Edited version of private ruling

Authorisation Number: 1011895148221

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Ruling

Subject: Fringe Benefits Tax

Question 1

If part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply, is the provision of accommodation in a caravan a "fringe benefit" as defined in subsection 136(1) Fringe Benefits Tax Assessment Act 1986 (FBTAA) where paragraph 47(5)(c) and subparagraph 47(5)(c)(ii) of the FBTAA are satisfied?

Answer

No

Question 2

If Part 2-42 of the ITAA 1997 does not apply, will the allowance paid to the employee be a living away from home allowance benefit as defined in subsection 30(1) of the FBTAA if it is paid for the period in which the employee resides in the caravan and the employee is not entitled to a personal income tax deduction in respect of any expenses he incurs in relation to being away from home during this period?

Answer

Yes

Question 3

If Part 2-42 of the ITAA 1997 does not apply, will the allowance paid to the employee be a living-away-from-home-allowance benefit as defined in subsection 30(1) of the FBTAA if it is paid for the period in which the employee resides in rental accommodation and the employee is not entitled to a personal income tax deduction in respect of any expenses he incurs in relation to being away from home during this period?

Answer

Yes

Question 4

If the entity (the employer) is a personal service entity but not a personal service business for the purpose of Part 2-42 of the ITAA 1997, is the provision of accommodation in a caravan a "fringe benefit" as defined in subsection 136(1) of the FBTAA where paragraph 47(5)(c) and subparagraph 47(5)(c)(ii) of the FBTAA 1986 are satisfied?

Answer

No

Question 5

If the employer is a personal service entity but not a personal service business for the purpose of Part 2-42 of the ITAA 1997, will the allowance paid to the employee be a living-away-from home allowance benefit pursuant to subsection 30(1) of the FBTA if it is paid for the period in which the employee is residing in the caravan and the employee is not entitled to a personal income tax deduction in respect of any expenses he incurs in relation to being away from home during this period?

Answer

Yes

Question 6

If the employer is a personal service entity but not a personal service business for the purpose of Part 2-42 of the ITAA 1997, will the allowance paid to the employee be a living-away-from-home allowance benefit pursuant to subsection 30(1) of the FBTA if it is paid for the period in which the employee is residing in rental accommodation and the employee is not entitled to a personal income tax deduction in respect of any expenses he incurs in relation to being away from home during this period?

Answer

Yes

Question 7

If the employer is a personal service entity but not a personal service business for the purpose of Part 2-42 of the ITAA 1997, will the provision of the caravan and the allowance be deductible under section 8-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period(s):

Year ended 30 June 2011 for question 7

Year ended 31 March 2011 for questions 1, 2, 3, 4, 5 & 6

The scheme commences on:

1 April 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The entity (the employer), is an incorporated company.

The employer has been formed primarily to provide technical expertise to various industries.

Currently the employer has one employee (the employee), who provides the bulk of the services.

The employee is the sole occupant of a property which he has owned since for a number of years.

In undertaking the employment duties the employee is required to work at various job locations, some of which are located at an interstate location.

The employee returns to the property at the end of each contract.

The duration of the contracts undertaken by the employer will vary depending upon the size and complexity of the project.

As an example of a project that may be undertaken, the employee has been working on an eight month contract. Since commencing this contract, the employee has returned home on three occasions to see his accountant and to check and maintain the property. Usually the employee will return home on a more regular basis to check and maintain the property, but due to work requirements this has not been possible with this contract.

Prior to forming the employer, the employee was working in another country on a fly in fly out basis.

To enable the employee to perform employment duties at the various locations, the employer purchased a caravan to provide a mobile office and workshop facilities.

For the initial six months of the current contract the caravan was also used to provide sleeping accommodation to the employee.

For the subsequent two months of the current contract, the employee is renting a house approximately some kilometers away from the worksite.

The employer is intending to pay the employee an allowance to compensate the employee for the additional costs incurred as a result of having to live away from the usual place of residence. The allowance will be made up of two components:

· an amount to cover the additional accommodation expenses. This amount will vary depending upon the contract location and whether the employee is using the caravan for accommodation; and

· an amount to cover the costs of additional food expenditure incurred as a result of living away from the usual place of residence. This will be the amount over and above the food costs that would be incurred by the employee if he had been living at his usual place of residence.

Where the employee uses the caravan for accommodation the employer will charge the employee rent for utilising the caravan.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 85

Income Tax Assessment Act 1997 Section 85-15

Income Tax Assessment Act 1997 Section 85-20

Income Tax Assessment Act 1997 Subsection 85-35(1)

Income Tax Assessment Act 1997 Subdivision 86-B

Fringe Benefits Tax Assessment Act 1986 Division 7

Fringe Benefits Tax Assessment Act 1986 subsection 30(1)

Fringe Benefits Tax Assessment Act 1986 subsection 47(5)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Part 2-42 ITAA 1997 is contained in Division 84 - Personal Services Income

Ignoring any possible implications of Part 2-42 ITAA 1997, the issue becomes is provision of accommodation in a caravan a "fringe benefit" as per subsection 136(1) of the Fringe benefits Tax Assessment Act 1986 (FBTAA).

As defined in subsection 136(1) of the FBTAA, a benefit will constitute a fringe benefit when the provision of the benefit is in relation to the employment of the employee.

Specifically, it is a benefit provided to the employee or to an associate of the employee by:

(a) the employer;

(b) an associate of the employer; or

(c) a person ("arranger") other than the employer or an associate of the employer under an arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger;

in respect of the employment of the employee The benefit in this case is the use of that part of the caravan that can be used for private purposes of the employee, namely the sleeping and living areas.

The caravan is owned by the employer and the employee is allowed the use of it as a consequence of his employment.

However, there are several exclusions from the definition of a Fringe Benefit and one of those is described in subparagraph 136(1)(g) of the FBTAA. This subparagraph states:

A benefit that is an exempt benefit in relation to the year of tax.

This necessitates a consideration of subsection 47(5) of the FBTAA

This subsection states:

Where:

(a) a residual benefit consisting of the subsistence, during a year of tax, of a lease or licence in respect of a unit of accommodation is provided to an employee of an employer in respect of his or her employment;


(b) the unit of accommodation is for the accommodation of eligible family members and is provided solely 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;


(c) the accommodation is not provided while the employee is undertaking travel in the course of performing the duties of that employment; and

(d) either of the following conditions is satisfied:


(i) subsection (7) applies in relation to the provision of transport for the employee in connection with travel in the period in the year of tax when the lease or licence subsisted, being travel

(ii) the employee gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, purporting to set out:


(A) the employee's usual place of residence; and


(B) the place at which the employee actually resided while living away from his or her usual place of residence;

the benefit is an exempt benefit in relation to the year of tax.

To examine subsection 47(5) with regard to the facts at hand:

(a) a residual benefit consisting of the subsistence, during a year of tax, of a lease or licence in respect of a unit of accommodation is provided to an employee of an employer in respect of his or her employment;

A residual fringe benefit arises when it is not covered by any of the other valuation rules. The only valuation rule which would be remotely relevant would be as to whether it is a Housing Benefit. A housing benefit arises where an employer grants an employee a "housing right" - a right to occupy or use a unit of accommodation as a usual place of residence. However as can be seen from the response to question 2 the caravan is not the usual place of residence of the employee.

(b) the unit of accommodation is for the accommodation of eligible family members and is provided solely 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;

"Eligible family member" is defined in subsection 136(1) FBTAA 1936 and includes "employee"

(c) the accommodation is not provided while the employee is undertaking travel in the course of performing the duties of that employment; and

As the question to be answered by the Commissioner includes the proviso where paragraph 47(5)(c) and subparagraph 47(5)(c)(ii) of the FBTAA 1986 are satisfied it is not necessary to consider this issue as it is considered to be satisfied.

d) either of the following conditions is satisfied:

(i) subsection (7) applies in relation to the provision of transport for the employee in connection with travel in the period in the year of tax when the lease or licence subsisted, being travel between the employee's usual place of residence and the employee's usual place of employment;

(ii) the employee gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, purporting to set out:

(A) the employee's usual place of residence; and

(B) the place at which the employee actually resided while living away from his or her usual place of residence;

It is not necessary to consider the first condition as the employee is not working on an oil rig. However regarding the remote area aspect, he may very well work in remote areas from time to time but is not rostered on and off on a regular basis.

As the question to be answered by the Commissioner includes the proviso where paragraph 47(5)(c) and subparagraph 47(5)(c)(ii) of the FBTAA 1986 are satisfied it is not necessary to consider this issue as it is considered to be satisfied.

As each of the requirements are met, the provision of accommodation in the caravan will not be a fringe benefit where paragraph 47(5)(c) and subparagraph 47(5)(c)(ii) of the FBTAA are satisfied.

Question 2

It is intended that the employer will pay the employee an allowance to cover the additional accommodation and food costs that are incurred by the employee as a result of having to live away from the usual place of residence.

The amount of the allowance will depend upon the location at which the employee is performing his employment duties and the type of accommodation in which the employee will be staying.

You have indicated that when the employee uses the caravan for accommodation, the accommodation component will be the amount of rent that the employee will be required to pay for the use of the caravan. As discussed above, the use of the caravan will be an exempt benefit. Given it is an exempt benefit, it is not clear as to why rent is being charged.

Subsection 30(1) of the FBTAA sets out the conditions that must be satisfied for a payment to be a living-away-from-home allowance. 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.

Therefore, for this subsection to apply:

1. the payment must be an allowance paid to an employee;

2. the allowance must be in the nature of compensation for additional expenses that are not deductible expenses or additional non deductible expenses and other disadvantages; and

3. the additional expenses must arise by reason of the employee being required to live away from the usual place of residence to perform the duties of employment.

In considering these requirements:

Is the payment an allowance?

Taxation Ruling TR 92/15 discusses when a payment will be an allowance. In applying this ruling it is accepted that the payment will be an allowance as it is a set predetermined amount.

Is the allowance in the nature of compensation for additional expenses that are not deductible expenses or additional non deductible expenses and other disadvantages?

The allowance is being paid for the accommodation and food costs that would not be incurred if the employee was residing at his usual place of residence. It is accepted that these expenses are additional expenditure.

Since the question is framed in such a manner that it states the employee is not entitled to a personal income tax deduction in respect of any expenses he incurs in relation to being away from home during this period, it is also accepted the employee would not be able to claim an income tax deduction for the expenditure.

Do the additional expenses arise by reason of the employee being required to live away from the usual place of residence to perform the duties of employment?.

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 the usual place of residence.

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. . .

Therefore, in applying paragraph 14 of MT 2030 we need to consider the following factors:

· The employee was residing at their usual place of residence;

· Their employer required that employee to relocate in order to work temporarily for their employer at another locality; and

· The reason for the employee residing away from his or her usual place of residence is because their employer required them to work and reside temporarily at the second locality.

In considering these factors:

· the employee has owned and lived at a residence for a number of years;

· If the employee was not required to work at the alternative work sites the employee would be residing at the residence;

· the employee returns to the residence at the conclusion of each contract; and

· where the contract is for an extended period of time, the employee regularly returns to the property to check and maintain the property.

These factors indicate the residence is the employee's usual place of residence.

Therefore, as the employee was residing at this address before being required by the employer to temporarily relocate to an alternative residence so as to undertake the duties of employment it is accepted that the additional expenses for which the allowance is being paid arise as a result of the employee being required to live away from the usual place of residence to undertake his employment duties.

As each of the requirements are satisfied the allowance will be a living-away-from-home allowance.

Question 3

As established in question 2, the employee is required to live away from home as part of his employment duties.

For the current customer contract, which has run some months, the employee who was engaged to perform the contract used the caravan for the above purposes, as well as sleeping accommodation, for a number of months.

For a number of subsequent months, the employee is renting a house approximately some kilometers from the worksite where the caravan is based, and the caravan is used solely for the purposes of providing work related facilities.

Since the question is framed in such a manner that it states the employee is not entitled to a personal income tax deduction in respect of any expenses he incurs in relation to being away from home during this period, it is not necessary to consider whether the payment is in the nature of an allowance or reimbursement for Income Tax purposes. The issue is therefore whether it is living away from home allowance benefit as defined in subsection 30(1) of the FBTAA

It is accepted the allowance in respect of this rental accommodation is a living away from home allowance as it is being paid for basically the same purposes as the allowance in respect of the period he resides in the caravan was being paid for.

Question 4

As established in Question 1 it is not a fringe benefit and the fact the employer is a personal service entity but not a personal service business for the purpose of Part 2-42 of the ITAA 1997 does not change the nature of the benefit.

Question 5

As established in question 2, the employee is required to live away from home as part of his employment duties.

The employee is living away from home and staying in a caravan owned by the employer. Regardless of where the employee stays the allowance will still be a living away from home allowance and the fact the employer is a personal service entity but not a personal service business for the purpose of Part 2-42 of the ITAA 1997 does not change the nature of the benefit.

Question 6

As established in question 2, the employee is required to live away from home as part of his employment duties.

For the current customer contract, which has run some months, the employee who was engaged to perform the contract used the caravan for the above purposes, as well as sleeping accommodation, for some months.

For the subsequent months, the employee is renting a house approximately some kilometres away from the worksite where the caravan is based, and the caravan is used solely for the purposes of providing work related facilities.

It is accepted the allowance in respect of this rental accommodation is a living away from home allowance as it is being paid for basically the same purposes as the allowance in respect of the caravan was being paid for and the fact the employer is a personal service entity but not a personal service business for the purpose of Part 2-42 of the ITAA 1997 does not change the nature of the benefit.

Question 7

It is considered in the circumstances of the employer, payment of the allowance and the costs associated with the provision of the caravan would amount to losses or outgoings incurred in the course of gaining or producing assessable income and, if those circumstances were that of the individual, would be deductible for that individual under section 8-1 of the ITAA 1997.

Therefore the LAFHA paid to an employee of the employer, who is a personal services entity, is deductible to the employer under section 8-1 of the ITAA 1997 as it constitutes the provision of a fringe benefit to an employee. The costs the employer incurs in relation to the caravan would likewise be deductible.

This view was formed after consideration of the following issues:

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature or relate to the earning of exempt income.

For example an employee IT technician, who travels as a fundamental part of their work day, a deduction is generally allowable under section 8-1 of the ITAA 1997 for the cost of the travel.

However, in circumstances where the employee IT technician:

· is employed in a different town to where he or she normally resides

· continues to maintain the family home, and

· incurs accommodation, travel and other related expenses so that they can be located near to the place of work each working day;

the expenses incurred are not deductible under section 8-1 of the ITAA 1997. These expenses are private in nature, or are incurred before or after the activity of earning assessable income (and not part of the income earning activity itself).

This was the view taken by the High Court in Lunney v. FC of T (1958) 100 CLR 478; 77 ATC 4076; 7 ATR 166. Williams, Kitto and Taylor JJ stated that (at 499):

It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income.

Deductions relating to personal services income

Division 85 of the ITAA 1997 deals with deductions relating to personal services income. As stated in section 85-5 of the ITAA 1997, the object of Division 85 is to ensure that individuals who derive personal services income, and are not conducting a personal services business, cannot deduct expenses that are similarly unavailable to employees.

Section 85-15 of the ITAA 1997 provides that you cannot deduct an amount for rent, mortgage interest, rates and land tax in relation to your residence, or the residence of your associate, to the extent the amount relates to gaining or producing your personal services income.

Section 85-20 of the ITAA 1997 provides that you cannot deduct an amount paid to, or incur arising from an obligation to, your associate, to the extent the amount relates to gaining or producing your personal services income. However, subsection 85-25(2) provides that the amount may be deductible where you engage that person in the performance of work that forms the principal work for which you gain or produce your personal services income.

Subsection 85-35(1) of the ITAA 1997 provides that Division 85 does not apply to an amount, payment or contribution to the extent that the amount, payment or contribution relates to personal services income that you receive as an employee.

Subdivision 86-B of the ITAA 1997 deals with deductions for personal services entities. The general rule for deductions is set out in section 86-60 of the ITAA 1997, which states that:

A personal services entity cannot deduct under this Act an amount to the extent that it relates to gaining or producing an individual's personal services income, unless:

(a) the individual could have deducted the amount under this Act if the circumstances giving rise to the entity's entitlement to deduct the amount had applied instead to the individual; or

(b) the entity receives the individual's personal service income in the course of conducting a personal services business.

Taxation Ruling TR 2003/10 sets out the Commissioner's view on deductions that relate to personal services income. TR 2003/10 does not apply to an individual or to a personal service entity, including where an entity that is taken to be conducting a personal services business under Division 87 of the ITAA 1997; or, the individual is an employee excluded under section 85-35 from the operation of Division 85.

However it is useful to note that in paragraphs 97-102 of TR 2003/10 the Commissioner explains that to apply section 86-60 of the ITAA 1997 you place the service provider (individual) in the shoes of the personal services entity and ask whether the service provider would have been entitled to a deduction had the service provider incurred the outgoing for an identical purpose having regard to all the surrounding facts and circumstances.

In other words, you suppose the service provider incurred an expense in providing an allowance to an employee and ask whether the service provider would have been entitled to a deduction under section 8-1 of the ITAA 1997, having regard to any limitations placed on deductions to individuals, which may include sections 85-15, 85-20 and 85-25.

In addition, paragraph 102 of TR 2003/10 explains that section 86-60 of the ITAA 1997 will not deny a deduction to a personal services entity in respect of a transaction between the entity and the test individual merely because it is with the test individual.

Application to your circumstances - Living away from home allowance

Whilst the amounts paid by the employee are not deductible to either the employee or to personal services entity as they are considered to be private in nature and are not incurred in the course of gaining or producing assessable income, the situation is different when an employer pays a LAFHA which is considered a fringe benefit provided to the employee.

The employer has paid an allowance to that employee to compensate for those additional expenses incurred due to living away from home, which constitutes the provision of a LAFHA benefit under Division 7 of the FBTAA.

However the taxable value of the LAFHA benefit may be reduced to the extent of exempt accommodation or food components under section 31 of the FBTAA.

To determine whether the LAFHA is deductible to the PSE, it is necessary to examine whether a LAFHA allowance would be deductible if paid by the employee in gaining or producing their personal services income. However, where payment of an allowance relates to an associate or an obligation arising in relation to that associate, subject to certain conditions, a deduction may be denied for an individual under section 85-20 of the ITAA 1997.

In analysing the circumstances of the employer, as if those circumstances were that of the individual (the employee), the payment of the allowance is made to a third party who is not an associate of the individual but is an employee of the individual. That payment is made in the course of gaining or producing assessable income of the individual. As the third party is not an associate, section 85-20 of the ITAA 1997 does not deny the individual a deduction for the amount of that payment.

It is considered that in the circumstances of the employer, payment of that allowance would amount to a loss or outgoing incurred in the course of gaining or producing assessable income and, if those circumstances were that of the individual, would be deductible for that individual under section 8-1 of the ITAA 1997.

Therefore the LAFHA paid to an employee of the employer, who is a personal services entity, is deductible to the employer under section 8-1 of the ITAA 1997 as it constitutes the provision of a fringe benefit to an employee. Division 7 of the FBTAA will apply in respect of that allowance.

Application to your circumstances - Provision of a caravan

The same reasoning applies to the provision of the caravan by the employer in this instance as it constitutes the provision of a benefit (but not a fringe benefit) to an employee and the employer, who is a personal services entity, is entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of providing that benefit.