Edited version of your written advice

Authorisation Number: 1012947935826

Date of advice: 29 January 2016

Ruling

Subject: Fringe benefits tax - expense payment fringe benefits otherwise deductible rule

Question 1

Can the taxable value of the fringe benefit that is provided when you pay your employees' gym memberships be reduced by the 'otherwise deductible' rule?

Answer

No

This ruling applies for the following periods:

A number of fringe benefits tax years commencing in the 2015 fringe benefits year

The scheme commences on:

In the FBT year ending 31 March 2015

Relevant facts and circumstances

X of your employees (the relevant employees) work with high-risk clients and spend 1:1 time with them.

The relevant employees are the only employees who specialise in this area.

The type of work performed by the relevant employees enables them to earn a higher income than other employees in the same profession.

The relevant employees are required by their job description to maintain a physical readiness to perform the work and you state that they must be able to physically protect themselves when the situation arises.

The employees have undertaken self-defence training while in previous roles and they maintain these skills through their current gym memberships.

The benefit

These employees are members of gyms and regularly and frequently attend gym sessions to maintain the level of fitness required to exercise their roles. The fitness regimes they undertake include personal training, weight and strength training.

The memberships are in the employees' individual names, and you pay the membership fees on their behalf via direct debit to the gyms on either a weekly or fortnightly basis.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 24

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-45

Reasons for decision

Question 1

Can the taxable value of the fringe benefit that is provided when you pay your employees' gym memberships be reduced by the 'otherwise deductible' rule?

Detailed reasoning

The relevant employees are members of gyms. They each hold their gym membership in their own names. You pay for their gym memberships via direct debit to the respective gym.

Section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) defines an expense payment benefit as follows:

Where a person (in this section referred to as the provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient) in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

When you pay your employees gym membership fees via direct debit to the gym you are providing your employee with an expense payment benefit in accordance with paragraph 20(b) of the FBTAA. The benefit is a fringe benefit according to the definition of 'fringe benefit' in section 136 of the FBTAA.

The taxable value of an expense payment fringe benefit can be reduced in certain circumstances by the 'otherwise deductible' rule, if the employee would have been entitled to claim an income tax deduction for the expense had they paid for the expense themselves. Section 24 of the FBTAA states:

(1) Where:

(a) the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

(b) if the recipient had, at the time when the recipients expenditure was incurred, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure), in respect of the same matter in respect of which the recipients expenditure was incurred, equal to:

(i) in the case of an in-house expense payment fringe benefit - the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the expense payment fringe benefit in relation to the year of tax; or

(ii) in the case of an external expense payment - the amount of the recipients expenditure;

a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross expenditure;

…

(ea) …the taxable value, but for Division 14, of the expense payment fringe benefit in relation to the year of tax is the amount calculated in accordance with the formula:

TV - ND
where:

TV is the amount that, but for this subsection and Division 14, would be taxable value of the expense payment fringe benefit in relation to the year of tax; and

ND is:

(g) if neither paragraph (ea) nor paragraph (f) applies and paragraph (l) does not apply - the notional deduction; …

The recipient of the benefits are your employees and therefore, the taxable value of the expense payment fringe benefits can be reduced using the 'otherwise deductible' rule if the employees would have been entitled to a once-only deduction had you not paid for the expense on their behalf.

Would the employees who received the benefit have been entitled to a once-only deduction for the expenses had you not paid for the expenses on their behalf?

A 'once-only' deduction is defined in subsection 136(1) to mean:

once-only deduction, in relation to expenditure, means a deduction in a year of income in respect of a percentage of the expenditure where no deduction is allowable in respect of a percentage of the expenditure in any other year of income.

The general rules about deductions are contained in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) which states:

8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your*exempt income or your *non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

There is no specific guidance on the deductibility of fitness expenses for your employees' profession. However, numerous Taxation Rulings and Determinations exist which discuss the deductibility of the costs of maintaining a certain level of fitness in particular industries, the general principles of which can be applied to your situation.

Taxation Determination TD 93/114 Income Tax: is a police officer, who is required to maintain an adequate level of physical fitness in order to undertake police duties, entitled to claim a deduction for fitness related expenditure? (TD 93/114) and Taxation Ruling TR 93/13 Income tax: employee police officers - allowance, reimbursements and work-related deductions (TR 93/13) discuss the circumstances in which fitness expenses could be deductible to police officers.

TD 93/114 states:

Where police duties do not require an officer to undertake regular strenuous physical activity, expenses of keeping fit are not deductible under subsection 51(1) of the Income Tax Assessment Act 1936. This type of expense does not have the essential character of being incurred in the course of gaining or producing assessable income.

An employer's requirement that an employee incur expenditure which is not related to income-producing activities does not convert that expenditure into a deductible outgoing (per Hill J in FC of T v. Cooper 91 ATC 4396 at 4414; (1991) 21 ATR 1616 at 1636). Therefore, whilst Police Regulations may require an officer to remain in a physically fit condition, this does not mean expenditure related to keeping fit is allowable as an income tax deduction.

However, there may be circumstances where such expenditure by a police officer is an essential element of gaining income. This could occur in those occupations within the police force where strenuous physical activity by an officer is an essential and regular element of performing that officer's duties. It is considered a police academy physical training instructor may be in this category.

Example 1

A general duties police officer regularly plays squash to ensure he maintains a high level of fitness as he may be called upon to undertake strenuous activities at any time in the line of duty. The officer claims his squash fees as a deduction. As the officer's ordinary duties do not require regular strenuous physical activity, no deduction is available to the officer for squash fees or any related expenses.

TR 93/13 similarly states:

Fitness expenses

109. A deduction is not allowable for fitness expenses as they are considered to be of a private nature. An exception to this general rule applies if a police officer's income-earning activities involve strenuous physical activities on a regular basis.

110. For example, members of special emergency squads, a diving squads, and police officers who work regularly with police dogs and train them, may be able to demonstrate that their income-producing activities demand a high level of physical fitness. Similarly, Police Academy physical training instructors may be able to prove that fitness expenses they incur are directly related to their income-producing activities.

In summary, a deduction will only be allowable for the fitness expenses of a police officer if their duties require them to undertake strenuous physical activity on a regular basis to the point that the expenditure is an essential element of gaining their income. Examples provided of these types of roles include members of special emergency squads, diving squads, police officers who work regularly with police dogs and train them, and Police Academy physical training instructors. These roles, where the physical activity is very strenuous and a regular part of the job can be contrasted with the example in TD 93/114, of the general duties police officer who could potentially be called upon to undertake strenuous physical activity at any time as part of his job.

Your employee's employment situation is more comparable to the general duties police officer described in TD 93/114 than any of the specific roles listed in TR 93/13. That is, like the general duties police officer, your employees may potentially be required to undertake strenuous physical activity at any time, however their income-producing activities do not demand a high level of physical fitness on a regular basis and as such it is not an essential element in gaining their income.

It is also relevant to note that TD 93/114 confirms that an employer's requirement that an employee incurs expenditure does not make the expenditure a deductible outgoing. That is, your requirement that the relevant employees maintain a certain level of fitness does not necessarily makes the expenditure they incur on maintaining that level of fitness deductible.

Similarly to TD 93/114 and TR 93/13, TR 95/17 Income tax: employee work-related deductions of employees of the Australian Defence Force (TR 95/17) differentiates between general Australian Defence Force (ADF) members and ADF members whose particular roles involves strenuous physical activity as such an essential and regular element that they are paid to maintain the highest level of fitness. TR 95/17 states:

Fitness courses/gymnasium fees

114. Costs associated with attending fitness courses or membership of a gymnasium are generally private in nature and no deduction is allowable under subsection 51(1) of the Act. However, a deduction is allowable for these costs if the ADF member can demonstrate that strenuous physical activity is an essential and regular element of his or her income-earning activities and that the these costs were incurred to maintain a level of fitness well above the ADF general standard.

…

119A. Example: John is a member of the Special Air Services Regiment (SAS). He is paid to maintain the very highest level of fitness. To maintain his fitness level, John's fitness program includes weight training three times a week at a city gymnasium. His costs for attending the gymnasium such as gymnasium fees, transport costs, protective sports shoes, shorts and T-shirts expenses are allowable deductions (paragraphs 120 to 124).

Unlike the member of the SAS in the example in paragraph 119A, strenuous physical activity is not such a crucial element of your employees' roles that they are paid to maintain the very highest level of fitness.

Taxation Ruling TR 95/20 Income tax: employee performing artists - allowances, reimbursements and work-related expenses (TR 95/20) and Taxation Ruling TR 94/14 Income tax: employee teachers - allowances, reimbursements and work-related deductions (TR 94/14) similarly reiterate that a deduction for fitness expenses is only allowable where physical activity is an essential element of the income earning activity and the means by which the taxpayer earns their income. TR 95/20 states:

Fitness expenses including chiropractic/massage/physiotherapy

105. A deduction is not allowable for the costs of maintaining general fitness or body shape. A deduction may be allowable if a performing artist can show that physical fitness and physical activity are essential elements of the income-earning activities and are the means by which the performing artist earns his/her income (see Taxation Determination TD 93/114).

106. Example: Albin, a circus trapeze artist, regularly attends a gymnasium to maintain fitness and strength to perform his rigorous aerial routines. Albin's fitness costs have the essential character of an income producing expense. The cost of attending the gymnasium has a direct nexus to the earning of assessable income and is an allowable deduction.

TR 94/14 states:

Fitness expenses

113. A deduction is not allowable under subsection 51(1) of the Act for expenses of keeping fit such as gym fees and aerobic class fees. It is not a requirement that employee teachers, including employee physical education teachers, maintain a high level of fitness. This type of expense does not have the essential character of being incurred in the course of gaining or producing assessable income (see Taxation Determination TD 93/114)

Compared with the example of the circus trapeze artist provided in paragraph 106 of TR 95/20, physical fitness and physical activity are not the means by which your employees earn their income and according to the explanations provided by TR 95/20 and TR 94/14 the fitness expenses do not have the essential character of being incurred in the course of gaining their income.

In summary, while your employees may be required to maintain a certain level of fitness for their roles it is not at a level that makes it an essential and regular element of their employment. Your employees are not paid to maintain the very highest level of fitness and physical fitness or physical activity is not the means by which they earn their assessable income. As evidenced above, fitness expenses are generally considered to be private in nature and therefore not deductible. Your employees' situations are not comparable to any of the exceptions to this general rule provided in TD 93/114, TR 95/17, TR 95/13 and TR 95/20.

Therefore, as your employees would not have been entitled to a once-only deduction for their fitness expenses had you not paid the expense of their behalf, the taxable value of the expense payment fringe benefit you provide cannot be reduced using the 'otherwise deductible' rule.

Further issues to consider

It is relevant to note that regardless of the first tests for deductibility being met under section 8-1 of the ITAA 1997, paragraph 8-1(2)(d) disallows a deduction to the extent that another provision of the ITAA 1997 specifically prevents you from deducting it:

8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

…

(d) a provision of this Act prevents you from deducting it.

In considering the deductibility of gym memberships or the use of gym section 26-45 of the ITAA 1997 states:

Section 26-45 Recreational club expenses

26-45(1)

You cannot deduct under this Act a loss or outgoing to the extent you incur it to obtain or maintain:

(a) Membership of a *recreational club; or

(b) Rights to enjoy (otherwise than as a *member) facilities provided by a *recreational club for the use or benefit of its *members;

whether for yourself or someone else.

Meaning of recreational club

26-45(2) A recreational club is a company that was established or is carried on mainly to provide facilities, for the use or benefit of its *members, for drinking, dining, *recreation or entertainment.

…

995-1

recreation includes amusement, sport or similar leisure-time pursuits.

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