Edited version of private ruling

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Ruling

Subject: Living-away-from-home allowance benefits

Question 1

Is the proposed payment a living-away-from-home allowance (LAFHA) benefit as described in subsection 30(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

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

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2011

Year ended 31 March 2012

The scheme commences on:

1 June 2010

Relevant facts and circumstances

The employee is a citizen of Country A and until date x was living in Location A in Country A.

From date X the employee was employed by the employer under an employment agreement at Location B in Country B.

The employee's spouse and two children relocated to Location B with the employee.

The address of the residence in Location A and Location B was provided.

The employee was employed from Location A by the employer following a search process.

Employment Agreement

The employment contract is for a permanent role in the organisation and is an open-ended contract.

At the time the employment contract was entered into the employee was residing in Location A.

The employer anticipated that the appointment was not for a pre-defined duration however the employee has made it clear to the employer that the employee considers the role to be an assignment of finite duration that is expected to last in the order of two to three years.

Based on the employee's expressed intentions and the surrounding circumstances, the employer accepts that the employee intends for the tenure in the role to be of finite duration.

Proposed Allowance

Prior to commencing in the role the employee raised with the employer the prospect of receiving a LAFHA.

The employer made enquiries and sought external tax advice on the matter to ensure such arrangements were within existing Australian tax law. As a consequence of that advice the employer advised the employee that it would be willing to package their compensation to include LAFHA if a private binding ruling was obtained.

Following receipt of a favorable ruling, the employer will enter an amendment to the employee's current employment contract to provide a salary packaging arrangement that:

· the employee be paid X per annum by way of accommodation allowance

· the employee be paid Y per annum by way of food allowance; and

· the employee's current annual gross salary (excluding super) be reduced by X plus Y.

The quantum of the annual allowance for accommodation has been arrived at by considering the additional accommodation costs necessitated by living in Location B.

The quantum of annual food allowance is based on applying Taxation Determination TD 2010/4 food allowances for a family of two adults and two children ($412) less the exempt food component to the employee's family composition ($42 per week per adult and $21 per week per child statutory food amount) or $286 X 52 = $14,872.

The employee also provided evidence of their continued links to Location A and Country A.

Reasons for decision

Question 1

Summary

Yes, subsection 30 (1) of the FBTAA provides a definition of what is LAFHA. For payment to constitute a LAFHA benefit under this subsection the following conditions must be met:

· the employer pays an allowance to the employee in respect of the employee's employment;

· the employee is required to live away from their usual place of residence to perform the duties of their employment; and

· the allowance is paid to compensate the employee for non-deductible additional expenses that the employee incurs, or for both non-deductible additional expenses that the employee incurs and other disadvantages arising, as a result of having to live away from home.

All of these conditions have been satisfied.

Detailed reasoning

Is the payment an allowance?

As described in paragraph 2 of Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement, 'A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.'

In this case the payment is an annual figure for accommodation based on the employee's accommodation costs (both in Locations A and B) and food based on the expatriate rates issued by the Commissioner each year.

Once the payments are made there is no evidence to suggest that the employee has to justify the expenditure on accommodation and food. This suggests that the payment could be an allowance.

However to receive this amount the employee wishes to enter into a salary sacrifice arrangement (SSA) in which the employee will sacrifice part of their current salary entitlement to receive a LAFHA of the same amount.

This raises the question as to whether the payment is a payment to cover an estimated expense or continues to be salary. The issue of carving a LAFHA from existing salary entitlement was addressed in the Board of Review in Case C55 (1971) 17 CTBR(NS) 332; 71 ATC 242 (Case C55) which considered the former section 51A of the Income Tax Assessment Act 1936 (ITAA 1936).

In Case C55 the taxpayer, his wife and children lived in an isolated company mining town where he was jointly employed as secretary/accountant by a group of medical unions and hospital and medical societies. The town, which suffered from a harsh climate and a very high cost of living, was also at such a distance from neighbouring provincial towns as to prevent the sending of children there to day schools. The schooling provided in the town itself was inadequate and did not proceed beyond primary level. Faced with the problem and expense of educating his children (3 were already boarded out) the taxpayer moved his family to a provincial town with the necessary educational facilities where they took up residence in a house he purchased. The taxpayer continued to live in the mining town in the company house he and his family had previously rented. He joined his family for one weekend in two.

For part of the income year under review, the taxpayer received the same salary as prior to his family's move but at his request $6 per week was identified as a living-away-from-home allowance. For the remainder of the year his salary was increased by $10 per week and, of his total remuneration, $20 per week was allocated to such allowance.

In considering the question whether the taxpayer was in fact in receipt of a living-away-from-home allowance within the former sec.51A of the ITAA 1936 definition during the year the Board said, at ATC 247:

We do not think that the mere fact that a decision is made to create a living-away-from-home allowance by carving it out of an existing salary is necessarily and of itself an objection to a finding that an allowance exists. As long as the salary has, prior to such decision, contained as a matter of deliberate advertence an element of bona fide compensation for having to live away from home, it does not matter that, for example through ignorance of the taxation benefit that flows from identifying it as such, the allowance has not been so identified. In other words, a living-away-from-home allowance can then be described specifically, the remaining salary nominally lowered and a deduction claimed.

This indicates that it is possible for a LAFHA to be created from existing salary provided the salary contained an element of bona fide compensation for having to live away from home.

In this case the issue of a LAFHA was raised by the employee before signing the employment agreement and the employer agreed to and did look into this. However the arrangement had not been formalised prior to the employee signing the agreement. Although not formalised in writing this suggests that the original salary component contained to some extent an element of compensation for the employee being required to relocate from Location A to Location B.

However the compensation still has to be bone-fide compensation for the additional expenditure incurred to be a LAFHA. In other words it has to be linked to expenditure incurred and not simply a percentage of salary or any other amount that is not referenced to an expense incurred.

The payment here has been linked to the employee's accommodation expenses and the food expenses are based on amounts issued by the Commissioner.

Therefore based on the decision in Case C55 the payment being made can be an allowance even though it is being carved out of existing salary.

However for a SSA agreement to be effective it has to be made in respect of an employee's prospective salary entitlement. Any salary entitlement that has already been earned before the agreement has been entered into remains salary (See Taxation Ruling TR 2001/10 for more detail).

Is the allowance in respect of employment?

The allowance is paid because the employee is required to live near their place of employment in Location B.

In addition it was originally paid as and treated as salary of the employee and will be paid under a SSA.

Therefore the allowance is being paid in respect your employment.

Is the employee living-away-from-home?

Whether an employee is living-away-from-home is a question of fact and Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax : living-away-from-home allowance benefits provides guidance on how the Commissioner determines whether an employee is living-away-from-home. Paragraph 14 states in part:

. . .the question whether an employee is living away from his or her usual place of residence normally involves a choice between two places of residence, i.e., the place where the employee is living at the time or some other place. A person is regarded as living away from a usual place of residence if, but for having to change residence in order to work temporarily for his employer at another locality, the employee would have continued to live at the former place. It would be relevant in reaching that view that there is an intention or expectation of the employee returning to live at the former place of residence on cessation of work at the temporary job locality. This would be relevant even if the employee is living in temporary quarters close to a temporary job site. . .

To paraphrase the above paragraph, an employee is living-away-from-home where there is a choice of two residences but they would not have left their first residence if they had not been required to work and reside temporarily at another locality.

For the purposes of the FBTAA a place of residence is defined in subsection 136(1) of the FBTAA as:

· in relation to a person, means:

· a place at which the person resides; or

· a place at which the person has sleeping accommodation;

· whether on a permanent or temporary basis and whether or not on a shared basis

In this case the employee had a home in Location A where the family residing when the employee was offered the position in Location B. In addition the employee has now leased a home in Location B to reside near their place of employment. Both of these would be places of residences as defined under subsection 136(1) of the FBTAA.

In looking at the facts of the case and comparing the two places of residence, the residence in Location A would have been the employee's usual place of residence prior to leaving Location A. What needs to be determined is whether the employee is living-away-from-home or has relocated to the extent that the residence in Location B has become the employee's usual place of residence.

In this case the employment agreement is open-ended, this in itself would indicate that the position held by the employee is permanent. In respect of permanent employment paragraph 19 contains a general presumption that an employee's usual place of residence is near where that employee is permanently employed. So if we followed this general presumption we would have to conclude that the home in Location B has become the employee's usual place of residence.

However before accepting the position the employee made it clear to the employer of the intent to return to Location A within two to three years. In response the employer accepted and recognised that this is the employee's intent even though they anticipated the successful candidate would take the position on permanently.

Therefore although the contract is open-ended and the employer may prefer that the employee remain indefinitely, both parties have agreed (or at least are aware), that prior to the employee taking up the position that the employee would return to Location A within three years. Therefore the general presumption contained in paragraph 19 does not necessarily apply in this case.

In addition to the stated intent, the majority of the employee's physical assets remain in Location A including the house there whilst the employee intends to lease a home whilst in Location B.

Also the employee has also many other ties to Location and Country A which are absent from Location and Country B.

In effect the employee's only ties to Location A (at this stage at least) are in respect of the employment there (for example the leased accommodation near the place of employment).

These factors indicate that the employee's absence from the home in Location A (and conversely the time he will spent living in Location B) is temporary.

Given that the employee only relocated to Location B in order to perform the duties of employment and that all evidence suggests a return to Location A within three years the employee is living-away-from-home for the purposes of subsection 30(1) of the FBTAA.

Compensation for non-deductible additional expenses or both non-deductible additional expenses and other disadvantages?

For an expense to be deductible it has to be incurred in gaining or producing your assessable income and it cannot be a loss or outgoing of a private or domestic nature. (see section 8-1 of the Income Tax Assessment Act 1997)

The allowance has been paid to you to compensate you for food and accommodation expenses near his work locality. In respect of food and accommodation paragraph 29 of Taxation ruling TR 95/18 states:

Private or domestic expenditure is considered to include costs of living such as food, drink and shelter. In Case T47 18 TBRD (NS) 242; 14 CTBR (NS) Case 56, J F McCaffrey (Member) stated (TBRD at 243; CTBR at 307):

'In order to live normally in our society, it is requisite that individual members thereof be clothed, whether or not they go out to work. In general, expenditure thereon is properly characterised as a personal or living expense...'

However food and accommodation expenses would deductible if an employee is travelling in the course of business.

However as the employee is not travelling the accommodation and food costs are private or domestic in nature and remain non-deductible.

Therefore the allowance is a LAFHA as described in subsection 30(1) Of the FBTAA.

Question 2

Summary

Yes, the taxable value of the LAFHA has been reduced by the exempt accommodation component and the exempt food component to nil.

Detailed reasoning

Under section 31 of the FBTAA the taxable value of a LAHFA benefit is the amount of the allowance less the sum of the exempt accommodation component and the exempt food component.

Paragraph 4 of MT 2030 describes the exempt accommodation component as:

The exempt accommodation component is so much of the allowance as it is reasonable to conclude is in the nature of compensation for additional expenses on accommodation that the employee could reasonably be expected to incur.

In this case the accommodation component of the allowance was determined using the actual expenditure incurred by the employee in Location B on accommodation less the income received by the employee from leasing the Location A residence out.

In setting the allowance the employer has taken into account the additional expenditure incurred in Location B when setting the allowance. They also took into account the income received from renting out the home in Location A that the employee would not otherwise have received. Therefore it is reasonable to conclude that the amount being paid towards the employee's accommodation in Location B is in respect of additional expenditure incurred by the employee and represents the exempt accommodation component.

The exempt food component is described in paragraph 5 of MT 2030 as:

The exempt food component is so much of the allowance as is reasonable compensation for additional expenses on food. It is arrived at by first ascertaining the "food component" of the allowance, as defined in section 136. The food component is so much of the allowance as is in the nature of compensation for expenses the employee could reasonably be expected to incur on food and drink

In respect of expatriate employees working in Australia the Commissioner issues a Taxation Determination each year containing amount that he considers to be a reasonable food component depending on the employee's family size. The current Taxation Determination is TD 2010/4.

How the figures in TD 2010/4 should be read is explained in paragraph 6 of MT 2040 Fringe benefits tax: living-away-from-home allowance benefits: reasonable food component for expatriate employees (the figures in TD 2010/4 are indexed from those contained in MT 2040), which states:

In applying the living-away-from-home allowance rules to expatriate employees working in Australia during the year of tax ended 31 March 1988, a family consisting of 2 adults and 2 children under 12 will be treated as spending $188 per week on food and drink. That is, $188 per week of a living-away-from-home allowance benefit received by an expatriate employee in Australia with a spouse and 2 children under 12 will be treated as the food component of the allowance, on the basis that it was intended to cover the total cost of the family's weekly food bill. In that case, the exempt food component would be $188 minus $126 ($42 + $42 + $21 + $21), i.e., $62, with the remaining $126 of the food component being exposed to fringe benefits tax.

Also in respect of setting an allowance to take into account home food costs paragraphs 7 and 8 of MT 2030 state:

If the food component of the allowance has been set to reflect only additional costs by reducing the allowance for home food costs, and the amount of the reduction on this account equals or exceeds the statutory food amounts, the amount of the net food component is the exempt food component.

If, however, the estimated home food costs taken into account in setting the allowance are less than the statutory food amounts, the food component reduced by the amount by which the statutory food amounts exceed the estimated home food costs is the exempt food component. For example, if the food component for a single person has been set at $100 after allowing for estimated home food costs of $30, the exempt food component would be $100 - ($42 - 30), i.e., $88.

TD 2010/4 was used by the employer in determining the employee's annual food allowance. The employer took the amount for a family of two adults and two children of $412 and deducted the total statutory food amount of $126 ($42 per week per adult and $21 per week per child statutory food amount) leaving an amount of $286.

As the allowance paid has been set by accounting for home food costs (albeit by applying the statutory food amounts), the whole of the food component is in respect of additional expenditure on food and represents the exempt food component.