House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 1 Fringe benefits tax - reducing regulatory burdens on business

Outline of chapter

1.1 Schedule 1 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to:

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increase the minor benefits exemption threshold from less than $100 to less than $300;

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increase the reportable fringe benefits amount threshold from more than $1,000 to more than $2,000;

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increase, from $500 to $1,000, the reduction of taxable value that applies to eligible fringe benefits (ie, in-house fringe benefits and airline transport fringe benefits); and

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extend the definition of 'remote', for the purposes of the fringe benefits tax (FBT) concessions, where the shortest practicable route involves travel by water.

Context of amendments

1.2 In October 2005, the Prime Minister and the Treasurer announced the establishment of a taskforce to identify actions to address areas of Australian Government regulation that are unnecessarily burdensome, complex, redundant or that duplicate regulations in other jurisdictions.

1.3 As part of the Report of the Taskforce on Reducing the Regulatory Burdens on Business - Rethinking Regulation , it was recommended that the Australian Government increase the minor benefits exemption threshold from less than $100 to less than $300, and increase the reportable fringe benefits amount threshold from more than $1,000 to more than $2,000. On 7 April 2006, the Prime Minister and the Treasurer announced that these recommendations had been accepted.

1.4 Increasing the minor benefits exemption threshold will reduce compliance and record-keeping costs for employers who provide minor benefits to employees.

1.5 Increasing the reportable fringe benefits amount threshold to more than $2,000 will enable employers to reduce their compliance and record-keeping costs by not having to report fringe benefits for employees who receive no more than $2,000 worth of fringe benefits in the FBT year.

1.6 In the 2006-07 Budget the Government announced that it will increase, from $500 to $1,000, the reduction of taxable value that applies to eligible fringe benefits (ie, in-house fringe benefits and airline transport fringe benefits).

1.7 The Government also announced in the 2006-07 Budget that it will extend the definition of remote for the purposes of the FBT concessions. This will ensure that the FBT remote area concessions recognise the special circumstances of employees who work in locations isolated from populated areas by a body of water, as it is generally more difficult and inconvenient to travel by water than to travel by land.

Summary of new law

1.8 Paragraph 58P(1)(e) of the FBTAA 1986 is amended to increase the minor benefits exemption threshold from less than $100 to less than $300.

1.9 Subsections 135P(1) and 135Q(2) are amended to increase the reportable fringe benefits amount threshold from more than $1,000 to more than $2,000.

1.10 Paragraphs 62(1)(a) and (b) of the FBTAA 1986 are amended to increase, from $500 to $1,000, the reduction of taxable value that applies to the aggregate of the taxable values of eligible fringe benefits provided to an employee in a year of tax.

1.11 Section 140 of the FBTAA 1986 is amended so that where the shortest practicable surface route between a tested location and an eligible urban area includes a route by water, the total kilometres of the surface route that are by water are doubled for the purposes of determining whether a location is remote.

Comparison of key features of new law and current law

Detailed explanation of new law

1.12 Currently, the minor benefits exemption applies to certain benefits provided to an employee (or their associate) with a notional taxable value of less than $100, and, having regard to several factors described in paragraph 58P(1)(f) of the FBTAA 1986, it would be unreasonable to tax the benefit.

1.13 Paragraph 58P(1)(e) of the FBTAA 1986 is amended so that a minor benefit will qualify for the exemption if the notional taxable value of the benefit is less than $300, where the other conditions in section 58P of the FBTAA 1986 are satisfied. [ Schedule 1, item 1, paragraph 58P(1)(e )]

1.14 Currently, employers are required to record and report the grossed-up taxable value of fringe benefits provided in respect of an employee's employment on their payment summary when the taxable value of those benefits is more than $1,000. The reporting of fringe benefits places employees with access to fringe benefits on a more even footing with employees whose remuneration consists entirely of salary or wages.

1.15 Subsections 135P(1) and 135Q(2) of the FBTAA 1986 are amended to increase the reportable fringe benefits amount threshold for a year of income in respect of an employee's employment to more than $2,000. [ Schedule 1, items 3 and 5, subsections 135P(1 ) and 135Q(2 )]

1.16 An amendment is also made to examples 1 and 2 in subsection 135P(1) of the FBTAA 1986 to reflect the increase to the reportable fringe benefits amount threshold to more than $2,000. [ Schedule 1, item 4, examples 1 and 2 in subsection 135P(1 )]

1.17 An eligible fringe benefit for the purposes of section 62 of the FBTAA 1986 is an in-house fringe benefit or an airline transport fringe benefit. Broadly, an in-house fringe benefit is a good or service provided to an employee that is identical or similar to those that the employer supplies to the public in the ordinary course of the employer's business. An airline transport fringe benefit arises where an employee (or their associate) of an airline or a travel agent is provided with free or discounted air travel that is subject to the stand-by restrictions customarily applying to employees in the airline industry. Currently, the aggregate of the taxable values of eligible fringe benefits provided to an employee (or their associate) in a year of tax, are reduced by $500.

1.18 Paragraphs 62(1)(a) and (b) of the FBTAA 1986 are amended to provide for a $1,000 reduction in taxable value of eligible fringe benefits provided to an employee (or their associate) in a year of tax. [ Schedule 1, item 2, paragraphs 62(1)(a ) and ( b )]

1.19 There are a number of concessions for fringe benefits provided to employees in 'remote' locations. These concessions include an exemption for certain remote area housing benefits and reductions in the taxable value of certain benefits arising from housing assistance and residential fuel.

1.20 Section 140 of the FBTAA 1986 includes a definition of 'eligible urban area'. A 'remote' location is a location that is not in, or adjacent to, an eligible urban area. Section 140 of the FBTAA 1986 also outlines the method for measuring the distance by the shortest practicable surface route between an eligible urban area and a location that is being tested as remote.

1.21 Currently, a location is remote where it is situated at least 40 kilometres, by the shortest practicable surface route, from the centre point of an eligible urban area with a 1981 census population of less than 130,000 (but greater than 14,000), and is situated at least 100 kilometres, by the shortest practicable surface route, from the centre point of an eligible urban area with a 1981 census population of at least 130,000. Currently, in testing whether a location is remote, there are no special rules for travel by water.

1.22 Schedule 1 introduces a new formula for calculating the distance between a tested location and an eligible urban area, where the shortest practicable surface route between the two locations includes a route by water. Where the shortest practicable surface route between the tested location and the eligible urban area includes a route by water, the total number of kilometres of the surface route that are by water are doubled:

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If the shortest practicable surface route is entirely by water, the total number of kilometres is doubled.

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If the shortest practicable surface route includes travel by land and water, the total number of kilometres by water are doubled and added to the total number of kilometres by land.

[ Schedule 1, item 6, subsection 140(2A )]

1.23 The distance calculated using the formula in new subsection 140(2A) is then used to determine whether a location is remote.

Example 1.1

Wong Island is 80 kilometres, by the shortest practicable surface route, from the centre point of an inland eligible urban area with a population of 140,000. The shortest practicable surface route to the island involves 40 kilometres of travel by road and 40 kilometres of travel by sea.

Wong Island is also situated 45 kilometres, by the shortest practicable surface route, from the centre point of an eligible urban area with a population of 20,000.

Previously, Wong Island would not have been considered 'remote' for the purposes of FBT as it is less than 100 kilometres away from an eligible urban area with a population of at least 130,000. However, under the amendment, Wong Island would be 'remote' as it would be considered to be 120 kilometres - ie, 40 kilometres by land + (2 x 40 kilometres by water) - from the eligible urban area by the shortest practicable surface route.

Application and transitional provisions

1.24 These amendments will apply in respect of the FBT year starting on 1 April 2007 and all later FBT years. [ Schedule 1, item 7 ]

1.25 While the increase in the reportable fringe benefits amount threshold will apply from the FBT year starting 1 April 2007 and all later FBT years, the increase in threshold will first appear in the payment summaries of employees for the year of income ending 30 June 2008. The payment summaries of employees for the year of income ending 30 June 2007 will contain the reportable fringe benefits amount of employees for the FBT year ending 31 March 2007, notwithstanding the threshold was increased on 1 April 2007.