Tax Law – Expense Payment fringe benefits
A common form of fringe benefit is the expense payment fringe benefit, where one party reimburses expenses incurred by an employee. This article looks at how FBT treats expense payment fringe benefits.
Expense payment fringe benefits
An expense payment fringe benefit will normally arise where a payment is made in respect of employment in the following ways:
- the employer reimburses the employee after the fact for expenses the employee incurs; or
- the employer pays a third party in satisfaction of expenses incurred by the employee.
The taxable value of expense payment fringe benefits is generally the amount paid or reimbursed. However, special rules apply where the payment is an in-house expense payment fringe benefit.
In-house expense payment fringe benefits
Sometimes an expense payment may be for an expense in purchasing goods or services that the employer or an associate normally sells in the course of business. This is called an in-house expense payment fringe benefit.
Such in-house expense payment fringe benefits have their taxable value calculated exactly as if the benefit were:
- a property benefit; or
- a residual benefit
depending on whether the good or service, if provided directly, would have been classified as a property or residual benefit.
For example, if:
- an employee purchases goods from their employee;
- the goods would otherwise constitute a property benefit if provided by the employer directly;
- the goods are of a sort that the employer normally provides in the course of business; and
- the employer reimburses the amount,
then the reimbursement would be an in-house expense payment fringe benefit to the employee, with its taxable value calculated as if the goods were a property fringe benefit.
Otherwise deductible rule
A common issue relating to expense payment fringe benefits is whether the otherwise deductible rule applies. If the employee, had he or she paid the expense directly, would have been entitled to a deduction for the expense, the taxable value of the expense payment benefit is reduced by the extent of the deduction.
Under an amendment to the law, from 13 May 2008, the otherwise deductible rule is restricted. Previously, if an expense payment benefit was provided both to an employee and to an employee’s associate, then the otherwise deductible rule applied to the extent that the expense would otherwise have been deductible by the employee and the associate.
From 13 May 2008, the rule is that in such a situation, the otherwise deductible rule only applies to the extent that the employee would have been entitled to a deduction.
Example: Otherwise deductible – in-house expense
A Co employees B. B has a sister, C, who does not work for the same company.
A Co manufactures leather goods including luggage. In 2012, B and C walk into A Co’s store one day and buy a whole lot of new luggage, including a briefcase each for their workplace, but also including travel baggage for their respective overseas holidays.
They spend a total of $3,000, of which $300 relates to the two briefcases, (which cost $150 each). Assume that each amount represents the taxable values of these items accurately. Also assume that the briefcases are deductible to B and C as their respective work related expenses.
A Co then reimburses B and C for the entire $3,000 bill.
In this case, the $3,000 is an in-house property expense benefit. It is calculated in respect of B and his associate C as if they were receiving property benefits directly.
However, the taxable value of the luggage is reduced to the extent that it would otherwise be deductible if B had incurred the expense directly. In this case, that only reduces the taxable value by $150. This is because, under the new rules, the otherwise deductible rule applies only to the extent that the expense would otherwise be deductible to B, not C.
(Note that the above ignores the issue of whether the briefcases are exempt fringe benefits).
If you have concerns about FBT and expense payment fringe benefits, call LAC Lawyers and we can provide advice and assistance.