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Ruling

Subject: Living-away-from-home allowance

Question 1

Will the living-away-from-home allowance (LAFHA) paid to you from 1 July 2009 be included in your assessable income?

Answer

No.

This ruling applies for the following period<s>:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts

You are an Australian resident taxpayer employed by an overseas company in an overseas location.

You are employed on a rotation cycle of 28 days on, 28 days off. You return to your usual place of residence in Australia during your off period. Leave and vacation days are included in your off period, and are not paid for. Travel time to and from your usual place of residence to your overseas employment location is included in your off period and is not paid for.

Your usual place of residence is in Australia.

Your Services Agreement confirms that you are paid a LAFHA of USD x per annum whilst living away from your usual place of residence in order to perform the duties of your employment. The reason provided in your Services Agreement for paying the LAFHA is that it is 'paid to compensate you for the additional disadvantages of being required to live away from your usual place of residence to perform your employment with xx.'

The LAFHA is paid to you to compensate for additional expenses and disadvantages suffered as a result of living away from your usual place of residence.

The additional expenses include frequently purchasing food, personal hygiene items and other goods at a general store. You are provided with standard meals during your working days by your employer; however these meals have limited choices.

The disadvantages suffered include the following:

§ being physically isolated from family

§ being subject to the laws, regulations and morales of foreign jurisdictions

§ being required to work 12 hour shifts, 7 days a week

§ being accommodated in spartan dormitory accommodation

§ being subject to communal showers and toilet facilities which are dirty, poorly maintained and often without hot water

§ being provided with limited food choices

§ temperature swings and weather conditions you are exposed to include 38 to 45 degrees Celsius during the dry season when it is very dusty and up to 35 degrees during the wet season when conditions are very muddy

§ not being entitled to annual leave or long-service leave

§ not having any superannuation support by your employer

§ being subject to regular drug and alcohol testing

§ items for enjoyment are contraband including alcohol and loud music

According to your Services Agreement, the term of your employment overseas is two years.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 30(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1936 Section 23L(1)

Income Tax Assessment Act 1997 Section 6-15(3)

Income Tax Assessment Act 1997 Section 6-23

Income Tax Assessment Act 1997 Section 11-10

Taxation Administration Act 1953 Subsection 12-1(2)

Taxation Administration Act 1953 Section 12-35

Reasons for decision

Summary

An allowance constitutes a LAFHA benefit under subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where:

(a) 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 non deductible expenses incurred by the employee during a period; or

§ additional non deductible expenses and other additional disadvantages to which the employee is subject during a period; and

(b) the additional expenses and other disadvantages arise because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment.

As both of these conditions are met the allowance paid to your employee will be a LAFHA.

A LAFHA is a fringe benefit which is not assessable for income tax purposes pursuant to subsection 23L(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in combination with section 6-23 and subsection 6-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997). This compares with your submission that the LAFHA is exempt income pursuant to subsection 23L(1A) of the ITAA 1936 in combination with sections 11-10, 6-20 and subsection 6-15(2) of the ITAA 1997.

Detailed reasoning

Will the LAFHA paid to you from 1 July 2009 be included in your assessable income?

Is the payment a LAFHA?

Section 30 of the FBTAA sets out the circumstances in which a payment to an employee will be a LAFHA benefit.

Subsection 30(1) states:

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;

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.

In summarising these requirements an allowance will be a LAFHA if:

(a) 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 non deductible expenses incurred by the employee during a period; or

§ additional non deductible expenses and other additional disadvantages to which the employee is subject during a period; and

(b) the additional expenses and other disadvantages arise because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment.

(a) Is the payment an allowance or a reimbursement

Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement (TR 92/15) gives guidance concerning distinguishing between an allowance and a reimbursement as follows:

2. 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.

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed.

A payment of USD x per annum was paid to you in compensation for purchasing food, personal hygiene items and other goods not provided by your employer and additional disadvantages in living away from your usual place of residence. This is considered to be a predetermined amount to cover the estimated expense of personal purchases. It is accepted that the payment is an allowance.

(b) Is the allowance paid for additional non deductible expenses and other disadvantages?

The allowance will be paid to compensate you for additional personal purchases. Your Services Agreement confirms that the allowance was paid to compensate for additional disadvantages due to being required to live away from your usual place of residence. The disadvantages include:

§ being physically isolated from family

§ being subject to the laws, regulations and morales of foreign jurisdictions

§ being required to work 12 hour shifts, 7 days a week

§ being accommodated in spartan dormitory accommodation

§ being subject to communal showers and toilet facilities which are dirty, poorly maintained and often without hot water

§ being provided with limited food choices

§ temperature swings and weather conditions you are exposed to include 38 to 45 degrees Celsius during the dry season when it is very dusty and up to 35 degrees during the wet season when conditions are very muddy

§ not being entitled to annual leave or long-service leave

§ not having any superannuation support by your employer

§ being subject to regular drug and alcohol testing

§ items for enjoyment are contraband including alcohol and loud music

As you are not able to claim an income tax deduction for these expenses this requirement is satisfied.

(c) Do the additional expenses arise because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment?

In determining whether the additional expenses arise as a result of the employee being required to live away from his usual place of residence it is necessary to identify the usual place of residence.

The FBTAA does not define 'usual place of residence'. However, in subsection 136(1) it does define a 'place of residence' 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.

In the absence of a legislative reference it is relevant to refer to the ordinary meaning of 'usual'. The Macquarie Dictionary defines 'usual' to mean:

1. habitual or customary: his usual skill.

2. such as is commonly met with or observed in experience; ordinary: the usual January weather.
3. in common use; common: say the usual things.

noun

4. that which is usual or habitual.

phrase

5. as usual, as is (or was) usual; in the customary or ordinary manner: he will come as usual.

Guidelines for determining an employee's usual place of residence are provided by Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits.

Paragraphs 15 to 18 refer to various decision of Taxation Boards of Review relating to the former 51A of the ITAA 1936. In referring to these decisions paragraph 14 of MT 2030 states:

As the decisions illustrate, 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.

Further discussion occurs at paragraphs 19 to 25. Paragraph 20 provides the following general rule:

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. For example, a construction worker having to travel to a construction site to live and work would be in this category unless he had abandoned the former place of residence upon moving to the locality of the site. A case of the latter situation would be where the employee decided to permanently leave the former home, e.g., if a resident of Sydney, on obtaining a job for two years on a construction site in a remote part of Western Australia, decided to "sell up" in Sydney and move permanently to Western Australia to live.

As an example of the application of this general rule paragraph 22 states:

Examples of employees on appointments of finite duration who will generally be living away from their usual place of residence are foreign nationals employed in Australia on a temporary basis and Australian residents (e.g., export consultants, diplomats, immigration officials, etc.) stationed in a foreign country for a time. Provided the appointment is for a limited period and the employee can be expected in the normal course to return to the same city or district of the home country to live, the employee may be treated as living away from his or her usual place of residence.

However, this is subject to paragraph 21 which states:

Some employees may be unable to establish that they are living away from their usual place of residence because the transitory nature of their lifestyle means that their usual place of residence is wherever they happen to sleep at night. Employees who follow the job, say, from construction site to construction site and have no permanent place of residence would fit into this particular category.

Further examples are provided in paragraph 25 which states:

… certain kinds of occupations have a career structure which brings with it the necessity to accept regular transfers from one location to another, e.g., police officers, school teachers, members of the defence force, bank employees, etc. Employees in these situations will generally not be treated as living away from home when they move on transfer to live in proximity to the current work place. That will be the case even if the employee owns a home elsewhere in which he or she eventually intends to reside.

These principles and the various cases that have considered usual place of abode or usual place of residence were discussed by the Administrative Appeals Tribunal in Compass Group (Vic) Pty Ltd (as trustee for White Roche & Associates Hybrid Trust) v. FC of T [2008] AATA 845; 2008 ATC 10-051. At paragraphs 55 and 56 Deputy President S A Forgie said:

55. There are several principles that can be gleaned from these cases. The first is that the fact that s 30 and, before it, s 51A, are concerned with what is described as a living-away-from-home allowance. That allowance is paid by an employer to an employee in respect of the employee's employment. It is a payment in the nature of compensation. The compensation is to meet additional expenses the employee incurs during a particular period and for other additional disadvantages he or she faces in that period but only if the expenses are incurred because he or she is required to live away from his or her usual place of residence in order to perform the duties of employment. As Mr Cotes alluded to in Case B47, it necessarily assumes that the taxpayer has two places that could be described as his or her place of residence before one or the other needs to be identified as the "usual place of residence".

56. Putting to one side the case of Case 50, all cases looked to the taxpayer's place of residence before he or she acquired another place of residence. Each looked to the taxpayer's continuing connection with the first place of residence including matters such as whether his or her family continued to live there, the frequency of the taxpayer's visits there and whether or not that was a place to which the taxpayer could return at will if he or she so wished. Also relevant was the nature of the employment and whether the move to another place was a temporary or permanent move.

Application to your circumstances

In considering the factors referred to by the AAT the following factors indicate that your usual place of residence is in Australia:

§ you will be employed overseas for a finite period, two years;

§ you will continue to maintain your residence in Australia;

§ your family lives in Australia;

§ you suffer hardships such as residing in spartan dormitory accommodation, communal showers often without hot water, dirty, poorly maintained toilet facilities, limited food choices, and banned alcohol which would not apply if living at your usual place of residence;

§ you will return to Australia every 28 days to reside in your residence for up to 28 days during the two year employment overseas;

§ you intend to return to Australia permanently after two years working overseas.

The facts of the case indicate that if you were not transferred from Australia to an overseas location, you would not have been required to change residence and incurred additional expenses. You have maintained family and asset ties with Australia, including the family home which you will return to in Australia when your assignment overseas is completed. You have no family ties overseas and own no assets overseas. When your temporary employment duties overseas are concluded in two years you will return to the same house in Australia you have maintained during your absence, and where you returned every 28 days.

It is accepted that your usual place of residence is in Australia, and you are living away from your usual place of residence while on temporary transfer overseas in accordance with paragraph 14 of MT 2030

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.

Given your usual place of residence is in Australia and your employment duties are being performed overseas it is accepted that you are required to live away from your usual place of residence in order to perform your duties of employment.

As all the required conditions have been met, the allowance paid to you is a living-away-from-home allowance benefit pursuant to subsection 30(1) of the FBTAA.

Is the LAFHA exempt from income tax?

(a) Is the LAFHA considered to be fringe benefit?

A fringe benefit is defined in subsection 136(1) of the FBTAA as follows:

"fringe benefit", in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit -

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax,

being a benefit provided to the employee or to an associate of the employee by -

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the "arranger") other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of "arrangement" between -

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

in respect of the employment of the employee but does not include -

(f) …

(g) a benefit that is an exempt benefit in relation to the year of tax; …

Employee is defined in subsection 136(1) of the FBTAA as:

"employee" means -

(a) a current employee;

(b) a future employee; or

(c) a former employee

Current employee is defined in subsection 136(1) of the FBTAA as:

"current employee" means a person who receives, or is entitles to receive, salary or wages

Salary or wages is defined in subsection 136(1) of the FBTAA as:

"salary or wages" means:

(a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; …

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) states that:

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

It is accepted that you are an employee of an overseas company which is required to withhold from amounts it pays to you as salary and wages.

Subsection 12-1(2) of the TAA states that:

In working out how much to withhold under section 12-35, 12-40, 12-45, 12-47, 12-115, 12-120, 12-315 or 12-317 from a payment, disregard so much of the payment as is a living-away-from-home allowance benefit as defined by section 136 of the Fringe Benefits Tax Assessment Act 1986.

Subsection 136(1) of the FBTAA defines a living-away-from-home allowance and a living-away-from-home allowance benefit as:

"living-away-from-home allowance fringe benefit" means a fringe benefit that is living-away-from-allowance benefit;

"living-away-from-home allowance benefit" means a benefit referred to in section 30.

It is confirmed above that the allowance is a living-away-from-home allowance and that allowance is a fringe benefit.

(b) Is a LAFHA fringe benefit exempt from income tax?

You have referred to subsection 23L(1A) of the ITAA 1936 which advises that exempt benefits are not income tax assessable. This section is also listed in exempt income in section 11-10 of the ITAA 1997. A LAFHA is a fringe benefit not an exempt benefit. The appropriate section is subsection 23L(1) of the ITAA 1936 as follows:

[Fringe benefits] Income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer.

Non-assessable non-exempt income is discussed in section 6-23 of the ITAA 1997 which states:

An amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of this Act or of another Commonwealth law states that it is not assessable income and is not exempt income.

The LAFHA is not assessable income and is not exempt income under section 6-23 of the ITAA 1997 as a provision of another Commonwealth law, subsection 23L(1) of the ITAA 1936, states that it is so.

Subsection 6-15(3) of the ITAA 1997 states:

If an amount is non-assessable non-exempt income, it is not assessable income.

Hence, the LAFHA is not assessable income for income tax purposes under subsection 23L(1) of the ITAA 1936 in combination with section 6-23 and subsection 6-15(3) of the ITAA 1997. This compares with your submission that the LAFHA is exempt income pursuant to subsection 23L(1A) of the ITAA 1936 in combination with sections 11-10, 6-20 and subsection 6-15(2) of the ITAA 1997.