Section 31D (2) (d) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) contains an anti-avoidance measure to ensure that the 12 month limit cannot be extended where an employee changes employment to an associate of the original employer. Specifically paragraph 31D (2) (d) states:
(d) Treat as one employer any of the employee's earlier employers that is or has been an associate of the current employer
The issue for Government entities is the definition of associate for the purposes of the FBTAA. Can the ATO confirm whether an employee's 12 month limit applies for the duration of their employment within the Commonwealth, State or Territory Government, regardless of any movements between Government agencies during the period of employment in the Commonwealth, State or Territory Government?
Section 31D of the FBTAA limits the concessions available for employees receiving Living Away From Home Allowance (LAFHA) benefits to 12 months at any one location. Specifically, we understand that the limit imposed by section 31D is a lifetime limit. That is, an employee can only receive concessionally taxed LAFHA benefits for 12 months at one location for the duration of their employment.
There are specific provisions which define the relationship of Commonwealth, State and Territory bodies to each other. In relation to Commonwealth entities, section 4 of the Fringe Benefits Tax (Application to the Commonwealth) Act 1986 states
Subject to this Act and to such modifications as are prescribed, the Assessment Act applies, in respect of any matter or thing in respect of the employment of a Commonwealth employee, as if:
(a) the employee were employed by the responsible Department and not by the Commonwealth;
(b) the responsible Department were a company and each other Department, and each authority of the Commonwealth, were a company related to the responsible Department; and
(c) the responsible Department were a government body.
For State and Territory bodies, Section 135U of the FBTAA states:
(5) Also, for the purposes of this Act:
(a) the nominated State or Territory body is taken to be a company; and
(b) the following are taken to be companies related to the nominated State or Territory body:
(i) each other nominated State or Territory body of the State or Territory concerned; and
(ii) the State or Territory concerned;
(iii) each authority of the State or Territory that is not a related company of the nominated State or Territory body under subparagraph (i) or (ii);
(c) the nominated State or Territory body is taken to be a government body.
It is our understanding of these provisions that each State, Territory or Commonwealth department is considered to be an associate of the other under according to the definition contained in section 318 of the Income Tax Assessment Act 1997. This is the generally agreed application in respect of car fringe benefits.
Industries view/suggested treatment
Whilst we agree that paragraph 31D (2) (d) would apply to entities with the State, Territory and Commonwealth Governments, it may not result in the employees time limit being limited to 12 months for the duration of their employment. Subsection 31D (1) states
The employee satisfies this section if the fringe benefit relates only to all or part of the first 12 months that the duties of that employment require the employee to live away from the… [emphasis added]."
Arguable where an employee changes departments and role within the Government the new LAFHA period does not relate to the first employment. That is, where an employee lives away from home for a second 12 month period at the same location, but for a different role/purpose for a different, albeit, related Department, the benefits are not in relation to 'that employment' where the first 12 month period was undertaken. In this regard, the employee would be afforded a second 12 month period with the new Department.
E.g. an employee is required to live away from home to complete an assignment for Department X in Adelaide for 12 months. Two years after returning to their home location, the employee ceases employment with Department X and commences with Department Y. Department Y requires the employee to live away from home for a 12 month period in Adelaide to complete an assignment unrelated to the assignment under Department X. In these circumstances the employee should be afforded two 12 month periods under section 31D.
However where an employee changes Department but the role is identical (e.g. MoG change) the 12 month period at the one location would remain. E.g. an employee is required to live away from home for two years for Department X. A Machinery of Government (MoG) change means that the functions and employees of Department X are transferred to Department Y. The employees would only be eligible for concessional LAFHA treatment on the first 12 month period.
Impact on clients
The intent of section 31D (2) (d) would appear to be an anti-avoidance measure directed at private sector organisations with related group entities. Limiting the 12 month location limit across all employment within the State, Territory or Commonwealth government would:
- Be practically very difficult to administer;
- Reduce the incentives to have a flexible and mobile workforce; and
- Result in employees/employers being disadvantaged due to unrelated activities of another entity.
If the 12 month location limit applies across all employment within the Government, systems and processes will have to be developed to track employee deployments. Given the number of affected agencies this could be a difficult task to implement in a timely manner.
In discussion, members expressed their concern at the practical difficulties that will arise from having associated employers treated as one employer and questioned how a Department will know whether a new employee has previously received a LAFHA for living in a particular location. In raising this concern, members referred to the changes that occur with a Machinery of Government change and the staff movements that occur between departments and the private sector.
In response, the ATO acknowledged there may practical issues that will need to be addressed by each of the members. While there may be a number of alternative procedures that can be implemented, one suggestion that was raised in discussion is for the employer to require the employee to provide details of any previous LAFHAs that they have received. This may include a requirement to provide details such as who paid the LAFHA, the period for which it was paid and the location at which the employee was working.
In response to this suggestion, members asked the ATO to consider changing the declarations to include questions that ask the employee to provide details of any previous LAFHAs that they have received. The ATO advised members that it will forward the suggestion to the area responsible for the declarations.
In general terms, an employer of an employee who is not a fly-in fly-out and drive-in drive-out employee is only able to reduce the amount of the living-away-from-home fringe benefit if:
- the employee maintains a home in Australia at which they usually reside;
- the fringe benefit relates to the first 12 months at a particular location; and
- the relevant declarations are provided by the employee.
The requirement that the fringe benefit relate to the first 12 months that the employee is required to live away from home at a particular location is contained within section 31D of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). It is discussed in paragraphs 1.38 to 1.43 of the Revised Explanatory Memorandum to Tax Laws Amendment (2012 Measures No. 4) Bill 2012.
Subsection 31D(1) requires the fringe benefit to relate to all or part of the first 12 months that an employee is living away from home in Australia for the purposes of their employment. This requirement is subject to subsection 31D(2) which:
- enables the employer to pause the 12 month period;
- for a new 12 month period to commence if the employee is required to live away from home at another location for the purposes of their employment and it is unreasonable to expect the employee to commute to the new location from the earlier location for which a LAFHA fringe benefit was provided.
Any other changes in the nature of the employee's employment that are made within the same work location, such as changes to the conditions of employment (a promotion of the employee to a management position, or a change in the employee's job title) will not affect the 12 month period.
For the purposes of considering the requirement in subsection 31D(1), paragraph 31D(2)(d) provides that the employer and any of the employee's earlier employers that is or has been as associate of the current employer are to be treated as one employer.
That is, if an employee of a government Department who is living away from home is transferred to another government Department and continues to be required to live away from home at the same location, the second Department in determining whether the employee has been at the location for more than 12 months will need to take into account the period spent at the location while being employed by both Departments. A new 12 month location will not commence as a result of the transfer.
The ATO advised members that it did not agree with the contention that a new 12 month period will commence with the transfer as paragraph 31D(2)(d) specifically provides that the employer and any associates are to be treated as one employer for the purposes of applying the 12 month rule. Therefore, while it agreed that a new 12 month period could commence if the employee took up employment with a new employer that was not an associate of the previous employer, it did not agree that a new 12 month period would commence if an employee transfers between departments. As set out in the agenda item, each of the departments within a particular jurisdiction will be an associate of the other departments in that jurisdiction.