Fringe benefits tax: New exemption to support retraining and reskilling

22 April 2021

Fringe benefits tax: New exemption to support retraining and reskilling

In brief

On 16 April 2021, Treasury released an exposure draft of proposed legislation, which will give effect to the 2020-21 Federal Budget measure to provide a fringe benefits tax (FBT) exemption for employer-provided retraining/reskilling benefits for redundant (or soon to be redundant) employees. Unlike existing concessions within the FBT regime (such as the otherwise deductible rule), the exemption generously extends to benefits which are not sufficiently connected to the employee’s current employment. 

Given the ongoing impact of the COVID-19 pandemic on job retention, the exemption provides a timely incentive for employers to retrain and reskill employees to help them transition to new employment opportunities. Importantly, the exemption is permanent and is not a short-term concession (i.e. there is no sunset deadline), and is available to employers going forward. 

The new law, once enacted, will apply to all eligible benefits provided on or after 2 October 2020, being the date that the measure was announced.

In detail 

Under the current FBT law, there are only limited concessions available for redundant (or soon to be redundant) employees. 

For example, in addition to otherwise deductible benefits (which requires an assessment of whether the expenses would be personally deductible for the employee), outplacement services are only deemed exempt where it satisfies specific, narrow criteria. Generally, the concessions only apply where the expenses improve or maintain the quality of the performance of the remaining employee, which limits the application.

The currently proposed exemption to support retraining and reskilling broadens the range of benefits that employers can provide to outgoing employees, whilst mitigating any punitive FBT impact. Under the proposed law, a benefit is exempt from FBT under a newly-constituted section 58ZE  of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) if all of the following conditions are satisfied:

• the benefit is provided in, or in respect of, the tax year in respect of education or training undertaken by an employee of an employer

• the employee is redundant

• the employer has complied with any obligations under the Fair Work Act 2009 that applies in relation to the redundancy; and

• the education or training is for the primary purpose of enabling the employee to gain or produce salary or wages in respect of any employment to which the education or training relates.

Notably, the new exemption does not require a nexus to current employment, but rather to any employment. As a result, this exemption allows employers to support redundant (or soon to be redundant) employees with new career paths.

Further, the concept of redundancy for the purposes of the new exemption is broad. For instance, it includes circumstances where an employee is made redundant in one part of the employer’s business but is able to be redeployed to another part.

There are specific benefits that are excluded from the new FBT exemption, namely:

• benefits provided under a salary packaging arrangement

• benefits that are a payment or other amount covered by subsection 26-10(1) of the Income Tax Assessment Act 1997

• benefits that involve a primary course or secondary course (as defined under the A New Tax System (Goods and Services Tax) Act 1999); and

• benefits provided to relatives of certain employers (or certain individuals who are connected to the employer).

The takeaway

As outlined in the supporting draft Explanatory Materials, the increased rate of globalisation and technological change, and the changing nature of work and the labour market, are among the key drivers that necessitate continued skills upgrading throughout one’s working life. This, coupled with market factors that may impact job security (e.g. the COVID-19 pandemic), has driven a need for employers to be able to provide such benefits without punitive tax measures applying. 

The new exemption, once legislated, enables employers to retrain or reskill redundant (or soon to be redundant) employees so that they are better prepared for their next career step, even where that is unconnected or distinct to current employment. Employers should strongly consider this exemption in designing redundancy packages for employees, as it provides a cost-effective opportunity to enable future employment for relevant individuals.  

Submissions on the exposure draft are due by 29 April 2021. If you would like to contribute, please advise your relevant PwC contact.