Our fringe benefits tax (FBT) laws are, in many ways, no different to the income tax laws. Both have their complexities and quirks. And they both have to deal with the 21st Century.
An employer can provide an employee with “eligible work related items” without attracting FBT. This exemption extends to portable electronic devices (such as laptop computers, mobile phones, personal digital assistants (PDAs) and electronic diaries), computer software, protective clothing, briefcases and tools of trade. The item must be primarily for use in the employee’s employment. Sounds good so far. But, there’s more!
If “eligible work related items” have “substantially identical functions”, the FBT exemption is limited to one item per FBT year (which runs April 1 to March 31), unless it is a replacement item. In other words, if two or more items with substantially identical functions are provided to an employee in an FBT year, the FBT exemption will only apply to the first item (unless the later item is a replacement for the first one, eg. because it was lost or destroyed).
In this rapidly evolving electronic age, this “substantially identical functions” test can cause some confusion. It’s a case of the FBT law running up against reality!
The Tax Office has previously confirmed that the FBT exemption can apply to more than one item in a category (eg. portable electronic devices). For example, a mobile phone and a laptop computer are each a portable electronic device, but since those items do not have substantially identical functions, both can be considered as “eligible work related items” that, subject to satisfying the terms of the relevant FBT law, may be FBT exempt items.
But, just how different do two items have to be in order for the FBT exemption to apply? The ATO was recently asked this question.
The new generation of tablet computers (eg. the Apple iPad) offer a range of functionalities that are both different and similar to those offered by a traditional laptop computer. In many cases, the differences are a matter of degree (eg. improved functionality or operating platforms) and in others, those differences are more pronounced (eg. the ability to load external programs).
The difficulty experienced by employers in determining whether items have substantially identical functions will only become more pronounced as technology moves forward and the range of portable electronic devices increases.
It has been suggested to the ATO that the functionality of a portable electronic item (for the purposes of the FBT exemption) be measured by reference to the employment purpose for which it is to be issued to the relevant employee.
Thus, if two portable electronic devices have similar functionality but are issued to an employee for two substantially different employment tasks, those items should not be considered as having substantially identical functions. In that way, the FBT exemption would apply to both devices.
For example, a mobile phone and a PDA may both have calendar/organiser functionality, but if the employer issues an employee a phone for the purposes of contacting customers and a PDA for the purposes of managing a business calendar, the items should not be treated as having identical functions.
Conversely, if two devices have similar functionality and are issued to an employee to undertake substantially similar employment tasks, those items should be treated as having substantially identical functions. For example, a tablet computer and laptop computer may have some different functionality, but if both are issued for the purposes of working remotely from the office they should be treated as having substantially identical functions.
The Tax Office acknowledges that in some cases it may be difficult for an employer to determine whether a portable electronic device has substantially identical functions to another device. However, it considers that the “substantially identical functions” test cannot be substituted by a test that looks to determine the functionality of a portable electronic device by reference to the employment purposes for which the device was issued.
In the context of the FBT exemption, items will have substantially identical functions where the functions of two items are the same in most respects. However, items may be different in a number of ways which do not impact on an item’s functions. For example colour, shape, brand and design would not generally be relevant considerations when determining whether 2 items have substantially identical functions.
In applying the “substantially identical functions” test in a practical sense, the Tax Office considers that a mobile phone with calendar/organiser functionality does not have substantially identical functions to a PDA. They may have some functions in common, but they do not have functions that are the same in most respects. So, in principle, both would be exempt from FBT.
In applying the “substantially identical functions” test to portable computers more generally (eg. laptops, tablets, netbooks and ultraportables), an employer would need to determine whether two portable computers have substantially identical functions. Don’t forget that, after all, FBT is a tax paid by employers.
It is obvious to say that difficulties may arise in some scenarios, particularly where items are similar in functionality but do not have identical functions. As is often the case under tax law, it will be a question of fact in each case as to whether such items have substantially identical functions.
In regards to the iPad, the Tax Office accepts that it does not have substantially identical functions to a laptop computer. So, we can be thankful for small mercies!
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.
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