Edited version of private ruling

Authorisation Number: 1011554493116

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Ruling

Subject: Living-away-from-home allowances

Question 1

Is the allowance a living-away-from-home allowance (LAFHA) benefit pursuant to section 30 of the Fringe benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If the answer to question 1 is yes, will the taxable value of the LAFHA benefit be reduced to nil pursuant to section 31 of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2010

Year ended 31 March 2011

Year ended 31 March 2012

The scheme commences on:

18 May 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The employee is employed by their employer at Location A in Country A.

The employee is a citizen of Country B and in order to perform the duties of employment in Location A had to acquire a visa (Visa A).

The employee had previously been employed by another employer in Country A and was in Country A under Visa B.

The employee left employment and under the terms of Visa B returned to Country B. At the time the employee ceased employment the employee still had personal matters pending in Country A and the position with the current employer was pending.

The employee returned to Country A on a tourist visa to attend the personal matters and whilst there received positive feedback regarding the visa application. The employee decided to remain to complete the personal matters and then take up employment with the employer.

The employee's original offer of X amount per annum included an amount for a LAFHA but the employer has stated that they were unaware that the LAFHA should have been separated from the taxable salary component.

The allowance being paid is a set amount per month in respect of accommodation and a copy of the employee's lease agreement for the accommodation in Location A was provided.

The employee owns a home in Location B in Country B and is paying off a mortgage on that home. The employee leased this home out.

The employee has stated the date they will return to Location B to and the employment agreement states the employment will cease on termination or expiry of Visa A.

Relevant legislative provisions

FBTAA Section 30

FBTAA Section 31

FBTAA Subsection 136(1)

Reasons for decision

Question 1

A living-away-from-home allowance is defined under subsection 30(1) of FBTAA. This definition is explained in paragraph 2 of Taxation ruling No. MT 2030 Fringe Benefits Tax: Living-away-from-home allowance benefits. This paragraph states:

A living-away-from-home allowance exists where it is reasonable to conclude from all the surrounding circumstances that some or all of the allowance is in the nature of compensation to the employee for additional expenses incurred, or additional expenses incurred and other disadvantages suffered, because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment. Additional expenses do not include expenses for which the employee would be entitled to an income tax deduction.

Therefore for a payment to be a LAFHA for the purposes of the FBTAA the following conditions must be satisfied:

· it is an allowance paid by the employer to the employee in respect of the employment of that employee;

· the employee is required to live away from their usual place of residence so as to be able to perform the employee's duties of employment; and

· it would be concluded that the whole or part of that allowance is in the nature of compensation for non-deductible additional expenses that the employee incurs, or for non-deductible additional expenses and additional disadvantages arising, as a result of having to live away from home to perform the duties of employment.

Paragraph 2 of Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement describes as allowance as:

A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

In this case the employee is receiving an amount of X per month to help cover accommodation expenses. This is a definite predetermined amount to cover an expense. Although this is less than what the employee is currently incurring on accommodation expenses in Location A there is nothing to suggest that the employee has to provide evidence that they actually expends this money on accommodation.

Therefore the payment could be seen as an allowance paid to an employee in respect of their employment.

MT 2030 provides guidance on how the Commissioner determines whether an employee is living-away-from-home. Paragraph 14 states in part:

. . .the question whether an employee is living away from his or her usual place of residence normally involves a choice between two places of residence, i.e., the place where the employee is living at the time or some other place. A person is regarded as living away from a usual place of residence if, but for having to change residence in order to work temporarily for his employer at another locality, the employee would have continued to live at the former place. It would be relevant in reaching that view that there is an intention or expectation of the employee returning to live at the former place of residence on cessation of work at the temporary job locality. This would be relevant even if the employee is living in temporary quarters close to a temporary job site. . .

To paraphrase the above paragraph, an employee is living-away-from-home where there is a choice of two residences but they would not have left their first residence if they had not been required to work and reside temporarily at another locality.

For the purposes of the FBTAA a place of residence is defined in subsection 136(1) as:

in relation to a person, means:

(a) a place at which the person resides; or

(b) a place at which the person has sleeping accommodation;

whether on a permanent or temporary basis and whether or not on a shared basis

The employee owns a home in Location B and also leases a place in Location A near the place of employment. These are the two places of residence we are looking at. What we need to determine is whether the employee would have continued to reside in Location B if the employee had not been required to work temporarily for the employer in Location A.

In this case the was not living in the home in Location B when they first applied for the position. However after applying for the position the employee did return to Country B.

The employee then returned to Country A for a matter unrelated to employment and whilst there the employment was finalised.

Although the employee was in Country A and not at home when applying for and having employment, the employee had returned to Country B at the end of the previous employment and would have done so if the current employment with had not been confirmed.

Therefore of the two places of residence under consideration the one in Location B would be the employee's usual place of residence.

The next step is to determine whether the absence is temporary in that there is an intent to return to Location B when the temporary employment with the employer ends.

The employee has stated that they will return to Location B to reside and there is nothing to suggest that the employee is contemplating remaining in Location A to live.

Therefore providing the employee's actions are consistent with following the intent of returning to Location B to live on the stated date it can be concluded that the employee is living-away-from-home as described in paragraph 14 of MT 2030.

As stated above the allowance is to cover accommodation expenses whilst they are employed by the employer. Accommodation expenses are non-deductible expenses as they are private expenses (except where an employee is travelling on business).

Also it can be concluded that the employee is incurring additional expenditure on accommodation as the employee continues to incur expenses on the home in Location B.

Therefore the payment is LAFHA benefit as described in subsection 30(1) of the FBTAA.

Question 2

The taxable value of a LAFHA benefit is the amount of the LAFHA less the exempt accommodation and/or exempt food component.

In this case the whole allowance is in respect of accommodation and paragraph 4 of MT 2030 explains that the exempt accommodation component is so much of the allowance that is reasonable compensation for additional expenses on accommodation.

Given the fact that the employee's actual accommodation expenses exceed the amount of allowance being received it could be concluded that the total allowance constitutes the exempt accommodation component.

As the whole allowance represents the exempt accommodation component the taxable value of the allowance is reduced to nil.

Further issues considered

The Board of Review in Case C55 (1971) 17 CTBR(NS) 332; 71 ATC 242 (Case C55) which considered the former section 51A of the Income Tax Assessment Act 1936 (ITAA 1936).

In Case C55 the taxpayer, his wife and children lived in an isolated company mining town where he was jointly employed as secretary/accountant by a group of medical unions and hospital and medical societies. The town, which suffered from a harsh climate and a very high cost of living, was also at such a distance from neighbouring provincial towns as to prevent the sending of children there to day schools. The schooling provided in the town itself was inadequate and did not proceed beyond primary level. Faced with the problem and expense of educating his children (3 were already boarded out) the taxpayer moved his family to a provincial town with the necessary educational facilities where they took up residence in a house he purchased. The taxpayer continued to live in the mining town in the company house he and his family had previously rented. He joined his family for one weekend in two.

For part of the income year under review, the taxpayer received the same salary as prior to his family's move but at his request $6 per week was identified as a living-away-from-home allowance. For the remainder of the year his salary was increased by $10 per week and, of his total remuneration, $20 per week was allocated to such allowance.

In considering the question whether the taxpayer was in fact in receipt of a living-away-from-home allowance within the former section 51A of the ITAA 1936 definition during the year the Board said, at ATC 247:

We do not think that the mere fact that a decision is made to create a living-away-from-home allowance by carving it out of an existing salary is necessarily and of itself an objection to a finding that an allowance exists. As long as the salary has, prior to such decision, contained as a matter of deliberate advertence an element of bona fide compensation for having to live away from home, it does not matter that, for example through ignorance of the taxation benefit that flows from identifying it as such, the allowance has not been so identified. In other words, a living-away-from-home allowance can then be described specifically, the remaining salary nominally lowered and a deduction claimed.

In this case the employer has stated that in their negotiations with the employee that they agreed to compensate the employee for accommodation costs but did not separate the payment as a LAFHA but included it in salary.

Although section 51A of the ITAA 1936 no longer exists the principles of Case C55 still applies in respect of a LAFHA benefit in that a LAFHA benefit will be subject to fringe benefits tax (FBT) in the hand of the employer and not assessable income of the employee.

Although the employer did not account for the payment as a LAFHA benefit at the time it was paid and withheld tax from the payment it should not have had tax withheld as the allowance was subject to FBT.

However as the taxable value of the allowance is reduced to nil and the employer would not have an FBT liability in respect of this particular LAFHA benefit.

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