House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Small Business, the Bruce Billson MP)

Chapter 3 - Fringe benefits tax exemption - portable electronic devices for small businesses

Outline of chapter

3.1 Schedule 3 to this Bill extends the fringe benefits tax (FBT) exemption that applies to employers that provide employees with work-related portable electronic devices, such as mobile phones, laptops and tablets.

3.2 The amendments extend the exemption to small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.

3.3 Currently, where a device has substantially identical functions to a device provided to the employee earlier in the FBT year, the later device does not get the FBT exemption, unless it is a replacement item.

Context of amendments

3.4 FBT is a tax employers pay on certain benefits they provide to their employees, including to their employees' family or other associates. The benefit may be in addition to, or part of, the employee's salary or wages package. Benefits provided to some other persons that are not employees may also be subject to FBT, such as directors of a company or statutory officeholders.

3.5 FBT is calculated under the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986).

3.6 FBT is separate to income tax and is calculated on the grossed up taxable value of the fringe benefits provided. The FBT year runs from 1 April to 31 March.

3.7 A benefit that is exempt is not a fringe benefit. This means that it is not included in calculating an employer's FBT liability.

3.8 Section 58X of the FBTAA 1986 allows an FBT exemption for the following work-related items:

•

a portable electronic device;

•

an item of computer software;

•

an item of protective clothing;

•

a briefcase; and

•

a tool of trade.

3.9 The FBT exemption in section 58X applies to these items provided by way of an expense payment benefit, a property benefit or as a residual benefit (these terms are defined in section 136 of the FBTAA 1986).

3.10 Even if an employer provides an employee with a work-related item that is subject to an FBT exemption, they still need to consider the limitations on the exemption.

3.11 The meaning of the specified work-related items, and the limitations on the exemption, are explained in the Australian Taxation Office Publication, Fringe benefits tax - a guide for employers, Chapter 20: Fringe benefits tax exempt benefits (1 July 2014).

Portable electronic device

3.12 A portable electronic device is a device that 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.

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

Limitations on exemption

3.14 The exemption is currently limited to:

•

items primarily for use in an employee's employment - that is, for work-related use (subsection 58X(2) of the FBTAA 1986); and

•

one item per FBT year for items that have a substantially identical function, unless the item is a replacement item (subsections 58X(3) and (4) of the FBTAA 1986).

Work-related use test

3.15 An item is primarily for use in an employee's employment if it is provided principally to enable the employee to do their job. This is referred to as the 'work-related use test'.

3.16 When determining whether or not an item is primarily for use in an employee's employment, the decision is based on the employee's intended use at the time the benefit is provided to them. An employer does not have to look at the employee's actual usage over the FBT year to determine whether the item is used primarily in the employee's employment.

3.17 However, an employer must use a reasonable basis to determine whether an item is primarily for use in an employee's employment - for example, the employee's job description, duty statement or employment contract.

3.18 Alternatively, if an employer is aware that there may be private use of an item, they can document factors such as those listed below to determine whether the item is primarily for use in the employee's employment:

•

the reason or reasons the item was provided to the employee;

•

the type of work the employee will be performing;

•

how the use of the item relates to the employee's employment duties; and

•

the employer's policy and any conditions relating to the use of the item.

Substantially identical functions

3.19 An eligible work related item will not be exempt from FBT if earlier in the same FBT year the employer has provided the employee, by way of an expense payment or property benefit, with an item that has substantially identical functions. This is referred to as the 'substantially identical functions test'.

3.20 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.

3.21 Items 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.

3.22 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.

Replacement items

3.23 The substantially identical functions limitation does not apply if the later item is a replacement item for the earlier item (subsection 58X(4) of the FBTAA 1986). An item is a replacement item if the previous item is lost or destroyed, or needed replacing because of developments in technology.

3.24 The distinction between replacement items and other substantially identical items, and the operation of the 'substantially identical functions test' impose significant compliance costs on small businesses. The distinctions are difficult to apply and result in uncertainty for employers. This reduces the utility of the exemption to small business.

Summary of new law

3.25 Schedule 3 to the Bill removes, for small businesses, the substantially identical functions limitation on the FBT exemption for work-related portable electronic devices.

3.26 The amendments ensure small business employers that provide multiple portable electronic devices to an employee in an FBT year can claim an FBT exemption for all of those devices.

3.27 The requirement that devices are primarily for use in the employee's employment (the work-related use test) will remain.

Comparison of key features of new law and current law

Detailed explanation of new law

Extended operation of the exemption

3.28 Currently, a portable electronic device is not exempt from FBT if, earlier in the same FBT year, the employer has provided the employee, by way of an expense payment or property benefit, with an item that has substantially identical functions (see paragraphs 3.19 to 3.24).

3.29 For small businesses, this limitation will be removed with respect to portable electronic devices. Small business employers will be allowed an FBT exemption for multiple portable electronic devices provided to the same employee in the same FBT year, notwithstanding that those devices have substantially identical functions. [Schedule 3, item 2, paragraph 58X(4)(b) of the FBTAA 1986]

3.30 These amendments will provide certainty and reduce compliance costs for small businesses. Employers will no longer need to apply the substantially identical functions test to determine whether or not the later device provided is subject to FBT. As long as the later device is primarily for use in the employee's employment, it will be exempt from FBT.

Example 3.1 : Small business entity providing multiple devices

Lindy owns a marketing firm that meets the definition of a small business entity for the relevant FBT year. A new employee commences, and Lindy's business provides them with both a laptop and a tablet.

The laptop is provided for the employee to use when travelling for work and so that they can work from home. The tablet is provided for the regular meetings that the employee has with clients of Lindy's business. Both devices are primarily for use in the employee's employment.

Lindy's business no longer needs to consider whether or not the tablet has substantially identical functions to the laptop.

Even if the devices do have substantially identical functions, Lindy's business will be allowed an FBT exemption for both the tablet and the laptop.

Neither the laptop nor the tablet will be included in calculating Lindy's business's FBT liability.

3.31 The substantially identical functions test in subsection 58X(3) of the FBTAA 1986 will still apply with respect to the other eligible work related items in section 58X of the FBTAA 1986. These items are an item of computer software, an item of protective clothing, a briefcase and a tool of trade (subsection 58X(2) of the FBTAA 1986).

3.32 These amendments do not affect the work-related use test, which must still be satisfied if a personal electronic device provided to an employee is to be exempt from FBT (subsection 58X(2) of the FBTAA 1986).

Small businesses entitled to the extended exemption

Definition of small business entity

3.33 A small business entity is defined in section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997). Broadly, an entity is a small business entity for an income year if it:

•

carries on a business in the income year; and

•

satisfies the $2 million aggregated turnover test for the income year.

3.34 An entity will satisfy the $2 million aggregated turnover test for an income year if one or both of the following apply:

•

the entity's aggregated turnover for the previous income year was less than $2 million (subparagraph 328-110(1)(b)(i) of the ITAA 1997);

•

the entity's aggregated turnover for the income year, worked out as at the first day of the income year or as at the day the entity starts to carry on the business, is likely to be less than $2 million (subparagraph 328-110(1)(b)(ii) of the ITAA 1997).

3.35 An entity will also satisfy the $2 million aggregated turnover test for an income year if the entity's aggregated turnover for the income year, worked out as at the end of the income year, is less than $2 million (subsection 328-110(4) of the ITAA 1997).

3.36 An entity's 'aggregated annual turnover' for an income year includes its annual turnover for an income year and the annual turnovers of its connected entities and affiliates (subsection 328-115(2) of the ITAA 1997).

Being a small business entity for an FBT year

3.37 To be entitled to the extended exemption, an employer must be a small business entity for the purposes of the relevant FBT year in which they provide the portable electronic device.

3.38 The FBT year starts on 1 April and ends on 31 March. In contrast, the definition of small business looks at whether a business is a small business entity for an income year (generally 1 July to 30 June).

3.39 To address this, the amendments apply to an employer for an FBT year, if the employer was a small business entity for either or both of:

•

the year of income starting most recently after the start of the FBT year; or

•

the year of income ending most recently after the start of the FBT year.

[Schedule 3, item 2, paragraph 58X(4)(b) of the FBTAA 1986]

3.40 If the employer was a small business entity for either or both of these income years, then they will be eligible for the extended FBT exemption for the relevant FBT year.

3.41 If the later relevant income year ends before the employer must lodge their annual FBT return, they are able to use the two tests described in paragraph 3.34, above to work out whether they are a small business entity for the relevant income year.

Example 3.2 : Is an employer a small business entity for an FBT year?

Darren wants to know if his surveying business can access the extended FBT exemption under the new law for portable electronic devices provided during the 2016-17 FBT year, which runs from 1 April 2016 to 31 March 2017.

To determine this, Darren's business looks at whether it met the 'small business entity test' for either or both of:

•

the income year starting most recently after the start of the FBT year (for Darren's business, this is the 2016-17 income year, which started on 1 July 2016);

•

the income year ending most recently after the start of the FBT year (for Darren's business, this is the 2015-16 income year, which ended on 30 June 2016) .

Darren's business does not meet the 'small business entity test' in section 328-110 of the ITAA 1997 for the 2016-17 income year.

However, Darren's business does meet the 'small business entity test' for the 2015-16 income year. This is on the basis that his business's aggregated turnover for the previous income year, the 2014-15 income year was less than $2 million (subparagraph 328-110(1)(b)(i) of the ITAA 1997).

This exemption is allowed regardless of when in the 2016-17 FBT year the devices are provided.

New employers that start part of the way through the income year

3.42 Under the existing law, a special rule applies to entities that start carrying out business operations part of the way through one of the relevant income years. The entity's turnover for that year is worked out using a reasonable estimate of what the turnover would have been if the entity had carried on a business for the whole of the income year (subsection 328-120(5) of the ITAA 1997).

Consequential amendments

3.43 The definition of 'small business entity' is moved from section 58GA of the FBTAA 1986 to the dictionary in section 136 of the Act. As this definition is now used in two sections of the FBTAA 1986, it is included in the FBTAA 1986's dictionary. [Schedule 3, items 1 and 3, subsection 58GA(3) and 136(1) of the FBTAA]

Application and transitional provisions

3.44 The amendments apply in relation to the 2016-17 FBT year and later FBT years. [Schedule 3, item 4]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Fringe benefits tax exemption - portable electronic devices for small businesses

3.45 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.46 Schedule 3 to this Bill extends the fringe benefits tax exemption that applies to employers that provide employees with work-related portable electronic devices, such as mobile phones, laptops and tablets.

3.47 The amendments extend the exemption to small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.

Human rights implications

3.48 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.49 This Schedule is compatible with human rights as it does not raise any human rights issues.