House of Representatives

Explanatory Memorandum

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

Chapter 2 - Application of fringe benefits tax to nominated State or Territory bodies

Outline of chapter

2.1 Part 2 of Schedule 1 to this Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to provide the States and Territories with fringe benefits tax (FBT) treatment that is consistent with the treatment given to the Commonwealth. From the FBT year commencing 1 April 2001 and all later years of tax, the States and Territories will be able to devolve the administration and payment of FBT to nominated State or Territory bodies.

Context of reform

2.2 The States and Territories have sought consistent treatment with the Commonwealth for the payment of FBT. Each department or agency of the Commonwealth pays FBT, whereas each State or Territory pays FBT for the whole of its government.

2.3 Employer is defined in subsection 136(1) as a current employer, a future employer or a former employer, but does not include the Commonwealth and certain Commonwealth authorities. Current employer is defined as a person, including a government body, who pays, or is liable to pay, salary or wages. Government body is defined as the Commonwealth, a State, a Territory or an authority of the Commonwealth or of a State or Territory (subsection 136(1)). Each State and Territory is, therefore, an employer and subject to the rights, benefits and obligations that are imposed on employers by the FBTAA 1986.

2.4 Paragraph 4(1)(a) of the Fringe Benefits Tax (Application to the Commonwealth) Act 1986 provides that the FBTAA 1986 applies as if a Commonwealth employee were an employee of a Commonwealth department and not of the Commonwealth. Paragraph 4(1)(c) effectively treats a Commonwealth department as a government body and therefore as an employer. Accordingly, FBT is imposed at the departmental level in relation to the employees of each department and not at the Commonwealth level.

2.5 Therefore, to provide consistent treatment between the Commonwealth and the States and Territories, each State and Territory government department, or its equivalent, must be able to be treated as an employer for FBT.

Summary of new law

2.6 Part 2 of Schedule 1 to this Bill will amend the FBTAA 1986 to:

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treat nominated State or Territory bodies as employers for FBT;

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treat nominated State or Territory bodies as associates of:

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each other;

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authorities of the State or Territory; and

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the State or Territory;

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enable the calculation of FBT instalments for the nominated bodies; and

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allow the continuation of certain FBT treatment that would otherwise be lost because of the change in employer for FBT.

Detailed explanation of new law

2.7 To allow State and Territory governments to devolve the administration and payment of FBT to a departmental level, Part XIC is inserted in the FBTAA 1986. Part XIC provides for the application of the FBTAA 1986 to nominated State or Territory bodies. [Schedule 1, Part 2, item 3, Part XIC]

Nomination of eligible State or Territory bodies

2.8 If a State or Territory chooses to devolve its FBT responsibility, the State or Territory must make a nomination and provide the Commissioner of Taxation (Commissioner) with certain information to facilitate the process. [Schedule 1, Part 2, item 3, section 135S]

2.9 States and Territories may nominate only certain bodies for treatment as employers under Part XIC [Schedule 1, Part 2, item 3, subsection 135S(1)] . The bodies eligible for nomination are the State and Territory equivalents of Commonwealth departments (see paragraphs 2.14 to 2.28). A body nominated for the purposes of Part XIC is referred to as a nominated State or Territory body [Schedule 1, Part 2, item 3, subsection 135S(6)] .

2.10 The nomination must be in the approved form and must specify the first year of tax for which it will apply (the first year of tax). The nomination must be given to the Commissioner no later than 21 May of the first year of tax. [Schedule 1, Part 2, item 3, subsection 135S(2)]

2.11 The nomination has effect for the first year of tax and all subsequent years unless a variation or revocation is made [Schedule 1, Part 2, item 3, subsection 135S(3)] . A variation or revocation of a nomination must:

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be in the approved form;

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specify the first year of tax for which it is to have effect; and

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be given to the Commissioner by 21 May of that first year of tax [Schedule 1, Part 2, item 3, subsection 135S(5)] .

2.12 A State or Territory may nominate more than one eligible State or Territory body for treatment as an employer. The nominations do not have to be effective from the same year of tax and do not have to be made at the same time. This allows a State or Territory to phase in the devolution of FBT if it so chooses and to make changes as the need arises. [Schedule 1, Part 2, item 3, subsection 135S(4)]

2.13 For the purposes of establishing an employer/employee relationship between a nominated State or Territory body and certain employees, the nomination may also specify that a class or classes of employees are to be considered as having a sufficient connection (see paragraphs 2.30 to 2.31) with the nominated State or Territory body. [Schedule 1, Part 2, item 3, paragraph 135S(2)(c)]

Eligible State or Territory bodies

2.14 The bodies that are eligible for nomination are listed in section 135T. Because each State and Territory has its own legislative definitions of bodies that are the equivalent of Commonwealth departments, subsection 135T(1) defines an eligible State or Territory body by reference to the State or Territory legislation.

2.15 A government body that pays, or is liable to pay, salary or wages is excluded from being an eligible State or Territory body because it is an employer in its own right. [Schedule 1, Part 2, item 3, subsection 135T(2)]

2.16 In the case of amendment or repeal of the State or Territory legislation cited in paragraphs 2.17 to 2.27, regulations may be made to make modifications, including additions, omissions and substitutions, to the list in subsection 135T(1). [Schedule 1, Part 2, item 3, subsections 135T(3) and (4)]

New South Wales

2.17 New South Wales may nominate a department as defined in section 3 of the New South Wales Public Sector Management Act 1988 [Schedule 1, Part 2, item 3, paragraph 135T(1)(a)] . Section 3 of that Act defines department as a department of the Public Service that is specified in Schedule 1 to that Act. Schedule 1 lists departments and their heads by name and title, for example, Department of Education and Training, Community Relations Commission and Cabinet Office.

Victoria

2.18 Victoria may nominate either:

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an agency as defined in section 4 of the Victorian Public Sector Management and Employment Act 1998 [Schedule 1, Part 2, item 3, paragraph 135T(1)(b)] ; or

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an office as referred to in subsection 16(1) of that Act [Schedule 1, Part 2, item 3, paragraph 135T(1)(c)] .

2.19 Section 4 of that Act provides that an agency is a department or an administrative office. Both terms are also defined in that section. A department is established by the Governor in Council and an administrative office is a body or group existing in relation to a department and established by the Governor in Council.

2.20 Subsection 16(1) of that Act lists the following offices:

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Victorian Auditor-Generals Office;

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the Office of Public Prosecutions;

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the Victorian Electoral Commission;

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the Chief Commissioner of Police;

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the Ombudsman;

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the Office of the Commissioner for Public Employment;

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the Office of the Regulator-General; and

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the Legal Ombudsman.

Queensland

2.21 Queensland may nominate a department as defined in section 7 of the Queensland Public Service Act 1996 [Schedule 1, Part 2, item 3, paragraph 135T(1)(d)] . Section 7 of that Act defines a department as an entity declared under the Act to be a department of government by the Governor in Council.

Western Australia

2.22 Western Australia may nominate a department as defined in section 3 of the Western Australian Public Sector Management Act 1994 and as extended by subsection 3(2) of the Western Australian Financial Administration and Audit Act 1985 [Schedule 1, Part 2, item 3, paragraph 135T(1)(e)] . Section 3 of the Public Sector Management Act 1994 provides that a department is established under section 35 by the Governor. The definition is extended by subsection 3(2) of the Financial Administration and Audit Act 1985 to include:

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the Legislative Assembly;

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the Legislative Council;

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the Joint House Committee;

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the Joint Printing Committee;

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the Joint Library Committee;

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the Parliamentary Commissioner for Administrative Investigations; and

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the Information Commissioner.

2.23 Western Australia may also nominate a subsidiary body as defined in paragraphs (aa) and (b) of the definition of the term in subsection 3(1) of the FAAA 1985 [Schedule 1, Part 2, item 3, paragraph 135T(1)(f)] . These bodies are declared under an act or determined by the Treasurer to be subsidiary bodies of a department.

South Australia

2.24 South Australia may nominate an administrative unit as defined in section 3 of the South Australian Public Sector Management Act 1995 [Schedule 1, Part 2, item 3, paragraph 135T(1)(g)] . Section 3 of that Act defines an administrative unit as an administrative structure in which persons are, or are to be, employed and established under the Act as an administrative unit.

Tasmania

2.25 Tasmania may nominate a government department as defined in section 3 of the Tasmanian State Service Act 1984 [Schedule 1, Part 2, item 3, paragraph 135T(1)(h)] . Section 3 of that Act provides that a government department is established under section 24 by the Governor.

Australian Capital Territory

2.26 The Australian Capital Territory may nominate a department as defined in section 3 of the Financial Management Act 1996 of the Australian Capital Territory [Schedule 1, Part 2, item 3, paragraph 135T(1)(i)] . Section 3 provides that a department is an administrative unit, part of an administrative unit or a group of 2 or more administrative units.

Northern Territory

2.27 The Northern Territory may nominate either an agency or a government business divisionas defined in section 3 of the Northern Territory Financial Management Act 1995 [Schedule 1, Part 2, item 3, paragraphs 135T(1)(j) and (k)] . An agency is broadly a unit of government administration nominated for the purposes of the Act. A government business division is an activity or group of activities of which a significant proportion of the operating costs is recovered through charges on users.

Parliament or Legislative Assembly

2.28 Each State or Territory may also nominate a department of a Parliament of a State or a department of a Legislative Assembly of a Territory. [Schedule 1, Part 2, item 3, paragraphs 135T(1)(l) and (m)]

Consequences of nomination

2.29 Under section 66 of the FBTAA 1986, tax is imposed in respect of the fringe benefits taxable amount of an employer for a year of tax and is payable by the employer. Nominated State or Territory bodies are taken to be government bodies [Schedule 1, Part 2, item 3, paragraph 135U(5)(c)] and are, therefore, employers.

2.30 By nominating an eligible State or Territory body, the State or Territory is no longer the employer of the relevant employees. Instead, the nominated body is treated as the employer of each employee who has a sufficient connection with that body. [Schedule 1, Part 2, item 3, subsection 135U(1)]

2.31 An employee has a sufficient connection with a nominated State or Territory body if:

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the employee performs their duties of employment wholly or principally in that body [Schedule 1, Part 2, item 3, subsection 135U(2)] ; or

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the employee is of a class of employees that the State or Territory has specified in the nomination (under paragraph 135S(2)(c)) as having a sufficient connection with the body and the employee does not perform the duties of employment wholly or principally in any other nominated State or Territory body [Schedule 1, Part 2, item 3, subsection 135U(3)] .

2.32 However, if a nominated State or Territory body ceases to exist during a year of tax, the State or Territory becomes the employer, from the time of cessation, of the employees who had a sufficient connection with the body immediately before it ceased to exist. This means that the State or Territory is responsible for any FBT liability that may arise in relation to these employees for the remainder of the FBT year. [Schedule 1, Part 2, item 3, subsection 135U(6)]

2.33 Because the nominated State or Territory bodies do not have a separate legal identity from the State or Territory, any right that would be conferred or obligation that would be imposed on that body is instead conferred or imposed on the State or Territory. For example, if a nominated body were not to comply with its obligations as an employer, the State or Territory would be ultimately responsible for those obligations. [Schedule 1, Part 2, item 3, subsection 135U(4)]

2.34 As a consequence of the nomination, each nominated State or Territory body is treated as a company for the purposes of the FBTAA 1986 [Schedule 1, Part 2, item 3, paragraph 135U(5)(a)] . Also each:

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other nominated State or Territory body of the State or Territory concerned; and

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State or Territory concerned; and

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authority of the State or Territory concerned,

are treated as related companies [Schedule 1, Part 2, item 3, paragraph 135U(5)(b)] .

2.35 Companies and related companies are deemed to be associates of each other under section 159 of the FBTAA 1986. A fringe benefit is defined in subsection 136(1) to include benefits provided by an associate of an employer to an employee of the employer. Therefore, an FBT liability may arise where one nominated State or Territory body provides benefits to an employee of another nominated State or Territory body of the same State or Territory.

Notional tax amount

2.36 An instalment of tax is calculated by reference to an employers notional tax amount under section 111. An employers notional tax amount is generally the amount of tax assessed to the employer for the most recent year of tax. However, the notional tax amount is nil when there is no previous year of tax for which an assessment has been made (section 110).

2.37 Therefore, to ensure the uninterrupted payment of tax instalments by States and Territories, rules are required to determine the notional tax amount where a nomination has been made, varied or revoked under section 135S. [Schedule 1, Part 2, item 3, section 135V]

2.38 Where a State or Territory makes, varies or revokes a nomination for a year of tax (year of the change), the State or Territory must specify the amounts of tax that are deemed to be assessed for the immediately preceding year of tax (prior year of tax) for:

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each nominated State or Territory body for the year of the change; and

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the State or Territory [Schedule 1, Part 2, item 3, subsection 135V(2)] .

These amounts are used to determine the notional tax amount under subsection 110(1) [Schedule 1, Part 2, item 3, subsection 135V(5)] .

2.39 The State or Territory will determine these amounts based on each bodys share of the total FBT liability of the State or Territory and any nominated State or Territory bodies in the prior year of tax. The sum of the amounts specified under subsection 135V(2) must equal the sum of the tax that was assessed for the prior year of tax in respect of the State or Territory and the nominated State or Territory bodies, if any. [Schedule 1, Part 2, item 3, subsection 135V(3)]

2.40 The amounts determined in accordance with subsections 135V(2) and 135V(3) must be specified in the approved form and given to the Commissioner on or before 21 May of the year of change. [Schedule 1, Part 2, item 3, subsection 135V(4)]

2.41 If these requirements are not satisfied, there are no nominated State or Territory bodies for the year of tax. In this case, the amount of tax deemed to have been assessed for the prior year of tax to the State or Territory is the sum of the amounts of tax assessed to the State or Territory and any nominated State or Territory bodies. [Schedule 1, Part 2, item 3, paragraph 135V(6)]

2.42 If a nominated State or Territory body ceases to exist during a year of tax, then the notional tax amount of the State or Territory is determined as:

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the actual amount of tax assessed in respect of the State or Territory for the immediately preceding year; plus

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the notional tax amount of the nominated State or Territory body in respect of the year of tax as at the end of the last quarter before the body ceased to exist; less

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the total of any tax instalments of the nominated State or Territory body for the year of tax that became due and payable before it ceased to exist; less

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the total of any credits claimed under section 112A in relation to one or more instalments of tax of the nominated State or Territory body for the year of tax.

[Schedule 1, Part 2, item 3, subsection 135W]

2.43 This returns the responsibility for FBT to the State or Territory for the remainder of the year of tax, taking into account any tax instalments that have become due and payable during the year.

Application of certain provisions

2.44 Section 135X provides that the Commissioner may enter into a written agreement with a State or Territory regarding the application of certain provisions in certain circumstances [Schedule 1, Part 2, item 3, section 135X] . Where the agreement is inconsistent with the FBTAA 1986, the agreement prevails [Schedule 1, Part 2, item 3, subsection 135X(4)] .

2.45 Section 135X has 2 objects. The first is to ensure that the calculation of the taxable value of certain fringe benefits is not affected as a result of a break in the continuity of certain record keeping requirements solely because of a transitional event [Schedule 1, Part 2, item 3, paragraph 135X(1)(a)] . The second object is to preserve the character of certain benefits where the character would otherwise be lost solely because of a transitional event [Schedule 1, Part 2, item 3, paragraph 135X(1)(b)] .

2.46 A transitional event is defined as:

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the making of a nomination under section 135S;

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the variation of a nomination under section 135S;

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the revocation of a nomination under section 135S; or

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the cessation of the existence of a nominated State or Territory body.

[Schedule 1, Part 2, item 3, subsection 135X(2)]

2.47 Under these circumstances only, a written agreement may be entered into in relation to the application of the following provisions:

[Schedule 1, Part 2, item 3, subsection 135X(3)]

Application and transitional provisions

2.48 These measures will apply from the year of tax commencing 1 April 2001 and all later years of tax. [Schedule 1, Part 2, item 3, section 135R]