We provide expense payment fringe benefits to our employees. This, in part, involves returning input tax credits (ITCs) to the employees via payroll. How are the returned ITCs treated in the hands of the employee?
Question
We provide expense payment fringe benefits to our employees. This, in part, involves returning input tax credits (ITCs) to the employees via payroll.
How are the returned ITCs treated in the hands of the employee? Are the ITCs treated as assessable income to the employees, with only the GST exclusive portion of the expense payment treated as a fringe benefit? Or are the ITCs included as part of the fringe benefit?
Answer
When you provide an expense payment fringe benefit to an employee, the taxable value of the fringe benefit is taken to be the amount of the payment/reimbursement made (refer to s. 23 of the FBTAA). Accordingly, the GST component of the expense (for which the employer claims an ITC) forms part of the fringe benefit and, therefore, is not taxable income for the employee.
The fact that the fringe benefit (which implicitly includes the GST component of the reimbursed expense) is not income of the employee is supported by s. 23L of the ITAA 1936, which states:
‘SECTION 23L CERTAIN BENEFITS IN THE NATURE OF INCOME NOT ASSESSABLE
(1) Income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer.
(1A) Income derived by a taxpayer by way of the provision of a benefit (other than a benefit to which section 15-70 of the Income Tax Assessment Act 1997 applies) that, but for paragraph (g) of the definition of fringe benefit in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986, would be a fringe benefit is exempt income of the taxpayer.
(2) Where:
(a) in a year of income, a taxpayer derives income consisting of one or more non-cash business benefits (within the meaning of section 21A); and
(b) the total amount that is applicable under section 21A in respect of those benefits does not exceed $300;
the income is exempt income.’
For completeness, from the employer’s perspective, the ITC dictates whether the benefit is a Type 1 or Type 2 benefit for FBT grossing up purposes (i.e. for working out the employer’s FBT liability). Depending on the nature of the expense, the employer may be able to claim the ITC in determining its GST liability.