Edited version of your written advice

Authorisation Number: 1051343263359

Date of advice: 26 February 2018

Ruling

Subject: Fringe Benefits Tax – travel expenses – otherwise deductible rule

Question 1

Is the Trust providing an expense payment fringe benefit under section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) in providing accommodation to their employee?

Answer

Yes

Question 2

Can the Trust claim a deduction under section 8-1 of the ITAA 1997 for the lease expenses, running costs and depreciation of assets relating to the provision of accommodation to their employee in a shack to enable the employee to conduct business activities?

Answer

Yes

This ruling applies for the following period(s):

Income Tax Year ended 30 June 20XX. And

Fringe Benefit Tax Year 13 March 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The Taxpayer is The Trust. The Trust carries on with business activities from Location A.

The Trust has made profits at least in the past five years of operation

An employee, Mr X, is both the trustee and beneficiary of The Trust. There is no written employment contract between the Trust and Mr X.

End-to-end process

Mr X has a home office in Suburb 2 at which he monitors weather and prices, conducts accounting and banking and carries out repairs to equipment required for business activities. He determines at his home when is the best time to travel to The Island to conduct his business activities.

Mr X travels to Location A to conduct his employment duties. He resides at a relevant shack at Location A.

There is no other suitable accommodation nearby due to the isolated location of Location A.

Mr X carries tools and equipment in a commercial vehicle (one tonne ute) to and from Location A for any repairs and maintenance at the relevant shack and at home.

From Location A, Mr X travels by boat to conduct business. These are then sold by the Trust to a wholesaler. Your product is not transported back to Mr X’s home for storage, processing, or sale. A contractor collects your product from Mr X at location A and transports them to the wholesaler.

The Trust has already made significant investment leases and shares and owns relevant licences.

The Trust has a significant number of valuable licences. The Trust has been allocated a quota based on the number of licences held.

The Trust pays Mr X a travel allowance for the overnight stays at Location A. The allowance provides for food and incidentals incurred while staying at Location A.

The Relevant Shack

The relevant shack at Location A is leased by the Trust from related Trust for the purpose of providing Mr X with accommodation.

Facilities in the shack include:

● Toilet

● Shower

● Basic Kitchen

● Office desk

● 3 rooms which can be used as bedrooms if required

● Workshop

● Garage

The Trust also pays the running costs and has purchased assets for use in the relevant shack. Such costs and assets include:

● furniture

● upgrades to the power system, including batteries and chargers

● electricity, including fuel for the generator, and

● general repairs and maintenance.

Mr X’s living and travel arrangements

Mr X had lived in Suburb 1 which is approximately 40km from Location A.

Mr X has relocated to Suburb 2 situated about 130km from Location A for personal reasons.

Mr X’s family remains in the Suburb 1 property and he returns to the property on a minimum of a weekly basis.

In the off season Mr X stays in the shack approximately four to five times for a night or two to undertake maintenance and repairs on the shack and other essential gear.

In peak season Mr X will stay five or six days or more at the shack at a time. Mr X travels back home one night a week mostly to get supplies, gear, food and fuel as there are no shops of any kind on Location A.

In months outside of the off peak period there are shorter peak periods. These periods vary year by year, depending on stock quality, prices and weather.

Mr X travels to and from Location A 70 times in a year staying approximately 130 nights.

Mr X’s family generally remain at home in Suburb 1 and do not accompany him to Location A. The exception is the January school holidays and Easter holidays Mr X continues to work during the time his family accompany him.

Mr X’s children do not attend school at Location A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 21

Fringe Benefits Tax Assessment Act 1986 paragraph 21(ba)

Fringe Benefits Tax Assessment Act 1986 section 24

Fringe Benefits Tax Assessment Act 1986 section 136(1)

Reasons for decision

Question 1

Is the Trust providing an expense payment fringe benefit under section 20 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) in providing accommodation to their employee?

Answer

Yes

Summary

The provision of accommodation to the employee and the employee’s family is an expense payment fringe benefit. The taxable value of this benefit may be reduced by the ‘otherwise deductible’ rule under section 24 of the FBTAA as the employee would otherwise have been able to claim a deduction for the accommodation had they incurred the expenditure. The taxable value cannot be reduced to the extent the accommodation relates to the use by the employee’s family. The employee would not otherwise be able to claim a deduction for such expenditure had they incurred it.

Detailed reasoning

Under subsection 136(1) of the FBTAA, a “fringe benefit” is defined as a benefit provided to an employee (or an associate of an employee) by their employer in respect of their employment, not including the payment of salary or wages.

In this case the benefit, being the accommodation, has been provided by the Trust to Mr X (and his family when they accompany him) in respect of his employment.

In determining if the Trust has a liability to pay fringe benefits tax on the provision of the accommodation in the fishing shack it is necessary to determine the type of benefit being provided.

Section 20 of the FBTAA states:

Where a person (in this section referred to as a provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure in incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

Lease payments have been made by the Trust in discharge of an obligation by Mr X to make payment to related Trust. Therefore the provision of accommodation in the shack to Mr X (and his family when they accompany him) will be an expense payment fringe benefit.

Exempt benefit?

An expense payment benefit may be exempt if it is found to be an exempt accommodation expense payment benefit under section 21 of the FBTAA. A condition of the exemption at paragraph 21(ba) of the FBTAA requires that:

the accommodation is not provided while the employee is undertaking travel in the course of performing the duties of that employment

It is therefore necessary to determine whether Mr X is travelling in the performance of his duties of employment. The factors to consider are detailed in paragraphs 50 to 54 of Draft Taxation Ruling TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses (TR 2017/D6) and include:

(a) the employee’s work activities require them to undertake the travel

(b) the work requires the employee to sleep away from home overnight

(c) the employee has a permanent home elsewhere, and

(d) the employee does not incur the expenses in the course of relocating or living away from home.

Required to travel

To determine whether travel is undertaken in performing an employee’s work activities, the following factors are considered:

● whether the work activities require the employee to undertake the travel

● whether the employee is paid, directly or indirectly to undertake the travel

● whether the employee is subject to the direction and control of their employer for the period of the travel, and

● whether the above factors have been contrived to give a private journey the appearance of work travel.

Mr X has chosen to recently relocate from Suburb 1 (40km from Location A) to Suburb 2 (130km from Location A) for personal reasons.

As per paragraph 25 of TR 2017/D6 because travel by Mr X is required in performing his work duties or work activities, little regard is given to a choice Mr X may have had which would have avoided or reduced the need for travel.

A private journey is not in the performance of employee’s work activities merely because an obligation to travel has been contrived to create the appearance of work travel.

In determining whether a travel arrangement is contrived, it is relevant to consider whether the travel is attributable to Mr X having co-existing work locations.

Paragraphs 43 to 45 of TR 2017/D6 describe the circumstances where there would be co-existing work locations or an alternative work location.

Co-existing work locations travel involves travel which can be attributed to Mr X having to work in more than one location.

This includes where travel is directly between work locations and it is reasonable to conclude that the travel is undertaken in performing his work activities because of the requirement to work in more than one location.

Mr X has a home office in Suburb 2 in which he monitors weather and prices, conducts accounting and banking and carries out repairs to equipment required for business activities. There Mr X determines when is the best time to travel to Location A to conduct the business activities of the business.

Mr X’s home office is considered to be one work location.

Mr X travels to and from the relevant shack 70 times in a year staying approximately 130 nights.

The length of his stay at the relevant shack varies depending on whether it is peak or off peak season.

Mr X does repairs and maintenance work on the shack and other essential gear. Mr X’s family visits him at the shack during certain school holidays although Mr X continues to work throughout this period.

The relevant shack is considered another work location.

Mr X carries tools for repairs and equipment in a commercial ute to and from Location A.

Therefore, Mr X is required to travel for work and paid to do so on all occasions during the year that he travel from his home to his co-existing work location at the relevant shack. There is no contrivance to create the appearance of work travel.

Required to sleep away from home

The requirement to sleep away from home overnight is a practical test that considers the circumstances of the work and the need for employees to have sufficient rest to perform their duties effectively. Mr X’s choice to return home and avoid staying away overnight does not affect the character of the expenditure if an overnight stay is reasonably required from a practical point of view.

Given Suburb 2 is 130km from the Location A relevant shack, it would be impractical during peak business periods for Mr X to travel back to his home in Suburb 1 other than to get supplies, gear, food and fuel as there are no shops of any kind on Location A.

During the off peak season Mr X would only sleep overnight in the relevant shack away from his family solely for work.

Therefore Mr X is required to sleep away from home whenever he is residing at the relevant shack.

Permanent home elsewhere

For these purposes, ‘permanent home’ is the residential accommodation where Mr X ordinarily lives when not temporarily absent and where he intends to return to live immediately after the work travel.

Indicators that residential accommodation is Mr X’s permanent home include his ownership or possession of the premises and occupation by members of his family.

Mr X has a permanent home in Suburb 1. While Mr X is at Location A his family remains in the Suburb 1 property and he returns to the property on a minimum of a weekly basis. Travel back to Suburb 1 is for getting supplies, gear, food and fuel.

It is accepted Mr X has a permanent home elsewhere.

Not relocating or living away from home

Whether Mr X is living away from home depends on the following factors as set out at paragraph 72 of TR 2017/D6:

(a) the time spent working away from home

(b) whether the employee has a usual place of residence at a previous location

(c) the nature of the accommodation, and

(d) whether you are or can be accompanied or visited by family or friends

Time spent away from home

The longer Mr X spends working away from home, the more likely that he is living away from home.

‘Time spent working away from home’ means the time Mr X spends working away at a particular work location. Where Mr X works at one location for an extended period, that period is not broken by short trips you take from that location. However, where Mr X works at different locations for extended periods, each period is considered separately.

The time Mr X spends living away from home is ad hoc and unpredictable. Normal and peak business periods are not clearly distinguishable on a forward looking basis. This is because the business activities strategy is determined daily. This would mean that Mr X could be at the shack anywhere from one to six nights a week.

Therefore ‘time spent working away from home’ is not considered a determinative factor.

The nature of the accommodation

The nature of the employee’s accommodation while working away from home is relevant but does not determine whether the employee is travelling in performing their duties or living away from home.

An employee may live and make their home in any kind of accommodation, including huts and caravans. If the accommodation has amenities common in a home, such as an equipped kitchen and laundry, this would support the view that the employee is living away from home.

While the relevant shack has home-like characteristics we accept that this is due to convenience ease of having a base when Mr X is required to travel to Location A for work.

Whether Mr X is or can be accompanied by family or visited by family or friends

No family belongings have been transferred to the relevant shack other than when Mr X’s family accompanies him during certain holiday periods. Mr X’s children do not attend school at Location A.

Although there is no restriction to Mr X’s family joining him, it would be impractical as Mr X travels to the relevant shack often whereas his family reside and go about their daily lives at Suburb 1.

Therefore we do not consider Mr X to be living away from home. Mr X is considered to be travelling between co-existing work locations.

The expense payment benefit would therefore not be an exempt accommodation expense payment benefit under section 21 of the FBTAA because Mr X is undertaking travel in the course of performing the duties of employment. The provision of accommodation to Mr X’s family would not be an exempt benefit under that provision for the same reason.

How will the taxable value of the expense payment fringe benefit be calculated?

Section 24 of the FBTAA provides that the taxable value of an expense payment fringe benefit may be reduced where the ‘otherwise deductible’ rule applies.

Paragraph 112 of Taxation Ruling TR 2001/2 Fringe benefits tax: the operation of the new fringe benefits tax gross-up formula which applied from 1 April 2000 states:

The taxable value of certain fringe benefits may be reduced to the extent that the employee would have been able to claim an income tax deduction had the employee themselves incurred the expense. The otherwise deductible rule applies to reduce the taxable value of a board fringe benefit, an expense payment fringe benefit, a loan fringe benefit, a property fringe benefit or a residual fringe benefit. The taxable value is reduced by the hypothetical income tax deduction to which the employee would have been entitled had the employee incurred the expense. An employee has no 'entitlement to an input tax credit' under the GST Act and may, for the purposes of section 27-5 of the ITAA 1997, claim a deduction for the GST-inclusive value of any relevant expenditure. Therefore, where the 'otherwise deductible rule' applies to the calculation of the taxable value of a fringe benefit such 'deductible amount' will be at the GST-inclusive value as applicable.

The same factors as detailed in paragraphs 50 to 54 of TR 2017/D6 apply in determining whether expenses are incurred in performing work activities and therefore deductible.

In the present case it was concluded that Mr X is undertaking travel in the course of performing the duties of employment. Therefore, if he had incurred the lease expenses, and other costs associated with the shack, he would have been entitled to a deduction under section 8-1 of the ITAA 1997.

It is noted, however, that Mr X would have to apportion his deduction for these expenses for the period his family joined him at the shack during holidays. Such expenditure is of a private or domestic nature and therefore not deductible.

The taxable value of the expense payment fringe benefit may therefore be reduced to the extent the expenses are otherwise deductible to Mr X.

Question 2

Can the Trust claim a deduction under section 8-1 of the ITAA 1997 for the lease expenses, running costs and depreciation of assets relating to the provision of accommodation to their employee in a shack to enable the employee to conduct business activities?

Summary

Yes. The Trust can claim lease costs, running costs and depreciation of assets relating to the use of the shack as deductions under section 8-1 of the ITAA 1997 when incurred in the provision of fringe benefits. The expenses require apportionment for the periods Mr X’s family accompany him.

Detailed reasoning

Employers can generally claim an income tax deduction for the costs incurred in providing fringe benefits to employees provided the requirements of section 8-1 of the ITAA 1997 are satisfied.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which it is incurred in carrying on a business for the purpose of gaining or producing assessable income.

‘Business’ is defined in subsection 995-1(1) of the ITAA 1997 to include ‘any profession, trade, employment, vocation or calling but does not include occupation as an employee’.

Further guidance for considering whether the activity provider is carrying on a business is provided by Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

The Trust has a significant number of valuable licences. The Trust has made profits at least in the past five years of operation. Business and accounting records are kept. A commercial ute is utilised to transport tools and equipment including craypots regularly and repetitively between Suburb 2 and Location A. In the circumstances we accept that the Trust is carrying on a business activities.

Mr X is required to travel to Location A to conduct his employment duties. As the expenses paid for by the Trust are incurred in providing accommodation to Mr X to perform his employment duties, we consider the expenses to have been incurred in the ordinary course of the Trust’s business for the purpose of gaining or producing assessable income.

The Trust therefore may claim a deduction under section 8-1 of the ITAA 1997 for the lease and running costs of the shack. These costs may include electricity, fuel, insurance, depreciation or interest on loans for assets of a capital nature, and repairs to the extent the expenses are not capital expenses.

However, to the extent the expenses relate to periods Mr X’s family accompany him, they are not considered to be incurred in gaining or producing assessable income and are of a private or domestic nature. Such expenses would therefore need to be apportioned and no deduction claimed for the expenses to that extent.

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