Smart watches confirmed exempt fringe benefit

The ATO has made a ruling which allows a popular smart watch to be deemed a portable electronic device for fringe benefits tax purposes. As a result, FBTAA 1986 s58X applies to the watch, which means it is exempt from fringe benefits tax under the following circumstances:

•         The watch is provided in respect of employment and is used primarily for the employee's employment; and

•         The watch is not considered a second item purchased in the past 12 months that has a substantially identical function.

The ruling is restricted to a specific smart watch which came onto the Australian market in mid-2018. However, from the ruling it appears to be a smart watch which is specifically designed to be paired with a specific mobile phone device. As stated in the Private Ruling, the Smart Watch is designed for use with the iOS operating system, which is owned by a very large US-based technology company.

Despite the fact that the ruling relates to one specific product, the general rules regarding smart watches and the FBT exemption is covered and explained below.

Portable electronic device

Fringe benefits tax law does not define "portable electronic device", despite it being listed as a work-related item eligible for an FBT exemption.

However, this section (s 58X(2)) has been amended over time because of vast changes in technology. Prior to 2008, the former subsection provided a complete list of relevant items which was replaced with the term "portable electronic device". These list of items, which included mobile or car phones, calculators, electronic diaries or laptops became untenable since many items currently available today can do multiple functions.

Despite this, the ATO was satisfied the smart watch was a portable electronic device. Its ability to operate without an external power supply, as well as being designed as a complete unit is enough to satisfy the first leg of the exemption.

Substantially different in function to a mobile phone

The second leg generally applies only to entities who are not small businesses, and is covered by s 58X(3) of the Act. A smart watch would be ineligible for an FBT exemption if another item was previously purchased in the FBT year which had a substantially identical function.

The smart watch has similar functions to that of a mobile phone, however, the Commissioner ruled the functions between the two are substantially different. In this context, which could be utilised for other similar products on the market, the following was identified:

•         The watch can receive and display text messages and emails, but sending/replying is limited to pre-set phrases or dictating a reply as an audio file.

•         A keyboard cannot be used with the watch as it can with the paired phone.

•         Purported seamless transition between the watch and phone when needing to utilise more complex functions.

•         The watch cannot download or use the majority of mobile phone applications (ie apps). Only specifically designed applications work on the watch.

•         The watch is not capable of viewing complex webpages on the screen, thus requiring use of the phone in a lot of cases.

These limitations of the smart watch were enough for the Commissioner to consider that the device was substantially different to the phone. Therefore, an entity would be able for an exemption where both devices are provided to an employee within the same FBT year. This applies regardless of whether the entity is a small business entity or not.

Information sourced using CCH iknow