of the employment of the employee

A nexus between the provision of the benefit and employment must exist for there to be a fringe benefit. The nexus required is set out in the definition of “in respect of” in 136(1). According to that definition the benefit must be provided “by reason of, by virtue of, or for or in relation directly or indirectly to” the employment.

In J&G Knowles & Associates Pty Ltd v FC of T has indicated that there must be “some discernible and rational link between the benefit and employment”. The court emphasized that what was required was a “sufficient” or “material” casual connection or relationship between the benefit and the employment. Where the link between the benefit and employment is insufficient, no fringe benefit can arise.

Inter-relationship between Fringe Benefits Tax Assessment Act and Income Tax Assessment Act

By way of reconciliation with the income tax law, s136(1) expressly excludes a number of different benefits from the definition of “fringe benefit”, including the following:

• salary or wages (para (f))
• the acquisition of shares or rights under employee share schemes to which 26AAC ITAA36 or Div 13A applies (para (h), (ha)).
• The payment of money to a superannuation fund that the person making the contribution had reasonable grounds for believing was a complying superannuation fund (para (j))
• ETP’s (para(k)).
• Consideration of a capital nature for, or in respect of, a legally enforceable contract in restraint of trade or personal injury to a person (para (m)).
• The payment of an amount deemed to be a dividend under ITAA36, (para(r)); and
• A loan that would give rise to a deemed dividend under s109D ITAA36, were it not for the loan meeting the requirements of s 109N ITAA36 (para (s)).

As previously mentioned, the definition of “fringe benefit” also excludes an “exempt benefit” (para (g)). Such a benefit will therefore not fall within the FBT regime. Importantly, such a benefit will also not constitute assessable income under the income tax law by virtue of s 23L (1A) ITAA36. This means that an exempt benefit will not be taxed in either the hands of the employer or employee.

Step Two - What is the taxable value of the fringe benefit?

Recipient’s contribution

The taxable value of the fringe benefit is reduced by any contribution to the cost of the benefit made by the recipient of the benefit (reduced by any reimbursement paid to the recipient). This ensures that only the “net benefit” is taxable.

Under s51AJ ITAA36 a deduction is not allowed to the employee to the extent that the contribution is made towards the private component of a fringe benefit.

The “otherwise deductible” rule

The taxable value of a loan, expense payment, airline transport, board, property or residual fringe benefit may in certain cases be reduced by the “otherwise deductable rule”. The rule is designed to overcome the inequity that would otherwise arise where an employer is required to pay FBT on a fringe benefit and an employee would not be entitled to claim a deduction as he or she had not incurred the relevant expenditure.

The otherwise deductable rule prevents what is effectively a form of “double taxation” by reducing the taxable value of a fringe benefit to the extent that the employee has “lost” a deduction by reason of the provision of the fringe benefit. The taxable value of the fringe benefit is reduced by a “notional deduction” calculated in accordance with formulas found in the relevant provisions.

The FBTAA contains its own substantiation provisions which only allow employers the benefit of the otherwise deductible rule where they have obtained declarations and certain documentary evidence from their employees specifying the extent to which the expenditure would otherwise have been deductable.

Miscellaneous reduction amounts

Div 14 provides for concessional reductions in the taxable value of specific fringe benefits.

Step Three - Calculation of FBT liability

Section 66 is the FBTAA’s charging provision and imposes FBT on employees in respect of their “fringe benefits taxable amount” for a year of tax.