Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 3 - Fringe benefits

Outline of Chapter

3.1 Schedule 3 to this Bill explains the amendments to the GST Act to fine tune the interaction of the FBT and the GST. The amendments:

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extend Division 71 to apply to all entities that make input taxed supplies;

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ensure that entities can only claim input tax credits to the extent that an acquisition or importation in relation to entertainment is deductible under income tax law;

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allow entities to make a GST election in relation to their meal entertainment and entertainment leasing expenses and include a new adjustment event for these expenses to minimise an entitys compliance costs caused by the timing differences between GST and FBT; and

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extend the application of Division 111 so that an entity can claim input tax credits for all expense payment benefits that are fringe benefits.

Detailed explanation of new law

Fringe benefits provided by input taxed suppliers

3.2 Following the introduction of the GST, a new FBT gross-up rate was introduced. A GST-inclusive FBT gross-up rate applies to a situation where input tax credits have been allowed on the acquisition of a thing provided as a fringe benefit and the existing (lower) FBT gross-up rate applies where no GST was payable on the supply or no input tax credits are claimable on the acquisitions. Under the FBT gross-up rules, where an entity is entitled to an input tax credit, or even part of an input tax credit, for a thing acquired or imported to be provided as a fringe benefit, the employer would be subject to the higher gross-up rate.

3.3 Division 71 was inserted to deny input tax credits for things acquired or imported for the purpose of providing fringe benefits to employees of a financial supplier that is partially denied input tax credits on its acquisitions. As a result, the lower FBT gross-up rate applies to the fringe benefits. This ensured that these entities were not denied input tax credits and then required to calculate FBT at the higher gross-up rate.

3.4 However, Division 71 is limited to acquisitions or importations that relate to making financial supplies by entities which exceed the financial acquisitions threshold in Division 189. It does not apply in relation to entities which make other input taxed supplies, such as supplies of residential premises or precious metals. Acquisitions and importations that relate to making these supplies are subject to the higher GST-inclusive FBT gross-up rate, even though only a small proportion of the input tax credit might be allowed for these acquisitions or importations.

3.5 Items 14 and 16 amend the GST Act to extend Division 71 to apply to acquisitions or importations to the extent that they relate to making input taxed supplies that are not financial supplies. However, where acquisitions or importations relate to making financial supplies, the entity is still required to be over the financial acquisitions threshold before Division 71 applies.

3.6 The Division denies an input tax credit for the acquisition or importation where it is provided as a fringe benefit and the acquisition or importation also relates solely or partly to making supplies that are input taxed.

3.7 In addition, the wording of the current provisions contained in Division 71 has been amended to ensure the correct operation of the Division. There are certain things that must be satisfied before Division 71 applies to deny an input tax credit on the acquisition or importation. These are as follows:

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the acquisition or importation solely or partly relates to making input taxed supplies;

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the acquisition or importation must be of a kind referred to in paragraph 149A(2)(b) of the FBTAA 1986; and

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the acquisition or importation specifically relates to the provision of a particular benefit on which FBT is or will be payable.

[Subsections 71-5(1) and 71-10(1)]

3.8 Division 71 only applies where the person providing the benefit is denied input tax credits because the acquisition or importation relates to making input taxed supplies. Therefore, where acquisitions or importations relate to making financial supplies, the entity must be over the financial acquisitions threshold contained in Division 189 before Division 71 will operate to deny input tax credits. [Subsections 71-5(2) and 71-10(2)]

3.9 New paragraphs 71-5(1)(a) and 71-10(1)(a) provide that the acquisition or importation is one that is referred to in paragraph 149A(2)(b) of the FBTAA 1986. Generally, an acquisition or importation is of a kind referred to in paragraph 149A(2)(b) where there is an entitlement to input tax credits arising from the acquisition or importation of the thing to the person providing the benefit (or to another member of the GST group to which the person providing the benefit belongs).

3.10 In addition, the acquisition or importation must specifically relate to the provision of a particular benefit on which FBT is or will be payable at the end of the FBT year [paragraphs 71-5(1)(b) and 71-10(1)(b)] . Thus, where no FBT is or will be payable on the provision of the benefit, the supplier will not be denied input tax credits on the acquisition or importation under Division 71. The entitlement to input tax credits will be determined under the general rules contained within Divisions 11 and 15. Generally, where the benefit is an exempt benefit or has no taxable value either because it is otherwise deductible or because of a recipients contribution, there will be no FBT payable.

3.11 If at the time of acquisition or importation of the thing to be provided as a fringe benefit, the fringe benefit is one on which FBT will be payable, then the employer is denied input tax credits on the acquisition or importation if it also relates to making input taxed supplies [sections 71-5 and 71-10] . If the employer subsequently discovers that the taxable value of the fringe benefit has been reduced to nil because of an employee contribution, the employer should not be denied input tax credits under Division 71, and is entitled to claim an input tax credit subject to the general rules. Another amendment in this Bill allows an entity to claim an input tax credit in a later tax period than that in which the entity received a tax invoice. Thus, the employer can claim the input tax credit in the tax period that the employer discovers that no FBT will be payable on the provision of the fringe benefit, even though the employer received the tax invoice in an earlier tax period. This amendment is discussed further in paragraphs 60 to 6.11.

Example 3.1

EasyStay Co makes supplies of commercial accommodation. Some of the supplies it makes are of long-term accommodation which is eligible to have GST calculated at a concessional rate. Instead of applying Division 87, EasyStay Co has chosen to supply eligible long-term commercial accommodation as input taxed supplies.

EasyStay Co has a managing director who is provided with a car as a fringe benefit. However, the car is also used in the business and relates to some extent to making the input taxed supplies of long-term commercial accommodation. Under the general rules, EasyStay Co is not entitled to an input tax credit relating to the acquisition of the car to the extent that it relates to making the input taxed supplies.

EasyStay Co is denied all of the input tax credit for the acquisition of the car because it relates to making input taxed supplies and is also to be provided as a fringe benefit on which fringe benefits tax is payable. As a result, the lower FBT gross-up rate applies to the fringe benefit.

Reimbursements

3.12 Subsection 111-5(3) is amended to ensure that reimbursements that are provided as fringe benefits are not creditable acquisitions, if the acquisition would not have been a creditable acquisition because of Division 71, to the entity making the reimbursement. [Item 25, paragraph 111-5(3)(c)]

Consequential amendments

3.13 Items 1, 2, 6 and 7 correct references to Division 71 as a result of the change to the Division heading.

3.14 Items 11 to 13 and 15 amend the headings and descriptions for Division 71 to reflect that the Division applies to all entities that make input taxed supplies.

3.15 Item 31 repeals the definition of GST-creditable benefit. As a result of the changes to the wording of Division 71, the definition is no longer needed.

Application date

01 The amendments to Division 71 and subsection 111-5(3), as described in paragraph 3.12, will apply to acquisitions and importations that are attributable to the tax period in which the amendments were introduced. That is, from the tax period beginning 1 October 2000. [Item 34]

Amount of input tax credits for non-deductible expenses

3.17 A benefit must be provided to an employee or associate to be a fringe benefit under the FBTAA 1986 and will not arise when provided to a non-employee or client. However, meal entertainment benefits are frequently provided to employees and clients together. As a consequence of this, the FBTAA 1986 allows the taxable value of meal entertainment benefits to be calculated by way of an election. If no election is made, the taxable value is determined on the basis of actual expenditure.

3.18 Under Division 9A of the FBTAA 1986, the taxable value of a fringe benefit for meal entertainment may be calculated on a:

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50/50 split (where the employer makes an election under section 37AA of the FBTAA 1986). The taxable value is one-half of the expenses incurred in providing the meal entertainment benefits to all persons; and

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12-week register method (where the employer makes a further election under section 37CA of the FBTAA 1986). The taxable value is calculated with reference to the proportion of meal entertainment fringe benefits provided to employees over a 12 week period over the total meal entertainment expense incurred in that 12 week period.

3.19 An employer may also elect under section 152B of the FBTAA 1986 to use the 50/50 split method for calculating the taxable value of their total entertainment facility leasing costs.

3.20 Where an employer elects to use the 50/50 split method or the 12-week register method for determining the taxable value of meal entertainment and entertainment facility fringe benefits, only a corresponding proportion of the meal entertainment expenditure is deductible under sections 51AEA to 51AEC of the ITAA 1936.

3.21 In most cases, an input tax credit is not allowed for acquisitions to the extent that the entity cannot deduct the expense for income tax under Division 69 of the GST Act.

3.22 An acquisition or importation of meal entertainment and entertainment facilities will only be creditable to the extent that it is deductible under sections 51AEA to 51AEC of the ITAA 1936 [Item 9, subsection 69-5(3A)] . This new subsection ensures that an entity can only claim input tax credits for acquisitions and importations to the same extent that these expenses are deductible under income tax law.

3.23 If an employer does not make an election under section 37AA, 37AC or 152B of the FBTAA 1986, the entity can only claim input tax credits for acquisitions or importations for entertainment to the extent that it relates to benefits provided to an employee or associate of an employee. This is because an acquisition or importation is only creditable to the extent it is deductible in Division 32 of the ITAA 1997 (paragraph 69-5(3)(f) of the GST Act). Division 32 of the ITAA 1997 does not allow a deduction for such expenditure when it is incurred in providing a benefit to a client.

Elections for meal entertainment and entertainment facility expenses

3.24 An employer that elects that the taxable value of its meal entertainment expense or entertainment facility leasing cost is calculated by way of an election, will ordinarily do so after the end of the FBT year when they fill in their FBT return for that year. The election will apply retrospectively from 1 April of that FBT year and can potentially apply to a period covering up to 12 previous tax periods for GST purposes.

3.25 To alleviate an entitys compliance costs in having to lodge amended GST returns after it has made its FBT election, item 10 inserts new Subdivision 69-B into the GST Act to allow an entity to make a similar GST election in respect of these acquisitions or importations and then adjust the amount of previously attributed input tax credit after the end of the FBT year where it no longer reflects the corrected input tax credit amount through the new adjustment event in the Subdivision. New subsection 69-15 explains what new Subdivision 69-B is about.

Making an election under Subdivision 69-B

3.26 An entity may elect to have acquisitions or importations treated as non-deductible expenses for the purposes of paragraphs 69-5(3A)(a), 69-5(3A)(b) and 69-5(3A)(c) under new sections 69-25, 69-30 and 69-35 respectively.

3.27 Where an entity makes an election under new Subdivision 69-B , the entitys net amount will be worked out on the basis of that election, until the election ceases to have effect. [Sections 69-20 and 69-45]

3.28 If an entity wishes to work out the extent to which meal entertainment acquisitions or importations are creditable using the 50/50 split method, it will make an election under new section 69-25 . If instead the entity wishes to use the 12-week register method, it will make an election under new section 69-30 . An entity will make an election under new section 69-35 if it wishes to use the 50/50 split method to work out the extent its entertainment facility leasing acquisitions are creditable.

Example 3.2

Sui Chee Industries incurs a substantial amount of meal entertainment expenses throughout an FBT year and usually calculates its taxable value by way of an election under section 37AA of the FBTAA 1986 (i.e. by the 50/50 split method). It accounts for GST on a quarterly basis. It decides to make an election under new section 69-25 from 1 October, as it believes it will make a corresponding FBT election at the end of the FBT year. In that tax period Sui Chee Industries incurred $26,400 of meal entertainment expenses. As it has an election in place under new section 69-25 , the amount of input tax credits Sui Chee Industries can claim in respect of acquisitions and importations relating to meal entertainment is ($26,400/11) 50% or $1,200.

3.29 In order for an entity to make an election under new section 69-30 , it must have a valid meal entertainment register [subsection 69-30(2)] . Item 33 amends section 195-1 to insert the definition of valid meal entertainment register in the GST Dictionary. A valid meal entertainment register means a valid meal entertainment register within the meaning of section 37CA of the FBTAA 1986. Section 37CA of the FBTAA 1986 has certain requirements for a meal entertainment register to be valid. These include:

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the register must be kept for a continuous period of at least 12 weeks throughout which meal entertainment is provided;

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it must not contain any entry that is false or misleading;

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it must include various details; and

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it will not remain valid where the total meal entertainment expenditure in the FBT year is greater than 20% of the total meal entertainment expenditure for the first year in which the register was valid.

3.30 Apart from the requirement to have a valid meal entertainment register in new section 69-30 , there are no other requirements an entity must follow in order to make these elections. However an entity is only able to make an election for a current or future tax period, and is not able to make one for a past tax period. [Section 69-40]

3.31 An entitys election will cease to have effect from the start of the following tax periods:

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the tax period in which it specifies in a notice of withdrawal that it withdraws the election (the tax period may be a current or future tax period but must not be a past tax period);

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the tax period in which a different GST election takes effect;

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the tax period in which it ceases to have a valid meal entertainment register (and the entity has an election under section 69-30); or

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the tax period in which an election is made under sections 37AA, 37CA or 152B of the FBTAA 1986.

[Section 69-45]

Example 3.3

On 15 January, after closely examining its meal entertainment expenses, Sui Chee Industries believes it would be better to claim input tax credits on its actual meal entertainment fringe benefit. Sui Chee Industries is able to withdraw its election under new section 69-45 . It withdraws its election on 15 January under new section 69-25 with effect from 1 January (the start of the tax period specified in the withdrawal).

Adjustment events

3.32 Since an election under new Subdivision 69-B is able to be frequently changed during the FBT year, or may be different to the entitys FBT election, new section 69-50 includes these events as adjustment events. The adjustment event occurs only once a year and is aligned with the time an entity has to lodge its FBT return (or would have lodged its FBT return if it were so required). [Subsection 69-50(2)]

3.33 The adjustment event has been linked to an entitys FBT return lodgement date since an entity will not know the extent an acquisition is creditable under section 69-5 until after its FBT return is lodged. An entity that calculates its taxable value by way of an election under sections 37AA, 37CA or 152B of the FBTAA 1986 must make that election in their FBT return before lodging their return.

3.34 This election (or lack thereof) directly affects how much an entity can deduct under income tax laws, and consequently, to what extent an acquisition or importation is creditable under the GST Act. It is only after this FBT election is made that the entity can calculate their corrected input tax credit amount under Subdivision 19-C. New subsection 69-50(3) ensures that where more than one adjustment event occurs during the FBT year in section 69-50, all of the adjustment events are compared together with the corrected input tax credit amount to determine the entitys adjustment under Subdivision 19-C.

3.35 Under subsection 29-20(3), an entity is generally required to hold an adjustment note before attributing decreasing adjustments to a tax period. However, if that decreasing adjustment arises because of an adjustment event under new section 69-50 , the entity will not need an adjustment note to attribute that adjustment to a tax period. [Section 69-55]

3.36 The following events will be adjustment events under new subsections 69-50(1) :

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a change in an entitys GST election at any time other than the start of the FBT year [paragraph 69-50(1)(a)] ;

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an election is made under sections 37AA, 37CA or 152B of the FBTAA 1986 without a corresponding GST election covering all of the tax periods in the FBT year being made [paragraph 69-50(1)(b)] ; and

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a GST election covering one or more of the tax periods in the FBT year and no election under sections 37AA, 37CA or 152B of the FBTAA 1986 was made for that FBT year [paragraph 69-50(1)(c)] .

3.37 Subsection 69-50(4) sets out the election under new Subdivision 69-B that corresponds to an election under the FBTAA 1986. Item 30 amends section 195-1 to insert the meaning of FBT year in the GST Dictionary. FBT year is a year beginning on 1 April.

Example 3.4

Following on from Examples 30 and3.3, since Sui Chee Industries made an election under new Subdivision 69-B which was not effective for the whole of the FBT year, it has an adjustment event under new subsection 69-50(1) .

At the end of the FBT year, Sui Chee Industries decides to calculate the taxable value of their meal entertainment fringe benefit without an election (this causes Sui Chee Industries to have another adjustment event under new paragraph 69-50(1)(c) ). Assuming that under Division 32 of the ITAA 1997, the amount Sui Chee Industries can deduct is $56,100 and the amount of input tax credit it has previously attributed in its GST return is as follows:

tax period ending 30 June:	$500
tax period ending 30 September:	$1,500
tax period ending 31 December:	$1,200
tax period ending 31 March:	$1,400

The amount of Sui Chee Industries Subdivision 19-C adjustment is calculated as follows:

Previously attributed input tax credit amount = $4,600
Corrected input tax credit amount = $5,100 (1/11 of $56,100 due to paragraph 69-10(3)(f))


Sui Chee Industries decreasing adjustment = $5,100 - $4,600 = $500.

Sui Chee Industries will claim its decreasing adjustment of $500 in its June tax period GST return and may attribute this amount without holding an adjustment note. [Section 69-55]

Example 3.5

Prasad does not make an election under new Subdivision 69-B . Throughout the FBT year he claims input tax credits for the amount of GST included in its acquisitions relating to entertainment facility leasing fringe benefits (since an entertainment acquisition or importation relating to a client is not creditable because of paragraph 69-10(3)(f)). At the end of the FBT year Prasad decides to calculate the taxable value of this expenditure through an election under section 152B of the FBTAA 1986.

Since Prasad has made an election under 152B of the FBTAA 1986 without having made an election under new section 69-35 covering all of the tax periods in that FBT year, he has an adjustment event under new paragraph 69-50(1)(b) .

Consequential amendments

3.38 Item 8 inserts the heading for Subdivision 69-A which is as a consequence of new Subdivision 69-B being inserted into the GST Act. Items 3 to 5 insert references to Division 69 in sections 17-99, 19-99 and 29-39 respectively. This ensures that readers are aware of the special rules relating to an entitys net amount, adjustment event and attribution because of the new GST elections under Subdivision 69-B.

3.39 Item 28 amends the definition of adjustment event in section 195-1 to include reference to the new adjustment event in new section 69-50 in the definition. Item 32 amends the definition of non-deductible expense in section 195-1 to include reference to the new subsection 69-5(3A) in the definition.

Application date

3.40 The amendments concerning the amount of input tax credits for non-deductible expenses will apply to acquisitions and importations that are attributable to the tax period after the amendments were introduced. That is, from 1 November 2000 for entities with monthly tax periods and 1 January 2000 for entities with quarterly tax periods. [Item 34]

Expense payment reimbursements

3.41 The GST Act grants entitlements to input tax credits for acquisitions made by entities primarily through the operation of Division 11. Division 111 of the GST Act was enacted to resolve the problem of reimbursements to an entitys employees not being creditable acquisitions under Division 11 of the GST Act.

3.42 However, an input tax credit is only available under Division 111 of the GST Act for an expense reimbursement if the expense that the employee incurred is directly related to the employees activities as an employee.

3.43 Items 20 and 27 insert new paragraphs 111-5(1)(ab), 111-5(1)(ac) and 111-25(b) to allow an entity to obtain input tax credits for all expense payment benefits. Item 29 inserts the meaning of an expense payment benefit in section 195-1. An expense payment benefit means a fringe benefit that is a benefit of the kind referred to in section 20 of the FBTAA 1986. This definition provides that an expense payment benefit will include all reimbursements and payments made on behalf of a recipient that are fringe benefits and exempt benefits. A benefit must be provided to an employee or an associate of an employee for it to be a fringe benefit under the FBTAA 1986.

3.44 It does not matter that the reimbursement is to someone that is not the entitys employee, or is an associate of the entitys employee since the credit to the entity is recouped through the employer paying FBT at the higher rate.

3.45 Since a reimbursement that is directly related to an employees activities as an employee may not constitute a fringe benefit, entities reimbursing such expenditure will still be able to claim input tax credits under paragraphs 111-5(1)(a) and 111-25(a).

3.46 Where an employer reimburses an employee (or pays a third party on behalf of the employee) for an expense payment benefit that is related directly to the employees activities as an employee, the entity may claim input tax credits for the reimbursement under paragraph 111-5(1)(a) or new paragraph 111-5(1)(ab) . Item 18 amends subsection 111-5(1) to ensure that where an entity is able to claim input tax credits for reimbursement under more than one paragraph in section 111-5, the entity is unable to claim input tax credits for that reimbursement more than once. Items 19 and 21 make consequential amendments to paragraphs 111-5(1)(a) and 111-5(6) as a result of this change.

Example 3.6

Foreman and Fischer Enterprises makes the following reimbursements to its employees:

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$330 to Stephanie to reimburse her for a set a gold clubs;

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$550 to J-Accountants to pay for an employees professional body membership fees (that the employee is required to be a member of for work);

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$55 to Paulina to reimburse her for stationery she purchased for her employer, Foreman and Fischer Enterprises; and

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$2,420 to ABC Ltd to pay for an employees holiday to Cairns.

Foreman and Fischer Enterprises is able to claim input tax credits for all of the above reimbursements:

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$30 by way of new subsection 111-5(1)(ab) since the reimbursement constitutes an expense payment benefit (as it is not related to the employees activities);

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$50 by way of paragraph 111-25(a) or new paragraph 111-25(b)(i) since the payment (regarded as a reimbursement in Division 111) is directly related to the employees activities as an employee and an expense payment benefit that is otherwise deductible to the employee;

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$5 by way of paragraph 111-5(1)(a) since the reimbursement is directly related to the employees activities as an employee; and

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$220 by way of new paragraph 111-25(b)(i) since the payment (regarded as a reimbursement in Division 111) would constitute an expense payment benefit (as it is not related to the employees activities).

3.47 If an entity makes an expense payment benefit to a future or former employee, or to an associate of a future or former employee, the entity will be entitled to input tax credits for that reimbursement. [Section 111-30]

Example 3.7

Meng is about to start work for Webster Ltd. A motor vehicle forms part of his salary package with Webster Ltd. Meng signs the leasing agreement 2 weeks before he commences work and Webster Ltd starts paying the finance company for the car from that date. Webster Ltd can claim input tax credits for 1/11 of the amount of the lease payment even though Meng is not yet an employee of it under new section 111-30, new paragraph 111-25(b)(i) and subsection 111-10(1).

01 Item 23 rearranges paragraph 111-5(3)(a) and inserts new subparagraph 111-5(3)(a)(ii) to ensure that an entity is not able to claim input tax credits for a reimbursement for an acquisition that is not creditable because of Division 69.

Example 3.8

ABC Pty Ltd reimburses an employee $638 for library fines he incurs. The library fines include $58 of GST. ABC Pty Ltd is unable to claim input tax credits for 1/11 of the reimbursement because of new subparagraph 111-5(3)(a)(ii) as the reimbursement is in respect of a non-deductible expense under paragraph 69-5(3)(a).

Consequential amendments

3.49 Items 17, 22, and 24 make consequential amendments to section 111-1, subsection 111-5(1) and paragraph 111-5(3)(b) to include reference to associate in these sections since an entity is now able to claim input tax credits in respect of some reimbursements to an employees associate.

3.50 Subsection 111-10(2) operates to reduce the amount of input tax credit an entity may receive in respect of a reimbursement where that reimbursement does not relate directly to the activities of the person reimbursed. Item 26 rearranges subsection 111-10(2) to remove reference to employee and fringe benefits as a result of the above amendments. As an entity is now able to claim input tax credits for all reimbursements to an employee, employee should be removed from the operation of this subsection. As a consequence of this, fringe benefits may also be deleted from this subsection as it is not longer necessary as a fringe benefit is only able to be provided to an employee, and can not be provided to an agent, officer or partner.

Application and transitional provisions

3.51 The amendments in relation to expense payment benefits apply, and are taken to have applied, in relation to net amounts for tax periods starting on or after 1 July 2000. [Item 34]