In-house fringe benefits – rule changes on the way

The Tax Laws Amendment (2012 Measures No. 6) Bill 2012 (Bill) was introduced into the House of Representatives on 29 November 2012. The Bill was still before the House of Representatives as at 18 February 2013.

The Bill proposes to amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to remove the concessional FBT treatment of in-house fringe benefits accessed by way of salary packaging arrangements. The changes were announced in the Mid-Year Economic and Fiscal Outlook 2012–2013.

The Government said the FBT concessions in the law were not intended to allow employees to access goods and services by agreeing to reduce their salary and wages (through salary packaging arrangements) in order to buy goods and services out of pre-tax income. As a result of expansion in the availability of salary-sacrifice arrangements, employees are increasingly accessing concessionally taxed fringe benefits under these arrangements and receiving tax-free, non-cash remuneration benefits for goods and services. The Government said that, in comparison, other employees or self-employed persons who acquire these items are required to pay for them out of their after-tax income. Hence, it deemed that changes were necessary.

In particular, the proposed amendments will:

• remove the concessional taxable value calculation method for particular benefits, which will mean that:

- the concession associated with the valuation of particular in-house expense payment benefits, in-house property benefits or in-house residual benefits will no longer apply where the benefit is accessed by way of a salary packaging arrangement; and

- instead, the taxable value of the benefit will be based on the "notional value" of the benefit. The "notional value" of an in-house property fringe benefit accessed through a salary packaging arrangement takes its meaning from s 136(1) of the FBTAA and means the amount that the employee could reasonably be expected to have been required to pay to obtain the property from the provider under an arm's length transaction (that is, market or fair value);

• remove the exemption that applies for residual benefits that are provided for transport from home to work (for employers in the transport business) and accessed through a salary packaging arrangement; and

• remove the annual $1,000 reduction of aggregate taxable value in respect of in-house fringe benefits where they are provided under a salary packaging arrangement.

However, it is proposed that the amendments will not affect the concessions relating to in-house benefits provided by employers where those benefits are provided outside of a salary packaging arrangement or are paid for out of after-tax income.

Date of effect

The changes will generally apply to benefits provided on or after 22 October 2012 (ie, the date the changes were announced).

However, there are transitional arrangements that will apply to certain salary packaging arrangements that were entered into by an employer and employee before 22 October 2012 ("existing salary packaging arrangements"). Benefits under such an arrangement that are provided before 1 April 2014 will continue to be subject to the law as it applies now before the amendments. All benefits provided on or after 1 April 2014 to employees will be subject to the new provisions.

An "existing salary packaging arrangement" means a "salary packaging arrangement" (as introduced by the amendments in the Bill) that was both agreed to (ie, the employer and employee agreed to the conditions of the arrangement) and was entered into (ie, the arrangement was given legal force) before 22 October 2012.

Where an existing salary packaging arrangement is materially altered or varied on or after 22 October 2012, it will no longer be subject to the transitional arrangements. In determining whether an alteration or variation is material to the existing salary packaging arrangement, regard will need to be had to the particular wording of the agreement, and what constitutes a material alteration or variation will often depend on the facts and circumstances of the arrangement. The Explanatory Memorandum to the Bill says alterations or variations of an existing salary packaging arrangement that would more than likely be considered material would include, but are not limited to: (i) a change of employer; (ii) alteration of the fixed end date of the arrangement; and (iii) variation of the types of benefits covered under the arrangement.

Other amendments

Other amendments contained in the Bill concern the following:

• Medical expenses rebate – The Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to apply an income test to the rebate for medical expenses from 1 July 2012. For taxpayers with adjusted taxable income above the Medicare Levy Surcharge thresholds ($84,000 for singles or $168,000 for couples or families in 2012–2013), the threshold above which they may claim the net medical expenses tax offset will increase to $5,000 and the rate of reimbursement will be reduced to 10%.
• Managed investment trusts (MITs) – The Bill amends Sch 2 of the Tax Laws Amendment (2011 Measures No. 5) Act 2011 to extend the interim streaming rules for MITs until the commencement of the new tax system for MITs.
• Limited recourse debts – The Bill amends Div 243 of the ITAA 1997 (the limited recourse debt provisions) to clarify that the definition of "limited recourse debt" includes arrangements where, in substance or effect, the debtor is not fully at risk in relation to the debt.
• Native title benefits – The Bill amends the ITAA 1997 and ITAA 1936 to make it clear that native title benefits are not subject to income tax (including capital gains tax).
• Exploration expenditure – The Bill amends the ITAA 1997 to extend the immediate deductibility of exploration expenditure provided to mining and petroleum explorers to geothermal energy explorers. Geothermal energy explorers will be entitled to treatment of their exploration or prospecting expenditure incurred on or after 1 July 2012 that is equivalent to that afforded to mining and petroleum explorers. This includes an immediate tax deduction for the cost of depreciating assets first used for exploration or prospecting on or after 1 July 2012, provided certain criteria are met.
• Deductible gift recipients (DGRs) – The Bill amends the ITAA 1997 to update the list of DGRs by adding two entities as DGRs and extending the listing of another three entities.
• Miscellaneous amendments – The Bill makes miscellaneous amendments to the taxation laws and regulations as part of the Government's commitment to uphold the integrity of the taxation system.

Source: Tax Laws Amendment (2012 Measures No. 6) Bill 2012, www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r4939