Health
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Hospital Circular 07/2000

Date Issued: 31 March 2000
Publication: 07/2000
Distribution: Public Hospitals
Subject/s: National Tax Reform
Purpose: The purpose of this circular is to advise public hospitals with respect to proposed tax reforms for FBT, ABN Registration and the Acute Health Website.

A New Tax System (Fringe Benefits) Bill 2000

A New Tax System (Fringe Benefits) Bill 2000 was introduced into the House of Representatives on 9 March 2000.

This Bill proposes to implement the second phase of the Government's tax reforms

for FBT. Specifically, the proposed measures include:

With the exception of the new FBT gross-up formula, the Bill proposes that all of the above apply from 1 April 2000.

Although the Bill (as of 29th March) is still to be passed by the Commonwealth Parliament, hospitals should prepare themselves on the assumption that the legislation will be effective from 1 April and that concessional FBT treatment will be limited to $17,000 of grossed-up taxable value for each employee.

There are a number of ways in which hospitals and employees can meet these new requirements. These include limiting packaging to the $17,000 cap, or continuing packaging but with the employee accepting liability for FBT above the $17,000 cap. In the latter case, once the cap has been reached, or as otherwise agreed, the hospital will need to deduct the FBT liability and hold it in an appropriate trust fund until such time as the legislation is passed. The emphasis should be on hospitals offering choice to their employees, particularly given the uncertainty of the final legislative outcome.

Hospitals are advised that no variations to employment contracts to recompense for FBT changes are allowed unless with specific prior DHS approval. In addition, Health Care Networks are advised that, in view of possible changes to Network structure, no renegotiation of employment contracts or arrangements (including contracts of service or contracts for services) should take place which could cause any successor body to incur obligations or liabilities without the prior approval of DHS. Guidelines will be provided about this matter and related issues pertaining to possible Network restructuring shortly.

Preliminary advice has been received by the Department on Fringe Benefits Tax Changes as they affect public hospitals (attachment 1). This information outlines the legislation and provides advice on four specific issues raised by the Department and hospitals. Further advice on the application of the FBT cap to employees currently working for metropolitan networks that it is proposed will be restructured on 1 July is also provided (attachment 2). This information is provided for your assistance. Hospitals are separate legal entities and are encouraged to seek their own independent advice.

ABN Registration

The Secretary in his letter of 1st March on the implementation of the New Federal Tax System advised that the Victorian Government has written to the ATO listing hospitals as entities for registration, thus triggering the ATO mail out of appropriate registration forms. The letter also referred to the need for entities to apply for endorsement as a gift deductible recipient and income tax exempt charity.

The form that hospitals should be filling in is for Government Organisations. The latest advice from The Department of Treasury & Finance (DTF) is that the form has been emailed or posted out by the ATO from 10th March direct to your hospital. Hospitals will then need to fill in these ABN forms received as per the advice letter they receive with the ABN kit. Despite the current review of Health Care Networks, networks are required to register for an ABN.

A small number of hospitals are understood to have already registered and received an ABN. If this is the case there is no need to register provided that you have used the correct form. If necessary confirm this with the ATO.

From 1 July 2000, a new endorsement process will operate to maintain income tax exempt charity status and deductible gift recipient status. Applications for endorsement will be sent out by the ATO to organisations that indicate on their ABN application that they are entitled to this status.

Acute Health Web Site

Acute Health has developed a GST issues log that will list the leading issues facing hospitals (identified in discussion with the Industry Tax Reform Working Group) with responses including any related ATO or private rulings that have been sought and received. The issues log will allow hospitals to submit new issues.

Hospitals are able to access the issues log through the same password protection arrangements in place for the Ernst & Young report (viz: logon gstnc , password groucho).

DR CHRIS BROOK
DIRECTOR
ACUTE HEALTH

Attachment I

Extract of Preliminary advice received by the Department of Human Services on Fringe Benefits Changes as they affect public hospitals

We are now pleased to set out our comments below. These have been prepared as a general commentary on the proposed legislation and its implications for public hospitals. In relation to any specific scenarios involving particular employment arrangements or proposals for restructuring of the health system, further information will be required to ascertain the precise risks and liabilities which may arise as a result of changes to the law. We also note that the legislation has not been passed by Parliament, and is therefore subject to further potential amendment. The comments below are prepared on the basis of the currently proposed legislation, and will require further consideration in the event that changes are made during the passage of the Bill through Parliament.

1. EXECUTIVE SUMMARY

  1. All public hospital employers, whether government bodies or public benevolent institutions (PBIs), will have their exemption from fringe benefits tax (FBT) "capped" at $17,000 per employee.

  2. The "cap" or threshold of $17,000 refers to the grossed-up value of fringe benefits provided to each individual employee (which equates to approximately $8,000 in benefits).

  3. To ensure tax neutrality between fringe benefits and cash salary after introduction of the Goods and Services Tax (GST), the FBT gross-up formula will depend on whether an employer has claimed input tax credits in acquiring the benefit (ie a GST free benefit such as education or international air travel, as opposed to a benefit subject to GST such as domestic air travel).

  4. Each employee's fringe benefits are deemed to include their share of certain "excluded benefits" (which are not considered at this stage), however this provision does not apply to meal entertainment, car parking fringe benefits or certain entertainment facilities (such as corporate boxes)- These are not included in the cap" of $17,000 and will therefore remain exempt from FBT for public hospital employers.

  5. The threshold of $17,000 applies even where an employee has not been employed by a specific employee for the entire FBT year, and is not pro-rated to take into account any reduced employment periods.

2. THE PROPOSED LEGISLATION

A New Tax System (Fringe Benefits) Bill 2000 (the Bill) was introduced into Parliament on 9 March 2000 and is intended to have effect for the FBT year beginning on 1 April 2000.

Currently, section 57A of the Fringe Benefits Tax Assessment Act 1986 (the Act) provides that all benefits provided to employees of PBI's and government bodies in connection with public hospitals, are exempt from FBT. The Bill will amend the Act with the following general effect:

  1. if any benefits are provided by an employer that is:

    (1) a public hospital that is a PBI, or

    (11) a government body where the duties of the employee are exclusively performed in connection with a public hospital that is a PBI,

    then the employer will be liable to FBT on the grossed-up value of any fringe benefits in excess of $17,000 in value, provided to any individual employee. Effectively, the FBT-exempt amount able to be provided by a public hospital will be capped at a grossed-up value of $17,000 per employee per FBT year.

    As government and non-government public hospitals are not treated differently for the purposes of this threshold, we have not examined the distinction between the two for current purposes.

  2. if any benefits are provided by a PB1 which is not a public hospital or a government body as outlined above, the FBT exempt amount will be capped at a grossed-up value of $25,000 per employee per FBT year.

An employer's overall liability is determined on the aggregate of all amounts per employee in excess of the relevant threshold- Where the amount for a particular employee is below the threshold, the amount for that employee in calculating the employer's aggregate non-exempt amount will be $0.

The gross-up rate for determining the taxable value of a fringe benefit will be amended to ensure there is tax neutrality between cash salary and fringe benefits after introduction of the GST. There will be separate grossing-up formulae depending on whether or not input tax credits were claimed by the employer in its acquisition of the fringe benefit.

Certain benefits will be specifically excluded from the threshold per employee, these being meal entertainment, car parking benefits and corporate entertainment facilities. Such benefits will therefore remain exempt from FBT for public hospital employers.

3. DHS SPECIFIC ISSUES

You have requested us to advise you on the following specific issues:

In light of the possible variables in relation to the above Scenarios, including how a restructure may take place, what arrangements apply to the employment of VMO's, and the different contracts of employment currently being used across Victorian hospitals and networks, our observations in relation to these issues are of a general nature only. Each of these issues should be considered on a more detailed basis after review of relevant proposals, arrangements and contracts. However, in order to assist the Department in addressing the impact of the FBT legislation on a preliminary basis, we note our initial comments on the above issues as follows:

  1. The $17,000 threshold is calculated for each taxpaying employer on the basis of benefits provided to a specific employee in respect of theemployee's employment by that employer. The Bill does not provide for a ro-rata threshold for employment during only part of a year. Accordingly, where an employee changes employer, a separate threshold of $17,000 would generally apply for the new employer.

    However, section 160(1) of the Act provides that where a former employer disposes of its undertaking to a new employer, and the new employer continues to provide benefits to continuing employees of the undertaking, all benefits are treated as being provided solely in relation to the employee's employment by the new employer- If the re-structure of employing entitles within the health system falls within this scenario, this section may have the effect of combining the benefits provided by old and new employers under the one combined S17,000 cap. Further consideration will be required in relation to the proposed framework for the re-employment of staff in public hospitals, in light of these possible implications-

  2. The concurrent employment of VMO's by several different legal entities in respect of their part-time work at different hospitals will be subject to the same principles as outlined above. Each employer's FBT liability is separate- Where two or more employers of the same person are "associates" for FBT purposes (for instance they are all authorities of a State), the Act specifically provides that each employer will only be taxed in respect of the benefits that each provides to the employee. This overrides the usual associate deeming provisions to prevent a double assessment of FBT On this basis, and as there s no reference in the Bill to combining the thresholds of associated employers for specific employees, a separate threshold should apply for a VMO in respect of their employment with each individual employer. For current purposes, we do not consider whether proposed employing entities in any health system restructure would be associates for FBT purposes.

  3. Where denominational hospitals are public hospitals which are PBIs, the threshold of $17,000 for all public hospitals will also apply to these denominational hospital employers. Thus where a denominational hospital is a public hospital and is currently providing fringe benefits pursuant to the section 57A PBI exemption, it will be subject to the $17,000 threshold.

  4. The ability of an employer to recover the cost of any FBT liabilities from an employee in respect of whom the liabilities have arisen, will depend on the employment contract. While we are unable to comment at this stage on all contracts in use in public hospitals in Victoria, we can observe that employers' risks will be minimised where an employment contract includes a clause enabling the employer to recover from the employee any FBT which may arise, or to vary the employee's package so that no fringe benefits tax applies ie limiting benefits to a grossed-up value of $17,000) If such a clause is enforced, the employing hospital will not bear the FBT liability. If no such clause in included in any employment contract, an employer will be exposed to risk of FBT liabilities. A review of all relevant contracts in use would he required in order to identify the specific risks across all public hospitals.

We hope that the above provides you with an overview of the content and effect of the FBT proposals. As has been noted earlier in this letter, the specific queries addressed above will require further consideration of all relevant details and arrangements in order to ascertain the precise implications for public hospitals of the changes to FBT.

Attachment 2

Further advice received on the application of the FBT cap for employees working for networks that are being restructured

I have looked over the Departments legal advice (refer attachment 1) and concur with the following point they outlined;

With respect to the issue that section 160 of the FBT Act may be able to apply such that the benefits paid by the old and new employer will be combined so that the $17,000 threshold can only be utilised by the new employer, I do not believe Departments legal advice is a correct interpretation of section 160.

Section 160 was part of the FBT assessment act as originally introduced (ie it has not been introduced to correct an anomaly or as a result of a change in tax policy).

This section provides where a former employer disposes of whole/part of a business to a new employer and the new employer provides or continues to provide benefits to persons who were employed by the former employer, then the new owner of the business will be liable to fringe benefits tax on those benefits.

The section only applies where under the terms of the disposal of the business there is an arrangement whereby the new owner will provide or continue to provide fringe benefits to former employees of the former owner. It does not apply to benefits provided by the former employer to former employees - liability to fringe benefits remains with the former employer.

Take for example the situation where the Toyota motor company disposes of its business to the Ford motor company and part of the arrangement is that Toyota employees become employees of Ford. The Toyota motor company would be liable to pay FBT paid upon fringe benefits paid to their employees whilst they employed them. Any fringe benefits paid to the former Toyota employees once they are employees of Ford would be subject to FBT and payable by Ford. Ford would not be liable to pay FBT on any benefits provided by Toyota to the employees.

It is my belief that the policy design of section 160 is to ensure that if an employee receives a benefit from one employer, and the provision of that benefit is continued by the new employer the new employer is taken to provide the benefit. That is, the new employer can not claim that the benefit is being paid to the employee by virtue of the employment relationship that existed between the employee and the first employer, and hence there is no fringe benefit paid by them in respect of their employment of the person. This section ensures that the benefit is taken to be provided as a result of the employment relationship between the new employer and the employee.

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