House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 2 - Fringe benefits tax - reform of airline transport fringe benefits

Outline of chapter

2.1 Schedule 2 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to align the special rules for calculating airline transport fringe benefits with the general provisions dealing with in-house property fringe benefits and in-house residual fringe benefits.

2.2 The method for determining the taxable value of airline transport fringe benefits is also updated to both simplify the practical operation of the law and to better reflect the economic value of the benefit.

Context of amendments

Overview of the current law for airline transport fringe benefits

2.3 An airline transport fringe benefit arises under Division 8 of Part III of the FBTAA when an employee of an airline operator or a travel agent is provided with free or discounted air travel on a stand-by basis which is customary in the airline industry (including any related incidental services provided on board the aircraft).

2.4 Stand-by airline travel restrictions customarily apply in the airline industry and is travel in which seating on the aircraft is subject to availability and is not guaranteed for the employee or associate of the employee. This means that employees or associates of the employee may be displaced from a flight at any time up to the point of departure.

2.5 It is important to note that free or discounted airline travel that is provided to employees without stand-by restrictions is not an airline transport fringe benefit and is instead taxable under the ordinary in-house property or residual fringe benefit rules.

2.6 Division 8 of Part III of the FBTAA was originally introduced into the fringe benefits tax law in 1986 to provide industry-specific valuation rules for the airline industry in respect to free or discounted airline travel provided to employees or associates of the employee on a stand-by basis.

2.7 These provisions were introduced at a time when the industry was heavily regulated and stand-by travel was also available to commercial passengers.

Working out the value of an airline transport fringe benefit

2.8 Currently, in working out the taxable value of an airline transport fringe benefit the provider must ascertain the value of the benefit, less the employee contribution.

2.9 For domestic travel, the value of the benefit is broadly 37.5 per cent of the lowest publicly advertised economy airfare charged by the provider (or a carrier where relevant), at or about the time of travel, over that route. However, the precise airfare to be used for the value depends on whether the transport is on a scheduled passenger air service or not and whether a carrier operates a scheduled passenger air service over that route or not.

2.10 For international travel, the value of the benefit is broadly 37.5 per cent of the lowest fare published in Australia as charged by any carrier, for travel over that route in the 12 months preceding the end of the year of tax. Again, the precise airfare to be used for the value depends on whether the transport is on a scheduled passenger air service or not and whether a carrier operates a scheduled passenger air service over that route or not.

2.11 The method of determining the taxable value of an airline transport fringe benefit was developed at a time when stand-by travel was a feature of commercial airline pricing which was available to members of the public.

Background to reform of the airline transport fringe benefits provisions

2.12 Stakeholders from the airline industry have raised concerns about the methodology for valuing stand-by airline travel. In particular, they were concerned about the amount of time spent and costs required to calculate the taxable value of the benefit, and the fact that the industry had evolved a great deal since the time the provisions were introduced in 1986.

2.13 These industry views also reflect a need to update the application of the provisions as the concept of stand-by travel, whilst still available to employees of airlines and travel agents, is no longer offered by airlines commercially to members of the public, with airlines now using discounted pricing as a means to optimise passenger levels.

2.14 In response to these issues the Government announced in the 2012-13 Budget that it would reform the airline transport fringe benefits provisions in the fringe benefits tax (FBT) law so that the treatment of these benefits is aligned with the treatment of in-house benefits provided to employees in other sectors and the valuation method of the benefit is updated to simplify the practical operation of the law and better reflect the value of the benefit.

Summary of new law

2.15 Schedule 2 to this Bill reforms the special rules for calculating airline transport fringe benefits currently contained in Division 8 of Part III of the FBTAA with the result being that these benefits are aligned with the general provisions dealing with in-house property fringe benefits and in-house residual fringe benefits.

2.16 However, to reflect the restrictions that apply to employees or associates of employees travelling on a stand-by basis, the method for determining the taxable value of airline transport fringe benefits has been updated to simplify the practical operation of the law and better reflect the economic value of the benefit.

2.17 For airline transport fringe benefits provided after 7.30 pm by legal time in the Australian Capital Territory on 8 May 2012, the taxable value is calculated as 75 per cent of the stand-by airline travel value of the benefit.

2.18 Where the transport is on a domestic route the stand-by airline travel value is 50 per cent of the carrier's lowest standard single economy airfare for that route as publicly advertised during the year of tax.

2.19 Where the transport is on an international route, the stand-by airline travel value is 50 per cent of the lowest of any carrier's standard single economy airfare for that route as publicly advertised during the year of tax.

2.20 The reason for the 50 per cent discount, which provides a further concession against the value of the benefit compared with the use of notional value of other types of in-house fringe benefits, is that discounted employee travel is subject to a number of restrictions, for example, the travel is on a stand-by basis and the employees may be displaced from the flight, making a valuation more difficult and expensive.

2.21 The reforms to the airline transport fringe benefits complement the recent changes to the concessional treatment for in-house fringe benefits accessed by way of salary packaging arrangements as announced in the Mid-Year Economic and Fiscal Outlook 2012-13 and introduced into Parliament in Schedule 7 to the Tax Laws Amendment (2012 Measures No. 6) Bill 2012.

2.22 As a result, airline transport fringe benefits that are accessed by way of salary packaging arrangements will not receive the concessional in-house valuation and instead will be valued using the notional value.

Comparison of key features of new law and current law

Detailed explanation of new law

2.23 This measure reforms the airline transport fringe benefit rules by:

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aligning the airline transport fringe benefit rules with the in-house fringe benefit provisions; and

•

updating the valuation methodology for airline transport fringe benefits.

Aligning the airline transport fringe benefit rules with the in-house fringe benefit provisions

2.24 In order to better align the treatment of the airline transport fringe benefits with other in-house benefits provided by employers in other industries, these reforms introduce a rewritten definition of 'airline transport fringe benefit', repeal Division 8 of Part III of the FBTAA and insert updated airline transport fringe benefit rules into the existing in-house property and in-house residual fringe benefit provisions.

2.25 This improves consistency across the FBT law and also assists in reducing the complexity of the law.

Introducing a new definition of an airline transport fringe benefit

2.26 To facilitate the alignment of the airline transport fringe benefit rules with the in-house fringe benefit provisions, this measure introduces a rewritten definition of 'airline transport fringe benefit'.

2.27 The rewritten definition replaces the definition previously used for the purposes of Division 8 of Part III of the FBTAA to reflect modern airline industry airfare structures, and improve the clarity of the definition to simplify the practical operation of the law for airline operators and travel agents but does not alter its current scope. [Schedule 2, item 15, subsection 136(1) of the FBTAA]

2.28 An airline transport fringe benefit under this measure includes an in-house property fringe benefit or an in-house residual fringe benefit to the extent that the benefit includes the provision of transport in a passenger aircraft operated by a carrier (including any related incidental services on board the aircraft) and is subject to the stand-by restrictions that customarily apply in the airline industry.

The meaning of provision of transport in a passenger aircraft operated by a carrier and any incidental services on board the aircraft'

2.29 This term replicates (in a rewritten form) the relevant part of the existing definition of airline transport benefit (in section 32 of the FBTAA).

2.30 It describes the benefit that an airline or travel agent provides, which includes transport in a passenger aircraft operated by a carrier as well as other related incidental services.

The meaning of subject to stand-by restrictions that customarily apply for the provision of airline travel to employees in the airline industry'

2.31 An airline transport fringe benefit means the provision of transport that includes certain conditions or features and that are provided subject to stand-by restrictions.

2.32 Not all airlines and travel agents have the same corporate policies or staff remuneration policies in respect to stand-by travel for employees and associates of employees, so this definition is intended to identify the typical stand-by restrictions that apply across the airline industry (which is intended to include the travel agent industry).

2.33 Stand-by restrictions commonly mean that seating on the aircraft is not guaranteed for the employee or associate of the employee and transport on the aircraft is subject to seat availability up to the point of departure.

2.34 Stand-by restrictions also commonly mean that, whilst an employee or associate of the employee may be given a seat prior to departure, the employee or the associate of the employee may subsequently be asked to disembark for a commercial passenger.

2.35 Stand-by restrictions may also affect other incidental benefits such as meals and in-flight entertainment.

Inserting airline transport fringe benefit rules into the in-house fringe benefit provisions

2.36 The in-house fringe benefit provisions were inserted into the FBT law to provide special valuation methods for different types of benefits that may be provided in-house by employers in the business of providing the same goods and services to their clients.

2.37 An in-house fringe benefit is broadly a benefit that is provided either by the employer, an associate of the employer or a third party to an employee where the provider of the benefit carries on a business that consists of, or includes, providing identical or similar goods or services to customers at arm's length.

2.38 Employers in the airline and travel industry are in the business of providing airline travel or tickets for airline travel to customers. Where such an employer provides airline travel or tickets for airline travel to an employee (on a stand-by basis), they are not providing identical goods and services to the employee. However, they are providing similar goods or services which will nonetheless be in-house fringe benefits under the FBT law.

Example 2.1 :

An airline, as employer, provides discounted travel on another airline to its employees pursuant to an interline agreement. This travel is subject to stand-by restrictions.

As the employer is in the business of providing airline travel, the provision of this benefit is an in-house residual fringe benefit as similar benefits are provided principally to outsiders.

2.39 To give effect to these reforms this measure inserts a modified form of the airline transport fringe benefits rules into the existing in-house property and residual fringe benefit provisions to deal with the unique valuation requirements for stand-by airline travel.

2.40 Where the airline transport fringe benefit is an in-house property fringe benefit, the taxable value of the benefit is an amount equal to 75 per cent of the stand-by travel value of the benefit at the time the transport starts. [Schedule 2, item 2, paragraph 42(1)(ab) of the FBTAA]

2.41 Where the airline transport fringe benefit is an in-house residual fringe benefit, the taxable value of the benefit is an amount equal to 75 per cent of the stand-by travel value of the benefit at the comparison time (which is the time the transport starts). [Schedule 2, items 5 and 7, paragraphs 48(ab) and 49(ab) of the FBTAA]

2.42 In both cases (whether it is an in-house property or in-house residual fringe benefit), the 25 per cent discount (that is, 75 per cent of the value) equals the standard discount applied in the FBT law for goods and services provided in-house by an employer or associate of the employer.

2.43 The reason for valuing the benefit at 75 per cent is that the discount reflects a traditional understanding that there is a lower cost for employers providing those benefits to their employees or associates of their employee than to their customers.

2.44 The reduction of aggregate taxable value of fringe benefits under section 62 of the FBTAA will continue to apply to airline transport fringe benefits as an in-house fringe benefit. [Schedule 2, items 10 to 12]

2.45 A number of consequential amendments have also been made to the in-house fringe benefits provisions to update cross references and headings for the insertion of the reformed airline transport fringe benefits valuation rules. [Schedule 2, items 3, 4, 6, 8 and 10 to 12]

Determining whether the airline transport fringe benefit is an in-house property fringe benefit or an in-house residual fringe benefit

2.46 In valuing the airline transport fringe benefit, employers may need to determine whether the benefit is an in-house property fringe benefit or an in-house residual fringe benefit. This depends on the particular facts and circumstances of the situation and is based on the way the benefit is provided.

In-house property fringe benefits

2.47 In general, a property fringe benefit includes:

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goods (including gas and electricity, unless provided through a reticulation system) and animals;

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real property, such as land and buildings; and

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rights to property, such as shares or bonds.

2.48 However, to be an in-house property benefit, the property benefit must satisfy a number of conditions including the requirement that the property must be tangible property. For this purpose, tangible property does not include such things as real estate, buildings or shares.

2.49 Different valuation rules apply to in-house property fringe benefits depending on whether the employer makes the goods or sells them as part of the employer's business.

Example 2.2 :

A travel agent, as employer, provides an employee with a ticket for transport in a passenger aircraft subject to stand-by restrictions.

As the benefit the employer has provided to the employee is the ticket, it would be treated as an in-house property fringe benefit as the ticket is a property benefit that can be accepted as being tangible property.

In-house residual fringe benefits

2.50 Residual benefits on the other hand are those benefits that are not covered by a specific category of fringe benefit. Residual benefits often include benefits, such as services or use of property.

2.51 A benefit is an in-house residual fringe benefit if the employer (or an associate) provides an identical or similar right, service or facility to the public, in the ordinary course of business.

Example 2.3 :

An airline, as employer, provides free travel to its employees, subject to stand-by restrictions.

As the benefit is a service (transport on the aircraft) the airline transport fringe benefit is an in-house residual fringe benefit.

2.52 The reforms in this measure mean that regardless of whether the airline transport fringe benefit is provided as an in-house property fringe benefit or an in-house residual fringe benefit, the airline transport fringe benefit will be valued consistently.

2.53 This will assist in reducing compliance costs for employers providing the benefit and ensures consistent treatment of airline transport fringe benefits across different employers that are able to provide these benefits to employees or associates of employees.

Interaction with the recent reform to in-house fringe benefits accessed through a salary packaging arrangement

2.54 Consistent with the recent reform to the in-house fringe benefits provisions in Schedule 7 to the Tax Laws Amendment (2012 Measures No. 6) Bill 2012, where an airline transport fringe benefit is accessed through a salary packaging arrangement, the benefit will not be taxed under the concessional in-house FBT valuation rules and instead will be valued using the notional value.

2.55 A salary packaging arrangement means an arrangement where the employee receives a benefit:

•

in return for a reduction in salary or wages that would not have happened apart from the arrangement; or

•

as part of the employee's remuneration package, and the benefit is provided in circumstances where it is reasonable to conclude that the employee's salary or wages would be greater if the benefit were not provided.

Repealing the existing airline transport fringe benefit rules

2.56 As the airline transport fringe benefit rules have been updated and inserted into the in-house fringe benefit provisions, this measure repeals Division 8 of Part III of the FBTAA in full as it is no longer needed. [Schedule 2, item 1, Division 8 of Part III of the FBTAA]

2.57 There are also a number of consequential amendments across the FBTAA, and in particular in the interpretation section (section 136) of that Act, that cross reference provisions or definitions in Division 8 of Part III of the FBTAA that are also repealed in order to give effect to this reform. [Schedule 2, items 9, 13, 14, 16 to 27 and 28 to 30]

Updating the valuation methodology for airline transport fringe benefits

2.58 This measure updates the method for determining the taxable value of airline transport fringe benefits to simplify the practical operation of the law and better reflect the economic value of the benefit.

2.59 The economic value of the benefit (a proxy for its notional value) is defined as the stand-by airline travel value, which is slightly different depending on whether the transport is over a domestic route or an international route.

2.60 Where the transport is on a domestic route, the stand-by airline travel value is 50 per cent of the carrier's lowest standard single economy airfare for that route as publicly advertised during the year of tax. [Schedule 2, item 26, subsection 136(1) of the FBTAA]

2.61 Where the transport is on an international route, the stand-by airline travel value is 50 per cent of the lowest of any carrier's standard single economy airfare for that route as publicly advertised during the year of tax. [Schedule 2, item 26, subsection 136(1) of the FBTAA]

2.62 The 50 per cent reduction in the economic value of the benefit reflects the decreased value of the airline travel due to the stand-by restrictions that apply to the benefit.

2.63 This is consistent with the existing valuation method for domestic and international airline transport fringe benefits as the initial 25 per cent reduction that applies by way of the in-house fringe benefit concession coupled with the 50 per cent reduction by way of the stand-by airline travel value equates to the existing 37.5 per cent valuation currently applied.

2.64 The determination of the stand-by airline travel value is based on the employer determining the lowest standard single economy airfare for the particular route that the employee or associate of the employee is taking in respect to the benefit as publicly advertised during the year of tax in which the transport starts.

The difference between the valuation of stand-by airline travel value on domestic routes and international routes

2.65 The main difference between the stand-by airline travel value of domestic routes and international routes is what airfares can be used for the valuation method.

2.66 For domestic routes the valuation method is based on the carrier's lowest standard single economy airfare. This means the provider must use the lowest standard single economy airfare of the carrier that provided the transport.

2.67 For international routes the valuation method is based on the lowest of any carrier's standard single economy airfare. This means the provider can use the lowest standard economy airfare of any carrier that provides commercial airfares over the relevant route.

2.68 The ability to use any carrier for the valuation method in respect to travel over international routes reflects the existing law and assists providers who have to determine airfares over routes which they may not fly or service themselves.

2.69 For the purposes of clarity, a domestic route means a route in which the flight's departure and arrival are both within Australia. An international route on the other hand means a route in which the flight's departure or arrival (or both) are outside of Australia.

The meaning of standard single economy airfare

2.70 The term 'standard single economy airfare' is intended to take its ordinary meaning and reflect the economy airfare that an ordinary customer would be expected to pay in order to travel the same route in that year of tax.

2.71 The inclusion of the word 'single' is intended to preclude the use of discounted group booking fares as comparable fares in determining the stand-by airline travel value.

Example 2.4 :

An airline provider offers discounted fares where a group booking is made of more than 10 people. As this discounted fare is not a single economy airfare it cannot be used as a comparable airfare in determining the stand-by airline travel value.

2.72 The inclusion of the word 'standard' is also intended to preclude the use of discounted group booking fares or 'one-off' or heavily discounted fares as part of a marketing campaign for determining the stand-by airline travel value.

Example 2.5 :

GoCheap (an airline provider) is attempting to increase its market share and decides to set up a three month marketing campaign and as part of that, put out a select number of fares per flight over a couple of major routes during the off-peak season that are only $1.

The discounted fares are far below the cost price of the service and do not reflect the standard single economy airfare for that particular route and therefore cannot be used as a comparable airfare in determining the stand-by airline travel value.

Example 2.6 :

A travel agent is determining the stand-by airline travel value for an airline transport fringe benefit provided to one of its employees. The airline transport fringe benefit provided to the employee was transport in a passenger aircraft from Sydney to Perth.

When determining the lowest standard single economy airfare, the travel agent finds a GoCheap airfare (as per the example above) that is only $1 over the Sydney to Perth route.

Even though the travel agent may not be aware that the flight is far below cost price, the travel agent is able to ascertain that the flight is heavily discounted as part of a marketing campaign because it is so far below the average range of fares for that route (which the travel agent determines is between $150 and $500 plus).

The travel agent then determines that the GoCheap airfare does not reflect a standard single economy airfare and it is therefore not a comparable airfare that can be used to determine the stand-by airline travel value.

The meaning of publicly advertised during the year of tax

2.73 In order to reduce compliance costs for employers in the airline industry, in determining the stand-by airline travel value, providers need only consider the relevant airfare that is publicly advertised during the relevant year of tax in which the transport began.

2.74 'Publicly advertised' is intended to include mediums such as the internet, newspapers, television as well as any other medium in which a member of the public would be able to reasonably ascertain the cost of the fare.

2.75 This will make it easier for employers who need to determine the cost of a fare provided by an associate international airline under a code-share or interline arrangement.

2.76 'During the year of tax' is intended to ensure that the provider determines the stand-by airline travel value based on a contemporary fare and the relevant year of tax is determined by the year in which the travel starts. [Schedule 2, items 2, 5, 7 and 16]

Example 2.7 :

Axel, an employee of an Australian airline, is travelling on an international carrier that is in an interline arrangement with his employer.

Having waited for a few days to get onto a flight to travel home to Australia as part of the stand-by restrictions, Axel is finally able to get on flight on 31 March 2014.

Even though the flight lands in Australia on 1 April 2014 local time, the relevant year of tax in determining the stand-by travel value is the 2013-14 FBT year.

Example 2.8 :

Assume the same facts as Example 2.7 except that Axel is unable to get onto the 31 March 2014 flight and instead boards on 1 April 2014. In that case the relevant year of tax is the 2014-15 FBT year.

Application and commencement

Application date

2.77 This reform applies to airline transport fringe benefits provided after 7.30 pm by legal time in the Australian Capital Territory on 8 May 2012.

Commencement date

2.78 Schedule 2 to this Bill commences on the latter of the date that this Bill receives Royal Assent and the day that the recent changes to the concessional treatment for in-house fringe benefits accessed by way of salary packaging arrangements commence.

2.79 This is to ensure that amendments, which are to the same area of law, do not conflict.

2.80 The reform to in-house fringe benefits accessed through salary packaging arrangements are in Schedule 7 to the Tax Laws Amendment (2012 Measures No. 6) Bill 2012.

Retrospectivity of measure

2.81 These amendments apply retrospectively to benefits provided after 8 May 2012, however, the amendments (in situations where the tax outcome differs) are of a beneficial nature to affected entities.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Schedule 2 - Fringe benefits tax - reform of airline transport fringe benefits

2.82 Schedule 2 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.83 Schedule 2 amends the Fringe Benefits Tax Assessment Act 1986 to reform the special rules for calculating airline transport fringe benefits so that these benefits are aligned with the general provisions dealing with in-house property fringe benefits and in house residual fringe benefits.

2.84 The method for determining the taxable value of airline transport fringe benefits is also updated to simplify the practical operation of the law and to better reflect the economic value of the benefit.

Human rights implications

2.85 Schedule 2 does not engage any of the applicable rights or freedoms.

Conclusion

2.86 Schedule 2 compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury