Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)Chapter 7 - Declarations
Overview
7.1 The amendments in Schedule 5 of this Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to reduce the number of declarations that an employer must obtain from employees for certain fringe benefits.
7.2 Where an employer provides to an employee a series of fringe benefits that are essentially the same, the employee will need to provide a declaration only for the first benefit. The need for the employer to obtain a declaration for each of the later benefits will be removed.
7.3 Where an employer reimburses only business expenses, or an employer's procedures effectively prevent private use of benefits, the employer will be able to provide an annual declaration stating that the benefits were used only for employment-related purposes. Benefits covered by the declaration will be exempt benefits.
Summary of the amendments
7.4 The purpose of these amendments is to reduce the number of declarations that an employer must obtain from an employee where the employer provides a series of similar benefits or provides fringe benefits only for employment-related purposes.
7.5 Where an employee receives a series of expense payment fringe benefits, property fringe benefits or residual fringe benefits that are essentially the same but for differences in the value of the benefit or the proportion of business use of the benefit, a declaration (called a ' recurring fringe benefit declaration ') will need to be provided by the employee only for the first benefit.
7.6 The employer will not have to obtain a declaration from the employee for each of the later benefits covered by the recurring fringe benefit declaration.
7.7 A further recurring fringe benefit declaration will be required five years after the last declaration or if there is a decrease in the business use of the benefit by the employee of more than 10 percentage points.
7.8 This measure will apply to those benefits where a declaration is required to specify the proportion of employment-related use of the benefit. It will not apply to benefits provided in respect of an employee's car.
Benefits used only for employment-related purposes
7.9 Where an employer reimburses only employment-related expenses, or where an employer enforces a policy that benefits be used only for employment-related purposes, the employer will be able to make an annual declaration (a ' no-private-benefit declaration ') stating that the benefits were provided only for employment-related purposes.
7.10 This measure will apply to certain expense payment fringe benefits and residual fringe benefits.
7.11 Benefits covered by a no-private-benefit declaration will be exempt benefits. Under the existing law, these benefits are taxable. However, no tax is payable on the benefits because the taxable value of the benefits is reduced to nil as the benefits are used only for employment-related purposes.
7.12 These amendments will apply to assessments for the fringe benefits tax (FBT) year commencing on 1 April 1995 and later years. [Item 8]
Background to the legislation
7.13 The taxable value of a fringe benefit is reduced according to the proportion of the employee's use of the benefit for employment-related purposes. This is called the 'otherwise deductible' rule, because the employee would have been entitled to an income tax deduction if the employee had incurred the expense actually incurred by the employer in providing the benefit.
7.14 The effect of the otherwise deductible rule is that the benefit received is subject to FBT only to the extent of the employee's private use of the benefit. Any employment-related benefit is effectively not taxed.
7.15 For the otherwise deductible rule to apply, an employer needs to obtain a declaration from the employee for most categories of fringe benefits. A declaration must be in a form approved by the Commissioner. The employee must state the percentage of employment-related use of the benefit and give sufficient information to support the percentage. A declaration generally must be obtained before the employer's FBT return is lodged.
7.16
Example - otherwise deductible rule:
An employer provides an employee with miscellaneous minor tools valued at $500, which is a property fringe benefit. The employee's use of the tools is 80% employment-related and 20% private. The taxable value of the benefit is reduced by $400 to $100 under the 'otherwise deductible' rule.
7.17 If a declaration is required for a fringe benefit, a declaration is required for each similar benefit provided by the employer. For example, a declaration must be obtained every time an employer pays an employee's telephone account, even if the proportion of employment-related use of the telephone remains fairly constant.
7.18 Consequently, employers are required to obtain and retain large numbers of declarations where there may be a high degree of duplication in the information contained in the declarations.
7.19 The reduced number and frequency of declarations required as a result of the amendments in this Bill are designed to reduce employers' costs of complying with the FBTAA.
Explanation of the amendments
Recurring fringe benefit declaration
7.20 An employee will be able to make a single declaration that will cover all subsequent similar benefits under new section 152A [item 7] . This declaration will be called a ' recurring fringe benefit declaration '.
What benefits will be covered?
7.21 The declaration will cover all subsequent benefits that are 'identical' [new subsection 152A(6)] . Benefits will be identical for the purpose of subsection 152A(6) if there are only slight differences between them. Benefits will also be identical if the differences relate only to the deductible proportion (i.e., the proportion of employment-related use) or the value of the benefit [new subsection 152A(10)] .
7.22 Any decrease in the deductible proportion must not be greater than 10 percentage points. [New subsection 152A(7)]
7.23
Example - recurring fringe benefit declaration:
An employer regularly reimburses an employee for the total cost of home telephone bills. This is an expense payment fringe benefit. The employee may give the employer a recurring fringe benefit declaration that specifies that the employment-related use of the phone is 50%. The declaration will cover all further reimbursements of telephone bills over the next five years providing that the employment related use of the phone is not less than 40%.
7.24 The declaration will cover all identical benefits provided in the five year period starting when the first benefit was provided, unless the declaration is revoked before the end of the five year period. [New subsection 152A(6)]
7.25 A recurring benefit declaration will cover those expense payment fringe benefits, property fringe benefits and residual fringe benefits covered by paragraphs 24(1)(e), 44(1)(c) or 52(1)(c) of the FBTAA. These are generally fringe benefits where a declaration is required to show the proportion of employment-related use of the benefits. Fringe benefits that relate to an employee's car will not be covered by a recurring benefit declaration because declarations for such benefits include other essential details about each benefit.
7.26 An earlier declaration given in relation to a benefit will be revoked by a later declaration in relation to an identical benefit [new subsection 152A(8)] . This is a technical rule to ensure that a later declaration will prevail over an earlier declaration.
How is the nominal deduction for benefits covered by a recurring fringe benefit declaration calculated?
7.27 The amount by which the taxable value of benefits covered by a recurring benefit declaration is reduced under the otherwise deductible rule will be calculated by reference to the percentage of employment related use specified in the declaration.
7.28 Apart from fringe benefits provided in relation to an employee's car, the value of fringe benefits is reduced under the otherwise deductible rule generally by an amount called the 'notional deduction'. This is the amount of the hypothetical income tax deduction to which the employee would have been entitled if the employee had incurred the expenses incurred by the employer in providing the fringe benefit.
7.29 For expense payment fringe benefits, the formula for the calculation of the notional deduction is set out in paragraph 24(1)(ba). New paragraph 152A(2)(b) provides that, in calculating the notional deduction in relation to a benefit covered by a recurring fringe benefit declaration, it should be assumed that the proportion of employment-related use of the benefit is the same as the proportion of employment-related use specified in the recurring fringe benefit declaration.
7.30 The notional deduction will be calculated in the same way for property fringe benefits and residual fringe benefits covered by a recurring fringe benefit declaration. [New paragraphs 152A(3)(b) and 152A(4)(b)]
7.31
Example - calculation of notional deduction:
An employer reimburses an employee for the total cost of her home telephone bill of $200. The reimbursement is an expense payment fringe benefit. The employee gives the employer a recurring fringe benefit declaration in respect of the benefit specifying that the proportion of employment-related use of the phone is 25%. The value of the benefit of $200 is reduced by $50, the amount of the notional deduction. The taxable value of the benefit is therefore $150.
7.32The employer reimburses the employee for the next phone bill of $160 (which is another expense payment fringe benefit covered by the declaration). The actual employment-related use of the phone for this period is 30%. However, for the purpose of calculating the taxable value of this benefit, the notional deduction is calculated on the basis of 25% employment-related use because that is the proportion of employment-related use specified in the declaration and no other declaration has been made. Hence the value of the benefit is reduced from $160 to $120 by a notional deduction of $40.
What form must the declaration be made in?
7.33 The declaration must be made in a form approved by the Commissioner by the declaration date of the FBT year in which the first benefit covered by the declaration is provided. [New subsection 152A(5)]
Statutory evidentiary document
7.34 A recurring fringe benefit declaration will be a statutory evidentiary document under new paragraph (d) of the definition of 'statutory evidentiary document' in subsection 136(1) [Item 6] . Statutory evidentiary documents are documents required by the substantiation rules to show the proportion of employment related use of a fringe benefit.
7.35 New subparagraphs 24(1)(e)(ia), 44(1)(c)(ia) and 52(1)(c)(ia) are consequential amendments to ensure that a declaration will not be required for a benefit if the benefit is covered by a recurring benefit declaration. [Items 2, 3 and 5]
When may an employer make a no-private-use declaration?
7.36 Where an employer pays or reimburses only employment-related expenses, the employer will be able to make a declaration (a ' no-private-use declaration ') stating that the expense payment fringe benefits were provided only for employment-related purposes. [Item 1; new section 20A]
7.37 Similarly, an employer will also be able to make a no-private-use declaration for residual fringe benefits where the employer enforces a policy that benefits be used only for employment-related purposes. [Item 4; new section 47A]
7.38 Benefits covered by a no-private-use declaration will be exempt benefits [new subsections 20A(1) and 47A(1)] . An employer will not be required to obtain declarations from employees for benefits covered by a no-private-use declaration.
7.39 A no-private-use declaration may be made in relation to expense payment fringe benefits or residual fringe benefits.
What form must declaration be made in?
7.40 The declaration must be made in a form approved by the Commissioner by the declaration date. [New subsections 20A(3) and 47A(3)]
7.41
Example - no-private-use declaration:
An employer has a policy of reimbursing the component of employees' telephone bills that relate to business calls. The employer may make a no-private-use declaration in respect of the reimbursement of employees' telephone bills for the FBT year. The reimbursements of employees' telephone bills will be exempt fringe benefits.
Statutory evidentiary document
7.42 A no-private-use declaration will be a statutory evidentiary document under new paragraph (d) of the definition of 'statutory evidentiary document' in subsection 136(1). [Item 6]
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