Edited version of your written advice

Authorisation Number: 1013065547867

Date of advice: 16 August 2016

Ruling

Subject: Exempt Remote Area Housing Benefit

Question 1

Does the provision of residential accommodation by the Employer to an employee constitute an exempt remote area housing benefit under section 58ZC of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

The period to which the ruling applies

1 April 2015 to 31 March 2017

Date in which the scheme commences

1 April 2015

Relevant facts and circumstances

Background Facts

1. The Employer operates a production and distribution business in a remote area.

2. The Employer closed one of their production facilities when they consolidated their production; however the land on which those facilities were operated continued to be held by the Employer.

3. The Employer determined that the most effective realisation of the value of this land was through the redevelopment of the building on the land held (the Development).

4. As part of the Development, the Employer employed an employee (the Employee) as the property manager for the duration of the Development.

The Employee's Employment

5. As the proposed development was outside the regular operations of the Employer, it was determined that a property manager would be required to oversee the Development.

6. The employment duties of the property manager include the co-ordination of the Development and on-site property management and maintenance as required.

7. The Employee was engaged as the property manager due to their extensive experience in various property developments.

8. The only viable alternative to employing a property manager was to hire a consulting firm to perform this role. The cost in relation to such an arrangement was deemed to be untenable.

9. Local agents were also considered unviable, as they did not have the requisite skill or experience to oversee the project.

10. The Employer is a family-operated business.

11. The Employee is a relative of an employee of the Employer.

12. The Employee holds one 'B' Class share in the Employer. This entitles the Employee to any dividends on that class of share. The share has no voting or ownership rights.

Housing benefits

13. As part of the enticement for the Employee to work within a remote area, the Employee was provided with a unit of accommodation as part of their employment package.

14. The unit of accommodation is rented by the Employer, and is made available for the Employee for use as residential accommodation.

15. The Employer deemed that the provision of accommodation under this arrangement was necessary as:

a. Due to the price of rental properties, it would be difficult for a new employee to acquire accommodation.

b. It was deemed necessary to have the property manager regularly on-site to monitor the development.

16. For the full duration of the employment of the Employee, the unit of accommodation has been the main residence of the Employee.

17. The housing benefit provided by the Employer would have been provided to any person that filled the Employee's position irrespective of whether or not that person was also a shareholder or relative of the Employer.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 25

Fringe Benefits Tax Assessment Act 1986 Section 58ZC

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 140(1)

Reasons for decision

Is a housing benefit provided?

Section 25 of the FBTAA defines a 'housing benefit' as being a housing right granted by a person to another person.

A 'housing right' is defined by subsection 136(1) of the FBTAA to mean a lease or license granted to a person to occupy or use a unit of accommodation to the extent that the lease or license subsists at a time when the unit of accommodation is the person's usual place of residence.

Subsection 136(1) of the FBTAA defines a 'unit of accommodation' to include a house, flat or home unit, and accommodation in house, flat or home unit'. The terms 'lease' and 'licence' are not defined in the FBTAA. On their ordinary meaning, these terms would include the granting of a right to use the specified land for accommodation purposes.

The Commissioner's view on what is meant by 'usual place of residence' is considered in Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits (MT 2030). The relevant paragraphs of MT 2030 are paragraphs 12, 14 and 19. From these paragraphs, a person's 'usual place of residence':

• must be a place of residence that they dwell permanently, and not temporarily, and

• is presumed to be near where they are employed permanently.

Based on the facts provided, the arrangement involves a residential property rented by the Employer being made available to the Employee for use as residential accommodation. For the full duration of the Employee's employment, the unit of accommodation - which is located in the same area as where the Employee is permanently employed - has been the main residence of the Employee. As such, the unit of accommodation constitutes the Employee's 'usual place of residence' as defined in MT 2030.

The arrangement therefore satisfies the definition of a 'housing benefit' as defined in section 25 of the FBTAA.

Is the housing benefit provided exempt from FBT?

Under subsection 58ZC(1) of the FBTAA, a housing benefit that is a 'remote area housing benefit' is exempt from fringe benefits tax (FBT). The conditions for a housing benefit to be a 'remote area housing benefit' are set out in subsection 58ZC(2) of the FBTAA, as stipulated below.

A housing benefit in relation to an employer for a year of tax and for a unit of accommodation, being a benefit provided to an employee of the employer in respect of the employee's employment, is a remote area housing benefit if:

(a) during the whole of the tenancy period, the unit of accommodation was located in a State or internal Territory and was not at a location in, or adjacent to, an eligible urban area; and

(b) during the whole of the tenancy period, the recipient was a current employee of the employer and the usual place of employment of the recipient was not at a location in, or adjacent to, an eligible urban area; and

(c) (Repealed by No 77 of 2005)

(d) it would be concluded that it was necessary for the employer, during the year of tax, to provide, or to arrange for the provision of, residential accommodation for employees of the employer because:

(i) the nature of the employer's business was such that employees of the employer were liable to be frequently required to change their places of residence; or

(ii) there was not, at or near the place or places at which the employees of the employer were employed, sufficient suitable residential accommodation for those employees (other than residential accommodation provided by or on behalf of the employer); or

(iii) it is customary for employers in the industry in which the recipient was employed during the tenancy period to provide residential accommodation for their employees free of charge or for a rent or other consideration that is less than the market value of the right to occupy or use the accommodation concerned; and

(e) the recipients overall housing right was not granted to the recipient under:

(i) a non-arm's length arrangement; or

(ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of this section.

The term 'in respect of the employment of the employee' was considered in J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 (Knowles). The full Federal Court in Knowles - in examining the meaning of 'in respect of' an employee's employment - held that the phrase required a 'nexus, some discernible and rational link, between the benefit and employment', though noted that 'what must be established is whether there is a sufficient or material, rather than a causal, connection or relationship between the benefit and the employment'. A similar view was also held in Essenbourne Pty Ltd v FC of T 2002 ATC 5201 and Starrim Pty Ltd v FCT (2000) 102 FCR 194; [2000] FCA 952; 2000 ATC 4460; (2000) 44 ATR 487.

The full Federal Court in Knowles also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'.

To establish whether a sufficient or material connection exists between the provision of the accommodation and the employment of the employee, it is necessary to consider the circumstances in which it has been provided. The Employee has been provided with residential accommodation which allows the Employee to conduct the duties of property manager of the Development. Given this connection between the accommodation provided and the Employee's duties, it is clear that the accommodation was provided in respect of employment.

Therefore, the connection between the benefit received by the Employee and the Employee's employment is material and sufficient, and not merely causal. If it were not for the Employee's employment, the Employee would not have received the accommodation benefit.

On this basis, the benefit (the provision of property for personal use as residential premises) provided by the Employer to the Employee would be considered to be 'in respect of the employee's employment'.

In order to determine whether the housing benefit provided to the Employee constitutes a remote area housing benefit, a discussion is provided below in respect of whether each element or condition in subsection 58ZC(2) of the FBTAA is satisfied.

Paragraph 58ZC(2)(a) of the FBTAA

A unit of accommodation will be treated as being in a remote area if it is not located in, or adjacent to, an eligible urban area.

Pursuant to paragraph 140(1)(a) of the FBTAA, an 'eligible urban area' is an area that is either:

• situated in Zone A or Zone B for income tax purposes (as described in Parts I and II respectively in Schedule 2 to the Income Tax Assessment Act 1936 (ITAA 1936)) and is an urban centre with a 1981 census population of not less than 28,000, or

• not situated in Zone A or Zone B for income tax purposes and is an urban centre with a 1981 census population of not less than 14,000.

According to paragraph 140(1)(b) of the FBTAA, an area that is 'adjacent to an eligible urban area' is an area that is situated either:

• less than 40 kilometres by the shortest practicable surface route from the centre of an eligible urban area with a 1981 census population of less than 130,000, or

• less than 100 kilometres by the shortest practicable surface route from the centre of an eligible urban area with a 1981 census population of 130,000 or more.

To provide guidance on the application of subsections 58ZC(2) and 140(1) of the FBTAA, the ATO maintains a list of 'eligible urban areas', 'remote areas' and 'non-remote areas' on its website. That list specifically identifies the relevant area (the area where both the Development and the unit of accommodation provided to the Employee is located) as a 'remote area', and not as an area situated in or adjacent to an eligible urban area.

Therefore, as the Employee resides in an area specifically designated by the ATO as a remote area, the condition in paragraph 58ZC(2)(a) of the FBTAA is satisfied.

Paragraph 58ZC(2)(b) of the FBTAA

Based on the facts provided, it is accepted that during the relevant period of the arrangement, the Employee who has occupied/will continue to occupy the unit of accommodation is a current employee of the Employer, and the usual place of employment is not, as concluded above, located within or adjacent to an eligible urban area.

Therefore, the condition in paragraph 58ZC(2)(b) of the FBTAA is satisfied.

Paragraph 58ZC(2)(d) of the FBTAA

From the facts provided, subparagraphs 58ZC(2)(d)(i) and 58ZC(2)(d)(ii) of the FBTAA are not required to be considered.

Taxation Determination TD 94/97 Fringe benefits tax: what does the phrase 'customary for employers in the industry' mean in relation to the provision of fringe benefits to employees? explains what is meant by the phrase 'customary for employees in the industry' in subparagraph 58ZC(2)(d)(iii). Paragraph 2 of TD 94/97 states:

A benefit will be accepted as being customary where it is normal or common for employees of that class or job description in that industry to be provided with the same or similar benefits. It is not necessary that all or even the majority of employees in the industry receive the benefit. Where the provision of the benefit is unique, rare or unusual within an industry it would not be accepted as being customary.

The relevant industry in which the Employer is operating a business is 'non-residential building construction'.

The Commissioner accepts that it is customary for employers in the non-residential building construction industry to provide accommodation benefits to employees performing project management duties free of charge or for a rent that is less than market value in order to attract and retain skilled and qualified employees, thus being necessary for the Employer to provide the housing benefit to the Employee during the relevant period of employment.

Therefore, the condition in paragraph 58ZC(2)(d) of the FBTAA is satisfied.

Subparagraph 58ZC(2)(e)(i) of the FBTAA

Subsection 136(1) defines a 'non-arm's length arrangement' to mean an arrangement other than an arm's length arrangement. As the term 'arm's length arrangement' is not defined in the FBTAA, the Commissioner determined the term's meaning in ATO Interpretative Decision ATO ID 2005/156 Exempt benefits: remote area housing - non-arm's length arrangement (ATO ID 2005/156) for the purposes of subparagraph 58ZC(2)(e)(i) as follows:

• Subsection 136(1) defines 'arm's length transaction' to mean a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction.

• Parties will be dealing with each other 'at arm's length' in relation to the transaction, where:

n they are not connected in such a way as to bring into question the ability of one to act independently of the other, and

n they have behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs.

In Granby Pty Ltd v. FCT (1995) 30 ATR 400; 95 ATC 4240, where the expression 'dealing with each other at arm's length' in section 160ZH of the ITAA 1936 was in question, Lee J said (at ATR 403; ATC 4243):

The expression "dealing with each other at arm's length" involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length the inference may be drawn that they did not deal with each other at arm's length.

In ATO ID 2005/156, an employee who was also a shareholder was granted a housing right. Even though the employer and employee were not at arm's length, it was held that the arrangement was at arm's length. The Commissioner considered that a written policy that all management staff were entitled to a housing benefit indicated that the arrangement was at arm's length.

ATO ID 2005/156 further states that subparagraph 58ZC (2)(e)(i) of the FBTAA would not be satisfied in circumstances where a housing right is provided to family employees of a family business but not to other employees who perform the same duties as the family employees. In those circumstances, because of the family relationship, it would be considered that the housing right would be provided as a result of a non-arm's length arrangement as it would not have been provided to other employees who perform the same duties.

Despite the Employer and the Employee not being at arm's length in the current circumstances, nor the Employer having in place a formal written policy in relation to the arrangement (being the provision by the Employer of a housing benefit to the sole Employee to which the arrangement is applicable), the Commissioner considers the arrangement was not granted under a non-arm's length agreement on the basis that:

• it is customary for employers in the non-residential building construction industry to provide housing benefits to employees performing project management duties in order to attract and retain skilled and qualified employees, and

• as provided for in the facts, the housing benefit provided by the Employer would have been provided to any person that filled the Employee's position irrespective of whether or not that person was also a shareholder or relative of the Employer.

As such, the condition in subparagraph 58ZC(2)(e)(i) of the FBTAA is satisfied.

Subparagraph 58ZC(2)(e)(ii) of the FBTAA

Subparagraph 58ZC(2)(e)(ii) of the FBTAA requires consideration of whether the arrangement was entered into by the Employer and its Employee for the purpose of enabling the Employer to obtain the benefit of the application of section 58ZC of the FBTAA.

In Newton v. Federal Commissioner of Taxation (1958) 98 CLR 1; (1958) 11 ATD 442; (1958) 7 AITR 298, the Privy Council examined the meaning of the word 'purpose'.

Lord Denning said at page number CLR 8; ATD 445; AITR 304:

The word "purpose" means, not motive, but the effect which is sought to achieve - the end in view.

Lord Denning also said (at the same page):

In order to bring an arrangement within the section, you must be able to predicate by looking at the overt acts by which it was implemented that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.

The Commissioner considers that there are no overt acts by which one could predicate that the arrangement has been implemented by any of the relevant parties for the purpose of allowing the Employer to enjoy the benefits of the tax exemption. The arrangement can be explained as being one of ordinary business dealings as is customary in the non-residential building construction industry. This is further demonstrated by the fact the arrangement began only due to the Employee's employment, and the intention to cease the arrangement on the conclusion of the Employee's employment.

Therefore, the Commissioner accepts that when the arrangement was entered into by the Employer and its Employee, it was not entered into for the purpose of obtaining the benefit of section 58ZC of the FBTAA. As such, the condition in subparagraph 58ZC(2)(e)(ii) of the FBTAA is satisfied.

Conclusion

The arrangement involving a residential property rented by the Employer being made available to the Employee for use as residential accommodation for the duration of the Employee's employment as the property manager of the Development is the provision of a 'housing benefit' pursuant to section 25 of the FBTAA.

As per the discussion above, each of the conditions for such a housing benefit to constitute a 'remote area housing benefit' - as set out in subsection 58ZC(2) of the FBTAA - are satisfied. Therefore, such a remote area housing benefit provided by the Employer is exempt from FBT pursuant to subsection 58ZC(1) of the FBTAA.

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