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Edited version of private ruling
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Ruling
Subject: Living away from home allowance
Question 1
Is the employee considered to be living away from her usual place of residence for the purposes of section 30 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for the duration of her secondment to Australia with her employer?
Answer
Yes.
Question 2
If the answer to question 1 is yes, is the allowance a living away from home allowance (LAFHA) pursuant to section 30 of the FBTAA?
Answer
Yes.
Question 3
If the answer to question 2 is yes, will the taxable value of the allowance be reduced to nil pursuant to section 31 of the FBTAA?
Answer
Yes.
Relevant facts and circumstances
The employer is a foreign company with an Australian subsidiary. The employer has operations in several countries. The employer consolidated its global manufacturing capacity, shifting the majority of operations to the home country. As a result, the Australian manufacturing plant was closed; however, it was intended that the employer would maintain a sales office and distribution centre in Australia. As a result of the shift in operations, there was a short term need for an experienced accountant to set up the accounting function for the Australian office.
The employee commenced employment with the employer in the home country several years ago. Since joining the employer, the employee has been responsible for the implementation of accounting software and training of the relevant staff in the use of the software in the home country offices. The employee has a University degree from her home country and has extensive understanding and experience with the business's operations and reporting requirements. In her role with the employer in the home country, the employee liaised with contacts in the employer's offices overseas and was familiar with the facilities and systems used by these offices.
Due to the employee's skills, experience, qualifications and networks, she was requested to transfer to Australia to take up her role for a period of time to fulfil the short term need for an experienced accountant. The employee commenced her secondment to Australia on the understanding that after that time she would return to her current position in her home office.
During this period the employer expanded operations by opening manufacturing plants in more foreign countries. Following this expansion, there was a need for a Financial Controller to oversee the development of accounting functions in the region. The offices in these locations were also in need of experienced accounting assistance to establish accounting functions and it was expected that the Financial Controller would train the locally hired staff in various systems and the employer's reporting requirements.
As a result, the employee's assignment was extended for a further period of four years.
The reasons for the extension to the employee's initial assignment are summarised below:
§ the employee has a longstanding background in the operations of the employer's business and its global strategies. She also has extensive experience in the implementation and subsequent training in various accounting systems the new foreign offices were required to utilise
§ the employee's academic qualifications
§ the employee has been instrumental in achieving key objectives of the Australian entity in relation to successfully setting up the accounting function, and implementation of various accounting systems
§ the extension period will facilitate the employer's expansion into new regions
§ the extension period would ensure a smooth transition process for a successor and prevent the loss of knowledge and information that the employee currently possesses. It is imperative to the employer that an experienced accountant such as the employee is available to pass on her experience in this area.
Following the four year extension, the employee is scheduled to return to her home country. The employer is currently in the process of identifying a suitable local candidate to take over the employee's role. The employee will be responsible for training her successor, and the employee will be required to fully familiarise her successor with the role's responsibilities before she repatriates to her home country.
The employee considers the home country to be her permanent home and intends to return to her home country with assistance from her employer at the conclusion of her secondment to the Australian office in accordance with the terms of her assignment letter.
The employee has extensive family ties to the home country where all her immediate family reside.
The employee resided in a house she has owned for several years in the home country prior to her secondment to Australia. The employee has had this property tenanted for the duration of her secondment and intends to return to live in this property upon returning to the home country.
The employee has no family ties to Australia and prior to commencing her secondment had no assets or investments in Australia. The employee's assets remain in the home country.
The employee has remained an active member of a pension scheme in her home country and the employer has continued to make contributions on the employee's behalf.
The original intention of the employer and the employee was that she would remain in Australia only for the anticipated term of her assignment, the duration of which was expected to be three years. It was not originally considered that the assignment would require extension beyond this time.
Although the employee may live and work in Australia her stay was never intended to be of a permanent nature and that her intention to return to the home country at the conclusion of her assignment remains. The repatriation clause included in the employee's original assignment illustrates that it was and remains the intention of the employer and the employee that she would return to the home country at the conclusion of her assignment, the cost of which will be met by her employer.
The employee is paid a food allowance and an accommodation allowance. The employee has provided declarations annually that state that her usual place of residence is in the home country and her place of residence currently is in Australia.
Reasons for decision
Is the employee considered to be living away from her usual place of residence for the purposes of section 30 of the FBTAA for the duration of her secondment to Australia?
Summary
The employee is considered to be living away from her usual place of residence for the duration of her secondment with the employer.
Detailed reasoning
In determining whether the employee is considered to be living away from her usual place of residence it is necessary to identify the usual place of residence.
The FBTAA does not define 'usual place of residence'. However, in subsection 136(1) it does define a 'place of residence' to mean:
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.
In the absence of a legislative reference it is relevant to refer to the ordinary meaning of 'usual'. The Macquarie Dictionary defines 'usual' to mean:
1. habitual or customary: his usual skill.
2. such as is commonly met with or observed in experience; ordinary: the usual January weather.
3. in common use; common: say the usual things.
noun
4. that which is usual or habitual.
phrase
5. as usual, as is (or was) usual; in the customary or ordinary manner: he will come as usual.
Guidelines for determining an employee's usual place of residence are provided by Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits (MT 2030).
Paragraphs 15 to 18 refer to various decision of Taxation Boards of Review relating to the former 51A of the Income Tax Assessment Act 1936 (ITAA 1936). In referring to these decisions paragraph 14 of MT 2030 states:
As the decisions illustrate, 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.
Further discussion occurs at paragraphs 19 to 25. Paragraph 20 provides the following general rule:
Employees who move to a new locality to take up a position of limited duration with an intention to return to the old locality at the end of the appointment would generally be treated as living away from their usual place of residence. For example, a construction worker having to travel to a construction site to live and work would be in this category unless he had abandoned the former place of residence upon moving to the locality of the site. A case of the latter situation would be where the employee decided to permanently leave the former home, e.g., if a resident of Sydney, on obtaining a job for two years on a construction site in a remote part of Western Australia, decided to "sell up" in Sydney and move permanently to Western Australia to live.
As an example of the application of this general rule paragraph 22 states:
Examples of employees on appointments of finite duration who will generally be living away from their usual place of residence are foreign nationals employed in Australia on a temporary basis and Australian residents (e.g., export consultants, diplomats, immigration officials, etc.) stationed in a foreign country for a time. Provided the appointment is for a limited period and the employee can be expected in the normal course to return to the same city or district of the home country to live, the employee may be treated as living away from his or her usual place of residence.
However, this is subject to paragraph 21 which states:
Some employees may be unable to establish that they are living away from their usual place of residence because the transitory nature of their lifestyle means that their usual place of residence is wherever they happen to sleep at night. Employees who follow the job, say, from construction site to construction site and have no permanent place of residence would fit into this particular category.
Further examples are provided in paragraph 25 which states:
… certain kinds of occupations have a career structure which brings with it the necessity to accept regular transfers from one location to another, e.g., police officers, school teachers, members of the defence force, bank employees, etc. Employees in these situations will generally not be treated as living away from home when they move on transfer to live in proximity to the current work place. That will be the case even if the employee owns a home elsewhere in which he or she eventually intends to reside.
These principles and the various cases that have considered usual place of abode or usual place of residence were discussed by the Administrative Appeals Tribunal (AAT) in Compass Group (Vic) Pty Ltd (as trustee for White Roche & Associates Hybrid Trust) v. FC of T [2008] AATA 845; 2008 ATC 10-051. At paragraphs 55 and 56 Deputy President S A Forgie said:
55. There are several principles that can be gleaned from these cases. The first is that the fact that s 30 and, before it, s 51A, are concerned with what is described as a living-away-from-home allowance. That allowance is paid by an employer to an employee in respect of the employee's employment. It is a payment in the nature of compensation. The compensation is to meet additional expenses the employee incurs during a particular period and for other additional disadvantages he or she faces in that period but only if the expenses are incurred because he or she is required to live away from his or her usual place of residence in order to perform the duties of employment. As Mr Cotes alluded to in Case B47, it necessarily assumes that the taxpayer has two places that could be described as his or her place of residence before one or the other needs to be identified as the "usual place of residence".
56. Putting to one side the case of Case 50, all cases looked to the taxpayer's place of residence before he or she acquired another place of residence. Each looked to the taxpayer's continuing connection with the first place of residence including matters such as whether his or her family continued to live there, the frequency of the taxpayer's visits there and whether or not that was a place to which the taxpayer could return at will if he or she so wished. Also relevant was the nature of the employment and whether the move to another place was a temporary or permanent move.
Application to your circumstances
In considering the factors referred to by the AAT the following factors indicate the employee's usual place of residence is in the home country:
§ but for your business need, the employee would not have moved temporarily to Australia and would have continued to reside in the home country
§ it is your intention and that of the employee that the employee would return to the home country at the conclusion of her Australian assignment
§ the employee has maintained her home in the home country and has a number of personal items including furniture and her car in long term storage
§ the employee does not own an Australian property nor does she intend to purchase any property in Australia
§ the employee has been living in rented accommodation for the duration of her Australian assignment
§ the employee has maintained bank accounts and other investments in the home country
§ the employee has maintained her health insurance policy in the home country
§ the employee's assets remain in the home country
§ the employee has remained an active member of the pension scheme in the home country
§ the employee continues to have very close family and social ties to the home country where all her immediate family are based as well as the vast majority of her social network
§ the employee remains on a temporary working visa.
It is concluded that the employee is living away from home in accordance with paragraphs 20 and 22 of MT 2030.
Question 2
If the answer to question 1 is yes, is the allowance a LAFHA pursuant to section 30 of the FBTAA?
Summary
An allowance constitutes a LAFHA benefit under subsection 30(1) of the FBTAA where:
(a) 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 non deductible expenses incurred by the employee during a period; or
§ additional non deductible expenses and other additional disadvantages to which the employee is subject during a period, and
(b) the additional expenses and other disadvantages arise because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment.
As both of these conditions are met the allowance paid to your employee will be a LAFHA.
Detailed reasoning
Section 30 of the FBTAA sets out the circumstances in which a payment to an employee will be a LAFHA benefit.
Subsection 30(1) states:
Where:
(a) at a particular time, in respect of the employment of an employee of an employer, the employer pays an allowance to the employee; and
(b) it would be concluded that the whole or a part of the allowance is in the nature of compensation to the employee for:
(i) additional expenses (not being deductible expenses) incurred by the employee during a period; or
(ii) additional expenses (not being deductible expenses) incurred by the employee, and other additional disadvantages to which the employee is subject, during a period;
by reason that the employee is required to live away from his or her usual place of residence in order to perform the duties of that employment;
the payment of the whole, or of the part, as the case may be, of the allowance constitutes a benefit provided by the employer to the employee at that time.
In summarising these requirements an allowance will be a LAFHA if:
(a) 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 non deductible expenses incurred by the employee during a period; or
§ additional non deductible expenses and other additional disadvantages to which the employee is subject during a period; and
(b) the additional expenses and other disadvantages arise because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment.
(a) Is the payment an allowance or a reimbursement?
Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement (TR 92/15) gives guidance concerning distinguishing between an allowance and a reimbursement as follows:
2. 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.
3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed.
A payment was paid to the employee in relation to accommodation expense for herself, and a payment was paid to the employee in relation to food expense for herself. These are considered to be predetermined amounts to cover the estimated expense of accommodation and food. It is accepted that the payment is an allowance.
(b) Is the allowance paid for additional non deductible expenses and other disadvantages?
The allowance will be paid to compensate the employee for additional food and accommodation expenses that arise as a result of the employee working in Australia while she is away from her home country. As the employee would not be able to claim an income tax deduction for these expenses this requirement is satisfied.
(c) Do the additional expenses arise because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment?
As concluded in answering question 1 above, it is accepted that the employee is living away from her usual place of residence in order to perform the duties of employment.
As all the required conditions have been met, the allowance paid to the employee is a LAFHA pursuant to subsection 30(1) of the FBTAA.
Question 3
If yes, is the taxable value of the LAFHA fringe benefit reduced to nil by the exempt food and accommodation components pursuant to section 31 of the FBTAA?
Summary
The taxable value of the LAFHA fringe benefit is reduced to nil by the exempt food and accommodation components pursuant to section 31 of the FBTAA.
Detailed reasoning
Section 31 of the FBTAA sets out the method for calculating the taxable value of a LAFHA. It states that where fringe benefit is covered by subsection 30(1), the taxable value is:
(a) … the amount of the recipients allowance reduced by:
(i) any exempt accommodation component; and
(ii) any exempt food component; or
'Exempt accommodation component' and 'exempt food component' are defined in subsection 136(1) of the FBTAA. Both definitions provide that the exempt amount will depend upon whether the employee provides a Living away from home declaration. If a declaration is not provided, the exempt components will have a nil value.
Exempt accommodation expenses
If a declaration is provided, the exempt accommodation component is so much of the allowance as is reasonable compensation for additional expenses on accommodation that the employee could reasonably be expected to incur.
The employee is paid an accommodation allowance to compensate her for rental expenses incurred whilst living in Australia.
This is considered reasonable compensation for the employee incurring additional accommodation expenses because she is required to work in Australia.
Therefore, it is considered that this part of the allowance meets the requirements of being an exempt accommodation component as defined under subsection 136(1) of the FBTAA, and the taxable value of the LAFHA with respect to accommodation is reduced to nil.
Exempt food component
If a declaration is provided, the exempt food component is so much of the allowance as is reasonable compensation for additional expenses on food. It is arrived at by first ascertaining the 'food component' of the allowance. If the amount of the 'food component' is set with the intention that it covers all food costs of the employee and family, the exempt food component is the excess of that component over what the employee would normally spend on food if he or she was not living away from home. However, if the food component of the allowance has been set to reflect only additional costs by reducing the allowance for home food costs, and the amount of the reduction on this account equals or exceeds the statutory food amounts, the amount of the net food component is the exempt food component.
You have advised that the amount of the food component will be determined on the basis of the rates set out in the annual Taxation Determination that sets out the amounts that represent a reasonable food component of a LAFHA for expatriate employees. The amount set out in the Determination will be reduced by the statutory food amounts. As the food component of the allowance is the excess over what the employee would normally spend on food if she was not living away from home and the amount of the reduction equals the statutory food amount, the amount of the food component will be the exempt food component.
You have advised that the employee has provided the necessary declaration annually.
Conclusion
§ the employee is considered to be living away from home
§ the allowance paid to the employee is considered to be a LAFHA
§ the taxable value of the LAFHA is reduced to nil by the exempt food and accommodation components.
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