NTLG FBT Sub-committee Minutes 12 March 1998

QC: 16209 Content revised: No Abstract revised: No

Abstract:

Meeting minutes for 12 March 1998.

Venue: ICAA,Level 5, 37 York St, Sydney

Attendees:

Graham Daniel	ATO (Chair)	Evan Lancaster	ATA
Stuart Forsyth	ATO	Nick Adams	ATA
Lee Beaver	ATO	Annamaria Carey	TIA
Neil McNamara	ATO	Maria Doogan	ATO
Andrew Purdon	ASCPA	Paul Hockridge	ASCPA
Garry Sebo	TIA	Lynne McPhee	NIA
Graham Clarke	ICAA

Apologies:

Elizabeth Lucas	LCA
Ray Conwell	LCA

Secretariat:

Rob McLean
Telephone:	(02) 60587318
Fax:	(02) 60587499
Email:	Rob.McLean@ato.gov.au

^[H1]Disclaimer

Please note: NTLG - FBT Subcommittee agendas, minutes and related papers are not binding on the ATO or any of the other bodies referred to in these papers. While every effort is made to accurately record the views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

1 Opening of Meeting, including any changes to the Agenda

Graham Daniel welcomed members to the meeting.

2 Minutes of 11 December 1997 Meeting

As there were no comments on the draft minutes of the last meeting, those minutes will be issued as final minutes.

3 Items carried over from previous Meetings

3.1 Salary Sacrifice

The profession had very considerable concern that there has been such a long delay in the issuing of the salary sacrifice Ruling. The profession offered to assist the ATO in preparing guidelines on salary sacrifice, stressing particularly that these guidelines should address:

(a) PBI and rebatable employers; and

(b) the treatment of an employee underspend on fringe benefits at the year end, namely, whether the amount of the underspend constitutes salary or wages.

The ATO acknowledged that there were problems with some salary sacrifice arrangements, particularly post derivation arrangements. The offer of assistance to prepare guidelines on the issue will be forwarded to appropriate ATO channels.

3.2 Promotional Events

ATO response

Prior to the December 1997 meeting of the sub-committee, submissions were received from the ASCPA and the ICAA relating to promotional activities. The ATO offered to provide some general guidelines in relation to promotional events which are outlined as follows :

The ATO does not consider all promotional activities to constitute entertainment.

An activity which consists solely of a demonstration of the product and its features would not constitute entertainment. The addition of other activities such as performers or food or drinks may, depending upon the extent of each activity, change the character of the whole activity to entertainment.

In cases where it is considered that only part of the activity constitutes entertainment it may be appropriate to apportion certain expenses such as venue hire between the different activities. For example an exhibitor at a trade show may also be entitled to use a separate part of the venue for entertaining clients and employees.

The duties performed at the promotional activity and the character of the activities would be relevant when deciding whether expenses relating to employees of the promoting employer attending a promotion are considered to be expenditure on entertainment. For example if an employee performed significant business duties in areas such as giving a public presentation or providing advice at a display stand the otherwise deductible rule may apply to reduce the taxable value of particular benefits provided to the employee.

In deciding whether a particular function constitutes entertainment it is necessary to look at the four tests contained in paragraph 23 of Taxation Ruling TR 97/17. When looking at this paragraph the employee's individual circumstances and the location of the activity may mean that in different situations similar meals may have different taxation consequences.

Item 4.3 of section 32-45 allows an income tax deduction for expenses incurred in providing entertainment to promote a product. The deduction is not available under this item when some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public have. In a situation where only persons from a particular industry are invited to attend a promotion a deduction would not be available under item 4.3.

Employees or clients travelling solely to attend a promotional activity

Where the promotional activity constitutes entertainment the travel of such employees or clients falls within the ITAA sec 32-10 definition of "entertainment".

Income Tax and FBT consequences

This response only deals with whether or not entertainment is provided. The tax consequences of benefits provided are covered in Taxation Ruling TR 97/17.

Individual cases

In cases where a taxpayer is dissatisfied with a decision contained in a private ruling issued by the ATO that taxpayer has the right to object to that ruling. The circumstances of specific cases should not be raised with the FBT sub-committee of the NTLG.

Discussion at the Meeting:

This ATO response was discussed. The profession indicated that the response was too general and did not answer the questions raised in Andrew Purdon's ASCPA paper. It was accepted that, whilst all promotional events involve similar issues, given their broad variety, problems arise in determining the correct taxation treatment of the events. The profession acknowledged that Taxation Ruling TR 97/17 was helpful to some extent, however, this Ruling has extremely limited application to the promotional events issue. The profession requested that definitive answers be provided in respect of the issues raised in Andrew Purdon's paper. The ATO suggested that Andrew Purdon could meet with the ATO to discuss the issue further and present a paper back to the NTLG FBT sub-committee. This was accepted.

3.3 Arranger Provisions

Whilst Ray Conwell and Paul Hockridge undertook to provide a paper to the NTLG FBT sub-committee on the new 'arranger' provisions, this had not occurred as Paul was happy with the ATO response incorporated in agenda item 8 of the draft minutes of the meeting of 11 December 1997. The profession requested that this response be placed in the Explanatory Memorandum to Taxation Laws Amendment Bill No 6 of 1997. The ATO stated that it was too late to change the Explanatory Memorandum, however, the profession were advised that upon the Bill receiving Royal Assent, the ATO will :

(a) withdraw Taxation Determination TD 95/35, and issue an addendum to Taxation Ruling TR 97/17 deleting paragraphs 125 to 127 and the references in the table; and

(b) review whether another Taxation Ruling was required to outline the ATO position on the new 'arranger' provisions.

The profession expressed concern that the new 'arranger' provisions may apply to an employer who grants an employee time off to obtain a third party benefit, stating that, by doing so, the employer may have facilitated in the provision of the benefit. The ATO gave an undertaking to further review this issue.

3.4 Reimbursements - FBT or Income Tax ?

Paul Hockridge was happy to discuss this issue, being the uncertainty of the interrelationship of the ITAA and the FBTAA, with Stuart Forsyth independently of the NTLG FBT sub-committee.

3.5 Novated Lease TD

ATO Response

In response to the novation issues, raised by Garry Sebo, arising from the articles which appeared in the Australian Financial Review of 27 November 1997 and the Weekly Tax Bulletin of 15 December 1997, the ATO advised :

¦ The ATO released a draft document dated 19 September 1997 summarising its position on novation and other payment arrangements under IT 2509, TD 95/63 and its position on partial novations.

¦ Since the release of that paper, the ATO has provided non-binding advice on at least three different acceptable novations to several organisations including one put forward by RPC.

¦ To date no ruling has been provided to any organisation on fully novated agreements.

¦ The ATO has had extensive consultation with and comments from industry, industry representatives, financial institutions, accounting organisations and other interested parties. As a result a draft Taxation Determination is being prepared that will outline the tax consequences of partial novations, ostensibly in line with the position outlined in the draft document of 19 September 1997.

¦ RPC has been quoted in the articles as stating that the ATO had decided its position in relation to the tax consequences for employees under current partial novations. The ATO has not yet presented a concluded view on this matter. It will do so when it releases the draft Taxation Determination on partial novations.

¦ While external comments centre around the impact of the luxury car rules on partial novations, the taxation consequences impact on all partially novated car lease arrangements.

Discussion at the Meeting

This ATO response was discussed. The ATO advised that the draft Taxation Determination was expected to issue in approximately 3 weeks. The profession was concerned with the taxation implications which arise from partial novations, some issues being section 26AAB, luxury car rules, car benefit versus expense payment benefit, and whether the draft Taxation Determination will have retrospective application. It was agreed that a special purpose NTLG FBT sub-committee meeting should be scheduled, after the issue of the draft Taxation Determination, to discuss the taxation implications arising from the ATO position. If possible, the author of the draft Taxation Determination, will attend that special meeting.

4 FBT Cell Report

4.1 Record Keeping Exemption

The ATO provided a brief overview of the proposed Record Keeping Exemption provision emphasising that the provision could change prior to its introduction to Parliament.

4.2 Cents per kilometre for non cars

The ATO advised that the annual Taxation Determination TD 97/16, which relates to the indexation of the cents per kilometre valuation method for the private use of a motor vehicle other than a car, when reissued, will emphasis the requirements of Taxation Ruling MT 2034. MT 2034 deals with the FBT implications of the private use of motor vehicles other than cars and accepts, in certain circumstances, the cents per kilometre valuation method as one method for valuing the benefit. The ATO advised that future Taxation Determinations providing this indexation will reiterate the private usage condition outlined in MT 2034, namely that this cents per kilometre valuation only applies where minimal private usage exists.

4.3 Employee benefit/incentive unit trusts

The ATO indicated that it was currently reviewing the taxation implications of employee benefit/incentive unit trusts, which are established by employers to provide incentives to employee/unit holders who attain employment goals. Whilst the ATO acknowledged that some of these trusts are genuine, some may not be. Some of these trusts are used for aggressive tax planning.

5 Issue Of Draft/Final TD/TR since the meeting of the FBT Subcommittee on 11 December 1997.

No FBT Taxation Determinations or Taxation Rulings have issued since the December meeting.

6 News from the ATO

6.1 FBT Cell Membership

The ATO indicated that the FBT Cell had agreed that its membership should include an INB representative, if possible. The profession advised that there is a proposal before the NTLG that the NTLG FBT sub-committee be changed to the NTLG FBT and Individual sub-committee, as there was a significant interaction between these areas. The view expressed by professional representatives was that the FBT sub-committee should not address income tax questions for individuals generally but that there needed to be INB input where the respective provisions of income tax and fringe benefits tax interacted. The ATO undertook to discuss this issue with INB as, if an INB representative joined the FBT Cell, it would be appropriate for that person to join the FBT sub-committee.

6.2 Recipient Contributions

The ATO indicated that there will be provision on the company, partnership and trust return forms, for the income year ended 30 June 1998, for recipient (employee) contributions to be declared.

7 Cost of Compliance

7.1 Communication and Public Education Strategies - Maria Doogan (ATO)

Maria Doogan of Corporate Affairs and Marketing presented information on the direction FBT will be taking in the Public Education/Communication area. Specific reference was made to the results of market research conducted in February 1998 to clarify the communication needs of clients, attitudes towards FBT and the ATO and preferred methods of receiving information. Members were asked for comment on the results and specifically confirmed that clarity of communication, and certainty were priorities for tax agents. A new initiative to be trialed this year, is a one page facsimile to tax agents on FBT matters on an as required basis. This concept was strongly supported by the market research conducted in Sydney, Melbourne and Wollongong.

NTLG members supported the general thrust of the communication program for FBT, particularly the fact that it should be based on client needs. Two members of the NTLG offered their advice and assistance in developing the program.

7.2 Other issues

No other cost of compliance issues were raised.

8 Medical Cover for Temporary Overseas Employees

The submission received via Andrew Purdon:

Overseas employees temporarily located to Australia are required to obtain a Visa for entry into Australia. Where such a Visa is issued for work related purposes, the employer is required to guarantee to meet medical costs in respect of the employee.

In most cases employers take out medical cover in respect of employees to help to defray the cost if an employee is in fact in need of medical attention during their stay in Australia.

As the employee is personally covered by the medical insurance, on a literal interpretation of the Fringe Benefits Tax Assessment Act a benefit is being provided to the employee. However, the purpose behind the employer taking out such insurance is for the employer to meet their liability under the Visa application.

It is submitted for consideration that such an expense is in fact an expense of the employer and any benefit received in respect of the medical insurance is a benefit received by the employer as it is the employer who will, under the requirements of the Visa application, be required to meet any medical expenses of the employee.

Accordingly it is submitted that no benefit arises under the Fringe Benefits Tax Assessment Act in respect of the employer taking out medical cover so as to insure against medical expenses should the employee be taken ill or injured.

ATO response:

The question asked is one of is there a benefit where the employer is required to be guarantor for medical expenses and takes out medical insurance in respect of the employee.

The answer turns on the facts of each case. It is recognised that no fringe benefit arises if the actual liability for the expense lies with the employer, an example of this would be workers compensation insurance payments. However in these examples the liability for medical expenses would remain with the employee and the employer is a guarantor. If the employer was to insure his own risk then this would not be a fringe benefit.

The payment of medical insurance by an employer on behalf of an employee would be a benefit provided in respect of employment and subject to FBT. Section 148(1) and 148(4) would strengthen this position in cases where there are provision of benefits for multiple purposes.

Discussion at the Meeting

This ATO response was discussed. It was agreed that the FBT implications of this issue could only be determined after a review of specific documentation, particularly the written guarantee between the employer and the Department of Immigration, and the employment contract between the employer and the overseas employee. Andrew Purdon provided an undertaking to provide this specific documentation to the ATO. The ATO will review this documentation to determine whether a fringe benefit arises, and if so, will outline the FBT implications for employers who self insure.

9 Other Business

9.1 Section 58C - interpretation of the term 'solely'

The submission from Andrew Purdon

Section 58C exempts from FBT costs reimbursed by an employer with respect to the sale or acquisition of a dwelling as a result of relocation.

In particular the provision requires that the sale or acquisition of the dwelling occurs "solely because the employee is required to change his or her usual place of residence in order to perform the duties of that employment at the employee's new place of employment". [S58C(1)(b) and (3)(b)]

A common occurrence is that an Australian resident travelling overseas meets a person in another country and they decide to live together.

As an example we provide the following scenario. The two individuals endeavour to obtain postings to the other's home country. The overseas resident owns a home in their home country whilst the Australian resident resides with his/her parents or is in accommodation that he/she would not be able to share with another. If the overseas resident obtains a position in Australia, he/she will sell his/her home. Alternatively, if the Australian resident obtains a position overseas, he/she will move overseas and reside in the overseas country.

The overseas resident obtains a job offer in Australia. As a result, he/she disposes of his/her home and moves to Australia.

The couple decide to purchase a home together, as their combined residence in Australia.

NB: The first home of the overseas resident would not have been sold unless a job offer was made in Australia, ie. The individual resident overseas had the intention to remain in their present residence. Secondly, the new residence would not have been acquired if the non-resident did not obtain the job offer in Australia (that is the overseas resident had to have a dwelling in Australia in order to be in a position to reside in Australia and in turn perform his/her employment duties).

Does the ATO consider the non-resident has sold and acquired their dwelling "solely" because the non-resident is required to change his or her usual place of residence in order to perform the duties of their new employment in Australia ?

Discussion at the Meeting

Whilst a literal interpretation of section 58C requires the relocation to be solely for employment reasons, in practice, employers would not usually be aware of the employee's personal circumstances. Consequently, from the employer's perspective, the reason for relocation would be solely for employment. The facts as described in the submission by Andrew Purdon would not satisfy section 58C as the reason for transfer is not solely for employment.

9.2 Driver awareness programs

Australian Taxpayers Associations submission

FBT & Driver Awareness Training

Background

Some employers require employees who use company cars to attend training courses which are primarily focused on defensive driving techniques. The cars may be those which are used only for work purposes, those used for work and private purposes, and those used for only private purposes.

The aim of the employer in requiring the employee to undertake the course is to reduce expenditure on car repairs, insurance claims, workcover claims, days taken on sick leave and disruption of workplace performance due to absence of staff etc.

The question arises in such cases as to whether a fringe benefit is provided by the employer to the employee. The definition of a fringe benefit in S.136 is very wide but can be summarised as a benefit provided to an employee by an employer (or associate) in respect of the employment of the employee. In turn "benefit" is widely defined to include "any right,…..privilege, service or facility …..and includes a right, benefit, privilege, service or facility that is …..: provided under an arrangement for or in relation to the performance of work or the provision of facilities for entertainment, recreation or instruction.

"Provide" (in relation to a non property gift) includes allow, give, grant or perform.

Submission

The ATA is of the view that where the employee drives a car belonging to the employer, and the employer requires the employee to undertake the course, that no benefit accrues to the employee. What constitutes a benefit has not received much judicial interpretation, but in National Australia Bank Ltd v FC of T (93ATC 4914), concerning provision of taxis to staff working night shift, Ryan J. noted that benefit "comprehends the entitlement to travel to and from work by taxi cab…". That at least suggests a right rather than a mere receipt. However, it is clear that in other circumstances a benefit would arise even though there is no right accruing to an employee to receive the benefit (eg, provision of entertainment).

However, to be a fringe benefit, the benefit must nevertheless be provided in respect of the employment of the employee. The words "inrespect of", in relation to the employment of an employee, includes by reason of, by virtue of, or for in relation directly to that employment. Section 148 goes on to extent what constitutes the provision of benefits to be virtually everything but the receipt of social security benefits.

The ATA considers that in this case (despite S.148) the provision of the benefit is not to the employee, but to the employer. If indeed there is any "right, privilege, service or facility" being provided, it is not something accruing to the employee, it is a benefit being given to the employer be the employee. The employee is no more than the instrument by which the employer looks after their business assets.

There is also a possible application of the "otherwise deductible" rule. It would seem fairly clear that if an employer required, as a condition of employment, that an employee complete an advanced driving course before being allowed to drive an employer owned vehicle, the employee would bet a tax deduction if the expenses were incurred by themselves. This would certainly apply where the vehicle is one used mostly for carrying out the employers business activities. It would probably apply even to a vehicle provided under a salary sacrifice arrangement because the requirement is a condition of employment and does not have an intrinsic private or capital nature.

If an employee was to be provided with the training but did not drive an employer owned vehicle, then a fringe benefit would be provided. However, if an employee is required to take the lessons before being entitled to drive an employee vehicle, then the otherwise deductible rule would apply. This is certainly the case with some government bodies.

Summary of views

Employer business vehicle used only for business	No FBT
Employer vehicle used for business and private use	No FBT
Employer vehicle used only for private use	No FBT
Employee owned/leased vehicle used for business and private	FBT
Employee owned/leased vehicle used only for private use	FBT

Discussion at the Meeting

The ATO acknowledged that there are several different driver awareness programs, many of which, depending upon their circumstances, potentially fall within the otherwise deductible rule. The ATO accepts that the otherwise deductible rule will apply to programs for professional drivers and possibly for programs where all employees are required to attend.

10 Close of Meeting

11 June 1998 - ASCPA, 170 Queen St Melbourne