Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 7 - Fringe benefits tax - broadening the exemption for the purchase of a new dwelling as a result of relocation
Outline of chapter
7.1 Schedule 7 to this bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to broaden the fringe benefits tax (FBT) exemption to cover relocating employees who purchase a new dwelling and have their employer pay the incidental purchase costs associated with the new dwelling, before the employee has sold their old dwelling.
Context of amendments
7.2 Section 58C of the FBTAA 1986 allows an FBT exemption for costs incidental to the sale or acquisition of a dwelling as a result of relocation for employment purposes, as long as the employee sells their dwelling at the previous locality within two years, and purchases a dwelling at the new locality within four years, of the commencement date of the new employment position.
7.3 The exemption applies if, within the relevant time limits, an employee:
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- sells their old dwelling before purchasing the new dwelling; or
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- purchases a new dwelling before selling their old dwelling and the employer pays the incidental purchase costs after the old dwelling has already been sold.
7.4 The exemption does not apply if, within the relevant time limits, the employee purchases a new dwelling and the employer pays the incidental purchase costs before the employee sells the old dwelling.
Summary of new law
7.5 The amendment ensures that, when an employee purchases a dwelling in a new locality without having already sold their dwelling at the old locality, the employer is able to access the FBT exemption for costs incidental to the purchase of the new dwelling, provided the employee then sells their dwelling at the old locality within two years of commencing their new employment position.
7.6 The diagram below illustrates three situations (the steps show the chronological order of the sale and purchase of dwellings for each situation). Benefits of the kind provided in Situation One and Situation Two were already exempt under the previous provisions. A benefit of the kind provided in Situation Three is also FBT exempt as a result of this amendment.
| Situation One | Situation Two | Situation Three |
|---|---|---|
| Step 1. An employee relocates for employment purposes. | Step 1. An employee relocates for employment purposes. | Step 1. An employee relocates for employment purposes. |
| Step 2. The employee sells their dwelling at the old locality within two years of commencing employment. | Step 2. The employee purchases a dwelling at the new locality within four years of commencing employment. | Step 2. The employee purchases a dwelling at the new locality within four years of commencing employment. |
| Step 3. The employee purchases a dwelling at the new locality within four years of commencing employment. | Step 3. The employee sells their dwelling at the old locality within two years of commencing employment. | Step 3. The employer pays the costs incidental to the purchase of the new dwelling. |
| Step 4. The employer pays the costs incidental to the purchase of the new dwelling. | Step 4. The employer pays the costs incidental to the purchase of the new dwelling. | Step 4. The employee sells their dwelling at the old locality within two years of commencing employment. |
| Step 5. The benefit is FBT exempt. | Step 5. The benefit is FBT exempt. | Step 5. The benefit is FBT exempt as a result of this amendment. |
7.7 If the employee fails to sell their old dwelling within two years of commencing the new employment position, the FBT liability will be taken to arise once the two-year period has elapsed. Thus the benefit, which was exempt at the time it was provided by the employer, will be treated as being FBT liable if the old dwelling is not sold within the two-year time limit.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Costs incidental to the purchase of a new dwelling by an employee relocating for employment purposes are FBT exempt, provided that the employee sells their old dwelling within two years of commencing their new employment position. | Costs incidental to the purchase of a new dwelling by an employee relocating for employment purposes are FBT exempt, only if the employee has already sold their old dwelling prior to the employer paying the costs associated with the purchase of the new dwelling. |
Detailed explanation of new law
7.8 The amendments make two changes to the pre-conditions for accessing the FBT exemption for costs incidental to the sale or acquisition of a dwelling as a result of relocation for employment purposes.
7.9 Firstly, the employee must either sell their old dwelling or propose to sell their old dwelling. [Schedule 7, item 1, paragraph 58C(1)(b)]
7.10 Secondly, the employee is no longer required to sell the old dwelling before the employer can access the FBT exemption for costs incidental to the sale or acquisition of a dwelling as a result of relocation for employment purposes.
Fringe benefits tax exemption on sale of old dwelling
7.11 The day on which the employee commences to perform the duties of the new employment position is the new employment day. [Schedule 7, item 3, paragraph 58C(2)(a)]
7.12 For the costs associated with the sale of an old dwelling by a relocating employee to be FBT exempt, the employee must sell their old dwelling within two years of the new employment day.
Fringe benefits tax exemption on purchase of new dwelling
7.13 For the costs associated with the purchase of a new dwelling by a relocating employee to be FBT exempt, the employee must:
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- sell their old dwelling within two years of the new employment day; and
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- enter into a contract for the purchase of a dwelling in the new locality within four years of the new employment day.
[Schedule 7, item 4, paragraph 58C(3)(ca)]
7.14 The date the relocating employee enters into a contract for the purchase of the new dwelling is the contract day. [Schedule 7, item 4, paragraph 58C(3)(c)]
7.15 The effect of the amendment is that at the time the employer pays the costs incidental to the purchase of the dwelling in the new locality, it is not necessary for the old dwelling to have already been sold in order for the employer to access the FBT exemption.
Example 7.1
Frances was required to relocate from Geelong to Ballarat in order to perform her duties as a police officer. She commenced her duties in Ballarat on 1 January 2005.
Frances purchases a new house in Ballarat on 12 February 2005. Her employer pays the conveyancing costs associated with the purchase of the new house on 16 February 2005.
Frances then sells her old house in Geelong on 15 October 2006.
The conveyancing costs paid by Frances's employer are FBT exempt. This is because Frances enters into a contract for the sale of her house in Geelong within two years of commencing employment in Ballarat. This is despite the fact that at the time the employer pays Frances's conveyancing costs, Frances has not yet sold her house in Geelong. This benefit would not have been exempt under the previous provisions.
7.16 In the situation where an employee has not sold their dwelling at the old locality at the time the employer paid the costs incidental to the purchase of the new dwelling, and the employee fails to sell their old dwelling within two years of the new employment day, the benefit provided will become FBT liable in the year of tax in which the period of two years since the new employment day expires. [Schedule 7, item 5, subsection 58C(5)]
Example 7.2
Assume the same situation as in Example 7.1, except that Frances fails to sell her home in Geelong by 1 January 2007.
The conveyancing costs paid by Frances's employer are exempt at the time they are provided. However, as Frances did not sell her dwelling within two years of the new employment day, the benefit provided on 16 February 2005 will now become FBT liable in the 2006-2007 FBT year.
Application and transitional provisions
7.17 These amendments apply to benefits provided in respect of the FBT year of tax beginning on 1 April 2004 and to later FBT years.