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Ruling

Subject: Fringe Benefits Tax Living Away From Home Allowance and Personal Services Income

Question 1

Is the Living Away From Home Allowance (LAFHA) paid to an employee of PSE Co Pty Ltd (PSE Co), who is a Personal Services Entity (PSE), deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, however there will be Fringe benefits tax consequences for the employer.

Question 2

Is the LAFHA paid by PSE Co, to an employee, assessable income of the employee under section 6-5 of the ITAA 1997?

Answer

No, however there will be fringe benefits tax impacts and payment of the LAFHA may result in a reportable fringe benefit that may need to be recorded on the employee's payment summary.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

PSE Co won a large contract that included conditions that services were to be provided in various geographic locations. This meant that key personnel were required to work in a significantly separate locality to that in which they ordinarily reside.

The size of the contract has meant that this is the sole contract held by PSE Co. Therefore the services provided by the sole employee became 'Personal Services Income' (PSI) within the meaning given by section 84-5 of the ITAA 1997.

As a result PSE Co is a Personal Services Entity (PSE) within the meaning given by subsection 86-15(2) of the ITAA 1997. PSE Co is not carrying on a Personal Services Business (PSB) within the meanings given by subsection 87-15(1) and section 87-55.

Ordinarily the sole employee resides in a fixed locality with their family. During the 2010 year they were required to work extensively in a significantly separate locality to fulfil the requirements of their employer's contract.

PSE Co's employee is paid a 'Living Away From Home Allowance' (LAFHA) to compensate for additional expenses incurred by the employee due to the requirement for that employee to live away from their usual place of residence. The allowance is a LAFHA as set out in Division 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23L

Income Tax Assessment Act 1936 Subsection 23L(1)

Income Tax Assessment Act 1997 Division 6

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 6-20

Income Tax Assessment Act 1997 Section 6-23

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subdivision 11-B

Income Tax Assessment Act 1997 Section 11-55

Income Tax Assessment Act 1997 Division 84

Income Tax Assessment Act 1997 Section 84-5

Income Tax Assessment Act 1997 Division 85

Income Tax Assessment Act 1997 Section 85-5

Income Tax Assessment Act 1997 Section 85-20

Income Tax Assessment Act 1997 Subsection 85-35(1)

Income Tax Assessment Act 1997 Subdivision 86-B

Income Tax Assessment Act 1997 Subsection 86-15(2)

Income Tax Assessment Act 1997 Section 86-60

Income Tax Assessment Act 1997 Paragraph 86-60(a)

Income Tax Assessment Act 1997 Subsection 87-15(1)

Income Tax Assessment Act 1997 Section 87-55

Fringe Benefits Tax Assessment Act 1986 Section 5B

Fringe Benefits Tax Assessment Act 1986 Division 2

Fringe Benefits Tax Assessment Act 1986 Division 3

Fringe Benefits Tax Assessment Act 1986 Division 7

Fringe Benefits Tax Assessment Act 1986 Section 30

Fringe Benefits Tax Assessment Act 1986 Section 31

Fringe Benefits Tax Assessment Act 1986 Section 61G

Fringe Benefits Tax Assessment Act 1986 Section 66

Fringe Benefits Tax Assessment Act 1986 Section 136.

Reasons for decision

Question 1

Detailed reasoning

General discussion of the law

Income Tax - allowable deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature or relate to the earning of exempt income.

For example an employee IT technician, who travels as a fundamental part of their work day, a deduction is generally allowable under section 8-1 of the ITAA 1997 for the cost of the travel.

However, in circumstances where the employee IT technician:

· is employed in a different town to where he or she normally resides

· continues to maintain the family home, and

· incurs accommodation, travel and other related expenses so that they can be located near to the place of work each working day;

· the expenses incurred are not deductible under section 8-1 of the ITAA 1997. These expenses are private in nature, or are incurred before or after the activity of earning assessable income (and not part of the income earning activity itself).

This was the view taken by the High Court in Lunney v. FC of T (1958) 100 CLR 478; 77 ATC 4076; 7 ATR 166. Williams, Kitto and Taylor JJ stated that (at 499):

It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income.

Deductions relating to personal services income

Division 85 of the ITAA 1997 deals with deductions relating to personal services income. As stated in section 85-5 of the ITAA 1997, the object of Division 85 is to ensure that individuals who derive personal services income, and are not conducting a personal services business, cannot deduct expenses that are similarly unavailable to employees.

Section 85-15 of the ITAA 1997 provides that you cannot deduct an amount for rent, mortgage interest, rates and land tax in relation to your residence, or the residence of your associate, to the extent the amount relates to gaining or producing your personal services income.

Section 85-20 of the ITAA 1997 provides that you cannot deduct an amount paid to, or incur arising from an obligation to, your associate, to the extent the amount relates to gaining or producing your personal services income. However, subsection 85-25(2) provides that the amount may be deductible where you engage that person in the performance of work that forms the principal work for which you gain or produce your personal services income.

Subsection 85-35(1) of the ITAA 1997 provides that Division 85 does not apply to an amount, payment or contribution to the extent that the amount, payment or contribution relates to personal services income that you receive as an employee.

Subdivision 86-B of the ITAA 1997 deals with deductions for personal services entities. The general rule for deductions is set out in section 86-60 of the ITAA 1997, which states that:

A personal services entity cannot deduct under this Act an amount to the extent that it relates to gaining or producing an individual's personal services income, unless:

(a) the individual could have deducted the amount under this Act if the circumstances giving rise to the entity's entitlement to deduct the amount had applied instead to the individual; or

(b) the entity receives the individual's personal service income in the course of conducting a personal services business.

Taxation Ruling TR 2003/10 sets out the Commissioner's view on deductions that relate to personal services income. TR 2003/10 does not apply to an individual or to a personal service entity, including where an entity that is taken to be conducting a personal services business under Division 87 of the ITAA 1997; or, the individual is an employee excluded under section 85-35 from the operation of Division 85.

However it is useful to note that in paragraphs 97-102 of TR 2003/10 the Commissioner explains that to apply section 86-60 of the ITAA 1997 you place the service provider (individual) in the shoes of the personal services entity and ask whether the service provider would have been entitled to a deduction had the service provider incurred the outgoing for an identical purpose having regard to all the surrounding facts and circumstances.

In other words, you suppose the service provider incurred an expense in providing an allowance to an employee and ask whether the service provider would have been entitled to a deduction under section 8-1 of the ITAA 1997, having regard to any limitations placed on deductions to individuals, which may include sections 85-15, 85-20 and 85-25.

In addition, paragraph 102 of TR 2003/10 explains that section 86-60 of the ITAA 1997 will not deny a deduction to a personal services entity in respect of a transaction between the entity and the test individual merely because it is with the test individual.

Fringe benefits tax

Generally, a fringe benefit arises where an employer provides a benefit to an employee, or the associate of an employee, in respect of their employment in a tax year. 'Fringe benefit' and 'benefit' are defined terms under section 136 of the FBTAA.

Section 66 of the FBTAA provides that a tax is imposed and payable by an employer in respect of the fringe benefits taxable amount of that employer.

The fringe benefits taxable amount of an employer is worked out under section 5B of the FBTAA using the employer's aggregate fringe benefits amount for the year of tax. The aggregate fringe benefits amount is worked out under Division 2 and is made up of amounts including the fringe benefits amount for each individual employee. Individual employee fringe benefit amounts are worked out under Division 3.

Division 7 of the FBTAA deals with the provision of a benefit that is a Living-Away-From-Home Allowance Benefit (LAFHA). In particular, section 30 provides that:

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.

Certain reductions are available in respect of the taxable value of LAFHA fringe benefits and are set out under section 31 of the FBTAA, which provides that:

Subject to this Part, the taxable value of a living-away-from-home allowance fringe benefit in relation to a year of tax is:

(a) if the fringe benefit is covered by subsection 30(1) - the amount of the recipients allowance reduced by:

(i) any exempt accommodation component; and

(ii) any exempt food component; or

(b) if the fringe benefit is covered by subsection 30(2) - the amount of the recipients allowance.

Section 61G of the FBTAA deals with the reduction of the taxable value of fringe benefits if certain deductions relating to payments to associates are not allowed, which provides that:

If:

(a) a fringe benefit is provided in the year of tax in respect of the employment of a current employee; and

(b) the person providing the benefit cannot deduct an amount under the Income Tax Assessment Act 1997 for providing the benefit because of section 85-15, 85-20 or 86-60 of that Act;

the amount that, but for this section, would be the taxable value of the fringe benefit in relation to the year of tax is reduced by the amount mentioned in paragraph (b).

Application to your circumstances

Whilst the amounts paid by the employee are not deductible to either the employee or to PSE Co as they are considered to be private in nature and are not incurred in the course of gaining or producing assessable income, the situation is different when an employer pays a LAFHA which is considered a fringe benefit provided to the employee.

PSE Co has paid an allowance to that employee to compensate for those additional expenses incurred due to living away from home, which constitutes the provision of a LAFHA benefit under Division 7 of the FBTAA.

However the taxable value of the LAFHA benefit may be reduced to the extent of exempt accommodation or food components under section 31 of the FBTAA.

To determine whether the LAFHA is deductible to the PSE, it is necessary to examine whether a LAFHA allowance would be deductible if paid by the employee in gaining or producing their personal services income. However, where payment of an allowance relates to an associate or an obligation arising in relation to that associate, subject to certain conditions, a deduction may be denied for an individual under section 85-20 of the ITAA 1997.

In analysing PSE Co's circumstances, as if those circumstances were that of the individual (the employee), the payment of the allowance is made to a third party who is not an associate of the individual but is an employee of the individual. That payment is made in the course of gaining or producing assessable income of the individual. As the third party is not an associate, section 85-20 of the ITAA 1997 does not deny the employee a deduction for the amount of that payment.

It is considered that in PSE Co's circumstances, payment of that allowance would amount to a loss or outgoing incurred in the course of gaining or producing assessable income and, if those circumstances were that of the individual, would be deductible for the individual under section 8-1 of the ITAA 1997.

Therefore the LAFHA paid to an employee of PSE Co, who is a PSE, is deductible to PSE Co under section 8-1 of the ITAA 1997 as it constitutes the provision of a fringe benefit to an employee. Division 7 of the FBTAA will apply in respect of that allowance.

Question 2

Detailed reasoning

General discussion of the law

Section 6-5 of the ITAA 1997 provides that your income includes income according to ordinary concepts (ordinary income).

Other provisions in Division 6 of the ITAA 1997 provide that your assessable income also includes some amounts that are not ordinary income. In addition, certain amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

However section 6-15 sets out what is not assessable income and provides that if an amount is not ordinary income, and is not statutory income, it is not assessable income (so you do not have to pay income tax on it). Further, if an amount is exempt income, it is not assessable income.

If an amount is exempt income, there are other consequences besides it being exempt from income tax. For example:

· the amount may be taken into account in working out the amount of a tax loss;

· you cannot deduct, as a general deduction, a loss or outgoing incurred in deriving the amount;

· capital gains and losses on assets used solely to produce exempt income are disregarded.

Section 6-20 of the ITAA 1997 provides that an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law.

Section 6-23 of the ITAA 97 set out that an amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of this Act or of another Commonwealth law states that it is not assessable income and is not exempt income.

Subdivision11-B of the ITAA 1997 lists provisions that make an amount non-assessable non-exempt income for an entity, where section 11-55 sets out that those provisions include:

· alienated personal services income

· entitlements to a share of net income that is personal services income already assessable to an individual under 86-35(2) of the ITAA 1997

· payments by personal services entity or associate of personal services income already assessable to an individual under 86-35(1) of the ITAA 1997

· personal services entity, amounts of personal services income assessable to an individual under 86-30 of the ITAA 1997

· non-cash benefits

· fringe benefits subsection 23L(1) of the Income Tax Assessment Act 1936 (ITAA 1936)

Section 23L of the ITAA 1936 provides that certain benefits in the nature of income are not assessable. In particular subsection 23L(1) provides that income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer.

Application to your circumstances

As the provision of a LAFHA falls under the fringe benefits tax regime, subsection 23L(1) of the ITAA 1936 acts to make that amount non assessable non exempt income.

Therefore the LAFHA paid to an employee of PSE Co, who is a PSE, is not assessable income of the employee under section 6-5 of the ITAA 1997.

Other issues to consider

We have identified related issues that may need to be considered, including:

The application of Division 7 of the Fringe Benefits Tax Assessment Act 1986 in respect of the Living Away From Home Allowance.

A Fringe Benefits Tax liability (FBT) may arise as a result of providing a benefit to your employees.

You must lodge a FBT return if you have an FBT liability during an FBT year. The FBT year runs from 1 April to 31 March.

If you are lodging your first FBT return and are not currently registered for FBT, you must lodge an Application to register for fringe benefits tax prior to lodging your return.

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