Tax Law – Airline transport fringe benefits (Part 1)
A classic form of fringe benefit is the provision of air travel to employees. For the most part, such fringe benefits will be covered by residual fringe benefits. However, in certain circumstances airline transport benefits to employees of airlines, or their associates, have to be treated under a special FBT regime.
Airline transport fringe benefits apply only where employees, or associates of employees, of airlines or travel agents are given free or discounted air travel. However, the regime only kicks in where the benefit is subject to stand-by restrictions that apply to such employees.
What are stand-by restrictions?
Stand-by restrictions are customary industry stand-by arrangements, such that the relevant employees have rights subordinated to those of normal customers.
This means that if the employee/associate is not subject to such restrictions, the benefit will be calculated differently.
The taxable value of an airline transport benefit is the “stand-by value” of the benefit, minus any employee contribution.
The stand by value varies according to whether the travel is domestic or international, and the type of air service.
The stand-by value of the benefit for domestic travel is:
- where the provider operates the service, and it is a scheduled passenger air service – the value is 37.5% of the lowest publically advertised economy airfare the provider provides for that time and route;
- where the service is other – the value is 37.5% of the lowest publically advertised economy airfare “a carrier” provides for that time and route; and
- where the service is a combination of air services and cannot be substituted for a single air service at that route and time – the value is the value is 37.5% of the lowest publically advertised combination of economy airfares that “carriers” provide for that time and route
In any other situation the stand-by value is 75% of market value.
When determining what “a carrier” other than the provider would charge for the air service, published material available to the public may be consulted.
The stand-by value for international travel is identical to domestic travel, except that “lowest published fare” is restricted to that published during the relevant FBT year, and excludes group discounts.
Example: Stand-by value – international travel
J Co is a travel agent with several employees. One of them is K.
J Co, due to its status as a travel agent, has the capacity to offer flights to its employees cheaply, provided the employees are subject to stand-by restrictions.
K is offered an airline trip to the island of Orkney, UK. In order to get to Ornkey, K has to fly from Sydney Airport to Glasgow Airport, and then take a second flight from Glasgow to Kirkwall Airport.
K is subject to stand-by restrictions. He cannot get on the flight until the airline is certain that no normal customers wish to use his seat.
No airline offers an air trip direct from Sydney to Orkney. However, several offer the trip split into two parts, like the trip offered by J Co. The lowest publically advertised trip of this sort during that FBT year is offered by British Airways for $3,500. This is advertised to the public on websites and brochures.
The taxable value of the trip is therefore 37.5% of this advertised amount, ie $1,312.50, minus any contribution by K.
Note that this system, by definition, puts the onus on the employer to find the cheapest publically advertised trip of a similar nature, in order to reduce the taxable value of the benefit.
(Part 2 of this article will deal with the vexed question of consumer loyalty programs and similar discounts).
Part 1 of this article dealt with how to value airline transport fringe benefits. This part will deal with consumer loyalty programs and other discounts and how they impact on taxable value.
Extent of the issue
The controversy over such programs does cover situations where the benefit provided is technically an airline transport fringe benefit – ie the employer is an airline or travel agent, and the employee is subject to stand-by restrictions. However, the controversy extends beyond this to airline transport benefits that would ordinarily be classified as residual fringe benefits.
Consumer loyalty programs
The original controversy in a 1999 Ruling dealt with flight rewards received from a consumer loyalty program (commonly called a frequent flyer program). The confusion arose from a Federal Court case, Payne v FC of T.
From the Payne decision the ruling only covered flight rewards that satisfied the following:
- the benefit consists of free flights or upgrades, and attached free accommodation or car hire;
- the benefit is available only to the member or their immediate family; and
- the benefit is not transferable or redeemable for cash.
The consumer loyalty / frequent flyer program must be a marketing tool in which the customer is in an arms length with the provider and the membership of the program is dependent on paying fees, and the receipt of “points” for the flight rewards depends on the consumer buying goods and services from the provider.
Not a fringe benefit
The ATO stated that, if Payne style flight rewards were granted, then they are normally not fringe benefits at all. They arise solely from a personal contractual relationship and not from employment.
- the employer and employee are family members, and the flight reward is provided under a contract with the employer;
- the flight reward was specifically a business expenditure of the employer; or
- the flight reward is in return for the employee rendering a service.
X Co is an airline. Y is one of X Co’s employees.
X Co runs a frequent flyer program, under which anyone can apply to become a member and pay an annual fee of $150. Under the frequent flyer program, consumers who spend $10,000 or more per year on airline tickets will receive a choice of free flights worth about $500 to $1,500.
Y joins X Co’s frequent flyer program. He applies to become a member and pays the annual fee. He spends $12,000 on airline tickets in 2011/12 and thus receives a free flight worth $1,300. The ticket is subject to stand-by restrictions applicable to X Co employees.
In this case, the ticket is not a fringe benefit. The ticket is provided to Y as a consumer who has entered a private contract with X Co. The fact that the ticket is subject to stand-by restrictions does not affect matters.
The situation may be different if the flight reward program was specifically to reward Y’s services.
If you have concerns about FBT and airline transport fringe benefits, call LAC Lawyers and we can provide advice and assistance.