If an employer gains public benevolent institution (PBI) status during the FBT year, do employees become eligible to use the full $30,000 FBT exemption cap in that year?
In the June 2019 TaxEd Update, we considered the FBT implications of a public benevolent institution (PBI) that was previously entitled to the higher $30,000 FBT cap losing PBI status during an FBT year (see our Eligibility & FBT Article – PBIs that lose endorsement during an FBT year: Effect on FBT cap exemption access).
Following that article, we have had several member queries regarding how the FBT exemption applies where an organisation (that is historically not recognised as a PBI by the ATO) is accepted as a PBI with prospective effect during the FBT year. Is the $30,000 cap only available for the part of the year the exemption is held? In other words, should the $30,000 be allocated pro-rata based on the period of the year the organisation is a PBI?
The current rules are that there is no pro rata of the $30,000 cap required and an employee is entitled to the full $30,000 cap despite the organisation only being recognised as a PBI for part of the FBT year. This situation would be equally applicable to a newly established organisation or an organisation that has not previously undertaken packaging but wishes to commence as a result of being recognised as a PBI during the FBT year.
A major impediment to an employee being able to fully utilise the $30,000 exemption cap is whether there is sufficient time remaining in the FBT year for an effective salary sacrifice agreement to be undertaken so that enough prospective salary can be undertaken to fully utilise the cap.
For example, an organisation may receive PBI status effective on 1 March and choose to enter into a salary sacrifice arrangement (SSA) with an employee immediately. However, the organisation needs to meet specific requirements for the SSA to be considered ‘effective’. The ATO’s view on SSAs is discussed in TR 2001/10. According to TR 2001/20, ‘an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages’. In other words, the ATO’s criteria for an effective SSA is that you can only package prospective salary. If the organisation provides benefits under an ineffective SSA, the benefits are assessable income of the employee under section 6-5 or 6-10 of the ITAA 1997 and they are not exempt income under section 23L of the ITAA 1936′.
Therefore, while an employee is entitled to the full $30,000 cap despite the organisation only being recognised as a PBI for part of the FBT year, it is essential that an organisation considers what is required for an effective SSA to be entered with the employee.