House of Representatives

Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP

Chapter 1 - Fringe benefits tax - meal cards and eligible work - related items

Outline of chapter

Fringe benefits tax

1.1 Part 1 of Schedule 1 to this Bill amends the fringe benefits tax (FBT) law to ensure that:

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food or drink provided as part of a salary sacrifice arrangement (eg, meal card arrangements) are excluded from the FBT exemption in section 41 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) which applies to property consumed on the employer's premises on a working day; and

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the FBT exemption in section 58X of the FBTAA 1986 for eligible work-related items is restricted to items that are used primarily for work-related purposes. In addition:

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the exemption will be limited to one of each of the listed eligible work-related items per employee per FBT year unless the item is a replacement item; and

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the list of eligible work-related items will also be updated so that it is available to work-related portable electronic devices.

Income tax

1.2 Part 1 of Schedule 1 to this Bill also amends the income tax law to ensure that:

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there is no deduction available under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the decline in value of eligible work-related items that are exempt under section 58X of the FBTAA 1986; and

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section 51AH, of the Income Tax Assessment Act 1936 (ITAA 1936) does not operate to deny decline in value deductions under Division 40 of the ITAA 1997.

Context of amendments

Fringe benefits tax

Exempt property benefits - meal card arrangements

1.3 Section 41 of the FBTAA 1986 currently provides an exemption for property benefits provided to employees and consumed by them on a working day on the employer's business premises. This includes food and drink.

1.4 The original intent of the legislation was to ensure that a property fringe benefit would be subject to FBT where it was provided free or at a discount. An exception was provided for goods supplied on a working day and consumed on the employer's premises. The limited nature of the intended benefit was illustrated in the explanatory memorandum to the original Bill by the example of 'a daily ration of beer consumed at work by brewery workers would not be subject to tax'.

1.5 Employers and employees have been accessing this FBT exemption where meals are provided to employees under salary sacrifice arrangements. These arrangements include the use of 'meal cards'. Under such arrangements, an employer pays for an employee's meals which have been provided by an independent caterer located on, or the independent caterer delivers to, the employer's premises. This allows an employee with a meal card to effectively purchase food and drink out of pre-tax income, whereas most employees must purchase their meals from after-tax income.

1.6 The use of meal cards in these circumstances is inconsistent with the original policy intent of the FBT exemption which was to provide an exemption for staff canteens and other modest benefits. Therefore, the measure restores the original intent.

Exemption for eligible work - related items

1.7 The FBT exemption for eligible work-related items in section 58X of the FBTAA 1986 was introduced in 1995 as part of measures designed to reduce the cost of compliance for employers. The measure was intended to remove the need for employers to obtain declarations stating the percentage of employment-related use in applying the 'otherwise deductible' rule (generally, the extent to which the employer could obtain a deduction in relation to the benefit, as the benefit would have been deductible to the employee).

1.8 With the exception of mobile phones, computer software and protective clothing, the current exemption provides that items will be exempt without any requirement that their use be work-related. It was not anticipated that other benefits would be widely available for private purposes.

1.9 Since the exemption was introduced in 1995, changes in technology have increased access to portable electronic items such as laptop computers. Employees are able to acquire these items under a salary sacrifice arrangement for private purposes. This allows them to acquire goods for private use out of pre-tax income. This is inconsistent with the original policy intention that the exemption should only be available where personal use of a particular item is merely incidental to business use.

1.10 In addition, except for laptops or other portable computers, there is no restriction on the number of items for which the exemption can apply in an FBT year.

1.11 The list of exempt items has also 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. It is uncertain whether the FBT exemption applies to these items given their multiple functionality.

Income tax

Decline in value deductions for items which are exempt under section 58X of the FBTAA 1986

1.12 Employees are currently able to claim deductions for the decline in value of depreciating assets such as laptop computers to the extent they are used for a taxable purpose. This is notwithstanding that the item may have effectively cost them less than the purchase price because, for example, it was provided as an expense payment fringe benefit (where the employee has effectively been reimbursed the cost by their employer) or as a property fringe benefit and the benefit is exempt from FBT under section 58X of the FBTAA 1986. This is an inappropriate outcome as no FBT is payable and both the employee and employer can claim a tax deduction in respect of the item - even though the employee has effectively not incurred the cost of purchasing it.

Section 51AH of the Income Tax Assessment Act 1997

1.13 Section 51AH of the ITAA 1936 complements section 24 of the FBTAA 1986 which contains the 'otherwise deductible' rule as it applies to expense payment fringe benefits. It operates to deny an employee a deduction for expenditure where that expenditure has been reimbursed by the employer as an expense payment fringe benefit.

1.14 Under the existing Australian Taxation Office interpretation, section 51AH does not operate to deny deductions for decline in value of depreciating assets that are provided by way of expense payment fringe benefits.

1.15 As there is some doubt that this view is sustainable, the law is to be amended to ensure that section 51AH does not prevent a deduction for decline in value of depreciating assets that are subject to FBT.

Summary of new law

1.16 These amendments:

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ensure that the FBT exemption in section 41 of the FBTAA 1986 for property benefits consumed on the employer's business premises on a working day, excludes food or drink which is provided to an employee under a salary sacrifice arrangement;

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ensure that the FBT exemption for eligible work-related items under section 58X will now only be available for eligible work-related items where those items are used primarily for work purposes. In addition:

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the exemption will be limited to one of each of the listed eligible work-related items per employee per year unless it is a replacement item; and

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the list of work-related items will also be updated to deal with changes in technology;

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deny employees decline in value deductions for assets which are provided to the employee as either an expense payment fringe benefit or a property fringe benefit and the benefit is exempt under section 58X of the FBTAA 1986; and

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ensure that section 51AH of the ITAA 1936 does not prevent decline in value deductions for depreciating assets that are subject to FBT.

Comparison of key features of new law and current law

Detailed explanation of new law

Fringe benefits tax

Exempt property benefits - meal card arrangements

1.17 This Schedule will amend section 41 of the FBTAA 1986 so that it will not apply to provide a FBT exemption for food or drink provided to an employee where:

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an employee has agreed to receive the food or drink in return for a reduction in the employee's entitlement to receive salary or wages and this would not have happened apart from the agreement; or

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it is reasonable to conclude that the employee's salary or wages would be greater if the food or drink were not provided as part of the employee's remuneration package.

[ Schedule 1, item 2, subsection 41(2)]

1.18 The type of agreement or arrangement described in subsection 41(2) is commonly referred to as a 'salary sacrifice' arrangement. It includes 'meal card' arrangements whereby an employee forgoes salary and wages to have food and drink supplied to them on their employer's premises. The exclusion does not apply to a subsidised canteen which is available to all employees and which does not form part of a salary sacrifice arrangement.

Example 1.1

As an employee, Paul's income is subject to the top rate of taxation. There is a restaurant on the ground floor of Paul's employer's premises. The employer has entered into an arrangement whereby the restaurant provides employees with a 'swipe card' (meal card) to purchase meals.

Paul's employer offers a salary sacrifice arrangement to its employees to acquire a 'meal card'. Paul enters into a salary sacrifice arrangement for $3,000 with his employer to obtain a meal card. Paul orders his lunch each day (and occasionally dinner) and the restaurant delivers this to his office.

The provision of lunch consumed in his office is exempt from FBT under section 41 of the FBTAA 1986 so Paul's employer has no FBT liability on the provision of the benefit.

Paul has reduced his tax by $1,350.

Karen, who works in the building across the street, earns the same income as Paul. Karen's employer, however, does not offer these arrangements. Karen pays $1,350 more tax than Paul and has to buy her own lunch.

Exemption for eligible work - related items

1.19 This Schedule will replace subsection 58X(2) of the FBTAA 1986 so that the following eligible work-related items will be exempt where the items are primarily for use in the employee's employment:

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a portable electronic device;

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an item of computer software;

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an item of protective clothing;

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a briefcase; and

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a tool of trade.

[ Schedule 1, item 4, subsection 58X(2) ]

Example 1.2

Christine, Eva and Dean are friends from their school days. They all work in the city and are all subject to the top rate of taxation.

Christine and Eva's employers offer salary sacrifice arrangements. Dean's employer does not offer salary sacrifice arrangements for its staff.

Christine's husband wants a laptop computer. Christine's employer already provides her with the use of a laptop as her employer recognises that she does a lot of work at home after hours and on weekends.

Christine goes to the local department store and purchases a laptop for her husband for $3,000. Christine then provides the receipt to her employer and requests, under the salary sacrifice arrangement with her employer, that it be salary packaged and that she be reimbursed for the expense. As the benefit is an exempt fringe benefit under section 58X the employer would not be liable for FBT in relation to the benefit. Christine would have a reduction in her tax liability of $1,350.

Eva's employer does not provide her with a laptop even though she also does a lot of work after hours and on weekends. Eva purchases the same laptop as Christine for $3,000 and also asks her employer to reimburse her as part of a salary sacrifice arrangement. As the benefit is an exempt benefit under section 58X, the employer would not be liable for FBT in relation to the benefit. Eva also now has a reduction in her tax liability of $1,350.

Dean however, is not able to enter into a salary sacrifice arrangement to acquire a laptop for his wife who wants a laptop computer. Dean simply purchases a laptop out of his after tax income.

These amendments restore the equity for arrangements similar to those entered into by Christine and Dean and where a laptop is purchased wholly for private purposes, that is, the use of salary sacrifice will not put a person in a more favourable position compared to someone who does not salary sacrifice.

1.20 The exemption for these items will be restricted to one item per year for items that have a substantially identical function. [ Schedule 1, item 4, subsection 58X(3) ]

Example 1.3

An employee acquires two laptop computers in an FBT year as a fringe benefit. The second laptop computer has substantially identical functions to the first laptop computer. The FBT exemption in section 58X is only available in respect of the first laptop computer.

1.21 The exemption is available in respect of an item that is a replacement of another item acquired earlier in the FBT year. [ Schedule 1, item 4, subsection 58X(4) ]

Example 1.4

An employee (Eva in Example 1.2) is provided with a second laptop by her employer during the FBT year because the first computer was stolen. The FBT exemption in section 58X applies to exempt the second laptop computer from FBT.

Income tax

1.22 Prior to this amendment, where a person used a laptop purely for work-related purposes and the laptop had been acquired by way of the provision of an exempt benefit under section 58X, the employee would be able to claim a deduction for the decline in value of the laptop.

1.23 This Schedule amends section 40-45 of Division 40 of the ITAA 1997 to ensure that an employee is not able to claim a deduction for decline in value for eligible work-related items where the item is provided as an expense payment fringe benefit or a property fringe benefit and the benefit is exempt from FBT under section 58X of the FBTAA 1986. [ Schedule 1, item 8, subsection 40-45(2> )]

1.24 This Schedule also amends section 51AH of the ITAA 1936 to ensure that an employee can claim decline in value deductions for depreciating assets that are provided as taxable fringe benefits. [ Schedule 1, item 6, subsection 51AH(3) ]

Application and transitional provisions

Fringe benefits tax

Exempt property benefits - meal card arrangements

1.25 The amendment made by item 2 to section 41 of the FBTAA 1986 applies to food and drink provided after 7.30 pm Australian Eastern Standard Time (AEST) 13 May 2008. [ Schedule 1, subitem 3(1) ]

1.26 However, if an employee has entered into an agreement with their employer before 7.30 pm (AEST), 13 May 2008, any food or drink that relates to an existing balance at that time will not be subject to FBT if the food and drink is provided before 1 April 2009. Any food or drink purchased with additional credits ('top-ups') that occur after 13 May 2008 will be subject to FBT. [ Schedule 1, subitem 3(2) ]

Example 1.5

Following on from Example 1.1, if Paul had entered into the arrangement before 13 May 2008 and before this date an amount of $500 through payroll deduction had occurred by which a credit amount was available on the meal card, then Paul could continue to use the meal card after 13 May 2008 up to 31 March 2009 (end of the FBT year). This simply means that in this circumstance the meal card can continue to be used until the balance on the card is exhausted on or by 31 March 2008. Any food or drink provided from additional credits to the meal card after 13 May 2008 would be subject to FBT.

Exemption for eligible work - related items

1.27 The amendment made by item 4 to section 58X of the FBTAA 1986 applies to eligible work-related items acquired after 7.30 pm (AEST), 13 May 2008 other than items acquired under a contract entered into at or before that time. To avoid doubt, this applies to items substantially identical in function and replacement items. [ Schedule 1, item 5 ]

Income tax

1.28 The amendment made by item 8 to section 40-45 of the ITAA 1997 to deny decline in value deductions for items in relation to which section 58X (of the FBTAA 1986) exempt benefits have been provided, applies to assets acquired after 7.30 pm (AEST), 13 May 2008 other than assets under a contract entered into at or before that time. If the asset was acquired at or before that date, a decline in value deduction can be claimed for the 2007-08 income year, but not for later income years. [ Schedule 1, item 9 ]