House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

MAIN FEATURES

The main features of the principal bill - the Fringe Benefits Tax Assessment Bill 1986 - are as follows:

General application of fringe benefits tax

The tax is to apply to the value of benefits specified in the Bill that are provided after 30 June 1986 to an employee or an employee's associates (typically, the employee's spouse or children) by an employer in respect of the employee's employment activities. It will also apply where the benefits are provided by an associate of the employer or by another person by arrangement with the employer or associate. In all cases, however, the employer will be liable for the tax. The tax will extend to benefits that are provided to prospective or former employees in connection with their prospective or past employment.

Fringe benefits tax will apply to benefits provided in relation to an employee who is a resident of Australia, except where the relevant salary or wage of the employee is exempt from income tax, and to a non-resident employee whose salary or wage from the employment has an Australian source.

Subject to what follows, all employers who either directly or by arrangement with others provide benefits of the kind specified in the Bill to their current, prospective or former employees will be liable to fringe benefits tax. The tax will apply whether the employer is a sole trader, partnership, trustee, corporation, unincorporated association or government department or government authority, and whether or not the employer is exempt from income tax or other taxes.

Employers exempt from fringe benefits tax

Religious institutions will not be subject to fringe benefits tax on benefits provided to a minister of religion or a member of a religious order where the benefit is provided on account of that persons religious duties. Benefits provided in respect of duties that are not religious in nature will not be exempt.

In addition, employers who are exempt from taxation generally under international immunities provided by the International Organisations (Privileges and Immunities) Act 1983, the Consular Privileges and Immunities Act 1972 or the Diplomatic Privileges and Immunities Act 1967, and organisations established under international agreements which oblige Australia to grant a general tax exemption, will also be exempt from fringe benefits tax.

Fringe benefits tax year

Liability to fringe benefits tax will be assessed on an annual basis, with the tax year being the 12 month period 1 April to 31 March. The first "tax year", however, will be the 9 month period 1 July 1986 to 31 March 1987. For convenience, that 9 month period is called the transitional year of tax.

Self-assessment (Clauses 65 to 89)

Employers will self-assess their liability to pay fringe benefits tax. That will entail calculating the liability and remitting the tax so calculated with an annual fringe benefits tax return by the 28th day after the end of the tax year. The lodgment of a fringe benefits tax return will, for all practical purposes, constitute an "assessment" of an employer's fringe benefits tax liability.

If a fringe benefits tax return is not lodged by the due date, the Commissioner will be able to make a formal assessment of the fringe benefits taxable amount and of the amount of fringe benefits tax to which, in his opinion, the employer is liable. The Commissioner may alternatively require an employer to lodge a fringe benefits tax return for a particular year.

Where an assessment has been made of an employer's fringe benefits tax liability, including an assessment deemed to have been made by virtue of the lodging of the employer's fringe benefits tax return, the Commissioner will be authorised to amend the assessment, broadly according to the rules that apply for assessments made under the income tax law.

An employer will have rights, consistent with those under the income tax law, to object against a fringe benefits tax assessment.

Instalments of fringe benefits tax (Clauses 101 to 111)

As mentioned, fringe benefits tax is to be self-assessed by employers annually for a standard 12 month period 1 April to 31 March but with the first transitional "year of tax" being for the 9 month period from 1 July 1986 to 31 March 1987. Employers will be required to pay tax by quarterly instalments according to the following rules:

•

3 instalments of tax will be payable in respect of a standard year of tax on 28 July, 28 October and 28 January;

•

2 instalments of tax will be payable in respect of the transitional year of tax on 28 October 1986 and 28 January 1987;

•

the 3 instalments payable in respect of a standard year will generally equal one-quarter of the previous year's annual fringe benefits tax liability, although variations based on the estimated liability for the current year will be permitted;

•

the 2 instalments payable in respect of the transitional year will be based, broadly, on the taxable value of fringe benefits provided to employees in the September and December 1986 quarters (special valuation rules apply for this purpose);

•

on lodgment of the annual fringe benefits tax return, the 3 instalments - or 2 in respect of the transitional year - will be offset against the fringe benefits tax liability for the year, with the balance of the tax payable to be remitted with the return;

•

quarterly instalments will not ordinarily be required to be paid in respect of a standard year of tax unless the employer's assessed tax liability of the previous year exceeded $1000.

Car fringe benefits (Clauses 7 to 13)

As a general rule, a taxable fringe benefit will arise if an employer's car - one either leased or owned by the employer - is made available for the private use of an employee. For that purpose, a "car" is a passenger car, station wagon, mini-bus, panel van, utility or other commercial vehicle designed to carry less than 1 tonne or fewer than 9 passengers.

There are two alternative bases of valuing the benefit. Under the first, which will apply unless an election is made to adopt the second method, a percentage of the cost of the car (or the market value of a leased car as at the time the lease commences) is to be the taxable value, the attributable percentage to be determined according to how many kilometres are travelled in the year, as follows:

If any sales tax or customs duty concessions are obtained on the purchase of a car (e.g., by an employer who is a hospital or government authority), the cost price for fringe benefits tax purpose is the amount the employer could reasonably have expected to pay for the car if those concessions did not apply. In the case of a car manufacturer who as an employer makes a car available for the private use of an employee, the cost price is the wholesale value of the car grossed up for sales tax.

If the car is not owned or leased for the full year, or is not made available for the employee's private use throughout the full year, there will be a proportionate reduction in the taxable value.

After a car has been owned or leased for 4 years, the amount against which the relevant percentage is applied will be reduced to 2/3rds of the original cost price, or market value if leased.

Under the alternative method, the taxable value of the car fringe benefit is the total operating costs of the car for the relevant year, reduced in the proportion of private kilometres to total kilometres travelled.

Operating expenses here include all costs - whether incurred by the employer, the employee or others - of operating the car during the year including, if the car is owned, depreciation and imputed interest costs. Depreciation will be calculated at 22.5% per annum of the depreciated value of the car. Imputed interest will be the amount obtained by multiplying the depreciated value of the car by a statutory interest rate set, broadly, by reference to the lowest rate charged by the Commonwealth Savings Bank for housing loans immediately before the start of the year of tax. The interest rate will be published annually.

Under either method, any contribution by the employee for the use of the car, or in payment of car operating expenses, is deducted in calculating the final taxable value of the car fringe benefit. However, the employer will be required to obtain documentary evidence of any such contribution. This is to be generally in line with the records that would need to be kept under the income tax law to substantiate car expense deductions. If the operating costs method of valuation is adopted, a log book to establish the number of business and private kilometres travelled is also required.

Private use of taxis, panel vans, utilities and other commercial vehicles (i.e., those not designed principally to carry passengers) will not attract fringe benefits tax if an employee's private use of such a vehicle consists solely of travel to and from work and private travel that is incidental to travel in the course of performing duties of employment.

Loan fringe benefits (Clauses 16 to 19)

The taxable value of any interest-free or low interest loan provided to an employee will be the difference between an amount of interest notionally calculated as accruing over the year of tax by applying the benchmark interest rate to the daily balance of the loan and the interest that actually accrued on the loan during the year of tax.

The benchmark rate will generally be the lowest rate charged for housing loans by the Commonwealth Savings Bank immediately prior to the beginning of the year of tax. A maximum rate of 13.5% will, however, apply for housing loans made to employees before 3 April 1986. In addition, for fixed interest loans made prior to 1 July 1986, an employer will be entitled to adopt as the benchmark interest rate, the Commonwealth Savings Bank housing loan rate prevailing at the time the loan was made if this would be to his or her advantage.

For fringe benefits tax purposes, the deferral of a requirement to repay a debt on time will be treated as a loan granted at the rate of interest, if any, that accrues on the unpaid amount. If the terms of a loan enable interest payments to be deferred for more than 6 months, the lender will be treated at the end of each 6 months as having separately loaned interest-free the amount of interest so deferred.

Debt waiver fringe benefits (Clauses 16 to 19)

If an employer releases an employee from an obligation to pay an amount owing, there will be a taxable fringe benefit equal to the amount of the debt released.

Expense payment fringe benefits (Clauses 20 to 24)

Generally, the taxable value of expenses of an employee that are paid or reimbursed by an employer will be the amount of those expenses so paid or reimbursed.

Compensation paid to an employee for the cost of using the employee's own car will not be subject to fringe benefits tax if it is calculated according to a per kilometre basis, e.g., a reimbursement of car expenses at an agreed rate of cents per business kilometre travelled. A complementary amendment of the income tax law is proposed to ensure that such payments are treated as assessable income of employees. To the extent that the reimbursement is in respect of use of the car in the course of the employee's duties, offsetting deductions will be available to the employee.

Housing fringe benefits (Clauses 25 to 29)

A taxable fringe benefit will arise where an employee is granted a right to occupy, as a usual place of residence, a unit of accommodation provided by an employer.

If the accommodation is outside Australia, the taxable value will be the market value of the accommodation for the time it is occupied less any rent or other consideration paid.

For accommodation within Australia the taxable value is the "statutory annual value" of the accommodation less the amount of any consideration paid by the employee. If the employee's occupancy is for only part of the year, the statutory annual value is reduced proportionately.

To determine the statutory annual value, the market value of the right to occupy the accommodation for a full year is obtained in the year when the accommodation is first used to provide a housing fringe benefit. If in consecutive years the accommodation continues to be used to provide housing fringe benefits to employees, that initial annual amount is, generally, to be indexed annually according to movements in the rent sub-group of the Consumer Price Index. Each tenth year, an up to date market valuation will be made as the basis for setting the statutory annual value.

For accommodation located in a designated remote area of Australia, the statutory annual value will be reduced by 40% if the accommodation is provided under conditions of a kind that attract concessions in valuing employees' remote area housing benefits under the present income tax law.

Alternatively, an employer may elect to value remote area accommodation under a statutory formula. Under this, the annual value of the accommodation is set by multiplying the officially published figure for average adult full-time wages in the mining industry by the figure published for the dwelling rent share of private final consumption expenditure. The annual value determined on this basis is reduced by 40%, and then further by any employee rent, to arrive at the taxable value of the fringe benefit. If an election for this basis is made, all remote area accommodation provided by the employer must be valued by the formula.

Where the taxable value of remote area housing fringe benefits is calculated according to the above formula, that value will be taken to include the value of any free or subsidised domestic electricity, gas or oil that is provided for, or paid on behalf of, the employee occupying the accommodation. That is, the value of benefits of that kind provided by the employer will not be additionally taxed. If, however, a remote area housing benefit is valued by applying the 40% discount to the statutory annual value, a separate taxable fringe benefit will be subject to fringe benefits tax if residential fuel is provided or paid for by the employer. In calculating the taxable value of this a 40% discount will also be applied.

Accommodation will be treated as being "remote" for these purposes if it is located more than 40 kilometres from a population centre of 14,000 or more and beyond 100 kilometres of a population centre of 130,000 or more, the population being as established by the 1981 census.

If the accommodation is in a location that is in zone A or zone B, it will be treated as being remote for fringe benefits tax if it is located more than 40 kilometres from a population centre of 28,000 rather than 14,000.

Living-away-from-home allowance fringe benefits (Clauses 30 and 31)

An allowance paid to an employee to compensate for additional expenses or disadvantages suffered through the employee (and family) having to live away from home in order to perform duties for his or her employer may also be subject to fringe benefits tax.

The taxable value of a benefit derived from such an allowance is the amount of the allowance less so much of it as is reasonable to compensate the employee for the cost of accommodation away from home and for increased expenditure on food.

In determining what would be reasonable compensation for increased expenditure on food, $42 per week is specified for each person who is 12 years or over at the start of the year of tax as the amount that would have been expended on food at the employee's usual place of residence, and $21 per week for each younger person.

If, instead of paying a cash allowance, an employer provides, or pays for, accommodation of an employee (and, where appropriate, his or her family) who is living away from home, the accommodation benefit will not be treated as a taxable living-away-from-home allowance.

If food is paid for or supplied, the benefit of that will not be treated as a living-away-from-home allowance, but as an expense payment fringe benefit (as outlined above) or a property fringe benefit (as outlined below) respectively, the taxable value of which is reduced to the extent that it exceeds the amount prescribed as the standard cost of food expenditure at home (i.e., $42 per week for a person over 12 years and $21 per week for a younger person).

Airline transport fringe benefits (Clauses 32 to 34)

Industry-specific valuation rules will apply to free or discounted travel in passenger aircraft provided on a stand-by basis to airline employees on flights operated by an employer or by another airline under industry arrangements. They will also apply where such concessional air travel is provided to employees of a travel agent.

These rules only apply to travel undertaken by employees on the basis that their stand-by travel rights are subordinate to those of other airline customers.

Where the travel is on a scheduled domestic service of a domestic carrier, the taxable value of the fringe benefit is to be, in effect, 75% of an amount equal to the standard economy air fare as reduced by 50% of that fare to take into account the stand-by nature of the travel. In practice this means that the taxable value will be 37.5% of the standard economy fare. Any amount paid by the employee is deducted from the taxable value.

If the travel is not on a scheduled domestic service, e.g., if an international airline employee travels within Australia on a domestic leg of an international flight, the taxable value will generally be 37.5% of the lowest economy fare charged by TAA for an equivalent flight, again less the employee's fare.

The taxable value of travel provided over an international route will generally be 37.5% of the lowest fare published in Australia as being publicly available - including reductions for advanced fare or return travel bookings but not group bookings - in the 12 months up to the end of the year of tax, less the fare paid.

Board fringe benefits (Clauses 35 to 37)

Special valuation rules apply where an employee is provided with board by an employer. An employee is treated as being provided with board if the employee is entitled to the provision of accommodation and:

•

there is an entitlement under an industrial award to at least 2 meals a day; or

•

under an employment arrangement, at least 2 meals a day are ordinarily provided.

Where an employee is provided with board, the special valuation rules detailed below will apply to meals provided by the employer or, if the employer is a company, by a related company in a wholly owned group, that are prepared and supplied on the employer's (or related company's) premises or at or adjacent to a work site. Some common examples of where these rules could apply are meals given to shearers, etc., in a farmhouse kitchen or in a meal area attached to a bunkhouse. They would also apply to meals in a dining facility located on a construction site camp, oil rig or ship.

The taxable value of a board meals falling for valuation under these rules will be $2 for each meal to a person 12 years or more at the beginning of the year of tax, and $1 per meal for a younger person, less any amount paid for the meal.

Tax-exempt body entertainment fringe benefits (Clauses 38 and 39)

A taxable fringe benefit will arise where entertainment to the benefit of an employee is provided by an employer who is either wholly exempt from income tax or does not derive assessable income from the activities to which the entertainment relates, e.g., a tax exempt statutory authority or a taxable employer where the employees concerned work in an activity, such as gold mining, that is not subject to income tax.

If the entertainment is purely personal to the employee, e.g., a private dinner party, the whole of any expenditure incurred by the employer in providing the entertainment or reimbursing the employee for its cost will be the taxable value of the fringe benefit. However, if employees participate in official or business entertainment, e.g., a reception or other social function held mainly for clients of the employer, the taxable value will be so much of the relevant entertainment expenses as is reasonably attributable to the employees, i.e., usually a proportion based on the number of persons attending.

Entertainment expenses that would qualify as a specific exception to the general rule of non-deductibility of entertainment expenses for income tax purposes will not give rise to a taxable fringe benefit, e.g., the provision of meals to employees in staff cafeterias, the cost of meals at certain business seminars, meals on business travel away from home, etc.

Property fringe benefits (Clauses 40 to 44)

A taxable fringe benefit will arise where an employee is provided with property, free or at a discount, by an employer. For these purposes, property includes all goods (including non-reticulated gas and electricity and animals), real property, shares and other choses in action. Goods supplied on a working day and consumed on the employer's premises, e.g., a daily ration of beer consumed at work by brewery workers, will not attract tax.

Different valuation rules apply according to whether the property provided to the employee was:

•

goods normally manufactured or produced as part of an employer's business;

•

goods purchased by the employer and normally sold as part of the employer's business; or

•

goods not normally part of the employer's business at all, or other property, e.g., choses in action.

For goods provided to an employee that are identical or broadly similar to goods that the employer ordinarily supplies to the public in the course of his or her business, the following valuation rules apply:

•

where the goods provided free or at a discount to employees are identical to goods normally sold by the employer to manufacturers, wholesalers or retailers, the taxable value of the benefit is the amount by which the employer's lowest arm's length selling price (adjusted upwards, where appropriate, for sales tax) exceeds the price, if any, paid by the employee;

•

if the goods provided free or at a discount are identical to goods normally sold by the employer to the public by retail, the taxable value of the benefit is the amount by which 75% of the lowest price charged to the public exceeds the amount paid by the employee;

•

where particular goods provided to employees are similar to, but are not identical to, those sold by the employer (e.g., because manufacturing defects make them unsuitable for general sale) the taxable value is the amount by which the employee could be expected to pay to obtain the goods under an arm's length transaction exceeds the price actually paid.

For goods purchased by an employer for sale in the ordinary course of his or her business, which are supplied to an employee free or at a discount, the taxable value is the amount by which the arm's length purchase price paid by the employer (adjusted, if necessary, to include sales tax) exceeds the amount paid by the employee.

In the event that such goods have lost value by the time they are provided to the employee (e.g., because of obsolescence or deterioration) the taxable value is measured by reference to the amount for which the employee could be expected to purchase the goods in an arm's length dealing if that amount is less than the cost to the employer.

The taxable value of goods not normally sold as part of the employer's business or other property that is provided free or at a discount to employees is, generally, the amount by which the arm's length cost price of the property to the employer exceeds the price charged to the employee.

In the event that goods (or other property) are obtained from a third party under arrangements whereby the employer pays for the goods, etc, (e.g., where goods are purchased by an employee using the employer's credit card) the taxable value is the amount of expenditure incurred by the employer less any amount paid by the employee.

Other fringe benefits

There is a residual category of benefits not covered by any of the previous valuation rules. Examples, would include the supply of free or discounted services such as for travel or the performance of professional or manual work, the use of property and the provision of insurance coverage.

Different fringe benefit valuation rules apply according to whether or not benefits in this residual class are of a kind that the employer provides to the public in the ordinary course of business.

Where the benefits are of a kind ordinarily provided as part of the employer's business, the taxable value is 75% of the lowest price charged to the public less any amount paid by the employee. If the benefits are similar but not identical to those provided to the public, the taxable value will be based on 75% of the amount that a person could reasonably have expected to pay as an arm's length consideration, i.e., broadly, market value.

Where benefits do not relate to things of a kind ordinarily provided to the public as part of the employer's business, the taxable value will, generally, be the amount by which the cost to the employer of supplying the item exceeds any consideration paid by the employee. If a benefit is not provided directly by the employer, but the employer incurs expenditure to a third party under an arm's length transaction in respect of their provision to the employee (e.g., where the employee uses the employer's credit card to obtain the benefit) the taxable value will be the amount incurred by the employer. In any other case, the taxable value will be the amount the employee could expect to pay for the benefit under an arm's length transaction, less any consideration given for the benefit.

Concessional treatment of certain fringe benefits

The following kinds of benefits that would otherwise be taxable fringe benefits will be exempt from fringe benefits tax:

•

Live-in residential care workers (Clause 58)

The provision of residential accommodation to live-in residential care workers will be exempt from fringe benefits tax. These are employees of a government body, religious institution or non-profit body engaged in caring for disabled persons or persons in necessitous circumstances and who, in the course of those duties, reside with those persons in a house or hostel of the employer body in order to provide such care.

•

Employee share acquisition schemes and contributions to superannuation funds (Clause 136)

Benefits constituted by employer contributions to superannuation funds or the provision of shares or rights to employees under employee share acquisition schemes are subject to specific taxing arrangements under the income tax law and, as such, will not be subject to fringe benefits tax.

•

Free or discounted commuter transport (Clause 47)

Where an employer operates a business of providing transport (other than air transport) to the public, the provision of free or discounted travel to employees of that business for the purpose of their travelling to and from work will be exempt as will free or discounted travel on a scheduled metropolitan service of the employer.

Where the benefit is provided by an associate company, it will also be exempt if both the employer and the associate carry on a public transport business.

•

Recreational and child minding facilities (Clause 47)

Recreational or child minding facilities provided on an employer's business premises for the benefit of employees will be exempt from fringe benefits tax. Facilities of these kinds provided on business premises of a related company in a wholly-owned company group will be similarly exempt.

•

Use of business property on an employer's premises (Clause 47)

Where plant or equipment that is located on the business premises of the employer is used wholly or partly in connection with the operation of that business, any private use of that plant or equipment by an employee on a working day will be exempt from fringe benefits tax, e.g., private telephone calls.

•

Exemption of the first $200 of certain "in-house" fringe benefits (Clause 62)

The first $200 of the aggregate of the taxable values of three categories of fringe benefits that are given to an employee in a year of tax is exempt from fringe benefits tax. These are airline transport fringe benefits, goods fringe benefits or residual benefits attributable to things of a kind supplied to the public in the ordinary course of the employer's business. The exemption is proportionally reduced to $150 in the transitional (part) year of tax.

Some benefits provided to employees who work in designated remote areas of Australia will be either exempt from fringe benefits tax, or valued on a concessional basis, as follows:

•

Housing assistance (Clause 60)

Benefits may be provided to assist employees to acquire houses in remote areas instead of the employer supplying rental accommodation. These may take the form of reimbursing an employee for all or part of interest incurred by the employee on a loan to purchase a house for use as his or her residence. Alternatively, the employer may sell a house to the employee on interest-free or low-interest instalment terms. Such a house may also be sold at less than its market value.

The taxable value of these benefits will attract a 40% reduction if the house is located in a designated remote area as described in the notes relating to remote area housing benefits and the following additional factors apply:

-

the employee works in the remote area;

-

it is customary in the employer's industry for employers to provide employees with housing assistance; and

-

broadly stated, it is necessary for the employer to provide such assistance.

•

Associated fuel benefits (Clause 59)

Where electricity, gas and other fuel is supplied or paid for by the employer in relation to housing the subject of such an assistance arrangement, that benefit is also discounted by 40% for fringe benefits tax valuation purposes.

•

"Fly-in fly-out" arrangements (Clause 47)

Instead of providing permanent residential accommodation to their employees in designated remote areas, some employers choose to provide regular transport between the employee's place of residence and the work site. Under this kind of arrangement the employee is provided with accommodation at or near the work site on working days and is returned to his or her permanent place of residence on days off.

The provision of transport on this basis is exempt from fringe benefits tax where, having regard to the respective locations of the work site and the employee's place of residence, it would be unreasonable to expect the employee to travel to and from work on a daily basis.

Transport provided on a similar basis to employees on oil rigs and other installations off-shore are also exempt from fringe benefits tax.

•

Remote area holiday travel (Clause 61)

Employees working in remote areas may, under an award, be reimbursed for the costs of, or may be provided with, transport in connection with extended recreation leave (of more than 3 days) from the work locality to the town from which they were engaged to work or to the capital city of the State or Territory where the work place is located.

In such cases, the taxable value of the resulting fringe benefit is to be reduced by half. This concessional valuation also applies to such transport benefits given to the employee's family.

Reduction in taxable value: expenditure otherwise deductible to employee (Clauses 19, 24, 34, 37, 44 and 52)

The scheme of the Fringe Benefits Tax Assessment Act 1986 is to place a taxable value on a benefit provided to an employee, irrespective of whether or not the expenditure reimbursed or the property or other benefit supplied is used for the purpose of producing assessable income of the employee. The Bill, however, provides for the taxable value of the benefit to be reduced to the extent to which the expenditure incurred by the employee (in the case of expense payment benefits) or any expenditure that would otherwise have been incurred by the employee in obtaining the relevant benefit would have been deductible for income tax purposes. In determining this for fringe benefits tax purposes, the $250 deduction threshold embodied in section 82A of the Income Tax Assessment Act is to be disregarded.

This otherwise deductible rule will not apply in relation to deductions that might have been available by way of depreciation allowances or to interest and other expenses that would otherwise be subject to the proposed new "negative gearing" rules for income tax purposes in relation to property investments made after 17 July 1985. (See clause 11 of the Taxation Laws Amendment Bill 1986).

Substantiation requirements broadly consistent with those recently introduced into the income tax law for employee expenses apply for the purpose of determining the extent to which any expenditure is to reduce the taxable value of a fringe benefit on the basis that it would have been otherwise deductible to an employee. For this purpose specific rules apply for determining the extent to which any car expenses met by an employer would have been deductible to the employee. Employees will also be required to maintain travel diaries to demonstrate the extent to which expenses relating to overseas travel and extended domestic travel (other than domestic travel undertaken exclusively in the course of the employee's duties) would have been deductible for income tax purposes.

Reduction in taxable value: non-deductible expenses of employers

•

Entertainment expenses

Recent amendments to the income tax law introduced a code for the treatment of expenditure in respect of the provision of entertainment. As a general rule such expenditure is not allowable as a deduction, although there are some specific exceptions.

Where an employer reimburses entertainment expenses of an employee or incurs expenditure in providing a benefit in circumstances where the employer's expenditure is, wholly or in part, ineligible for income tax deductions under that code, the taxable value of the fringe benefit is reduced - broadly in proportion to the disallowance of deductions. If the whole of the expenditure is not allowable in this way no fringe benefits tax will be payable.

•

Leisure facilities and travel by accompanying relatives

Further provisions of the income tax law deny deductions for expenditure on club fees and certain leisure facilities and expenditure incurred in respect of relatives who accompany an employee on a business trip.

Consistent with the rule outlined above in relation to entertainment expenses, where an employer reimburses employees' expenditures of these kinds or incurs expenditure in providing benefits of these kinds such that the employer's expenditure is, wholly or in part, ineligible for income tax deductions, the taxable value of the resultant fringe benefit is reduced broadly in proportion to the disallowance of deductions.

A more detailed explanation of the provisions of the Bills is contained in the following notes.