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:: Taxation Issues - Australia |
Win for Frequent Flyers
A Federal Court decision appears to have cleared the way for frequent flyers
(and their family members) to enjoy the benefits tax free of frequent flyer
points accrued on employer paid work-related travel.
The ATO practice in this area to date has been to require taxpayers who have
acquired an airline ticket as a result of frequent flyer points accrued on
business travel, to include an amount in his or her assessable income except
in circumstances where the ticket was issued in the employee's name and was
non-transferable (refer para 16 TR93/2).
The decision in Payne v FCT ("Payne's case") resoundingly rejects the ATO's
stance on this matter and hence represents a significant win for taxpayers.
The taxpayer in Payne's case was an employee of a firm of accountants who
travelled frequently on business. She joined a frequent flyer program on one
of these trips paying the membership fee to the program personally. The
taxpayer did not indicate to any employee of the relevant airline that she
was an employee of the accounting firm nor did she discuss with her employer
her intention to join the program. Virtually all the points accumulated by
the taxpayer under the program were referable to work-related travel paid by
the taxpayer's employer. The taxpayer used points accumulated to obtain
flight tickets for her parents to visit from England and also to visit
Tasmania during their stay.
The Commissioner of Taxation sought to assess the taxpayer on the benefit
arising upon issue of the reward airline tickets (to the taxpayer's
parents), under either section 25(1) or section 26(e) of the Tax Act.
Section 25(1)
The argument that the flight tickets were assessable pursuant to section
25(1) was quickly dismissed by Foster J pursuant to the time honoured
principle that something cannot be income according to ordinary concepts if
it cannot be turned to pecuniary account by the taxpayer. The tickets were
not transferable and were subject to cancellation if sold.
Section 26(e)
Sub-section 26(e) was introduced into the Tax Act to catch within the tax
net the value of non-cash benefits provided to employees and other people
providing services. It applies to benefits allowed, given or granted to
taxpayers in respect of employment or services rendered.
In dealing with the section 26(e) submission, Foster J noted that three
requirements must be met before the sub-section is engaged, namely:
1. there must be "a ... benefit",
2. that benefit must be "allowed, given or granted" to the taxpayer, and
3. the benefit must be allowed, etc, "in respect of ... any employment of or
services rendered" by the taxpayer.
Fosters J's judgement primarily dealt with the latter two requirements of
the sub-section, it being clear that the reward tickets were indeed benefits
to the taxpayer.
Allowed, given or granted
His honour dealt with the "allowed, given or granted" requirement first. In
doing so, he referred to the leading authority on the point, Constable v The
Federal Commissioner of Taxation ("Constable's case")1952, 86 CLR 402. In
that case, the High Court expressed the view that where the taxpayer has a
contractual right to a benefit that crystallises on the happening of an
event, there cannot be an allowing, giving or granting in the relevant
sense, because it is the occurrence of the event (and the contractual right)
that gives rise to the benefit and not its bestowal by the employer.
As noted by Foster J the High Court made this finding notwithstanding that
the employer in Constable's case had not been entirely unconnected with the
provision of the benefit. The point, according to Foster J was that the
payment itself could not be characterised as the granting or giving of a
relevant benefit, it being the paying out of a contractual entitlement.
In applying this principle to the facts before him, Foster J held that the
provision of the free airline ticket to the taxpayer's parents occurred by
reason of the crystallisation of the taxpayer's rights under the frequent
flyer contract she had with the airline and hence there could be no
"allowing, giving or granting" of a benefit pursuant to section 26(e) of the
Act.
In respect of any employment of or services rendered
Foster J also considered whether the reward tickets were allowed, etc, "in
respect of ... any employment of or services rendered" by the taxpayer.
The taxpayer argued that as it was the rights under the frequent flyer
contract that gave rise to the reward ticket, there was no relevant
connection between it and the taxpayer's employment. The Commissioner on the
other hand argued that but for the accruing of points earned by the taxpayer
as a result of employment related (and employer paid for) travel, the
benefit would not have arose and hence a relevant connection, albeit
indirect existed.
Foster J rejected the "but for test" as a correct statement of principle in
this area of the law. He considered that in order for the relevant
connection to be made out, the benefit must either be provided by the
employer or by a third person in view of the taxpayer's employment. In other
words, the employment must be either wholly or partly the reason for the
donor or granter making the gift or the grant.
In the present case the court concluded that the airline provided the reward
tickets to the taxpayer not because of her employment, but because she had
become entitled to it pursuant to her contractual rights under the frequent
flyer program. Accordingly section 26(e) could have no application.
The question left begging of course is would the same result have followed
in the case if the frequent flyer membership had been initiated at the
suggestion of the employer and paid for by the employer. Arguably the result
would have been the same, as long as it was clear that the frequent flyer
contract was between the employee and the airline (ie that the employer was
not a party to it) and that the employer had no other relationship with the
airline.
In such circumstances the free ticket that issues would still crystallise
pursuant to a contractual right between the employee and a third party.
It would therefore be difficult to argue that the benefit has been "allowed,
given or granted".
Furthermore in these circumstances the reward tickets would be issued to the
employee on the basis of the employee's contractual rights with the airline
and not because of his or her employment. Accordingly it would also be
difficult to maintain that the benefit was granted "in respect of ... any
employment of or services rendered".
The Commissioner has advised that he will not be appealing against the
decision in Payne's Case.
Fringe Benefits Tax Implications
For the benefit received by an employee under a frequent flyer scheme to be
a fringe benefit, the benefit must be provided by the employer, an associate
of the employer or a person ("the arranger") under an arrangement between
the employer (or associate of the employer) and the arranger or another
person.
The Commissioner has stated in Taxation Ruling TR93/2 that where the
employee enters into a personal contract with the organisation operating the
frequent flyer program, flight tickets received under the program will not
be considered to have been provided by the employer and will not be subject
to FBT.
However where membership to the program involves a contract between the
organisation operating the frequent flyer type program and the employer it
is considered that an arrangement is formed between the organisation
operating the frequent flyer program and the employer. In these
circumstances benefits received by an employee which relate to points
accrued from employer-paid transactions will constitute fringe benefits
subject to FBT.
Of course where the employer pays for the employee's membership to a
frequent flyer program that fee itself will be a fringe benefit. However the
value of the benefit for FBT purposes will vary depending on the extent to
which the fee would be otherwise deductible.
Deloitte Touche Tohmatsu is one of the world's largest tax consulting, audit and management consulting firms, with offices in all major business centres
in Australia.
(c)Deloitte Touche Tohmatsu, 1996
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The Layman's Version of Taxation Issues - Australia
On May 16, 1996, the Federal Court of Australia reversed a previous Australian Taxation Office ruling of 1993, saying that frequent flyer points are not taxable benefits. The decision noted a few reasons why travel benefits accrued by frequent flyer program members are not taxable as income. They reward tickets are not transferable and if sold are subject to cancellation. They are not money and can not be turned into money. In addition, the free tickets are provided not because of the taxpayer's employment, but because she had become entitled to them under Qantas Airlines' frequent flyer program. They are not benefits of her employment. The Taxation Office has no plans to appeal the ruling. The decision effectively means that frequent flyers and their family members will be able to enjoy the benefits of points accrued from business travel without having to pay tax.
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