'Otherwise deductible' rule: application to HECS fees reimbursed by the employer

If an employer reimburses an employee's Higher Education Contribution Scheme (HECS) fees, can the 'otherwise deductible' rule under section 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) be applied to reduce the taxable value of an expense payment fringe benefit?

No. In accordance with section 24 of the FBTAA the 'otherwise deductible' rule does not apply to reduce the taxable value of the expense payment benefit arising through the reimbursement of HECS fees.

An employee of the employer incurred HECS fees in obtaining a university degree.

The HECS debt was paid by the employee.

During the FBT year the employer reimbursed the employee in respect of the expenditure incurred and as such provided an 'expense payment fringe benefit' as defined in subsection 136(1) of the FBTAA.

The taxable value of an expense payment fringe benefit may be reduced under section 24 of the FBTAA to the extent that the 'otherwise deductible' rule (ODR) applies.

The ODR applies when the recipient of the benefit is the employee. Furthermore, the ODR applies where the employee receiving the benefit would have been entitled to a 'once only' income tax deduction for the expenditure had it not been paid or reimbursed by the employer. A 'once only' deduction is one that is wholly or partly allowable in only one year (therefore excluding claims such as those relating to the 'decline in value' of depreciating assets that are spread over a number of years).

Section 26-20 of the Income Tax Assessment Act 1997 specifies that HECS contributions are non-deductible except where a person incurs expenditure in providing a fringe benefit. Although the reimbursement of HECS fees is a fringe benefit and is therefore deductible to the employer, this does not satisfy the requirements of section 24 of the FBTAA. As explained above, to be 'otherwise deductible' the employee must be entitled to an income tax deduction.

Accordingly the taxable value of the fringe benefit cannot be reduced under the otherwise deductible rule.