FBT: Tax law trips-up on technology

Providing work-related items that are exempt from FBT has been made more complex for employers by recent legislation. TERRY HAYES unravels the tax office tangle.

By Terry Hayes

Providing work-related items that are exempt from FBT has been made more complex for employers by recent legislation. We unravel the tax office tangle.

Changes announced by the Government in the May budget this year have now been legislated.

Among other things, they provide an FBT exemption for employers where they provide the following work-related items to employees that are used primarily for use in the employee’s employment:

• A portable electronic device.
• An item of computer software.
• An item of protective clothing.
• A briefcase.
• A tool of trade.

The FBT exemption is restricted to one item per FBT year for items that have a “substantially identical function”, unless the item is a replacement item. Before this latest change in the law, there was no limit on the number of work-related items that could be provided, whether they were substantially identical or not.

So what seems a simple idea in principle has turned into a more complex tax and FBT issue for employers.

Concerns have arisen about what is meant by the term “substantially identical function” when determining whether an exemption will be available for two or more eligible work-related items that are provided to the same employee during the same FBT year.

The FBT exemption applies where, among other things, the work-related item does not have a substantially identical function to another eligible work-related item that has been provided to the employee during the year, unless it is a replacement item (that is, where the original item was lost or destroyed, or needed replacing because of developments in technology).

Therefore, where two or more eligible work-related items are primarily used for the employee’s employment and are considered to have substantially identical functions, only one of those items will be exempt from FBT.

It seems that the “substantially identical function” limitation test needs to be considered for each work-related item, even if those items are in the same category (noted above).

For example, an employer provides an employee with a laptop computer and a mobile phone for employment purposes during the year. Would both items be exempt from FBT under the FBT law?

Seems simple that they should, but the law needs to be interpreted here.

The tax office view is that consideration needs to be given to the particular items to determine if their functionality is substantially identical to other benefits provided to an employee, irrespective of which category the benefits fall within – whether the item is a portable electronic device, an item of computer software, an item of protective clothing and so on.

In our example, although both a laptop and a mobile phone are portable electronic devices (and are therefore in the same category under the FBT law), they do not perform the same functions. The laptop cannot perform the task of a mobile phone, and conversely the mobile phone cannot perform the task of a laptop, notwithstanding that they are both portable and electronic.

The FBT exemption for work-related items was introduced in 1995 in order to reduce the cost of compliance for employers. With the exception of mobile phones, computer software and protective clothing, that exemption provided that items would be exempt from FBT without any requirement that their use be work-related. At the time, the government did not anticipate that other benefits would be widely available for private purposes.

However, changes in technology have increased access to portable electronic items such as laptop computers. The rationale for the latest amendments limiting the FBT exemption was that the Government was concerned that employees would be able to acquire these items under a salary sacrifice arrangement for private purposes. This would allow them to acquire goods for private use out of pre-tax income.

The Government considered this was inconsistent with the original policy intention that the exemption should only be available where personal use of a particular item is merely incidental to business use.

In addition, under the old law, except for laptops or other portable computers, there was no restriction on the number of items for which the exemption can apply in an FBT year.

The list of exempt items also became outdated because of changes in technology; for example, many portable electronic devices now have more than one function and other work-related electronic devices have become available. Under the old law, it became uncertain whether the FBT exemption applied to these items given their multiple functionality. So, the Government changed the law as I’ve discussed above.

The tax office considers that it will generally be an easy matter to determine that different items have substantially different functions. However, problems may arise where items are similar in appearance and/or functionality. In such circumstances, the taxman’s view is that it will be a question of fact as to whether items have substantially identical functions.

A tricky example arises where an employer provides an employee with both a mobile phone and a personal digital assistant (PDA). This raises questions of degree as to whether two separate items can have substantially identical functions.

Both are clearly portable electronic devices, but do not have identical functions, although a PDA can have phone capabilities but a mobile phone may not have PDA functionality.

Real life can certainly get the tax and FBT law in a tangle! Where, as in this example, some functions are replicated in both, the tax office generally takes the view that those items would not have substantially identical functions and both would be considered as being eligible work related items (and therefore in principle eligible for the FBT exemption).

In all of this, some degree of common sense and logic needs to be applied, albeit in the context of the law concerned and the tax office’s interpretation of that law. An employer will often see the situation as being quite clear, but the law may interpose its sometimes complicated and strict terms.

As always, get advice where there is doubt.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.