House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)

Chapter 13 Fringe Benefits Tax - Substantiation Discretion

Clauses: 3,4 and 5

Overview

Provides the Commissioner with a discretion, in certain circumstances, to accept something less than the strict level of substantiation required under the fringe benefits law.

Fringe Benefits Tax - Substantiation Discretion

Summary of the proposed amendment

13.1 Part 2 of the Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to allow the Commissioner of Taxation a discretion when applying the substantiation requirements relating to particular benefits.

13.2 The proposed amendment will provide that the Commissioner may give relief after a review of a taxpayers affairs, or after review or reconsideration of an assessment. The relief will be provided in circumstances where the requirements would otherwise operate to either disallow a reduction in taxable value or disallow the exempting of a benefit. The relief is to be available where the Commissioner of Taxation, having regard to certain matters, is satisfied that the benefit has been provided and it would be unreasonable for the substantiation requirements to apply.

Background to the legislation

13.3 Under the present fringe benefits tax legislation, substantiation is required in order to either reduce the taxable value of certain fringe benefits or to ensure that certain other benefits are exempt from fringe benefits tax. For example, the value of a car fringe benefit is reduced by the amount of any employee contribution, on the condition that the employee provides to the employer the necessary documentary evidence covering that expenditure. In the case of a car fringe benefit, the expenditure could reflect employee expenses in operating the car or amounts paid to the employer for the use of the car.

13.4 Substantiation provisions also appear in the income tax legislation. Those provisions require a high degree of detail, the harshness of which was highlighted in the so called "Minister's Case" ( Case W124
89 ATC 975 ), where deductions were disallowed because of minor defects in the supporting documents. That case resulted in section 82KZAA being inserted into the Income Tax Assessment Act 1936 . The new section was effective from 8 January 1991 and gives the Commissioner of Taxation a discretion to grant relief to taxpayers from the strict substantiation requirements in certain special circumstances.

13.5 To ensure consistent treatment of taxpayers, the proposed amendment will allow the Commissioner a similar discretion when considering the substantiation requirements of the FBTAA.

Explanation of the proposed amendment

13.6 The amendment proposes to insert a new section, section 123B, in Part X of the FBTAA. [Clause 4]

When will the substantiation requirements be waived?

13.7 The amendment provides that the substantiation requirements will not apply to a benefit where the Commissioner is satisfied that the benefit has been provided and it would be unreasonable to apply the substantiation requirements. Where the Commissioner is so satisfied, the substantiation requirements will not operate to deny a reduction or exemption. [New Subsection 123B(1)]

What are the substantiation requirements?

13.8 The substantiation requirements are those provisions which require the obtaining or retention of substantiation evidence, (including diaries and log books) and the giving of that evidence to the employer.

When will the discretion be exercised?

13.9 The amendment proposed provides that the Commissioner's discretion can only be exercised:

(a)

on the Commissioner's own motion while reviewing the affairs of the taxpayer (e.g., an audit);

(b)

in considering an objection against an assessment; or

(c)

in considering a request for an amendment of an assessment where the request was made before new section 123B commences to operate. [New subsection 123B(3)]

Discretion will not apply to certain requests for amendment

13.10 The section will not apply in situations where:

•

there has been a reduction in taxable value disallowed or an exemption disallowed before new section 123B commenced operation; and

•

the employer has not acted to have the matter reviewed or considered. [New paragraph 123B(3)(c)]

What must the Commissioner have regard to?

13.11 In making a decision under new subsection 123B(1), in respect of a benefit provided, the Commissioner must have regard to the nature and quality of the evidence and to any special circumstances affecting the employer.

13.12 The requirement to consider special circumstances affecting the employer allows the Commissioner to consider whether the employer should obtain the relief. These circumstances include the extent to which the substantiation requirements were complied with and whether the failure to comply was inadvertent or deliberate. Circumstances affecting other parties such as associates, providers and recipients will necessarily affect the employer. [New paragraph 123B(2)(b)]

13.13 As to the extent to which the requirements were complied with, this goes both to obtaining the relevant document or the recording of details in the log book or diary and the giving of it to the employer. The provision is concerned with the extent of compliance of all relevant parties.

Requests for extension of time for objection or reference

13.14 Where the period for lodging objections and referrals has ended before the commencement of new section 123B, the discretion under new subsection 123B(1) is not available to the Commissioner . This will ensure that employers cannot use new section 123B as a basis for objecting against assessments where avenues of challenge had been exhausted before the section commenced. [New paragraph 123B(5)(c)]

13.15 Further, the discretion is also not available where an application for an extension of time is granted for lodging objections and referrals. [New paragraph 123B(5)(d)]

13.16 The legislative provisions governing referrals are proposed to be transferred from the FBTAA to the Taxation Administration Act 1953 in Taxation Laws Amendment Bill (No.3) 1991.

Benefits affected

13.17 New section 123B will apply to a benefit provided before, at or after the commencement of the section. This provision will advantage taxpayers by allowing the Commissioner to apply the discretion when investigating the affairs of employers in prior years. [New subsection 123B(6)]

Discretion not to apply to Declarations

13.18 New section 123B will not apply to a declaration made under the Act. The various requirements to provide declarations already represent significant softening of the substantiation requirements and the necessity that the declarations be in a form approved by the Commissioner removes any need for concessional treatment under this section. [New subsection 123B(4)]

Amendment of assessments

13.19 The Commissioner may amend assessments made before the commencement of the section, which were made on the basis of the existing law, to give effect to these amendments. [Clause 5]

Commencement date

13.20 New section 123B will apply from the date the Royal Assent is given to the Bill.

Clauses involved in the proposed amendment

Clause 3: will facilitate references to the Fringe Benefits Tax Assessment Act 1986 for the purposes of the amendment to the Act made by this Bill.

Clause 4: will amend the FBTAA by inserting section 123B to provide a discretion for the Commissioner to accept substantiation which may fall short of the detail required by the Act.

Clause 5: allows for assessments made to be amended to give effect to the amendment being proposed.