House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)

CHAPTER ONE Fringe Benefits Tax

EXCESS DOMESTIC TRAVEL ALLOWANCE

Summary of Amendments

1.1 Purpose of the amendments: To amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to create an Excess Domestic Travel Allowance Benefit where a relevant allowance is in excess of a prescribed amount [Clause 4]. The Bill will also amend the Income Tax Assessment Act 1936 (ITAA) to deny a deduction for travel expenses in excess of a prescribed amount. Both measures relate only to travel within Australia [Clause 17].

1.2 The Bill inserts a new Division 7A into the FBTAA. Subdivision A of the new Division sets out what constitutes a domestic travel allowance and what constitutes an excess domestic travel allowance benefit. Subdivision B of the new Division sets out what is the taxable value of an excess domestic travel allowance fringe benefit.

1.3 The Bill inserts new section 51AM into the ITAA to deny deductions to employees for excess domestic travel expenses. The Bill also inserts new section 51AN into the ITAA to deny deductions to persons other than employees for excess domestic travel expenses.

1.4 Date of effect: The amendments to the FBTAA are to apply to FBT assessments from and including the FBT tax year commencing on 1 April 1994 [Clause 7].

1.5 The amendments to the ITAA are to apply to expenses incurred on or after 1 April 1994 [Clause 19 and 22]

Background to the legislation

1.6 A deduction under subsection 51(1) of the ITAA is available for expenditure incurred on the cost of food, drink, accommodation or incidentals on employment-related travel. This deduction, however, is subject to the substantiation provisions of the ITAA being satisfied. The relevant substantiation provisions are sections 82KZ and 82KZA.

1.7 In the case of domestic travel, subsection 82KZ(4) provides relief from the substantiation requirements contained in subsections 82KZ(2) and 82KZA where the taxpayer has received an allowance in respect of those expenses (whether or not the allowance was paid under an industrial instrument) and the following conditions are satisfied:

•

the expenditure incurred does not exceed the allowance; and

•

the Commissioner of Taxation considers the allowance to be reasonable.

1.8 The Commissioner provides guidelines on what he considers to be a reasonable travelling allowance by way of rulings, the most recent being Taxation Ruling TR 93/22 issued on 15 July 1993.

1.9 Where a taxpayer claims expenditure on food, drink, accommodation and incidentals in excess of a reasonable travel allowance and/or the travel allowance received by the taxpayer exceeds what the Commissioner considers to be reasonable, a deduction will be denied for all of the expenditure where the amounts are not fully substantiated.

1.10 Under the existing law, there is no limit imposed as to the amount of expenditure a taxpayer can claim with regard to these expenses. A taxpayer will be entitled to a deduction for expenditure incurred which is in excess of what the Commissioner considers reasonable provided the substantiation requirements (as outlined above) are satisfied.

Explanation of the amendments

Fringe Benefits Tax Assessment Act 1986

1.11 New Division 7A of the FBTAA provides for a new type of fringe benefit - an excess domestic travel allowance fringe benefit. [Clauses 5 and 6]

1.12 Generally, travel provided by an employer to an employee is already subject to the fringe benefits tax provisions. Most allowances, however, are not subject to the fringe benefits tax as they fall within the definition of "salary or wages" in subsection 221A(1) of the ITAA and "salary or wages" are excluded from the definition of "fringe benefit" in subsection 136(1) of the FBTAA. This Bill partially withdraws that exclusion from the definition of "fringe benefit" by amending subsection 221A(1) of the ITAA so that the excess domestic travel allowance is excluded from the definition of "salary or wages". [Clauses 20 and21]

1.13 The Bill defines a domestic travel allowance in terms similar to the substantiation provisions definition of travel allowance in subsection 82KT(1) of the ITAA. The three main conditions for such an allowance to exist are:

•

the travel must be away from the employee's ordinary place of residence;

•

the travel must be undertaken in the course of performing the employee's duties; and

•

the travel must be within Australia. [New subsection 31A(1)]

1.14 An excess domestic travel allowance benefit is that part of a domestic travel allowance which exceeds a limit which is to be prescribed by Regulation. [New subsection 31A(2)]

1.15 The taxable value of an excess domestic travel allowance fringe benefit is the amount of the domestic travel allowance which exceeds the prescribed limit. [New section 31B]

Income Tax Assessment Act 1936

1.16 New sections 51AM and 51AN operate to deny a deduction to taxpayers who claim domestic travel expenses that are in excess of a prescribed limit. [Clause 18]

1.17 Where an employee would otherwise be entitled to a deduction for domestic travel expenses, that part of the deduction which exceeds a limit which is to be prescribed by Regulation will no longer be allowable. [New subsection 51AM(2)]

1.18 Where a person other than an employee would otherwise be entitled to a deduction for domestic travel expenses, that part of the deduction which exceeds a limit which is to be prescribed by Regulation will no longer be allowable. [New subsection 51AN(2)]

1.19 New section 51AN applies to a traveller who is a natural person, a partner who is a natural person, or a trustee who is a natural person. [New subsection 51AN(1)]

1.20 The Bill defines domestic travel expenses in terms similar to the definition of travel allowance in the substantiation provisions of subsection 82KT(1) of the ITAA, i.e. the expenses were incurred in respect of travel:

•

away from the person's ordinary place of residence;

•

undertaken for employment (section 51AM) or other income-producing (section 51AN) purposes; and

•

within Australia. [New subsection 51AM(3) and subsection 51AN(3)]

NON-DEDUCTIBLE EXPENSES

Summary of amendments

1.21 Purpose of amendment: To amend the Income Tax Assessment Act 1936 (ITAA) to allow deductions for expenses relating to the provision of entertainment, club fees, leisure facilities, travel expenses of accompanying relatives, Higher Education Contribution Scheme (HECS) payments and Student Financial Supplement Scheme (SFSS) payments incurred by employers in providing fringe benefits to their employees. The Bill will also make reciprocal amendments to the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to ensure those fringe benefits provided to the employees are subject to fringe benefits tax under the FBTAA. [Clause 8]

1.22 Subsection 51(6), subsection 51AB(4), subsection 51AE(4), subsection 51AG(1) and subsection 54(3) of the ITAA deny deductibility for relevant expenses which would otherwise be deductible. The Bill will insert into section 51, section 51AB, section 51AE, section 51AG and section 54 of the ITAA, a new subsection which will allow deductibility of those expenses where the expense was incurred in providing a fringe benefit. [Clause 27]

1.23 As a result of these amendments to the ITAA, section 64, section 64A, section 65 and some definitions in subsection 136(1) of the FBTAA will have no further application. The Bill repeals these redundant provisions [Clauses 9 and 10]. The Bill also repeals section 65CAA and amends a number of other sections to delete reference to that section. [Clauses 12 to 15]

1.24 Date of effect: The amendments to the FBTAA are to apply to FBT assessments from and including the FBT tax year commencing on 1 April 1994. [Clause 11]

1.25 The amendments to the ITAA are to apply in relation to fringe benefits provided on or after 1 April 1994. [Clause 33]

Background to the legislation

1.26 An employer's costs incurred in providing fringe benefits to an employee (or an associate of an employee) are generally allowable deductions under subsection 51(1) of the ITAA.

1.27 However, there are certain benefits where the cost to the employer of providing those benefits to the employee is not allowable as a deduction under subsection 51(1) of the ITAA. While these benefits are included as fringe benefits for purposes of the FBTAA, the taxable value of the benefits are nil as their value is reduced to the extent to which they are non-deductible for income tax purposes.

1.28 The following types of fringe benefits are subject to these arrangements:

1.29 Entertainment Expenses

•

Subsection 51AE(4) operates to deny deductions to the extent to which the relevant loss or outgoing is in respect of the provision of entertainment. Section 64 of the FBTAA operates so that the taxable value in respect of the entertainment component of relevant fringe benefits is reduced by the amount of "eligible entertainment expenditure".

1.30 Club fees and expenditure relating to leisure facilities

•

Section 65 of the FBTAA applies to reduce the taxable value of these fringe benefits where the amount of any expenditure incurred by the employer on the benefit is expenditure in respect of which a deduction is denied under section 51AB or subsection 54(3) of the ITAA.

1.31 Expenditure on Higher Education Contribution/Students Financial Supplement Scheme

•

Section 64A of the FBTAA applies to reduce the taxable value of these fringe benefits where the amount of any expenditure incurred by the employer on the benefit is expenditure in respect of which a deduction is denied under subsection 51(6) of the ITAA. Payments affected by subsection 51(6) include both HECS payments and SFSS payments.

1.32 Travel expenses of accompanying relatives

•

Section 65 of the FBTAA applies to reduce the taxable value of these fringe benefits where the amount of any expenditure incurred by the employer on the benefit is expenditure in respect of which a deduction is denied under 51AG of the ITAA.

Explanation of the amendments

1.33 The Bill ensures that subsection 51(6), subsection 51AB(4), subsection 51AE(4), subsection 51AG(1) and subsection 54(3) of the ITAA which deny deductibility for expenses relating to the provision of entertainment, club fees, leisure facilities, travel expenses of accompanying relatives, HECS payments and SFSS payments do not apply where the expense was incurred in providing a fringe benefit. [New subsection 51(6A), new subsection 51AB(5A), new subsection 51AE(5AA), new subsection 51AG(1A) and new subsection 54(3A)] [Clauses 28 to 32]

1.34 The Bill also repeals section 64, section 64A, and section 65 of the FBTAA. As the expenses incurred in providing a fringe benefit relating to entertainment, club fees, leisure facilities, travel expenses of accompanying relatives, HECS payment and SFSS payments are no longer subject to subsection 51(6), subsection 51AB(4), subsection 51AE(4), subsection 51AG(1) and subsection 54(3) of the ITAA, these FBTAA provisions are redundant. [Clause 9]

1.35 As a consequence of these amendments, the taxable value of fringe benefits provided in the form of entertainment, club fees, leisure facilities, travel expenses of accompanying relatives, HECS payments and SFSS payments will no longer be subject to any reduction. The taxable value of the relevant fringe benefit will, therefore, be subject to fringe benefits tax in the usual manner.

CAR PARKING

Summary of amendments

1.36 Purpose of the amendment: To amend the Income Tax Assessment Act 1936 (ITAA) to deny a deduction for car parking expenses for certain non-employees. [Clause 23]

1.37 The Bill will insert a new section 51AGB into the ITAA. The new section, which applies to certain non-employees, denies a deduction for car parking expenses where conditions similar to those in section 39A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) apply. While the amount of the deduction denied is the actual amount of the expense incurred in providing the car parking facilities, a taxpayer may elect to choose an alternate amount based on either the commercial parking station method of valuation or the market value method of valuation.

1.38 Date of effect: The amendments are to apply to car parking expenses incurred by taxpayers on or after 1 July 1994. [Clause 26]

Background to the legislation

1.39 From 1 July 1993, car parking benefits provided under certain circumstances by an employer to an employee were made subject to Fringe Benefits Tax (FBT). To ensure that the overall tax effect of providing either a car parking benefit or an allowance to an employee to cover car parking is substantially similar, section 51AGA of the ITAA was inserted to deny a deduction to employees who incur car parking expenses under similar circumstances to those that give rise to an FBT liability.

1.40 Under these arrangements, persons other than employees are more favourably treated because they are able to claim an income tax deduction for car parking.

1.41 The rationale for imposing FBT, and denying a tax deduction to employees, for car parking under certain circumstances is equally relevant to persons other than employees. It is inequitable that some persons receive a tax deduction for the cost of car parking facilities while others must bear the cost of equivalent facilities without tax relief. Accordingly, the amendment in this Bill is required to restore equity in relation to the taxation treatment of these expenses.

Explanation of the amendments

Denial of deduction for certain non-employees

1.42 New section 51AGB will operate to deny a deduction for certain car parking expenses to non-employees. [Clause 24]

Application

1.43 The denial of deductions under section 51AGA of the ITAA applies only to employees who incur expenditure in providing car parking facilities to themselves. This amendment extends that denial of deduction for car parking facilities to any other taxpayer (a non-employee) who incurs expenditure on providing car parking facilities to themselves, including partners and trustees. [New paragraph 51AGB(1)(b)]

1.44 The new section will only apply if the conditions set out in new subsection 51AGB(1) apply. They are:

•

deduction for expenditure incurred in the provision of car parking facilities is, apart from this section, deductible;

•

the person to whom the car parking expenses relate is a natural person, a partner who is a natural person, or a trustee who is a natural person, and that person has a primary place of self-employment;

•

a permanent commercial car parking facility available for all-day parking is located within 1 kilometre of the premises where the car is parked;

•

the car is parked at, or in the vicinity of, the primary place of self-employment and is parked at that place for more than four hours during the period between 7.00am and 7.00pm on that day;

•

the expenditure is in respect of the provision of the relevant car parking facilities;

•

the car is used on that day to commute between the person's place of residence and their primary place of self-employment;

•

the provision of car parking facilities is not excluded by Regulation; and

•

the day the car is parked is on or after 1 July 1994.

Valuation

1.45 The value of the amount of deduction to be denied is, unless the taxpayer makes an election, the actual amount spent on the provision of the car parking facilities. [New subsection 51AGB(2)]

1.46 Where an election is made by the taxpayer, a deduction for the actual amount spent on the provision of car parking facilities is not denied in total. The actual amount that would be deductible but for new section 51AGB is reduced by either:

•

the commercial parking station amount; or

•

the market value amount. [New subsection 51AGB(3)]

The commercial parking station amount

1.47 The commercial parking station amount is the lowest fee for all-day parking charged by any commercial parking station operator within a 1 kilometre radius of the car parking facilities. [New subsection 51AGB(4)]

1.48 The Bill specifies that the 1 kilometre distance between the commercial parking station and the premises on which the car is parked is measured by the shortest practicable route. This route can be travelled by foot, car, train, boat, etc., whichever produces the shortest route. The 1 kilometre distance starts from the car entry point at parking premises and extends to the car entry point at the commercial parking station. [New subsection 51AGB(8)]

1.49 The Bill also provides a formula for converting longer term parking rates into daily rate equivalents for the purpose of determining the commercial parking station amount. [New subsection 51AGB(9)]

The market value amount

1.50 The market value amount is calculated on an arm's length valuation and needs to be based on a report from a suitably qualified valuer. [New subsection 51AGB(7)]. The report must be retained for five years after its receipt. [Clause 25]

Anti-avoidance

1.51 The Bill includes anti-avoidance provisions which will ensure that the commercial parking station amount is not undervalued. [New subsection 51AGB(10)]