Written by Bruce Quigley, CTA, Senior Tax Counsel
The various Tax Institute technical committees attempt to take a proactive approach in recommending improvements to the tax and superannuation systems. An example is a recent submission to the ATO prepared by members of the FBT and Employment Taxes Committee and members of the Tax Policy and Advocacy team recommending a simplified and pragmatic approach to the administration of the FBT Minor Benefits Exemption rules.
Section 58P of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides an exemption for minor benefits where the notional taxable value of the benefit is less than $300 and it is unreasonable to treat the benefit as a taxable fringe benefit having regard to a number of additional factors. These factors include the infrequency and irregularity with which similar or identical benefits are provided, the total value of the benefit and any associated taxable benefits, and the practical difficulty in determining that total value.
Applying those factors can be inherently difficult for employers. As a result, many employers currently incur a high cost of compliance, particularly in relation to meal and entertainment costs. The alternative and administratively simpler approach for most meal entertainment costs is to make a 50/50 election whereby half the cost is taxable – but that often results in a much higher FBT cost.
The objective of the submission is to recommend a practically easier way for employers to apply the minor benefits exemption that is still reasonably conservative, to enable an “’actual calculation” ‘ of taxable value, rather than needing to make the 50/50 election. The focus is on food and drink, since that is where the difficulties mostly arise.
The leading cases on the minor benefit exemption are National Australia Bank Ltd v Federal Commissioner of Taxation  FCA 531 (NAB) and Tribunal Case 2/96 (1995) 32 ATR 1099 (Case 2/96). In NAB, the Federal Court determined that:
- $35 taxi fares to or from shift work each day are individually ‘small’, but that the $8,000 annual aggregation of those fares (equating to one trip per work day), and which were expected to be repeated in future years, was too much to be minor; and
- taxi fares undertaken by the employee in different circumstances would not be aggregated with these trips to and from work, indicating the breadth of what can and cannot be aggregated as being ‘identical or similar’ is quite limited.
In Case 2/96, the Tribunal held that:
- 47 ad hoc taxi trips a year between work and home was the limit of what it considered ‘infrequent or irregular’;
- the the 47 trips would be exempt minor benefits notwithstanding there was no practical difficulty in determining the value of the trips; and
- benefits benefits that are scheduled to be provided repeatedly will become ‘regular’ at a lower frequency than ad hoc benefits provided on an as-needs basis.
A specific rule in section 58Z has since been enacted to exempt all taxi trips to and from work, but the principles from both decisions remain applicable in applying the minor benefits exemption.
The ATO provides examples in Taxation Ruling TR 2007/12 in which it accepts only a few similar ad hoc benefits that in total are valued under $300 in a year as being minor and exempt. Those examples are conservative in the extreme and do not provide additional illumination about where the limits of what is ‘minor’ reasonably falls.
The submission recommends some broad principles as a reasonable approach in applying the minor benefits exemption and other meal-related exemptions for food and drink and entertainment costs that are not salary packaged:
Separate benefit types should not be aggregated together - food and drink that is (i) coffee, (ii) a meal that is merely for sustenance and (iii) a meal that is for entertainment should be considered different types of benefits that are not sufficiently similar to require aggregation with each other.
Separate benefits delivered at the same time should not be aggregated for the $300 limit - events such as Christmas parties and other similar functions will often be comprised of a number of different benefits, such as venue hire, food and drink, and other entertainment. Each separate benefit should be independently assessed based on the relevant per head cost per benefit.
Maximum cost for a meal that is merely for sustenance should be linked to the ATO - accepted limits in the related context of travel that are set-out in annual determinations - Taxation Determination TD 2018/11 currently sets the lowest limit for lunch nationally at $28.15 + GST (roughly $30).
These principles are then applied in the submission to a number of specific meal/entertainment categories including:
Meals offsite costing up to $30 per head - based on Case 2/96, use a 47 irregular ‘normal meal’ frequency limit to apply the minor benefits exemption for an employee (ie. up to approximately $1,500 in aggregate per annum).
Meals entertainment - use a separate 10 ‘entertainment meal’ frequency limit to apply the minor benefits exemption for an employee with an overall cap of $1,500 per annum. Any meals costing $300 or more per head cannot be minor and exempt.
Sports/recreation events - apply a separate frequency analysis to different types of events. If appropriate, the cost may need to be broken down as partly attributable to travel to/from the event, meal entertainment at the event and gifts provided in connection with the event, as well as sponsorship costs.
We look forward to discussing our proposals with the ATO.
As Bob mentioned last week, we will have a summary table setting out the Coalition and Labor policies available in the coming days on our Federal Budget website. Look out for it as it may help you understand the competing policies being offered.
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Bruce Quigley, CTA