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Ruling

Subject: Fringe benefits tax: living-away-from-home allowance

Question

Will a fringe benefits tax liability arise from the payment of the allowance described as a 'living away from home allowance' in the employment agreement?

Answer

A fringe benefits tax liability will arise if the allowance is paid to an employee who:

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

· is not entitled to claim an income tax deduction for the cost of the meals and accommodation to which the allowance relates.

Any payments that do not meet these requirements will not come within the FBTAA and will be subject to pay as you go withholding in accordance with the attached fact sheet 'Withholding from allowances'.

This ruling applies for the following period:

1 April 2011 - 31 March 2012

The scheme commences on:

1 April 2011

Relevant facts and circumstances

Under the terms of the employment agreement eligible employees are entitled to receive:

· a payment for food and accommodation; or

· a lesser payment plus accommodation; or

· meals and accommodation.

The payments are described as being a living away from home allowance.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 21

Fringe Benefits Tax Assessment Act 1986 subsection 30(1)

Fringe Benefits Tax Assessment Act 1986 section 31

Fringe Benefits Tax Assessment Act 1986 section 41

Fringe Benefits Tax Assessment Act 1986 subsection 47(5)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Will a fringe benefits tax liability arise from the payment of the allowance described as a 'living away from home allowance' in the employment agreement?

Summary

To determine whether a fringe benefits tax liability will arise from the payment of the allowance described as a 'living away from home allowance' in the employment agreement to an employee it is necessary to determine:

· whether the payment comes within the provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) (that is, it is either a 'fringe benefit' or an exempt benefit); and

· if it is a 'fringe benefit', the taxable value of the 'fringe benefit'.

The payments will be a living-away-from-home fringe benefit if they are paid to:

· an employee who is required to live away from his or her usual place of residence in order to perform the duties of employment; and

· the employee is not entitled to claim an income tax deduction for the cost of the meals and accommodation to which the allowance relates.

Any payments that do not meet these requirements will not come within the FBTAA. The withholding obligations that will arise in relation to these payments are set out in the attached fact sheet 'Withholding from allowances'.

A fringe benefits tax liability will arise in relation to the living-away-from-home fringe benefits that are paid under the Agreement.

The taxable value on which the tax will be calculated will be:

· the amount of the allowance if a living away from home declaration is not provided; or

· the amount (if any) by which the accommodation component exceeds the reasonable accommodation amount; plus

· the amount (if any) by which the food component exceeds an acceptable food component; plus

· the statutory food amount.

Detailed reasoning

To determine whether a fringe benefits tax liability will arise from the payment of the allowance described as a 'living away from home allowance' in the employment agreement to an employee it is necessary to determine:

· whether the payment comes within the provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) (that is, it is either a 'fringe benefit' or an exempt benefit); and

· if it is a 'fringe benefit', the taxable value of the 'fringe benefit'.

A fringe benefits tax liability can only arise if the payment is a 'fringe benefit' that has a taxable value greater than zero.

If the payment does not come within the provisions of the FBTAA, it will be necessary to consider whether a pay as you go withholding obligation arises in relation to the payment.

1. Will the payment come within the provisions of the FBTAA?

A payment will come within the provisions of the FBTAA if it is a 'fringe benefit' as defined in subsection 136(1) of the FBTAA, or is one of the listed exempt benefits.

Examples of benefits that may be exempt benefits include:

· the payment or reimbursement of accommodation expenses incurred by an employee who is required to live away from his or her usual place of residence to perform the duties of employment;

· the provision of meals provided to and consumed by the employee on a working day on business premises of the employer; and

· the provision of accommodation to an employee who is required to live away from his or her usual place of residence in order to perform the duties of employment.

As the payments being considered in this ruling will not come within any of these exemptions it is only necessary to consider whether the payments will be a fringe benefit.

Will the payments be a 'fringe benefit'?

In general terms, a benefit will be a 'fringe benefit' if it is a benefit provided to an employee by the employer in respect of the employee's employment which is not one of the benefits excluded from the fringe benefit definition by paragraphs (f) to (s) of the 'fringe benefit' definition. For the purposes of this ruling, the relevant paragraphs are:

· paragraph (f) which provides that a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936) will not be a 'fringe benefit'; and

· paragraph (g) which provides that an exempt benefit will not be a 'fringe benefit'.

Will the payment be 'salary or wages'?

Generally, most allowances are treated as a payment of 'salary or wages'. However, a living-away-from-home allowance (LAFHA) does not come within the definition of 'salary or wages'.

Therefore, the initial question to consider is whether the allowance is a LAFHA. If it is, then it will be a 'fringe benefit'.

Will the payment be a LAFHA?

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

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 the requirements of subsection 30(1), the payments will be a LAFHA if:

(a) the payment is an allowance;

(b) 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

(c) 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.

Is the payment an allowance?

Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement provides guidance as to when a payment will be an allowance.

Paragraph 2 of TR 92/15 states:

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.

Under the terms of the Agreement the employees will receive either:

· $X per week to cover meals and accommodation; or

· $Y per week for meals if accommodation is provided.

In both instances the amount paid will be a definite predetermined amount to cover an estimated expense. Therefore, it will be an allowance.

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

The allowance will be paid to compensate the employee for additional food expenses and accommodation expenses. In determining whether these expenses are deductible expenses, the term 'deductible expenses' is defined in subsection 136(1) to mean expenses incurred by the employee in respect of which a deduction is allowable to the employee under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Guidance for determining whether the expenses would be deductible expenses is provided by Taxation Determination TD 96/7 Fringe benefits tax: is fringe benefits tax (FBT) payable on meals and accommodation provided to employees who work at remote construction sites, where the accommodation is not the usual place of residence of the employee?

Paragraphs 3 and 4 of TD 96/7 state:

3. Where meals are provided, and it is concluded that the employee is travelling in the course of their employment, the taxable value of the benefit will be reduced to nil under the 'otherwise deductible' rule. The criteria for determining whether an employee is travelling in the course of performing their job are set out in paragraphs 35-43 of Taxation Ruling MT 2030. These criteria include:

• the nature of the duties performed;
• whether the employee is accompanied by dependants; and
• the length of time spent away from home.

As a practical general rule, where the question of whether or not the employee is travelling cannot easily be determined and the period away does not exceed 21 days, the employee may be accepted as travelling.

4. Guidance as to whether the 'otherwise deductible' rule will apply to reduce to nil the taxable value of meals provided to employees who are not travelling for work purposes is found in paragraph 5 of Taxation Ruling TD 93/230. Relevant factors to take into account include whether the employee:

• is required to live close by work;
• has a permanent residence away from the work site;
• lives away from home for a relatively short period of time; and
• has any choice as to the location of the accommodation provided.

Again, the 21 day period mentioned in paragraph 3 above will be accepted as a relatively short period of time for the purpose of these tests.

To illustrate these principles TD 96/7 provides the following two examples:

1. Allan works for a builder who has subcontracted work at a remote construction site in the Gulf Country. Allan stays at the site for 1 year but is flown home for two weeks every three months. Allan maintains a home in Townsville where his wife and family continue to live while he is away. All meals and accommodation at the site are provided by Allan's employer.

The taxable value of the accommodation is an exempt benefit under subsection 47(5). As the 'otherwise deductible' rule does not apply, the taxable value of each meal is $2.00.

2. Bill works for a builder who subcontracts only on remote construction sites throughout North Queensland. Bill and his family live in Cairns. While working on a three week contract at a construction site on Cape York Peninsula, Bill's employer, in accordance with his usual practice, flies Bill home on the two intervening weekends. All meals and accommodation at the site are provided by Bill's employer.

The taxable values of the meals and accommodation are reduced to nil under the applicable 'otherwise deductible' rules, as Bill would be accepted as travelling in the course of his employment.

If the employee is able to claim an income tax deduction for the expenses the allowance will not be a LAFHA.

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 Januaryweather.

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 Income Tax Assessment Act 1936 (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.

Paragraph 24 states:

Subject to the qualifications indicated in earlier paragraphs, it would normally follow that employees in the following kinds of situations would, as specific examples, be regarded as living away from a usual place of residence:

· construction workers living in camps, barracks or huts;

· oil industry employees living on offshore oil rigs;

· marine industry employees living on board vessels; and

· trainee-employees (e.g., trainee teachers) living away from home in order to undergo training courses of extended duration. (Employees attending short-term staff training courses would generally be treated as travelling in the course of their employment, as explained in paragraphs 35-43.)

However, paragraph 25 states:

On the other hand, 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 CaseB47, 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.

From the information provided, it is not possible to determine whether the employees are living away from their usual place of residence. Nor is it possible to determine whether the employees are required to live away from their usual place of residence. Both of these issues will depend upon the circumstances of the individual employee.

If the employee is not required to live away from his or her usual place of residence the payment will not be a LAFHA.

Conclusion

The payments will be a living-away-from-home fringe benefit if they are paid to:

· an employee who is required to live away from his or her usual place of residence in order to perform the duties of employment; and

· the employee is not entitled to claim an income tax deduction for the cost of the meals and accommodation to which the allowance relates.

Any payments that do not meet these requirements will not come within the FBTAA.

2. Will the taxable value of the living-away-from-home fringe benefits be more than nil?

Section 31 of the FBTAA sets out the method for calculating the taxable value of a LAFHA. It states that where fringe benefit is covered by subsection 30(1) the taxable value is:

… the amount of the recipients allowance reduced by:

(i) any exempt accommodation component; and

(ii) any exempt food component; or

'Exempt accommodation component' and 'exempt food component' are defined in subsection 136(1) of the FBTAA. Both definitions provide that the exempt amount will depend upon whether the employee provides a Living away from home declaration. If a declaration is not provided, the exempt components will have a nil value.

Exempt accommodation expenses

If a declaration is provided, the exempt accommodation component is so much of the allowance as is reasonable compensation for additional expenses on accommodation that the employee could reasonably be expected to incur.

The amount being paid in relation to accommodation will be $A per week. From the information provided it is not possible to determine whether this is the amount the employee could reasonably be expected to pay to obtain accommodation near the work site.

If $A is more than the reasonable amount, a fringe benefits tax liability will arise in relation to the amount by which $A exceeds the reasonable amount.

Exempt food component

If a declaration is provided, the exempt food component is so much of the allowance as is reasonable compensation for additional expenses on food. It is arrived at by first ascertaining the 'food component' of the allowance. If the amount of the 'food component' is set with the intention that it covers all food costs of the employee and family, the exempt food component is the excess of that component over what the employee would normally spend on food if he or she was not living away from home. However, if the food component of the allowance has been set to reflect only additional costs by reducing the allowance for home food costs, and the amount of the reduction on this account equals or exceeds the statutory food amounts, the amount of the net food component is the exempt food component.

The amount being paid for food is $Y per week. From the information provided it is not possible to determine whether this is a reasonable amount. However, it is noted that Taxation Determination TD 2011/4 provides that an amount of $233 will be accepted as a food component for a single expatriate employee. If this amount applies to your employees, a fringe benefits tax liability will arise in relation to:

· the amount by which the amount of the allowance ($Y) exceeds $233; and

· the statutory food amount ($42).

Conclusion

A fringe benefits tax liability will arise in relation to the living-away-from-home fringe benefits that are paid under the Agreement.

The taxable value on which the tax will be calculated will be:

· the amount of the allowance if a living away from home declaration is not provided; or

· the amount (if any) by which $A exceeds the reasonable accommodation amount; plus

· the amount (if any) by which the food component exceeds an acceptable food component; plus

· the statutory food amount.

3. The PAYG requirements if the allowance is not a LAFHA

For your information please find enclosed a copy of the fact sheet titled 'Withholding from allowances' which sets out the withholding obligations for allowances that are not a LAFHA.