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Edited version of your written advice
Authorisation Number: 1012730077162
Ruling
Subject: Assessability of foreign allowances
Assessability of allowances
A non-resident entity that pays an Australian resident for work performed overseas must withhold an amount in accordance with section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) if the non-resident entity has a sufficient connection with Australia.
If there is a withholding obligation, obligations under the Fringe Benefits Tax Assessment Act 1986 (FBTAA) will arise in relation to benefits provided to an Australian resident employee in respect of the employment of the employee. If there is no withholding obligation, amounts paid to the employee by the non-resident entity for work performed overseas will not be 'salary and wages' as defined in subsection 136(1) of the FBTAA and no obligations under the FBTAA can arise for the non-resident entity in relation to benefits provided to that employee.
In your case, you were employed overseas by a non-resident entity. You receive salary and wages as well as an allowance for living expenses and travel between your accommodation and workplace.
Therefore, in order to determine whether the allowance is assessable income to you, it is necessary to determine whether your overseas employer is required to withhold PAYG from your salary.
Taxation Determination TD 2011/1 discusses the circumstances in which a non-resident entity can be required to withhold amounts from salary and wages paid to an Australian resident employee for work performed overseas under section 12-35 of Schedule 1 to the TAA, and be subject to obligations under the FBTAA in relation to benefits provided to an Australian resident employee in relation to work performed overseas.
Paragraph 18 of TD 2011/1 considers the factors to take into consideration when determining whether a non-resident entity has a sufficient connection with Australia, it states:
In the case of a non-resident entity making a payment to an Australian resident for work performed overseas, there is a sufficient connection with Australia if the non-resident carries on an enterprise or income producing activities (or part of such enterprise or activities) in Australia and has a physical presence in Australia (collectively referred to as a physical business presence). As the obligation to withhold is on the non-resident entity, the sufficient connection must be with that entity. The residency of the employee is not a matter that establishes a sufficient connection of the non-resident entity with Australia. Conversely, the fact that the payment is made overseas does not establish that there is no sufficient connection with Australia.
In your case, your non-resident entity employer, does not carry on an enterprise or income producing activity in Australia and does not have a physical presence in Australia. Therefore, the overseas employer does not have sufficient connection with Australia and is not required to withhold PAYG from your salary under the TAA. Furthermore, your overseas employer did not in fact withhold PAYG from your salary.
Therefore, because the overseas employer does not have a sufficient connection with Australia for the purposes of the TAA, it has no obligations under the FBTAA in relation to the allowance it pays to you.
As the overseas employer does not have any obligations under the FBTAA in regards to the allowances it paid to you, you will be required to include both the allowances in your Australian assessable income.
Deductibility of travel expenses
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with general deductions and allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.
Generally, the expenses of travel to and from work are not deductible. This is either because such expenditure is private in nature, or because it is not an expense incurred in gaining or producing assessable income. The cost of travelling between home and work is generally incurred to put the employee in a position to perform duties of employment, rather than in the performance of those duties.
In your case you hired a car and driver to transport you to and from work. This expense is private in nature as the travel to and from work put you in a position to perform your work duties and was not in the performance of those duties. Therefore the expenses associated with the hire of the car and driver are not deductible under section 8-1 of the ITAA 1997.
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