Edited version of your written advice

Authorisation Number: 1013071540243

Date of advice: 12 August 2016

Ruling

Subject: Living Away From Home Allowance

Issue 1

Fringe benefits tax: Living away from home allowance

Question 1

Can the payments the Company, pay to the Individual be treated as Living Away From Home Allowance (LAFHA) benefit pursuant to subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If the answer to question 1 is yes, is the taxable value of the LAFHA benefit reduced to nil by the exempt food/accommodation component pursuant to section 31 of the FBTAA?

Answer

Yes

Issue 2

Deductions: personal services entities

Question 1

Is the Company entitled to a deduction for the LAFHA paid to the Individual?

Answer

Yes

Question 2

If the answer to question 1 is yes, can the amount of personal services income attributable to the Individual be reduced by the LAFHA?

Answer

Yes

This ruling applies for the following period(s)

The income years ended 30 June 2016 and 2017

The scheme commences on

1 July 2015

Relevant facts and circumstances

The Individual is a project manager and consultant who contracts through the Company. The Company is a personal services entity. All the personal services income earned by the Company is attributable to the Individual.

The Individual acquired a contract requiring relocating to City B, for a period of time.

The Individual and their partner relocated to City B and intend to return to City A, on completion of the contract period. City A is the Individual and their partner's usual place of residence. City A residence remains vacant during the contract period.

The Individual's City B accommodation is a long term hotel room.

The Company provides the Individual an allowance comprising an accommodation component that does not exceed the actual accommodation expense incurred by the Individual.

The Company provides the Individual an allowance comprising of a food component in accordance with the Commissioner's estimate for additional reasonable food costs reduced by the statutory food amounts.

The Company makes payments for these additional accommodation and food expenses to the Individual via bank account transfer and does not pay any third parties directly. The Individual pays for accommodation and food.

Relevant legislative provisions

Subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986

Subsection 31(2) of the Fringe Benefits Tax Assessment Act 1986

Division 85 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Reasons for decision

A payment will constitute a Living Away From Home Allowance LAFHA benefit under subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986), where from 1 October 2012:

(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 duties of that employment require the employee to live away from his or her normal residence;

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.

According to Miscellaneous Taxation Ruling MT 2030:

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…

Therefore for an allowance to be a LAFHA for the purposes of the FBTAA 1986 the following conditions must be satisfied:

n 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

n 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.

n Employers generally require employees to fill in a living away from home declaration in order to receive a living away from home allowance.

Living away from their usual place of residence

An employee is regarded as living away from their usual place of residence if they are required to do so in order to perform their employment-related duties and could have continued to live at the former place if they did not have to work temporarily in a different locality.

Whether a place is an employee's usual place of residence is a question of fact, based on all the circumstances. An example would be an arrangement where an employee transfers to a branch office of the employer in another state for a two-year or three-year term on the basis that they will return to the permanent position at the end of that time. The employee would be regarded as living away from their normal residence provided that they intend to return there at the end of the term of the transfer.

In this case it is considered that the Individual is living away from home rather than travelling in the course of undertaking employment duties. The Individual maintains their usual place of residence in City A and works in another (City B), as well as having the intention to return to their normal residence after the period.

LAFHA - non-deductible expenditure

A LAFHA is in the nature of compensation for additional expenses incurred together with 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 a deduction.

Division 85 of the Income Tax Assessment Act 1997 (ITAA 1997) limits the amounts individuals, who are not conducting a personal services business, can deduct relating to their personal services income. Particular deductions excluded or limited under this Division include rent, mortgage, rates or land taxes for your home that is a place of business, motor vehicle expenses and payments to associates.

When you are not conducting a personal services business then deductions are limited to those available to employees under paragraph 8-1(1)(a) of the ITAA 1997.

In this case, the Individual earns personal services income. The Company is a personal services entity not conducting a personal services business. Therefore it needs to be considered whether the Individual would be entitled to the deduction for the additional expenses, being accommodation and food, whilst living away from their usual place of residence.

Generally, accommodation and meal expenses incurred by an employee who lives away from home to carry out the duties of their employment will not be deductible. Expenses of this nature have been found to be private. This is supported by the decision in Federal Commissioner of Taxation v. Toms 89 ATC 4373; (1989) 20 ATR 466.

Therefore the expense for additional accommodation and food of the Individual whilst living away from their usual place of residence would not be deductible expenditure.

The requirements of the payments to the Individual from the Company to be a LAFHA are satisfied.

The taxable value of a LAFHA

The payment of a LAFHA is a fringe benefit.

Fringe benefits tax is payable by the employer and the employee does not pay income tax on the value of the benefits provided to them. The FBTAA 1986 provides instruction as to how an employer should calculate their fringe benefits tax liability depending on the type of benefit provided, including and reductions or exemptions they should take into account. The relevant circumstance to make this calculation for this application is the employee maintains a home in Australia at which they usually reside and the fringe benefit relates to the first 12 month period.

The taxable value of a LAFHA is calculated in accordance with section 31 of the FBTAA 1986, reduced by any exempt accommodation or exempt food component (subsection 31(2)).

The exempt accommodation component is so much of the LAFHA that equals the accommodation expenses actually incurred by the employee for accommodation while living away from home. The Individual will receive an accommodation component equal to the cost of accommodation while living in City B. Therefore the taxable value is reduced.

The exempt food component takes into account the applicable statutory food total, where this calculation can be completed by providing an allowance that is net of the statutory food amount to compensate employees for additional food or drink expenses. The Individual will receive a food component applying this practice; therefore the taxable value is reduced.

In summary, the taxable value of the LAFHA is nil. No fringe benefits tax is payable by the Company.

LAFHA and the general rule for deduction entitlements of personal services entities

Section 86-20 of the ITAA 1997 provides for offsetting the personal service entity's deductions against personal services income included under section 86-15. Subdivision 86-B limits a personal services entity's entitlement to a deduction.

Section 86-60 of the ITAA 1997 provides when a personal services entity (not conducting a personal services business) cannot deduct an amount to the extent that it relates to gaining or producing an individual's personal services income unless the individual could have deducted the amount if the circumstances giving rise to the entity's entitlement to deduct the amount had applied instead to the individual.

A deduction for a LAFHA will not be denied under this section. Therefore the Company can claim the deduction for the amount of LAFHA paid to reduce the amount of personal services income included as assessable income of the Individual.

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