FBT Q&A – What are the FBT implications of benefits and outplacement services provided to former employees?

What are the FBT implications of benefits provided to former employees? This Q&A discusses some possible exemptions for employers that provide benefits or services to an employee as part of their redundancy.

Question

In January 2019, our organisation paid training course fees of $3,500 to a state government TAFE for a former employee to undertake a Diploma of Mental Health, which is an unrelated field of study to his previous line of work.  The former employee was made redundant in April 2018 and it was negotiated at that time that the severance package would include a career transition payment to undertake training to assist him to secure alternative employment at a later date.

Would the payment of this expense to a third party on behalf of the former employee be considered an expense fringe benefit under s. 20 of the FBTAA? If yes, are there any exemptions or concessions available to reduce the taxable value?

Answer

The definition of employee for FBT purposes encompasses former employees, so the reimbursement of the course fees could be viewed as an expense payment benefit by the ATO.

The otherwise deductible rule would not be available due to the lack of nexus with the former role of the employee. Therefore, the only possible exemption available would be under s. 58M of the FBTAA, i.e. work-related counselling.

To qualify for the exemption, the following conditions must be satisfied:

1. The benefit is an expense payment benefit, a property benefit or a residual benefit.
2. The scope of work-related counselling is limited to matters such as health, safety, fitness, stress management etc.
3. The work-related counselling is provided to an employee or to an associate in the presence of the employee.
4. The purpose of the counselling is to improve or maintain the quality of the duties performed by employees or prepare employees for retirement.
5. The counselling is not provided wholly or principally as a reward for services rendered by the employee.

The ATO consider that the provision of outplacement services to employees who have been made redundant falls within the definition of ‘work-related counselling’ since it improves or maintains the quality of the remaining employees’ performance (see TD 93/153). Typical examples of outplacement services which would be exempt benefits include the following:

• assistance in writing a resumé and job application;
• guidance on seeking new employment;
• training for employment interviews and selection tests; and
• the provision of any ancillary services in support of the primary services provided e.g. the use of the employer’s telephone or office space.

It is questionable whether the course undertaken by the former employee will come within this concept. We recommend that you apply for a private ruling if you wish to pursue the exemption based on the course qualifying as some sort of outplacement service.

There is an alternative argument regarding the treatment of the payment: that the payment is an employment termination payment. An employment termination payment (ETP) is a payment received in consequence of the termination of employment. However, it excludes some important termination payments such as superannuation benefits, unused annual or long service leave payments, and redundancy or early retirement scheme payments (which are taxed under other rules).

Given the ‘career transition payment’ was negotiated as part of the former employee’s employment exit, it would appear to fall within the scope of the ETP definition. The definition of fringe benefit specifically excludes an ETP. Therefore, to the extent the reimbursement payment does not form part of the former employee’s tax-free redundancy payment component, it could be argued that there is no FBT exposure for the employer.

However, to the extent FBT is not applicable, there would be PAYGW and payment summary requirements. The employee would also have a corresponding income tax obligation on the payment.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.