Edited version of your written advice

Authorisation Number: 1051394401249

Date of advice: 10 July 2018

Ruling

Subject: Fringe benefits tax – exempt benefit – provision of certain work related items

Question

Does the relevant Smart Watch fall under the definition of a Portable Electronic Device for the purpose of FBT Exemption in accordance with subsection 58X(2)(a) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2019

Year ended 31 March 2020

Year ended 31 March 2021

The scheme commences on:

April 2018

Relevant facts and circumstances

Smart Watch

This ruling is restricted to consideration of the Smart Watch (Series X and prior) as advertised for sale in Australia at mid-2018. Later updates to the features of the Smart Watch may change the answers to this ruling and the questions would need to be reconsidered.

The Australian relevant website provides the following information about the Smart Watch currently available in Australia in Mid 2018

● to use the Smart Watch (Series 2 and prior), it needs to be paired with an Phone v5s or later with iOS 11 or later. Smart Watch Series x (GPS + Cellular) requires an Phone v6 or later.

● when the Smart Watch Series 2 or earlier is not paired with or not in the vicinity of the user’s Phone the Smart Watch’s functions are restricted to:

● playing music from a synced playlist

● using the watch, world clock, alarm, timers and stopwatch

● using the activity and workout apps

● seeing the users heart rate

● displaying photos from synced photo albums in the Photos app

● making purchases with a relevant Pay system

● when the Smart Watch Series x (GPS + Cellular) is not paired with or not in the vicinity of the user’s Phone, the Smart Watch’s functions are restricted to that mentioned of Smart Watch Series x above and the added capabilities of:

● making phone calls

● replying to messages

● receiving notifications

● setting reminders

● sending calendar invitations

● providing directions via Maps

● the Smart Watch is designed for brief interactions and to be easy to use when the user is on the move – it is designed to let the user do things they are used to doing on their phone but in a more convenient and less obtrusive way

● when the Smart Watch is paired with and in the vicinity of the user’s Phone the Smart Watch:

● gives the wearer a discreet tap when they receive a notification, is activated by the wearer simply raising their wrist and turned off by the wearer lowering their wrist

● can be used to receive and display text messages and emails but sending or responding to messages and emails is limited to sending short, pre-set phrases from the Smart Watch, animated emojis, dictating a reply and sending it as audio or text, or sending a map showing the users location. You must switch to the Phone to use a keyboard to send or reply to text messages and emails

● has a handoff feature which allows the user to move from the Smart Watch to the Phone without losing focus on what they are doing. For example if the user wants to switch to the Phone to reply to an email using the onscreen keyboard this feature allows the user to easily and quickly open the same email in the phone and finish their reply. This feature works with Mail, Messages, Phone, Reminders, and Calendar.

● can be used to make and receive phone calls

● can be used to check and update the users calendar however calendar settings must be adjusted on the Phone

● when the Smart Watch is in a range of a Wi-Fi network that the Phone has connected to before, you can still do the following (even if the Phone is turned off):

● send and receive Digital Touch messages

● send and receive messages using Message

● make and receive phone calls (if the user has Wi-Fi calling enabled and they are within range of a Wi-Fi network that the Phone has connected to before)

● check current weather conditions

Relevant legislative provisions

Fringe Benefits Assessments Act 1986 section 58X

Reasons for decision

Subsection 58X(1) of the FBTAA states:

Any of the following benefits provided by an employer to an employee of the employer in respect of the employee’s employment is an exempt benefit:

(a) an expense payment benefit where the recipients expenditure is in respect of an eligible work related item;

(b) a property benefit where the recipients property is an eligible work related item;

(c) a residual benefit where the recipients benefit consists of the making available of an eligible work related item.

Subsections 58X(2) and 58X(3) of the FBTAA provide limitations on the subsection 58X(1) exemption. They state:

58X(2) Subject to subsection (3), each of the following is an eligible work related item if it is primarily for use in the employee’s employment:

(a) a portable electronic device;

(b) an item of computer software;

(c) an item of protective clothing;

(d) a briefcase;

(e) a tool of trade.

58X(3) An item (the later item) listed in subsection (2) is not an eligible work related item if, earlier in the FBT year, an expense payment benefit or a property benefit of the employee has arisen in relation to another item that has substantially identical functions to the later item.

That is, a property, expense payment or residual benefit provided by an employer to an employee, in respect of the employee’s employment, will be an exempt benefit if:

(1) the recipients expenditure is in respect of an eligible work related item (expense payment benefit) or the recipients property is an eligible work related item (property benefit) or the recipients benefit consists of the making available of an eligible work related item (residual benefit); and

(2) the eligible work related item is primarily for use in the employee’s employment; and

(3) an expense payment benefit or a property benefit of the employee has not arisen earlier in the FBT year in relation to another item that has substantially identical functions to the eligible work related item being considered, unless it is a replacement.

As detailed above, subject to subsection 58X(3) of the FBTAA and the requirement that the item is primarily for use in the employee’s employment, items that fall into one of the categories listed in paragraphs 58X(2)(a) to 58X(2)(e) of the FBTAA are considered to be eligible work related items for the purposes of section 58X of the FBTAA.

Regarding the list of eligible work related items provided by paragraphs 58X(2)(a) to 58X(2)(e) of the FBTAA, of the types of items listed, the most applicable to the Smart Watch is the ‘portable electronic device’.

Is the Smart Watch a ‘portable electronic device’?

The term ‘portable electronic device’ is not defined in the FBTAA.

The Australian Taxation Office (ATO) has considered the meaning of a 'portable electronic device' and provided an explanation of the phrase in Chapter 20 of the publication Fringe benefits tax – a guide for employers (FBT Guide for Employers)(NAT 1054) which states:

A portable electronic device is a device that is all of the following:

● easily portable and designed for use away from an office environment

● small and light

● can operate without an external power supply

● designed as a complete unit.

Examples of portable electronic devices include a mobile phone, calculator, personal digital assistant, laptop, portable printer, and portable global positioning system (GPS) navigation receiver.

ATO Interpretative Decision ATOID 2008/133 Fringe Benefits Tax Exempt Benefits: work related items – a portable electronic device (ATOID 2008/133) provides further guidance on the meaning of ‘portable electronic device’ for the purposes of paragraph 58X(2)(a) of the FBTAA in the context of considering whether a GPS navigation system is a portable electronic device. ATO ID 2008/133 states:

Subsection 58X(2) of the FBTAA includes a list of items that, if provided primarily for use in an employee’s employment, can be considered as ‘eligible work related items’.

The list in subsection 58X(2) of the FBTAA is as follows:

(a) portable electronic device

(b) ….

A ‘portable electronic device’ is included in the list. However, the FBTAA does not provide a definition of ‘a portable electronic device’; therefore it takes on its ordinary meaning.

The Macquarie Dictionary, [Multimedia] version 5.0.0, 1/10/01. defines ‘portable’ as:

2. easily carried or conveyed by hand.

The Macquarie Dictionary, [Multimedia] version 5.0.0, 1/10/01. defines ‘electronic’ as:

2. of, relating to, or concerned with electronics or any devices or systems based on electronics.

The meaning of the words ‘a portable electronic device’ should be restricted to the characteristics of the words that precede the word device. That is, the meaning of ‘a portable electronic device’ is limited to a device that is easily carried by hand and is based on electronics.

The Tax Laws Amendment (Budget Measures) Act 2008 repealed the former subsection 58X(2) of the FBTAA. Previously under subsection 58X(2) of the FBTAA the list of exempt items included, as relevant;

● a mobile phone or car phone

● a calculator

● an electronic diary, a personal digital assistant or similar item

● a notebook computer, laptop computer or similar portable computer, and

● a portable printer designed for use with a notebook computer, laptop computer or similar portable computer,

This previous list of exempt items had become outdated because of changes in technology, for example, many portable electronic devices have more than one function and other work-related electronic devices have become available.

‘A portable electronic device’ is a generic term which would include but is not restricted to items which were previously exempt under subsection 58X(2) of the FBTAA and items of new technology which may have characteristics similar to those previously listed items.

Taken together the dictionary meanings and characteristics of the previous listed items noted above indicate that the primary characteristics of a ‘portable electronic device’ for the purposes of this provision would be that the device is:

● easily portable and designed for use away from an office environment

● small and light

● can operate without an external power supply, and

● designed as a complete unit.

If a device has these characteristics it would be ‘a portable electronic device’ for the purposes of paragraph 58X(2)(a) of the FBTAA.

The Smart Watch is easily portable and designed for use away from an office environment, small and light, can operate without an external power supply and is designed as a complete unit. It is a similar device to the types of devices listed in the FBT Guide for Employers and ATO ID 2008/133. The current model Smart Watch as advertised for sale in Australia at Mid 2018 is a portable electronic device for the purposes of paragraph 58X(2)(a) of the FBTAA.

Is the Smart Watch substantially different in function to a mobile phone?

Subsection 58X(3) of the FBTAA states:

An item (the later item) listed in subsection (2) is not an eligible work related item if, earlier in the FBT year, an expense payment benefit or a property benefit of the employee has arisen in relation to another item that has substantially identical functions to the later item.

The term ‘substantially identical functions’ is not defined in the FBTAA.

The meaning of ‘substantially identical functions’ in the context of subsection 58X(3) of the FBTAA is discussed in the FBT Guide for Employers which states:

Substantially identical functions

An eligible work related item will not be exempt from FBT if earlier in the same FBT year you have provided your employee, by way of an expense payment benefit, with an item that has substantially identical functions.

It is the features or design specifications that are examined when determining whether items have substantially identical functions, not the intended use of the items.

Items will have substantially identical functions where the functions of two items are the same in most respects. However, items may be different in a number of ways which do not impact on an item’s function. For example, colour, shape, brand and design would not generally be relevant considerations when determining whether two items have substantially identical functions.

Where a tablet computer can perform the functions of a laptop computer, even in a reduced capacity, it would be considered to have substantially identical functions to the laptop computer. However, where a tablet computer is designed primarily as a means of digital media consumption, rather than creation, it would not have substantially identical functions to a laptop.

Example – Items do not have substantially identical functions

An employer gives their employee a laptop during the FBT so that they can work from home and access their email, prepare work related material such as word processing documents and complex spreadsheets and access the internet.

In the same FBT year, the employer gives that employee a tablet as it is more portable than the laptop and is useful for the employee when they are travelling. The tablet is designed to access email and browse the internet. It is not designed to create word processing documents or complex spreadsheets. The tablet does not have substantially identical functions to the laptop computer and would not be considered to be able to replace the laptop. The tablet would also be exempt from FBT, provided it was used primarily for work-related purposes.

The Smart Watch has similar functions to that of a mobile phone, however, as stated in the “Smart Watch Features” heading above, the Smart Watch has limited phone-like functionality and is designed for brief interactions for when the user is on the move. It is designed to let the user do things they are used to doing on their phone but in a more convenient and less obtrusive way.

The Smart Watch cannot do all the functions of a mobile phone, and is designed to act as a complimentary device to the user’s mobile phone. The Smart Watch is capable of performing basic tasks such:

● giving the wearer a discreet tap when they receive a notification

● receive and display text messages and emails but sending or responding to messages and emails is limited to sending short, pre-set phrases from the Smart Watch, animated emojis, dictating a reply and sending it as audio or text or sending a map showing the users location. You must switch to the Phone to use a keyboard to send or reply to text messages and emails

● a handoff feature which allows the user to move from the Smart Watch to the Phone without losing focus on what they are doing. For example if the user wants to switch to the Phone to reply to an email using the onscreen keyboard this feature allows the user to easily and quickly open the same email in the phone and finish their reply. This feature works with Mail, Messages, Phone, Reminders, and Calendar.

● to make and receive phone calls

● to check and update the users calendar however calendar settings must be adjusted on the Phone

● set reminders

● send calendar invitations

● give directions via Maps

● send and receive Digital Touch messages

● send and receive messages using Message; and

● check current weather conditions

As detailed above, the Smart Watch has basic functionality to compliment the user’s mobile phone, however if the user wishes to perform more complex tasks such as replying to a message or email via keyboard text, the user must use their mobile phone as the Smart Watch does not have keyboard functionality.

The Smart Watch does not also allow for majority of mobile phone applications (“Apps”) to be used on the device. Only applications specifically designed for the Smart Watch may be utilised.

The Smart Watch is also not capable of viewing complex webpages on the screen of the Smart Watch, and thus would require the user to use their mobile phone to access websites and complex applications.

These limitations of the Smart Watch satisfy its need to be substantially different to a mobile phone. Therefore, if earlier in the FBT year, an expense payment benefit or a property benefit provided by the employer to their employee has arisen in relation to an eligible work related item (i.e. mobile phone) under subsection 58X(2) of the FBTAA, subsection 58X(3) of the FBTAA will not preclude the Smart Watch from being an eligible work related item under subsection 58X(2).