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Bills Digest No. 87  
A New Tax System (Fringe Benefits Reporting) Bill 1998

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Passage History

Date Introduced: 2 December 1998

House: House of Representatives

Portfolio: Treasury

This Act commences on the day it receives Royal Assent. The commencement of the amendments made by the various Schedules is indicated under the section dealing with the Main Provisions.

The main purpose of the Bill is to implement the reportable fringe benefits system so that the fringe benefits of individual employees are reported by employers on group certificates.

The current provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) do not require an employer to determine the taxable value of fringe benefits in respect of each employee and there is no requirement under the Income Tax Assessment Act 1936 (ITAA 1936) to record fringe benefits on employee group certificates.

The Bill will amend with effect from the year of income 1999-2000:

• the FBTAA 1986 to set out the method of working out an employee's share of the taxable value of fringe benefits of the employer, and
• the ITAA 1936 to require an employer to record the grossed-up taxable value of fringe benefits provided in respect of an employee's employment on the group certificate relative to that employee where the taxable value of those benefits exceeds $1,000.

Fringe benefits in respect of meal entertainment and car parking fringe benefits are excluded from this reporting requirement.

The Bill also provides for the reportable fringe benefits of an employee to be taken into account from the year 1999-00 in working out:

• deductions for superannuation contributions
• rebate for personal superannuation contributions
• rebate for contributions to spouse's superannuation
• higher education contributions
• superannuation surcharge, and the
• Medicare levy thresholds.

A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Bill 1998 (the MLS-FB Bill) is being introduced to impose the Medicare levy surcharge on the reported fringe benefits.(1)

This Bill is one of a package of 17 Bills(2) that was introduced into the House of Representatives in December 1998, to give effect to Government's proposals on 13 August 1998 for a new tax system, which included the introduction of a GST. The outlines of Government's proposals were contained in the policy document Tax Reform: not a new tax, a new tax system: The Howard Government's Plan for a New Tax System,(3) which will be referred to as the A New Tax System (ANTS) in this Digest. The ANTS and further details of the proposals were contained in Fact Sheets, all of which were available in the Government's Tax Reform Website: http://www.taxreform.gov.au

Proposed section 1-3 of the A New Tax System (Goods and Services Tax) Bill 1998 (the GST Bill) provides that the Commonwealth will introduce further legislation to give effect to the Agreement on Principles for the Reform of Commonwealth-State Financial Relations endorsed at the Special Premiers' Conference in Canberra on 13 November 1998. In the Second Reading Speech on the GST Bill, the Treasurer stated that the Government proposes to enact the whole package by the end of this financial year and that when the package is enacted, Australia will have a new tax system from 1 July 2000.(4) The Prime Minister also stated in Parliament that further tranches of legislation will be introduced early in 1999 to implement the new tax system.(5)

Outline of four elements for the reform of the Fringe Benefits Tax in the A New Tax System

ANTS foreshadowed major reforms of the taxation of fringe benefits in the following four elements to make the system fairer for all taxpayers.

The taxation of fringe benefits in the hands of employers was considered necessary in 1986 as the provisions of the ITAA 1936 and paragraph 26(e) in particular were considered inadequate to tax certain benefits in the hands of employees, where such benefits could not be converted into cash. The proposal to attribute fringe benefits to employees and to treat such benefits as income for certain limited purposes is a major reform measure which, due to its complexity, calls for a review of the entire FBT regime, as will be indicated in this Digest.

The outline of this proposal in ANTS is as follows.

• while tax liability for such benefits will remain with the employer (under FBT) their value will be included as income for determining liability for tax surcharges (such as the Medicare levy surcharge and superannuation contributions surcharge) and income related obligations such as child support;
• the non-grossed-up amount for a wider range of fringe benefits will also be included in assessing entitlement to certain income-tested government benefits (ie Family Allowance and the parental income test for Youth Allowance).(6)

This is the only element of the FBT reform proposals in ANTS to be implemented by measures in this Bill and in the MLS-FB Bill. The other three elements which are to take effect from the 2000-01 FBT year will probably be included in further tranches of legislation referred to above.

The outlines of the three elements as indicated in ANTS is set out below.

• Stopping overuse of the concessional FBT treatment of public benevolent institutions and certain other not-for-profit organisations. This will be done by limiting, for each employee, the value of fringe benefits eligible for concessional treatment to $17,000 of grossed up taxable value per employee of such organisations (equivalent in broad terms, to the grossed-up value of an average 6 cylinder car and some additional minor benefits). Any amount above this limit will be subject to the normal FBT treatment.(7)

• Extending FBT to benefits in excess of $1,000 a year provided by companies to their shareholders or by trustees to trust beneficiaries, where the benefits are not taxed currently.(8)

• Extending the FBT exemption for remote area housing provided by the mining industry to their employees. This provides the mining industry with the same treatment that applies currently to primary producers.(9)

This section of the Digest only deals with the significant amendments to the FBTAA 1986 to achieve the main purposes of the Bill. Readers are invited to refer to the Explanatory Memorandum to the Bill for clarification of the other amendments.

New Part IIA - Core Provisions

New Part IIA is inserted into the FBTAA 1986 by Schedule 1 and includes provisions to work out the following amounts.

• an employer's fringe benefits taxable amount (New Division 1);
• an employer's aggregate fringe benefits amount (New Division 2), and
• an employee's individual fringe benefits amount (New Division 3).

Currently, the fringe benefits taxable amount for a year of tax is calculated in accordance with section 136AA of the FBTAA 1986 according to the following formula:

Employer's aggregate fringe benefits amount x	1
	1 - rate of fringe benefits tax

This formula for calculating the employer's fringe benefits taxable amount is relocated in proposed subsection 5B(1) of Division 1 of Part IIA and is subject to the provisions of proposed subsection 5B(2).

Schedule 3 of Taxation Laws Amendment Bill (No. 2) 1998(10) inserts new Part XIA to provide for the record keeping exemption arrangements (RKEA), which was part of Government's response to the Bell Report.(11) It is intended to reduce compliance costs and paper work for small business. Proposed new Section 135G of Part XIA will allow the employer's taxable amount to be worked out using the aggregate fringe benefits amount from an earlier year of tax in special cases where a business provides less than $5,000 in taxable benefits in a base year and maintains a similar level of benefit from year to year. Employers may elect to establish a new base year if taxable benefits vary by more than 20 per cent of the benefits in the previous base year. This method of working out the employer's fringe benefits taxable amount will be preserved under proposed subsection 5B(2).

Proposed section 5C of Division 2 of Part IIA sets out the steps required to work out the employer's aggregate fringe benefits amount. Basically, it amounts to the total of the following:

• the aggregate of the individual fringe benefits amounts of each employee (defined in proposed subsection 5E(2) of Division 3;

• all the taxable values of all the excluded fringe benefits provided in respect of all employees.

An excluded fringe benefit, as defined in proposed subsection 5E(3), is a fringe benefit in relation to the provision of meal entertainment or a car parking fringe benefit or a benefit prescribed by regulations for the purposes of proposed paragraph 5E(3)(c).

Under proposed subsection 5E(2) of Division 3 of Part IIA, an employee's individual fringe benefits amount is the sum of the employee's share of the taxable value of each fringe benefit provided in respect of employment other than excluded fringe benefits.

Reference is invited to the Explanatory Memorandum which sets out an informative diagram for determining an employee's individual fringe benefits amount. This diagram incorporates a situation where an employee has:

• an amortised amount of an amortised fringe benefit, as defined in section 65CA of the FBTAA 1986, in relation to remote area home ownership; and
• a reduction amount of a reducible fringe benefit, as defined in section 65CC of the FBTAA 1986, in relation to remote area home repurchase .(12)

Proposed section 5F of Division 3 of Part IIA sets out the method of calculating an employee's share of the taxable value of the various fringe benefits provided to all employees by an employer. It will be appreciated that:

• some fringe benefits may be provided for the benefit of one employee only and in this case proposed subsection 5F(2) states that the employee's share is 100% of the taxable value of that fringe benefit
• some discrete fringe benefits may be shared by 2 or more employees and in this case proposed subsection 5F(3) states that each employee's share is the amount that is reasonably attributable to each employee, subject to the requirement under proposed subsection 5F(5) that the sum of the attributed shares must be equal to the taxable value of such shared fringe benefits, and
• where a class of fringe benefits, such as car fringe benefits, may be provided for one or more employees and the taxable value is worked out by a single calculation, proposed subsection 5F(4) requires a reasonable apportionment of the taxable value taking into account all relevant circumstances so that the amount attributed to each employee aggregates to the total taxable value of that class of benefits as required by proposed subsection 5F(7).

New Part XIB - Reportable fringe benefits totals

Item 5 of Schedule 1 inserts new Part XIB to the FBTAA 1986 and deals with reportable fringe benefits totals of employees.

Proposed section 135N provides that an employee's reportable fringe benefits total is the sum of each of the employee's reportable fringe benefits amounts for the year. An employee's reportable fringe benefits amount from an employer is generally the grossed-up value of the employee's individual fringe benefits amount from that employer under proposed section 135P.

The reportable fringe benefits amount is the amount worked out using the formula:

Individual fringe benefits amount x	1
	1 - Rate of tax for the year of tax

An employee's individual fringe benefits amount is reportable if the total of that individual's fringe benefits amount for the FBT year of tax ending on 31 March in the year of income is more than $1,000. It should be noted that the year of income ends on 30 June following the FBT year end. As the FBT and income tax year end do not coincide, the reporting of fringe benefits in the group certificates of employees adds to the complexity of the reporting system with additional compliance costs.

Proposed section 135Q deals with the reportable fringe benefits of:

• employees of public benevolent institutions whose duties are performed exclusively in connection with a public hospital, and
• live-in residential care workers for the elderly or disadvantaged persons employed by government bodies, religious institutions and non-profit companies.

Certain benefits provided to these two categories of employees are exempt benefits under sections 57A and 58 respectively of the FBTAA 1986.

Proposed subsection 135Q(2) provides that a reportable fringe benefit amount of an employee of such an institution arises if the sum of the following amounts is more than $1,000:

• the employee's individual fringe benefits amount in the FBT year of tax ending on 31 March in the year of income, and
• the employee's individual quasi-fringe benefits amount for the FBT year of tax ending on 31 March in the year of income.

Under proposed subsection 135Q(3) the individual quasi-fringe benefits amount represents the individual fringe benefits amount that would have arisen had sections 57A and 58 not been enacted and no other fringe benefits were provided.

The effect of proposed section 135Q is to include the notional taxable value of these exempt benefits in the reportable fringe benefits amount of employees and the employers of these institutions will have to calculate the taxable values of the benefits provided. Although these institutions are required to report these amounts on group certificates where they exceed $1,000, the benefits will continue to be exempt from FBT.

The amendments made to the FBTAA 1986 in relation to the reportable fringe benefits system apply from the FBT year of tax commencing on 1 April 1999 and later years (Item 16 Schedule 1). As will be seen from the following paragraph the amendments to the ITAA36 (Item 16 Schedule 2) require employers to include reportable fringe benefits totals, where it exceeds $1,000 in respect of an employee, in that employee's group certificate from the year of income commencing on 1 July 1999.

Reporting reportable fringe benefits amounts and totals

The amendments to the ITAA36 proposed by Part 1 of Schedule 2 are to give effect to the requirement for employers to include the reportable fringe benefits amount on group certificates.

The amendments affect the:

• definitions in subsection 6(1)
• obligations of group employers in section 221F and impose penalties for failure to comply with those obligations
• application of tax instalment deductions and the employee's obligations regarding group certificates in section 221H and
• obligations of taxpayers to furnish returns in section 162.

Item 16 of Schedule 2 provides that these amendments apply to the income year commencing on 1 July 1999 and later years. The Explanatory Memorandum adequately covers the detail of these changes and the reader is invited to refer to it for clarification of the changes.(13)

Impact on employees

The Regulation Impact Statement has summarised the impact on employees generally as follows.

Salary sacrifice arrangements with a view to tax minimisation will be less attractive in consequence of the proposed changes which are considered in the following paragraphs.

Subsection 82AAS(3) allows a deduction for personal contributions to a complying superannuation fund or retirement savings account to a person who is substantially self employed. A person is substantially self employed if the total remuneration that person receives from an employer who provides superannuation support is less than 10% of that person's total assessable income.

The amendments to subsection 82AAS(3) proposed by Items 20 to 24 of Part 2 of Schedule 2 have the effect of varying the 10% test so that it applies to the aggregate of the employee's assessable income and reportable fringe benefits.

It is relevant to note that the effect of these amendments to subsection 83AAS(3) is to conceptually make reportable fringe benefits an extension of assessable income. This has been achieved by replacing the concept of income 'derived' in sub-subparagraph 82AAS(3)(b)(i)(A) by income 'attributable to'. The concept of 'income derived' has so far been central to the taxation of income in the ITAA36 and the Income Tax Assessment Act 1997 (ITAA97). The FBTAA 1986 was considered necessary in 1986 as the provisions of section 26(e) relating to the taxation of benefits from employment were thought to be deficient. However, if the concept of 'income attributable to' can have wider application in the taxation of benefits from employment, as indicated by the measures in this Bill, the perceived deficiencies in section 26(e) of the ITAA36 might be overcome by suitable amendments to the ITAA36 and ITAA97. The drafters and policy makers have taken a circuitous route through the highly complex maze of FBTAA 1986 and ITAA 1936 legislation to bring about this result. It is therefore necessary to consider the question whether there are other options to achieve the policy and revenue objectives of this Bill and the FBTAA 1986 generally without the high compliance costs to business which the FBTAA 1986 and the measures in this Bill entail. These options for a review of the FBTAA 1986 are considered in the section on Concluding Comments in this Digest.

Item 25 of Schedule 2 apply the amendments for the 1999-2000 year of income and later years.

The amendments proposed in Part 3 of Schedule 2 add on the taxpayer's reportable fringe benefits total for the year of income to the taxpayer's assessable income for the purpose of determining the rebate for personal superannuation contribution under section 159SZ of the ITAA36. The comments made in the previous paragraph of the need for a review of the role of the FBT regime are enhanced by these amendments.

Item 28 of Schedule 2 applies the amendments for the 1999-2000 year of income and later years of income.

Section 159T of the ITAA36 provides a rebate to a person making contributions to a complying superannuation fund or retirement savings account for their non-working or low income spouse (including a bona fide de facto spouse) if the assessable income of that spouse is less than $13,800.

The amendments proposed by Items 29 and 30 of Part 4 of Schedule 2 have the effect of aggregating the spouse's reportable fringe benefits with the spouse's assessable income in determining the cut-off limit of $13,800. The comments made in the previous two paragraphs of the need for a review of the FBT regime are enhanced by these amendments.

Item 31 of Schedule 2 applies the amendments for the 1999-2000 year of income and later years of income.

The A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Bill 1998 imposes a Medicare levy surcharge on persons whose taxable income and reportable fringe benefits total exceed thresholds set out in the Bill.(15) The surcharge is 1% of the reportable fringe benefits total. Persons can avoid the imposition of the surcharge by taking out adequate private hospital insurance.

Item 36 of Part 5 of Schedule 2 repeals existing section 251X and inserts proposed section 251X to provide that a notice of assessment served on a taxpayer must specify the total of levy and surcharge (if any) payable by the taxpayer for the year of income.

Item 37 inserts proposed section 251Z which provides that the Commissioner has the general administration of the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Act 1998.

Item 38 of Schedule 2 applies the amendments for the 1999-2000 year of income and later years of income.

Under the Higher Education Funding Act 1988, the repayment of a person's HECS debt is calculated as a percentage of that person's HEC repayment income. The HEC repayment income for an income year is defined in subsection 106H(1) to mean the sum of the person's taxable income for that year and the net rental losses claimed by that person in that year.

Item 1 of Schedule 3 repeals the present definition of HEC repayment income and Item 2 inserts a new definition of HEC repayment income for a year of income to mean the aggregate of a person's taxable income, net rental losses for that income year and the reportable fringe benefits total for that year of income (proposed subsection 106H(1).

The comments made in previous paragraphs of the need for a review of the FBT regime are enhanced by these amendments.

Item 2 of Schedule 3 applies the amendment for the 1999-2000 year of income and later years of income.

Under the Medicare Levy Act 1986 an additional surcharge is imposed on the taxpayer's taxable income where the taxpayer has not taken adequate private hospital insurance. Schedule 4 amends the Medicare Levy Act 1986 to ensure that the reportable fringe benefits total is added to a person's taxable income in determining whether the Medicare levy surcharge threshold has been exceeded and that person is liable to the Medicare levy surcharge on the taxable income.

The comments made in previous paragraphs of the need for a review of the FBT regime are enhanced by these amendments.

It should be noted that the liability to pay the Medicare levy surcharge on the reportable fringe benefits total is imposed by the A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Bill 1998.(16)

Item 8 of Schedule 4 applies the amendment for the 1999-2000 year of income and later years of income.

Schedule 5 amends the Superannuation Contributions Tax (Assessment and Collection) Act 1997 and the Superannuation Contributions Tax (Members of Constitutionally Protected Funds) Assessment and Collection Act 1997 to include the reportable fringe benefits total in the adjusted taxable income of a member. This is for the purpose of determining whether deductible contributions made on behalf of the member are subject to the superannuation surcharge.

The comments made in previous paragraphs of the need for a review of the FBT regime are enhanced by these amendments.

Item 3 of Schedule 5 applies the amendment for financial years of income commencing on or after 1 July 1999.

The Bill in introducing the reportable fringe benefits system, implements a major reform of the taxation of fringe benefits granted to employees in respect of employment. It is clearly aimed at improving the equity and fairness of the taxation and social security systems, as is indicated in the summary of the Regulatory Impact Statement (RIS).(17)

Assessment of compliance costs

The reportable fringe benefits system will add to the compliance costs of employers and small business in particular. Employees too will incur compliance costs as they will be brought into direct interface with the complexities of the FBTAA 1986 in ensuring that employers have correctly reported their fringe benefits which will be included in assessments issued on them in respect of various surcharges and levies. The costs to the Australian Taxation Office (ATO) in administering the reportable fringe benefits system will be considerable from the point of matching reportable fringe benefits in group certificates issued by employers with the fringe benefits tax returns of employers. This will be exacerbated by the need to deal with an increase in the appeals by employees against assessments issued on them on various surcharges and levies and or in issuing private rulings. The Explanatory Memorandum indicates that at a later stage the reportable fringe benefits amounts will be used in determining a person's entitlements to government benefits(18) thus involving administrative costs to the Department of Family and Community Services.

The Regulation Impact Statement (RIS)(19) identifies the groups affected as follows:

The RIS does not provide information on the numbers in the employee group who will be affected by the measures in the Bill. This can be expected to be a significant number of PAYE taxpayers given that there are 81,000 employers who lodged FBT returns in 1997-98 . The RIS also does not provide information on the number of employees in respect of whom exempt fringe benefits were provided by the 23,000 employers who were public benevolent institutions and institutions providing aged care. The compliance costs to employers will be a function of the number of employees who receive fringe benefits as it will be necessary to work out each type of fringe benefits attributable to each employee. This is a necessary step prior to ascertaining the employees who received reportable fringe benefits in amounting to $1,000 and over.

The Bill does not address the possibility that an employee may have more than one employer, each providing fringe benefits below $1,000 but receiving in aggregate fringe benefits in excess of $1,000. Taxation Statistics 1995-96 issued by the Australian Taxation Office does not give the number of employees who received fringe benefits in the year 1996-97. In the absence of publicly available information as to the number of employees receiving fringe benefits it is not possible to comment on whether this will be a significant number. However, as it is intended to include reportable fringe benefits at a later stage in tests for government benefit payments under the social security system, the need to improve the equity of the taxation and social security systems will require that consideration be given at that stage to receiving employer reports for fringe benefits less than $1,000.

The RIS estimates that the recurrent annual cost of compliance to employers will be $7 million and that compliance costs will be substantially reduced as 86 % of employers use a computerised system and will be able to automate the process of reporting fringe benefits on group certificates.(20)

Examples in the Explanatory Memorandum(21) indicate the varying degrees of complexity that may be encountered in apportioning the taxable value of an employer's fringe benefits to the employees concerned. This must add to the complexities of the fringe benefits tax (FBT) regime and the compliance costs to business in a manner that has not been fully appreciated in the RIS.

Accounting groups have lobbied the Government against this proposal on the grounds that it will dramatically increase the complexities of the present FBT rules. This proposal is to take effect from 1 April 1999 and there is concern that many businesses will not be able to upgrade their payroll systems in time in order to comply with the new rules.(22)

An examination of the statistics of FBT returns for 1996-97 indicate that the compliance costs of implementing the measures in the Bill will fall heavily on small business. Taxation Statistics 1995-96(23) shows that 68,250 organisations filed FBT tax returns in 1996-97 and 59 046 or 86.5% of the total returns were those of small business. Further small business paid 35.3% of the FBT for 1996-97 against 64.7% paid by large business organisations.

		Number	%		FBT $	%
Business
Small		59046	86.5	1114593		35.3
Large		9204	13.5	2045365		64.7
Total		68250	100.0	3159958		100.0

The Bell Report(24) observed that the compliance costs associated with the taxation of fringe benefits was one of the worst aspects of the Australian tax system. The paperwork associated with it was most unproductive to small business in particular and to the economy. Its key recommendations are set out below:

Although meals entertainment and car parking are excluded from the reportable fringe benefits measures, the other measures included in this Bill appear to aggravate problems which the recommendations of the Bell report sought to alleviate.

Lack of consultation before introducing FBT changes

The RIS notes that there have been concerns in business that there was limited consultation prior to the announcement of this proposal in ANTS on 13 August 1998 and as well as prior to the introduction of the package of Bills on 2 December 1998.

In a joint letter to the Prime Minister dated 10 November 1998, the Law Council of Australia, Institute of Chartered Accountants, Taxation Institute of Australia, Australian Society of Certified Practising Accountants and Australian Taxpayers Association urged Government to delay the FBT changes proposed in the two connected Bills until April 2000. The joint letter has stated that the changes proposed in ANTS in relation to FBT have the potential to render the fringe benefits tax and related rules the most complex that exist, both from a technical and administrative point of view. It adds:

Are there policy options which might draw an appropriate balance between compliance costs and equity?

An attempt has been made in designing the features of the reportable fringe benefits system to draw a balance between equity considerations and relative compliance costs. An example of this is the decision to exclude meal entertainment and car parking fringe benefits from the reporting requirements as well as any other fringe benefits that might be prescribed by regulations. The Explanatory Memorandum states that the compliance costs associated with reporting these excluded benefits outweigh the equity considerations that this measure is seeking to redress.(27) However, the comments and recommendations in the Bell Report on the undesirable aspects of the fringe benefits tax system as a whole and recent comments in the media on the reactions to the measures in this Bill lead one to the conclusion that more needs to be done towards reducing compliance costs particularly for small business. Further, the design of the measures in this Bill brings to focus the need to pursue other policy options including a review of the need for continuing the FBT regime as designed in 1986.

Review the need for the FBTAA 1986

The Fringe Benefits Tax (FBT) as it has operated so far is essentially a tax on business in relation to fringe benefits given to employees instead of remuneration in cash which would have been taxed in the hands of employees. The requirement under the measures in this Bill to identify the fringe benefit of each employee takes the taxation of fringe benefits seemingly through a tortuous cycle.

The measures in the Bill now attribute to each employee the fringe benefit, other than the excluded benefits, for the purposes of calculating:

• deductions for superannuation contributions
• rebate for personal superannuation contributions
• rebate for contributions to spouse's superannuation
• higher education contributions
• superannuation surcharge, and the
• Medicare levy thresholds.

A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Bill 1998 is being introduced to impose the Medicare levy surcharge on the reported fringe benefits.(28)

This brings into question the need for the fringe benefits tax as designed in 1986, if legislation can now achieve, albeit for the above limited purposes, what section 26(e) was incapable of achieving. In other words, what is the impediment to repealing the FBT legislation and installing in place the taxation of specified benefits in the hands of employees?

The justification for an FBTAA 1986 in 1986 was that the provisions of the ITAA were not adequate to tax all the benefits which an employee received from an employer under the definition of income or even the special provision of section 26(e). The latter provision currently brings into the tax net benefits from employment other than fringe benefits subject to tax under the FBTAA 1986. If the measures in this Bill have found a cost effective way of attributing fringe benefits to employees, then the question arises why such benefits should not in the first instance be taxed in the hands of employees by an amendment to section 26(e) of the ITAA36.

The Australian Society of Certified Practising Accountants (ASCPAs) have taken this view as indicated in a letter to the Australian Financial Review:

In view of the limited consultation that has taken place in relation to the measures in this Bill with the accounting profession, industry bodies and the taxation profession it may be appropriate that the Business Tax Review should examine this question.

It is relevant to note that the terms of reference of the Review of Business Taxation (RBT) under the Chairmanship of Mr John Ralph, AO, included the following terms which might leave the door open for the RBT to examine the need for the FBT in its present form.

While the above terms of reference would appear to give the RBT a wide brief to revisit the need for a FBT, the following term in the reference to the RBT circumscribes its activity and reporting capability to the reform strategy in the A New Tax System.

As indicated in the Background to this Digest, ANTS clearly spelt out four reform measures to the FBT including the proposal to identify fringe benefits on an employee-by-employee basis for attributing it to various levy and surcharge purposes of employees. Paragraph 2 under Outcomes, of the terms of reference will limit the RBT's ability from making meaningful recommendations on this or any of the four measures affecting the FBT.

The introduction of A New Tax System may warrant a review of business tax with wider terms of reference to examine whether the cumbersome FBT regime should now be replaced with direct assessment of benefits attributed to employees.

Review need for measures in the Bill and consider imposing a surcharge on FBT as an alternative

On the other hand if the RBT concludes that the measures in the Bill are cumbersome and should not be proceeded with, consideration could be given to the expediency of imposing a surcharge on FBT to raise the same revenue from employers that the measures in the Bill seeks to raise from employees.

The measures in this Bill are expected to raise $255 million in 2000-2001; $260 million in 2000-2003 and $270 million in 2003-2004. According to the 1998-99 Budget Papers, the revenue raised from FBT for 1998-99 will be 2.40% of the total tax revenue for that year. If this percentage of FBT remains constant the FBT revenue in the year 2000-01 will be $3739million and the additional revenue of $255 million raised by the measures in this Bill will represent 6.8 % of the total FBT revenue in that year.(31)

The above figures indicate that a surcharge on FBT of between 6 % and 7 % will without increasing tax compliance burden raise the same revenue as the measures in this Bill.

A surcharge on FBT payable by employers might also be a deterrent to employers agreeing to increase fringe benefits in lieu of salary payments

1. Reference should be made to the Bills Digest on A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Bill 1998 for highlights of this Bill.
2. A list of the Bills is set out below:

• A New Tax System (Aged Care Compensation Measures Legislation Amendment) Bill 1998,
• A New Tax System (Australian Business Number Consequential Amendments) Bill 1998,
• A New Tax System (Australian Business Number) Bill 1998,
• A New Tax System (Bonuses for Older Australians) Bill 1998,
• A New Tax System (Compensation Measures Legislation Amendment) Bill 1998,
• A New Tax System (End of Sales Tax) Bill 1998,
• A New Tax System (Fringe Benefits Reporting) Bill 1998,
• A New Tax System (Goods and Services Tax Administration) Bill 1998,
• A New Tax System (Goods and Services Tax Imposition-Customs) Bill 1998,
• A New Tax System (Goods and Services Tax Imposition-Excise) Bill 1998,
• A New Tax System (Goods and Services Tax Imposition-General) Bill 1998,
• A New Tax System (Goods and Services Tax Transition) Bill 1998,
• A New Tax System (Goods and Services Tax) Bill 1998,
• A New Tax System (Income Tax Laws Amendment) Bill 1998,
• A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Bill 1998,
• A New Tax System (Personal Income Tax Cuts) Bill 1998, First Reading,
• A New Tax System (Trade Practices Amendment) Bill 1998, First Reading,

The first 16 of these Bills were introduced on 2 December 1998 and the 17^th Bill was introduced on 10 December 1998.

3. Circulated by the Hon. Peter Costello MP, Treasurer of the Commonwealth of Australia (AGPS) August 1998.
4. Hansard, House of Representatives 2 December 1998, p. 1087.
5. Hansard, House of Representatives, 3 December 1998, p. 1343.
6. Tax Reform: not a new tax, a new tax system: The Howard Government's Plan for a New Tax System; pp. 49-50
7. Ibid., p. 50
8. Ibid., p. 50
9. Ibid., p. 50
10. This Bill was introduced into the House of Representatives on 11 November 1998 and passed by the House on 26 November 1998. It is now before the Senate.
11. Weekly House Hansard; 24 March 1997; Government Response to the Small Business Deregulation Task Force Report (the Bell Report), p. 2691.
12. Explanatory Memorandum to the A New Tax System (Fringe Benefits Reporting) Bill 1998 and A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Bill 1998, p. 8.
13. Ibid., paragraphs 1.83 to 1.99, pp. 17-20.
14. Ibid., pp. 32-33
15. Reference should be made to the Bills Digest on The A New Tax System (Medicare Levy Surcharge - Fringe Benefits) Bill 1998 for highlights of this Bill.
16. Ibid.,
17. Explanatory Memorandum to the A New Tax System (Fringe Benefits Reporting) Bill 1998 and A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Bill 1998,p. 2.
18. Ibid., paragraph 1.6, pp. 3-4.
19. Ibid., pp. 32-33.
20. Ibid., paragraph 1.168, p. 33
21. Ibid., paragraphs 1.40, 1.42 and 1.46 to 1.51, pp. 11 to 13
22. The Australian Financial Review; 4 December 1998, p. 5; Article titled -Howard tax plan draws heavy fire - Steve Lewis and Louise Dodson.
23. Taxation Statistics 1995-96; Table 1; pp. 168-169 and Taxation Statistics 1995-96 Summary; p. 32. For the purposes of Table 1 the small business sector is made up of four categories. The first category consists of unincorporated businesses which report in their annual income tax returns total business income less than $10 million. The second category consists of private companies which report total income less than $10 million. The third category consists of superannuation funds which report less than $50 million in investment income. The fourth category is other taxpayers who report distributions from either partnerships or trusts with business income, but report no separate business income or loss in their own income tax returns.

All public companies, irrespective of their total income, and all other taxpayers exceeding $10 million total business income threshold belong to the category of large business.

24. Report of the Small Business Deregulation Task Force titled Time for Business: Key Findings and Recommendations (November 1996); (The Chairman of the Task Force was Mr Charlie Bell and the report is generally referred to as the Bell Report).
25. Ibid., p. 5.
26. Explanatory Memorandum to the A New Tax System (Fringe Benefits Reporting) Bill 1998 and A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Bill 1998; paragraph 1.173; p. 34.
27. Ibid., paragraph 1.5; p. 3.
28. Reference should be made to the Bills Digest on A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Bill 1998.
29. The Australian Financial Review; 7 December 1998; Letter to the Editor from Angela Ryan, Director Taxation.
30. Treasurer Press Release No. 81 of 14 August 1998 titled : Business Income Tax Consultation; Attachment titled Business Income Tax Review
31. Budget Paper No. 1 1998-99; Table B1, p. 5-18 and Table 3, p. 2-28.

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