The meaning of "benefit" for FBT purposes

Income Tax Act 2004 -section CX 2-fringe benefit

All references are to the Income Tax Act 2004.

We have been asked whether a benefit would be provided for FBT purposes if:

1. an employee paid market value for the goods or services provided, and/or
2. the employer also receives a benefit from the provision of goods or services to an employee. 

These issues are fundamental to the interpretation of the FBT regime, in that they raise the question of what is a "benefit" and, therefore, what can give rise to a "fringe benefit" in terms of the scheme and purpose of the legislation.

Scheme of the legislation

FBT is payable by an employer who has provided or granted a fringe benefit:  section ND 1(1).  Under the definition of "fringe benefit" in section CX 2, there is a fringe benefit where:

• A benefit is provided by an employer to an employee in connection with their employment; and
• The benefit arises in a way described in any of sections CX 6, CX 8, CX 9, CX 11 to CX 15 or is an "unclassified benefit"; and
• The benefit is not excluded from being a fringe benefit by any provision of subpart CX. 

The value of the fringe benefit is determined in accordance with the rules set out in sections ND 1A to ND 1R.  FBT is calculated on the taxable value of a fringe benefit:  section ND 1(2).  In calculating the taxable value, the value of the benefit is reduced by payments made by the employee for receiving the fringe benefit:  section ND 1S. 

Therefore, in order to determine whether an employer has an FBT liability, it is necessary to establish:

• First, whether a benefit (either one of the specific types of benefit referred to in the legislation or any other benefit) has been provided by the employer to an employee in connection with their employment and none of the specific exclusions from the definition of "fringe benefit" applies.  If so, a "fringe benefit" is "provided";
• Secondly, the value of the fringe benefit in accordance with specific and detailed rules set out in the legislation;
• Thirdly, the taxable value of the fringe benefit.  In order to calculate the taxable value of a fringe benefit, amounts paid by an employee for the benefit must be deducted from the value of the fringe benefit determined under the FBT rules.

Would a benefit be provided if the employee had paid the market value of the benefit?

For a benefit to be provided, it is not necessary to establish that the employee has received a profit (that is, a surplus above the amount paid by the employee for the benefit).  In terms of the scheme of the FBT regime, a "benefit" means what is received by the employee, without regard to any contribution made by the employee.  However, in order to calculate the taxable value of the fringe benefit provided, amounts paid by the employee for the fringe benefit (other than an employment-related loan) are deducted from the value of the fringe benefit (determined under sections ND 1A to ND 1L).

The taxable value of a fringe benefit is the value of the benefit determined under those provisions:  section ND 1S(1).  The value of the benefit (other than an employment-related loan) provided to an employee is reduced by any amount paid by the employee for receiving the fringe benefit:  section ND 1S(2).  Therefore,  the effect of section ND 1S(2) is that if, the amount paid by the employee for a benefit (other than an employment-related loan) equals the value of the benefit for FBT purposes, the taxable value of the benefit would be nil so that FBT would not be payable in respect of the benefit. 

Some commentators have suggested that a fringe benefit does not arise where an employee has paid market value for the fringe benefit and that the issue of whether a benefit is a gross or net concept is of no practical significance as there will be no FBT liability where an employee pays the market value of the benefit provided by the employer.  However, the Commissioner considers that it is not possible to establish that there is no FBT liability unless the steps outlined above are carried out.  For example, the legislation contains special rules relating to the valuation of the benefit arising from the provision of a car for private use which may not necessarily be the exact market value of the benefit.  The McCaw Task Force (which recommended the introduction of FBT) considered that the value of benefits consisting of the provision of a car for private use should be determined on the basis of a specified formula because of difficulties in determining the value of such benefits on a case-by-case basis:  Report of the Task Force on Tax Reform (April 1982).  The Task Force considered that as a general rule the value to an employee of a fringe benefit consisting of the provision of a car for private use was equal to the amount by which the employee's need to meet private outgoings was reduced: see para 6.A3.  Under the current valuation rules the formula is based on the original cost of the vehicle and on the assumption that vehicles are kept for an average of five years. 

Is a benefit provided "in connection with" the employment of the employee, where an employee pays market value for the benefit provided?

In Smith v FCT 87 ATC 4883 it was held that a benefit was "in respect of, or for or in relation to" the employment where there was a connection between the benefit received and the employment.  It was considered that in determining whether there was a connection between the benefit and the employment relationship it was appropriate to consider the reason for the provision of the benefit.  Where the employment is a substantial reason for the provision of the benefit, there would be a relationship between the benefit and the employment.  The phrase "in connection with" also requires a relationship between two things:  Claremont Petroleum NL v Cummings (1992) 110 ALR 239; Strachan v Marriott [1995] 3 NZLR 272.   The Commissioner considers that a benefit is provided "in connection with" the employment relationship if the employment relationship is the reason for, or at least a substantial reason for, the provision of the benefit. 

Whether a benefit for which market value is paid by an employee is "in connection with" an employment relationship depends on the facts in each case.  If the employer's business does not include the provision of goods or services of the type provided to the employee, it is unlikely that the goods or services would have been provided to the employee if not for the employment relationship.  However, if the goods or services provided to an employee are of a type which the employer customarily makes available to the general public, and the goods and services are provided at the same price and on the same terms as the price and terms available to a member of the general public, it is likely that the goods or services would be provided because the employee has paid for such goods or services, rather than because of the employment relationship. 

Example

An employee of a supermarket selects goods off the shelves of the supermarket, queues at the checkout to pay for the goods and pays the shelf price for the goods.  Regardless of whether the checkout operator is aware that the employee is a staff member a benefit would not be provided to the employee "in connection with their employment" as the employee receives the goods on the same terms and conditions as any other customer. 

If by showing a staff card the employee obtained a discount on the goods, a benefit would be provided to the employee "in connection with the employment" as the employee is entitled to purchase goods at a discount only because of the employment relationship. 

A benefit would also be provided to employees "in connection with their employment" if employees were entitled to a rebate where their total purchases exceeded a certain level and such a rebate was not available to the public.

Would a benefit be provided where the employer also receives a benefit from the provision of goods or services?

Whether a fringe benefit is provided does not depend on whether employees consider that they have received an advantage or benefit: Case M9 (1990) 12 NZTC 2,069.  The definition of "fringe benefit" contains specific exclusions relating to situations where goods or services are provided to an employee for the purpose of performing employment duties: see sections CX 17 and CX 26(1) and the provisos to the definition of "private use or enjoyment" in section OB 1.  An inference can be drawn from these specific exclusions that it was contemplated that a benefit would be provided where both the employer and the employee derive a benefit from the provision of goods or services to the employee.  The specific exclusions relate to:

• Any benefit, to the extent to which it removes a need that would otherwise exist for the employer to pay the employee an allowance that reimburses the employee for transport costs that would have been incurred both in connection with their employment and for the benefit of the employer in travelling between home and work, such transport costs being attributable to any one or more of the following factors:
• the day or time of day when the work duties are performed;
• the need to transport any goods or material for use or disposal in the course of the employee's work;
• the requirement to fulfil a statutory obligation;
• a temporary change in the employee's place of work while in the same employment;
• any other condition of the employee's work;
• the absence of an adequate public passenger transport service that operates fixed routes and a regular timetable for the employee's place of work (section CX 17);
• The provision of "distinctive work clothing" (section CX 26(1));
• The use of a vehicle for emergency calls:  section CX 6(2); definition of "emergency call" in section CX 28.  The use of a vehicle for travel from the employee's home would not be private use where the vehicle is used for an emergency call. 
• The use of a work-related vehicle (including the use of such a vehicle for private use that is travel to and from the employee's home that is necessary in and is a condition of their employment or other private use where the travel arises in the course of their employment during which the travel arises incidentally to the business use):  section CX 6(2), definition of "work-related vehicle" in section CX 32.