Edited version of private ruling

Authorisation Number: 1011662772199

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Ruling

Subject: LAFHA & deductibility

Question 1

Is the payment by the employer to the employee a living-away-from-home allowance (LAFHA) benefit pursuant to subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

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

As the answer to question 1 is no, this question is not applicable.

Question 3

If the answer to question 1 is yes, Is the employer entitled to a deduction for the allowance paid to the employee?

Answer

As the answer to question 1 is no, this question is not applicable.

This ruling applies for the following period:

1 September 2010 to 30 June 2011

The scheme commences on:

1 September 2010

Relevant facts and circumstances

The arrangement

The employer provides consulting services. The employer employs the employee, assigned via a recruitment firm to Organisation A.

· The employee has worked continuously on this assignment at Organisation A via the recruitment firm since for several years, however the actual employer has been Employer 1, Employer 2 and now, the employer.

In a chain of on-hire, the employee is employed by the employer, who provides the employee's services to the recruitment firm. The recruitment firm in turn provides the services to Organisation A, who is the ultimate client. The employer competed to be 'agent 2', based on the level of administration fees levied and service provided to the employee.

Under this arrangement, the recruitment firm invoices Organisation A for the employee's time. In turn, the employer invoices the recruitment firm for his/her time.

The agreement between the recruitment firm and the employer was recently extended for a period of several months.

The weekly allowance is comprised as follows:

· Additional Accommodation Component

· Additional Food Component

The accommodation component is based on the actual rent that the employee is paying for the residence in Town B.

The food component represents the additional food only and a reduction has been made for the statutory food component.

As the remuneration is an hourly amount, the applicant has stated that where no hours are worked in a particular period by the employee, the LAFHA would be subtracted from the wages paid in the preceding or following period.

Employee's history in the role

The employee's assignment at Organisation A commenced several years ago.

The assignment was initially for a period of three months, during which time the employee returned to Town A on weekends to be with his/her family. The contract was extended for a 12 month period so the employee asked his/her spouse to relinquish their job and move to Town B. Subsequently the contract was extended for shorter periods.

The applicant believes that the many short extensions are a clear indicator that Organisation A does not anticipate that the position will be required for a further 12 month (or longer) period.

Places of residence

The employee previously resided in a residence in Town A.

Since taking up the role with Organisation A several years ago, the employee has resided in Town B.

The employee relinquished their rental accommodation in Town A after their spouse moved to Town B. All furniture and household goods were stored in Town A for two years, until they arranged to bring the furniture and goods to Town B.

The employee has lived most of their life outside Australia. Town A was the only place he/she had lived in Australia prior to the move to Town B.

The employee no longer holds any assets in Town A.

The employee has signed a living-away-from-home declaration in which he/she declared that during a several year period he/she was required to live away from his/her usual place of residence in order to perform the duties of his/her employment.

The employee intends to return to Town A when the current contract is finished, or earlier if a role at equivalent remuneration is available in Town A. He/she will select a residence in Town A which is close to his/her new workplace, school and childcare.

Relevant legislative provisions

Fringe benefits tax assessment act - subsection 30(1)

Fringe benefits tax assessment act - section 31

Fringe benefits tax assessment act - subsection 136(1)

Fringe benefits tax assessment act - paragraph 30(1)(b)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Question 1

Detailed reasoning

A payment will constitute a LAFHA benefit under subsection 30(1) of the FBTAA, where:

(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 employee is required to live away from his or her usual place of residence in order to perform the duties of that employment;

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 the following conditions must be satisfied:

· 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

· 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.

Is the employee required to live-away-from-home?

'Usual place of residence' is not defined in the FBTAA. However, 'place of residence' is defined in subsection 136(1) of the act in relation to a person, to mean:

(a) a place at which the person resides; or

(b) a place at which the person has sleeping accommodation;

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

The principles of determining whether an employee is living away from their usual place of residence have been established over the years by case law decisions. Whether or not an employee is living-away-from-home then will depend on the facts of each case.

The FBT guide for employers (Fringe benefits tax: a guide for employers - NAT 1054-08.2006) explains that in determining whether an employee is living away from their usual place of residence, factors such as the lifestyle of the employee, residency status, type of profession and industry often need to be taken into consideration.

In summarising the principles for determining whether or not an employee may be regarded as living away from their usual place of residence, the Commissioner issued Miscellaneous Taxation Ruling MT 2030, entitled Fringe benefits tax: living-away-from-home allowance benefits. The ruling draws on various decisions of Taxation Boards of Review relating to the former section 51A of the Income Tax Assessment Act 1936, which allowed deductions for employees being paid a living-away-from-home allowance.

Paragraph 14 of MT 2030 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...

Paragraph 14 of MT 2030 refers to a choice between two places of residence. Clearly the employee is currently residing in Town B. The place where he/she formerly resided is in Town A. Paragraph 14 would generally find that he/she is living away from their usual place of residence if, but for having to change residence in order to work for the employer in Town B, he/she would have continued to live in Town A. It would be relevant in reaching that view however, that there is an intention or expectation of the employee returning to live in Town A on cessation.

The employee was renting in Town A and as the rented property was relinquished, he/she has no physical home to return to. In addition he has no ties with Town A. His/her spouse and child reside with him/her in Town B. Their furniture and household goods have since been relocated to Town B.

Therefore although the employee might have remained in Town A had they not taken the position in Town B, there is no direct evidence showing that they would have remained there permanently. Nor is there any certainty that they will return to this location if they leave Town B.

Paragraph 30 of MT 2030 makes it clear that the FBTAA does not express a requirement for a person to qualify as having a 'usual place of residence' that it be established that he actually have such a residence. Therefore the fact that the employee relinquished their residence in Town A does not necessarily preclude them from claiming that their usual place of residence is in Town A. However, paragraph 30 maintains that the tests in paragraphs 11-25 of MT 2030 still need to be satisfied and that the allowance needs to be paid to compensate for additional costs.

What needs to be determined in this case is which one of these residences is the employee's usual place of residence. On one hand we have the current Town B residence where he/she resides with their family to perform a role he/she has been performing for several years for three different employers. On the other hand we have a place of residence described as 'Town A', the actual residence having been relinquished and all property under the employee's control having been relocated to Town B.

It has been accepted in MT 2030 that the various decisions of former section 51A of the Income Tax Assessment Act 1936 (ITAA 1936) may be used in establishing principles for determining whether or not an employee may be regarded as living away from his or her usual place of residence for fringe benefits tax purposes.

In Case 88 I TBRD 353, the taxpayer had been compulsorily transferred in his work from one capital city to another, a transfer he was bound to accept under the terms of his employment. The taxpayer brought his family to live with him in the new city. The board of review found, on the facts, that he had changed his place of abode and was not living-away-from-home.

R.A. Cotes (Member) provided the following:

In the present case it was certainly necessary for the taxpayer to live in Melbourne in order to perform his duties as an employee after his transfer to that city. It is necessary, however, to determine what was then his "usual place of abode". In the case of R. v. Hammond ((1852) 17 Q.B. 772), Lord Campbell C.J. said (at p. 781): "A man's residence, where he lives with his family and sleeps at night, is always his place of abode in the full sense of that expression." The evidence in this case establishes that the taxpayer, after securing the use of a residence in Melbourne, vacated the house previously occupied by him in Brisbane and brought his wife and daughter to live with him in Melbourne. On this view, at all times during which the allowance was paid to him, his place of abode or residence was in Melbourne. It is true that in some cases it has been held that for certain purposes a man's place of business may be his place of abode, but I do not think that this interpretation would be applicable for use in considering the meaning of the phrase for present purposes; but even if it were so interpreted, the result would be unchanged, because at all material times the taxpayer's place of employment and the source from which he drew his salary and allowance was located in Melbourne. I find therefore that in no sense was the taxpayer living "away from his usual place of abode" and the allowance paid to him was clearly not a "living-away-from-home allowance" as defined for purposes of s.51A ….

If we applied the above decision to the circumstances of this case we would find similarly that the employee vacated their former residence (in Town A) and travelled to Town B where he/she and his/her family have gradually taken up residence in Town B close to his/her place of employment. On this basis Town B would be considered to be his/her usual place of residence and as such he/she would not be considered to be living away from his usual place of residence.

The factors which support such a finding include:

· The employee had only resided in Town A for a number years

· After three months of performing his/her role at Organisation A in Town B, upon receiving a contract extension the employee asked his/her spouse to relinquish their job in Town A and move to Town B. Furniture and household goods were stored in Town A for another two years.

· Remaining ties with Town A were severed when the employee arranged to bring the furniture and goods to Town B.

· The employee does not hold any assets in Town A.

In Case 106 12 CTBR(NS) 616, the taxpayer was an international pilot posted by his company to London by his employer for a period of two years. He was paid a 'station allowance' for which he claimed a deduction as a LAFHA under section 51A of the ITAA 1936. The Taxation Board of Review allowed his objection, in part, as the Board found the allowance was in the nature of compensation to the pilot for the additional expenses incurred by him through having to live away from his usual place of abode.

The Board said (at p 618):

7….Here the taxpayer's overseas posting was for a temporary, even though substantial, period of fixed maximum duration. He left his home (his house) and his home town where he normally would have continued living if he had not to go abroad to perform his duties. As the evidence shows, he expected to return there to live. To that end he made provision for his return by letting his house for the maximum period of his probable absence on the expiration of which the tenant was to vacate. On these facts we think it is true to say that, even though he took his family with him, the taxpayer was required in terms of the definition 'to live away from his usual place of abode in order to perform his duties as an employee'. 'Abode', according to Wharton's Law Lexicon. 14^th ed., p6, seems larger and looser in its import than the word 'residence' which in strictness means the place where a man lives, i.e., where he sleeps or is at home. Hence, in our opinion, one cannot read 'place of abode' as meaning no more than a residence. It is not the use and existence of bricks and mortar that determines the application of the definition; so to construe it involves forcing the words 'usual place of abode' into an unduly restrictive mould.

The above case illustrates the following principles:

· Each case must be decided on its own particular facts.

· The expression 'place of abode' has a wider meaning than 'place of residence'. The term 'abode' is not confined to the existence of an actual residence. and

· Supports the view that an appointment for a fixed or limited duration is a persuasive factor in considering whether an employee is living away from home.

MT 2030 provides the following on the subject of appointments of a limited duration:

20. Employees who move to a new locality to take up a position of limited duration with an intention to return to the old locality at the end of the appointment would generally be treated as living away from their usual place of residence.

You have stated that the employee intends to return to live in Town A when the current contract is finished or earlier if a role at equivalent remuneration is available in Town A. However, the employee's contracts have been extended numerous times over a several year period and he/has has just accepted another extension for a period of several months. This calls into question whether he/she can be expected in the normal course to return to Town A upon cessation of the current contract. While his/her intention upon taking up the position many years ago may have been to return to Town A at the end of the three months, he/she did not return at that time and has not returned at the expiry of any of the temporary contracts.

Even if the facts pointed to a legitimate expectation to return to Town A upon cessation of his/her current employment in Town B, the duration of several years calls into question whether Town A would still be considered his usual place of residence, especially with regard to his/her lack of ties to Town A.

Another fact negating the expectation of a return to Town A on cessation of the current contract is your statement that 'Employer 1, Employer 2 and the employer have competed to be 'agent 2', based on the level of administration fees levied and service provided.' The fact that the employee called for offers of employment from the employer does not evidence an intention to return to Town A at the earliest opportunity.

In conclusion, the employee is not considered to be living away from his/her usual place of residence because:

· Continual contract extensions cast doubt as to whether he/she can be reasonably expected to return to his former residence at the cessation of his/her current contract

· If the employee does find a role of equivalent remuneration in Town A, his/her choice of residence will be determined with regard to the location of their workplace, school and childcare, without reference to a particular locality, and

· The facts of this case indicate that the employee's usual place of residence is now in Town B.

Is the allowance in the nature of compensation to the employee for additional expenses and other disadvantages?

Paragraph 30(1)(b) of the FBTAA provides that an allowance will only qualify as a LAFHA benefit where 'it would be concluded' that it bears a particular character.

In Atwood Oceanics Australia Pty Ltd v. Federal Commissioner of Taxation 89 ATC 4808, at 4816, the following point was made by Lee J. when discussing the operation of section 30:

…It was the requirement of the paragraph that the circumstances of payment of the allowance be such that a reasonable person would conclude, applying an objective view thereto, that the allowance bore the character described in the paragraph. The required character of the allowance was that it be a payment to an employee in the nature of compensation for additional expenses incurred by the employee during a period of employment, or for additional expenses so incurred and other additional disadvantages to which the employee was subject during that period by reason of the fact that the employee was required to live away from his usual place of residence…

Where an allowance is paid in addition to an employee's existing salary entitlement and relevant additional expenses have been identified, then applying an objective view, a reasonable person might conclude that the reason for the allowance is to compensate the employee for those additional expenses incurred. However, if the allowance is being carved out of an employee's existing entitlement then it is less likely that the required conclusion would be drawn.

Case C55 71 ATC 242 considered a purported living-away-from-home allowance and a related deduction under former section 51A of the Income Tax Assessment Act 1936. The board said at 71 ATC 247:

17. 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.

The board considered that an amount that satisfied the necessary tests may be treated as a living-away-from-home allowance (former section 51A) even if it came about through a sacrifice of salary, but only if the original salary included an element of compensation for having to live away from their usual place of residence.

In your case, the employee's total entitlement is equal to the amount received by the employer (net of GST) for work performed by him/her. He/she is remunerated on an hourly basis, less an administration fee. This amount of remuneration is determined by the amount that the recruitment firm contracts to pay to the employer for the provision of someone to perform this role. It is directly related to the number of hours worked by the service provider and was not negotiated by employer and employee to include an element of compensation for having to live away from his/her usual place of residence.

The employer is competing to be 'agent 2' based on the level of administration fees levied and service provided to the employee. The employer is not in a position to negotiate remuneration with the employee with a component of bona fide compensation for living away from home. The nature of the commercial relationship between the employer and the employee involves a pre-set hourly rate of remuneration which is linked exclusively to the number of hours worked.

While the arrangement allows for negotiation of how the salary package will be paid to the employee, an attempt to label part of the package as a LAFHA does not promote a conclusion that the payment is in the nature of compensation for expenses by reason that the employee is required to live away from home.

Conclusion

The payment is not a LAFHA pursuant to section 30 of the FBTAA, as:

· The employee is not required to live away from his/her usual place of residence so as to be able to perform his/her employment duties, and furthermore

· it would not be concluded that any part of the payment 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 his/her employment.