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Ruling

Subject: Living away from home allowance (LAFHA)

Question 1

Is the allowance you propose to pay to your employee a Living Away From Home Allowance (LAFHA) for the purposes of Division 7 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

This ruling applies for the following period:

Year ended 31 March 2012

The scheme commences on:

19 April 2011

Relevant facts and circumstances

You have engaged an employee, who will remain your employee until the completion of a specific project.

Your employee is a resident of Country X (X Country) and maintains a home there.

You require your employee to live away from home in order to perform their duties under their employment contract.

Your employee currently resides in Australia with their spouse. However your employee intends to return to their usual place of residence in X Country within 2 to 4 years.

Whilst employed in Australia, you propose to pay your employee an allowance to compensate for those additional expenses they incur because they are living away from home, which include:

· additional rent & associated bills for living in Australia

· additional food costs for your employee and their spouse.

In maintaining their usual place of residence, your employee's ongoing obligations include:

· Mortgage

· Council rates

· Electricity and gas

· Telephone and internet connection.

Your employee has not applied for, nor do they intend to apply for, permanent residency or citizenship in Australia.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Division 7

Fringe Benefits Tax Assessment Act 1986 Section 30

Fringe Benefits Tax Assessment Act 1986 Subsection 30(1)

Fringe Benefits Tax Assessment Act 1986 Paragraph 30(1)(b)

Fringe Benefits Tax Assessment Act 1986 Section 31

Fringe Benefits Tax Assessment Act 1986 Section 136

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1936 Section 27L

Income Tax Assessment Act 1997 Division 6

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 6-23

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 10

Income Tax Assessment Act 1997 Section 15-2.

Reasons for decision

General discussion of the law

Assessable Income

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) contains provisions relating to assessable income and exempt income.

Section 6-5 of the ITAA 1997 provides that your assessable income for an income year consists of income according to ordinary concepts. There is no definition of what constitutes ordinary income, however the term takes on its ordinary meaning, which has also been considered by the courts over time.

Generally your ordinary income is those amounts received periodically because of your employment, business or some other profit making venture, in which you have earned or derived that income.

Section 6-10 of the ITAA 1997 includes in your assessable income an amount that is not ordinary income and income that is specifically included in your assessable income under a provision of the Act.

Division 10 of the ITAA 1997 lists particular kinds of income that is included in your assessable income or where ordinary income is to be modified in some way when it is included in your assessable income. In particular, section 15-2 of the ITAA 1997 includes in your assessable income the amount of, among other things, any allowance or benefit provided by your employer in respect of your employment or services rendered.

Section 6-15 of the ITAA 1997 outlines the amounts that will not form part of your assessable income. In particular subsection 6-15(3) of the ITAA 1997 provides that an amount that is 'non-assessable non-exempt income' will not be assessable income.

Section 6-23 of the ITAA 1997 provides that an amount of ordinary income or statutory income will be 'non-assessable non-exempt income' if a provision of that Act, or of another Commonwealth law, states that it is not assessable income and is not exempt income.

In relation to whether certain benefits in the nature of income form part of a taxpayer's assessable income, subsection 23L(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that:

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.

Subsection 136(1) of the FBTAA defines that a 'benefit' includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

Subsection 136(1) of the FBTAA defines the term 'fringe benefit'. Generally a fringe benefit is a benefit provided at any time by an employer to an employee, or an associate of that employee, in respect of that employee's employment in a year of tax.

However, among other things, a fringe benefit generally does not include:

· a payment of salary or wages

· a payment that would be salary or wages if salary or wages included exempt income for the purposes of the ITAA 1936

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

Fringe benefits tax - living away from home allowance

Generally, most allowances are included in an employee's assessable income. This is because an allowance is usually in respect of the employment of an employee for costs incurred in the course of the employee carrying out their duties from which they will derive their income.

Section 8-1 of the ITAA 1997 provides that you can deduct a loss or outgoing from your assessable income to the extent that it is incurred in gaining or producing your assessable income. However, you cannot deduct an amount to the extent that it has the character of being capital, private or domestic in nature or is prevented from being deducted by a provision of the ITAA 1997.

LAFHA does not fall within the ordinary concept of an allowance to which section 15-2 of the ITAA 1997 would apply. This is generally because a LAFHA is paid in respect of expenses that have the character of being private or domestic in nature and have not arisen in the course of an employee carrying out their duties. Therefore is considered to be a benefit provided to the employee. Further, those expenses would not ordinarily be deductible to the employee as they would be prevented from being deductible under section 8-1 of the ITAA 1997.

Division 7 of the FBTAA deals with LAFHA fringe benefits. In particular, section 30 of the FBTAA sets out the circumstances where a benefit is considered to be a LAFHA benefit. Subsection 30(1) of the FBTAA provides that a LAFHA arises 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;

(iii) 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;

(iv) 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.

However, under section 31 of the FBTAA, the taxable value of a LAFHA fringe benefit may be reduced under certain conditions. In part, section 31 provides that:

…the taxable value of a living-away-from-home allowance fringe benefit in relation to a year of tax is:

(a) if the fringe benefit is covered by subsection 30(1) the amount of the recipients allowance reduced by:

(i) any exempt accommodation component; and

(ii) any exempt food component; or…

Paragraphs 4 and 5 of Miscellaneous Taxation Ruling MT 2030 explain that the taxable value of a LAFHA fringe benefit can be reduced by any amount representing the exempt component of accommodation or food.

The exempt accommodation and food components are defined in subsection 136(1) of the FBTAA and are discussed in MT 2030. Broadly the exempt component is so much (if any) of the allowance that can be concluded is in the nature of compensation to the employee for additional expenses that might reasonably be expected to be incurred by the employee in respect of obtaining accommodation or provision of food for either the employee or other eligible family members.

However, for a reduction to be allowed for the exempt component, the employee must provide their employer with an appropriate declaration, in a form approved by the Commissioner, by the relevant date.

Employer pays an allowance in respect of the employment of the employee

The meaning of the phrase 'in respect of the employment of the employee' was considered in the Full Federal Court case of J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; 44 ATR 22 (Knowles case).

It was found in Knowles that the phrase 'in respect of' means that there must be a sufficient or material relationship or connection between the provision of the benefit and 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 meaning of allowance:

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.

Allowance paid to compensate employee for additional costs

To determine whether this condition is satisfied it is necessary to determine:

· the reason for paying the allowance, and

· if the allowance is paid to compensate the employee for additional expenses incurred by the employee, whether the expenses were deductible expenses.

Paragraph 30(1)(b) of the FBTAA specifies the reasons for which the allowance must be paid. These requirements were considered by the Federal Court in Atwood Oceanics Australia Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 742; (1989) 30 IR 58; 89 ATC 4808; which proposed the following:

The circumstances of the payment of the allowance must be such that a reasonable person would conclude, applying an objective view thereto, that the allowance bore the character described in paragraph 30(1)(b) of the FBTAA.

The section does not require the allowance to be paid as compensation. It is sufficient that in the eyes of an objective observer the allowance was in the nature of compensation to the employee.

The allowance in the nature of compensation must relate to additional expenses incurred by an employee during a period, or to additional expenses incurred and additional disadvantages to which the employee was subject during a period.

In stipulating that the additional expenses and disadvantages be incurred or suffered by reason of the employee being required to live away from his or her usual place of residence to perform the duties of employment, the Act required demonstration of some causal connection between the likelihood of additional expenses and disadvantages and the requirement to live away from home for a period. An obvious example of such additional expenses would be extra costs for food and accommodation that would not be incurred if the employee were not required to live away from home.

It is the underlying purpose of the allowance that determines the applicability of the Act and the fact that in addition to the allowance an employee may have enjoyed countervailing savings which offset his or her additional expenses would be irrelevant.

Living away from your usual place of residence in order to perform the duties of employment

In determining whether the additional expenses arise because of a requirement to live away from the 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) of the FBTAA it does define a 'place of residence' to mean:

· 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.

MT 2030 sets out some guidelines for determining an employee's usual place of residence. In particular, paragraphs 15 to 18 refer to various decisions of Taxation Boards of Review relating to the former section 51A of the ITAA 1936.

In referring to those decisions, paragraph 14 of MT 2030 explains that 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.

MT 2030 further explains that 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. Further, 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.

Further discussion occurs at paragraphs 19 to 25 of MT 2030. Paragraph 20 highlights 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.

An example of the application of this general rule is discussed in paragraph 22 of MT 2030, which 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.

Salary packaging arrangements

The Board of Review decision in Case C55 (1971) 17 CTBR(NS) 332; 71 ATC 242 and the guidelines provided in Taxation Ruling TR 2001/10 discuss the treatment of benefits provided as part of a salary packaging arrangement.

Case C55 considered the former section 51A of the ITAA 1936 to a situation where an employee, his wife and children lived in an isolated company mining town. The town, which suffered from a harsh climate and a very high cost of living, was also at such a distance from neighbouring provincial towns as to prevent the sending of children there to day schools. The schooling provided in the town itself was inadequate and did not proceed beyond primary level. Faced with the problem and expense of educating his children (3 were already boarded out) the employee moved his family to a provincial town with the necessary educational facilities where they took up residence in a house he purchased. The employee continued to live in the mining town in the company house he and his family had previously rented. He joined his family for one weekend in two.

For part of the income year under review, the employee received the same salary as prior to his family's move but at his request $6 per week was identified as a living-away-from-home allowance. For the remainder of the year his salary was increased by $10 per week and, of his total remuneration, $20 per week was allocated to such allowance.

In considering the question whether the taxpayer was in fact in receipt of a LAFHA within the definition under the former section 51A of the ITAA 1936 during the year the Board said, at ATC 247:

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. In other words, a living-away-from-home allowance can then be described specifically, the remaining salary nominally lowered and a deduction claimed.

This indicates that it is possible for a LAFHA to be created from existing salary provided the salary contained an element of bona fide compensation for having to live away from home.

Taxation Ruling TR 2001/10 provides guidelines for the treatment of benefits provided as part of a salary sacrifice arrangement.

An effective salary sacrifice arrangement as defined in paragraph 21 of Taxation Ruling TR 2001/10 involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

The premise underlying TR 2001/10 include that:

· before an employee earns an entitlement to be paid, or have their remuneration applied they can enter into an agreement with their employer as to the character of various parts of the remuneration, such that, when later derived, the ordinary and statutory income can be derived either as salary or wages assessable income or as non-assessable, non-exempt income (section 23L of the Income Tax Assessment Act 1936 (ITAA 1936)); and

· once an employee has earned an entitlement to be paid an amount of their remuneration as salary or wages, that amount of remuneration when paid to the employee, or applied for their benefit can only be derived as salary or wages.

Neither Case C55, nor the Commissioner's view in TR 2001/10 prevents a LAFHA from forming part of in the remuneration paid to an employee. However, they both provide restrictions on the situations in which it can occur.

For example, they indicate that where an employee is in existing employment receiving a predetermined salary or wage which does not include an element of compensation for the employee having to live away from home, it is not possible to prospectively or retrospectively rename part of the salary or wage already paid or applied as being a LAFHA.

However by contrast, where the level of remuneration is not subject to an existing Award which governs the amount of salary or wage that is to be paid and the level of remuneration is negotiated by the employee and employer prior to the employee commencing their duties, it is possible for a LAFHA to form part of the remuneration paid to the employee.

Application of the law to your circumstances

· You propose to pay your employee a living away from home allowance. For the allowance to be considered a LAFHA, it must be demonstrated that:

· the allowance is paid in respect of the employment of your employee in a year of tax

· expenditure to which the allowance relates must be additional and non-deductible

· the payment of that allowance is made so as to compensate your employee for incurring those additional expenses

· those additional expenses are incurred because your employee is living away from home in order to perform their duties.

As you have entered into a contract with your employee for the term of a specific project, they would not otherwise receive the proposed allowance from you but for the fact that they are your employee. Therefore, it is considered that the allowance is to be paid in respect of their employment.

It is apparent that the expenses incured whilst living in Australia, for which the allowance is to be paid, being rent and food, are additional expenses to those they would otherwise incur if they had remained in their ordinary place of residence.

Your employee's rental payments for a residence in Australia and additional food costs are considered to be private in nature and are not incurred in the course of gaining or producing their assessable income. Those expenses would not ordinarily be deductible as these would be excluded under section 8-1 of the ITAA 1997.

You propose to pay an allowance to compensate for those additional non-deductible expenses incurred, being rent and food. In these circumstances, it is considered that a reasonable person would conclude that you are compensating your employee for having incurred those expenses in performing his duties whilst living away from his ordinary place of residence.

In examining your circumstances, it appears that your employee would not have incurred those additional expenses but for you requiring them to perform their duties in a location away from their ordinary place of residence. Further, as discussed in MT2030, the following factors tend to indicate that your employee is living away from home:

· they are a citizen of Country X .

· they retain financial ties with Country X , including maintaining a mortgage on their usual place of residence, rates, electricity, gas and telephone connections.

· although they are residing in Australia their intention is to return to Country X within two to four years.

· their spouse has accompanied them in living away from home.

· they have not applied for, nor do they intend to apply for, permanent residency or citizenship in Australia.

Given the facts of your circumstances, it is considered that the allowance you intend to pay your employee constitutes a LAFHA as provided within Division 7 of the FBTAA.