Edited version of private ruling

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Ruling

Subject: Living Away from Home Allowance

Question 1: Can a non resident employee in receipt of a LAFHA continue to receive the allowance after purchasing a house to reside in, in Australia?

Detailed reasoning

Subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides as to when an allowance will be taken to be a living-away-from-home benefit allowance (LAFHA) for employees.  Subsection 30(1) of the FBTAA states:

Where:

· at a particular time, in respect of the employment of an employee of an employer, the employer pays an allowance to the employee; and

· it would be concluded that the whole or a part of the allowance is in the nature of compensation to the employee for:

· additional expenses (not being deductible expenses) incurred by the employee during a period; or

· 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.

An allowance will constitute a LAFHA benefit under subsection 30(1) of the FBTAA if the following conditions are met:

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

· the employee is required to live away from the employee's usual place of residence so as to be able to perform the employee's duties of 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.

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

The FBTAA does not provide a definition for the term 'allowance'. However, paragraph 2 of Taxation Ruling TR 92/15 Income tax and fringe benefits tax: The difference between an allowance and a reimbursement provides the following guidance on the term's meaning:

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.

The employee will be paid a set amount of money per week in respect of accommodation and food regardless of whether they actually incur the expected expenses. Given this situation, it is determined that the payment being made to the employee will be an allowance.

One of the reasons the proposed allowance is being paid is to enable the recipient to live in accommodation in, or near, the area in which the recipient carries out their employment duties and, therefore, the proposed allowance is being paid in respect of the employment of the employee. This criterion is satisfied.

The employee is required to live away from the employee's usual place of residence so as to be able to perform the employee's duties of employment.

To satisfy this criterion, it will need to be shown that the employee is living away from the employee's usual place of residence that is, living away from home. It also needs to be shown that it is necessary to live away from home for the employee to perform the employee's employment duties.

Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: Living-away-from-home allowance (MT 2030) benefits provide guidance as to when a person may be considered to be living away from home. Paragraphs 11, 12, 14 and 22 respectively of MT 2030 state:

11. Place of residence" is defined in section 136.  It means, in relation to a person, 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.

12. A place of residence of a person is thus the place where he or she resides or has some form of sleeping accommodation.  The customary meaning of the word "reside" is to dwell permanently or for a considerable time, or have one's abode for a time.  In turn "residence" means the place, especially the house, in which one resides; a dwelling place; or a dwelling.

14. 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.

22. 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.

These paragraphs of MT 2030 give rise to the following general principles:

An employee's usual place of abode is near where the employee is permanently employed. If the employee's place of permanent employment changes and the employee moves as a consequence, the employee would not be considered to be living away from home.

The employee needs to demonstrate that the employee is only working temporarily at the new location and will return, or there is a legitimate expectation of a return, to live at the former place of abode on cessation of work at the new location.

Whether an employee is living away from the employee's usual place of residence depends on all of the facts of the particular case and is not solely dependant on whether the person is merely living away from the employee's 'point of origin'.

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.

The following Taxation Board of Review case also provides guidance on the meaning of the phrase 'usual place of residence' in the following extracts:

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 'living-away-from-home' allowance under section 51A of the ITAA 1936. The 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):

.. …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 gives rise to the following principles:

· each case must be decided on its own particular facts, and

· 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.

For the following reasons, it is considered that, the employee's usual place of residence is overseas during the period of his employment in Australia:

· Prior to relocating to Australia, the employee was living overseas. 

· The employee is in Australia on a temporary Class 457 work visa.

· The employee is working under a 2 year contract with the taxpayer.

· The employee has bank accounts, superannuation, children's education investments, life and income protection insurance all active overseas.

· The employee has purchased a house in Australia where he resides with his family.

· The employee has stated his intention to return overseas on expiration of his temporary Class 457 Australian work visa.

Therefore, it is considered that the employees' usual place of residence is in New Zealand, however he is required to live in Australia (away from his usual place of residence) to perform his current employment duties. This criterion is satisfied.

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.

This criterion requires that the allowance be paid:

· to compensate the employee for either non-deductible additional expenses or for non-deductible additional expenses and other disadvantages during the relevant period; and

· by reason the employee is required to live away from his or her usual place of residence to perform the duties of that employment.

The proposed allowance will be paid to the employee for the employee's for non-deductible additional expenses and other disadvantages incurred due to the employee living away from his usual place of residence overseas to perform his duties of employment with the taxpayer in Australia. 

Declaration

As pointed out in paragraph 9 of MT 2030, the taxable value of a LAFHA may not be reduced on account of an exempt accommodation component or an exempt food component unless the employee gives the employer a declaration, in a form approved by the Commissioner of Taxation, that sets out particulars of the employee's usual place of residence and actual place of residence for the period during which the LAFHA was paid in the year of tax. The declaration is generally required by the date of lodgement of the employer's relevant fringe benefits tax return.

The employee, in this case, will need to provide the taxpayer with the appropriate living-away-from-home declaration as required.

It is considered that it can be concluded from all the surrounding circumstances that the allowance is in the nature of compensation to the employee for additional expenses incurred (not being deductible expenses) because the employee is required to live away from his normal place of residence in order to perform his duties with the taxpayer.

There is:

· A change in work location away from the permanent home location overseas.

· A primary residence overseas plus other connections

· The intention to return overseas at the end of the contract

· The probability that the employee would be overseas had the role with the taxpayer not been offered

· A two year contract with the taxpayer.

Conclusion

The purchase of a house was a financial decision by the employer that was more cost effective to him and his family, than continuing to rent suitable accommodation.

As an overseas resident the employee is subject to the foreign investment rules with regard to the purchase of real property in Australia by a non resident.

The purchase of a house in Australia by the employee does not detract from the facts relating to the provision of the "Living Away from Home Allowance", nor does it diminish in any way the reasons the allowance is being paid.

The employee has made it clear that his intention is that he and his family are going to return to his normal place of residence, at the end of his contract period.

The allowance paid by the taxpayer, in respect of the employee's additional accommodation and food costs, is a LAFHA fringe benefit pursuant to subsection 30(1) of the FBTAA.

It is considered that as all the conditions under section 31 of the FBTAA have been met, the taxable value for the LAFHA benefit paid to each employee will be entitled to be reduced by the exempt food and accommodation components pursuant to section 31 of the FBTAA.

Further issue for you to consider as an employer

Reimbursement or payment of Mortgage expense

Whilst the facts you have provided appear that you do not intend on reimbursing or making payment of mortgage expenses, we have provided the following advice as further information.

ATO ID 2001/803 provides that the payment or reimbursement by the employer of mortgage expenses in respect of a house purchased by an employee and used as a dwelling by the employee and members of the employee's family while they are temporarily residing in Australia is not an exempt accommodation expense payment benefit pursuant to paragraph 21(b) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The facts in ATO ID 2001/803 are set out below:

· The employee and members of the employee's family arrived in Australia on a prearranged three to four year employment assignment.

· The intention of the employer and the employee is that the employee will only remain in Australia for the anticipated duration of the assignment, which is not expected to exceed four years.

· But for the assignment in Australia, the employee would not have established a residence in Australia and would have continued to reside overseas.

· The employee will continue to maintain an overseas residence which will be let during the duration of the employee's assignment in Australia.

· The employee would prefer to purchase a house in which to live while temporarily residing in Australia.

· The employee would have leased a property instead of purchasing a house if a suitable rental property had been available.

· The employer proposes to compensate the employee by way of reimbursement for mortgage expenditure incurred by the employee.

A further issue to be considered by your employee

CGT Implications when residence is not the employees primary residence

A taxpayer may have a capital gains tax liability if a CGT event has happened. CGT event A1 is the most common of the CGT events. It occurs when a taxpayer disposes of a CGT asset. In order to determine whether a capital gain or loss arises, you are required to compare between the capital proceeds (amount received from the disposal) and the cost base (total costs associated with a CGT event).

A capital gain is made if the capital proceeds from the disposal are more than the cost base. A capital loss is made if the capital proceeds are less than the asset's reduced cost base.

If there is a net capital gain, the amount of that net gain is included in your assessable income. If you incur a capital loss on disposal of the CGT asset, such a capital loss can be used only to offset against capital gains and cannot be offset against income. However, the capital loss may be carried forward indefinitely.

One of our publications, Guide to Capital Gains Tax, can help you to work out your capital gain or loss and the amount of tax payable on that capital gains.

This advice is general in nature and is not binding on the Commissioner. However, you are assured that:

· If you rely on this advice and, in doing so you make an honest mistake, we will not charge you a penalty, although we may ask you to pay interest on any underpaid tax.

· If the advice is misleading and you make a mistake as a result, we will not charge you a penalty or interest on any underpaid tax.