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Ruling

Subject: Personal Services Entity and Reimbursements

Question 1

Are you entitled to an income tax deduction for the following expenses in respect to your employee whilst they are living away from their home in City X:

(a) cost of leasing an apartment in City X?

(b) cost of reimbursing the employee's food expenses as listed on their personal credit card?

(c) No

(d) Yes

Question 2

Alternatively, if you were to pay your employee an allowance to cover their additional accommodation and food expenses whilst working in City X, would the allowance be a living-away-from-home allowance?

Yes where you are provided with a declaration in the approved form.

Question 3

Are you entitled to an income tax deduction for the cost of reimbursing your employee's airfares between City Y and City X?

Yes

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Relevant facts

You were incorporated to allow your employee to work for ABC Co.

ABC Co required that initial work be performed in City X on a full-time basis (five days per week). ABC Co indicated that your employee would probably be allowed to be employed in City Y later in the year.

Your income will be subject to the Personal Services Income (PSI) rules. You have no other sources of income and do not get paid on a results basis.

Work started with ABC Co in City Y on x xxxx 20xx. The written contract between you and ABC Co was finalised in xxx 20xx. You were offered either reimbursement for travel expenses or an allowance for extra expenses incurred by your employee in living away from City Y on a temporary basis.

You accepted City X living allowance, took out a lease on a serviced apartment on short term basis, then took out a six month lease over a furnished apartment. You pay the rent in City X.

Day to day living expenses (meals) are paid by your employee but are reimbursed by you out of the allowance you get from ABC Co.

Your employee has paid for airfares between City Y and City X on their credit card.

Your employee has been a resident of City Y.

Your employee has remained in City X to date but has continued to maintain their home in City Y. Their household furniture and most personal effects are also in their City Y home.

Almost all of your employee's mail still goes to their City Y postal address. Their driver's licence and motor vehicle registration have been maintained in City Y. Your employee's electoral roll registration is still in City Y.

Your employee provided you with a declaration stating they were living away from home.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 section 85-15

Income Tax Assessment Act 1997 section 86-60

Fringe Benefits Tax Assessment Act section 30

Fringe Benefits Tax Assessment Act section 31

Fringe Benefits Tax Assessment Act subsection 47(5)

Fringe Benefits Tax Assessment Act section 63

Fringe Benefits Tax Assessment Act subsection 136(1)

Reasons for decision

Issue 1

Question 1

Are you entitled to an income tax deduction for the following expenses in respect to your employee whilst they are living away from their home in City X;

(a) cost of leasing an apartment in City X?

(b) cost of reimbursing the employee's food expenses as listed on their personal credit card?

Detailed reasoning

You are a Personal Services Entity in relation to your employee as your income consists solely of your employee's Personal Services Income (PSI). Therefore, part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to income received by and expenses claimed by you.

As you are a Personal Services Entity, in determining whether you are able to claim an income tax deduction for the listed expenses it is necessary to consider the PSI deduction rules are covered in Divisions 85 and 86 of the ITAA 1997.

a) Cost of leasing an apartment in City X

You have taken out a lease on a furnished apartment in City X for your employee. You pay the rent for the apartment.

Section 85-15 of the ITAA 1997 states;

You can not deduct under this Act, an amount of rent, mortgage interest, rates or land tax:

a) for some or all of your residence; or

b) for some or all of your associate's residence;

to the extent the amount relates to gaining or producing your personal services income.

Taxation Ruling TR 2003/10 Income tax: deductions that relate to personal services income states at paragraph 31:

Section 85-15 denies a deduction for an amount of rent, mortgage interest, rates or land tax for some or all of an individual's (or an associate's) residence to the extent that the amount relates to gaining or producing the individual's personal services income.

The cost of rent paid by you will therefore not be tax deductible.

Will a fringe benefit arise from the provision of accommodation?

The provision of accommodation to your employee whilst they are in City X can be a fringe benefit.

Has a fringe benefit been provided?

The definition of fringe benefit within sub-section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) defines a fringe benefit to mean a benefit:

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

(b) provided in respect of the year of tax

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

(c) the employer; or

(d) an associate of the employer; or

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

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

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

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

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

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:…

The definition goes on to provide that benefits listed in paragraphs (f) to (s) will not be fringe benefits.

Therefore, the payment will be a fringe benefit if the following criteria are satisfied:

· the benefit will be provided to the employee or an associate of an employee

· the benefit will be provided by:

- the employer;

- an associate of the employer, or

- a person other than the employer or an associate of the employer under an arrangement, or a situation that comes within paragraph (ea) of the fringe benefit definition

· the benefit will be provided in respect of the employment of the employee; and

· the benefit is not listed under paragraphs (f) to (s) of the definition of fringe benefit.

Was a benefit provided?

A 'benefit' is defined within subsection 136(1) of the FBTAA as including;

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:..

As you have provided your employee with a furnished apartment you have provided your employee with a benefit.

Was the benefit provided by the employer or an associate of the employer?

The benefit was provided by the employer.

Was the benefit provided in respect of the employment of the employee?

You provided the accommodation to your employee to enable them to perform their employment duties in a different city to where they normally resided. Therefore the benefit was provided in respect of the employment of the employee.

Does the benefit come within any of the paragraphs from (f) to (s) under the definition of fringe benefit?

Paragraph (g) of the fringe benefit definition provides that a benefit that is an exempt benefit is not a fringe benefit.

Subsection 47(5) of the FBTAA 1986 provides that accommodation provided to an employee while they are living away from their usual place of residence will be an exempt benefit.

Subsection 47(5) of the FBTAA 1986 states where;

(a) a residual benefit consists of the subsistence, during the 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) ……………………….

(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.

Therefore, the provision of accommodation will be an exempt benefit under subsection 47(5) if the following conditions are satisfied:

1. the benefit is a residual benefit consisting of the provision of accommodation

2. the accommodation is provided as the employee is required to live away from their usual place of residence

3. the employee is not travelling while performing their employment duties, and

4. the employee provides a declaration in the approved form.

1. Will the benefit be a residual benefit consisting of the provision of accommodation?

As the provision of accommodation may be a housing benefit it is necessary to determine whether the subsidised accommodation is a housing benefit.

What is a housing benefit?

Section 25 of the FBTAA sets out the circumstances in which a housing benefit will be provided. It states:

The subsistence during the whole or a part of a year of tax of a housing right granted by a person (in this section referred to as the "provider") to another person (in this section referred to as the "recipient") shall be taken to constitute a benefit provided by the provider to the recipient in respect of the year of tax.

'Housing right' is defined under subsection 136(1) of the FBTAA to mean:

a lease or licence granted to the person to occupy or use a unit of accommodation insofar as that lease or licence subsists at a time when the unit of accommodation is the person's usual place of residence.

Therefore a housing benefit will be provided where the accommodation is the employee's usual place of residence. Where the accommodation is not the employee's usual place of residence the benefit will be a residual benefit.

Is the accommodation the employee's usual place of residence?

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

(a) a place at which the person resides; or

(b) a place at which the person has sleeping accommodation;

whether on a permanent or temporary basis and whether or not on a shared basis.

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

1. habitual or customary: his usual skill.

2. such as is commonly met with or observed in experience; ordinary: the usual January weather.

3. in common use; common: say the usual things.

noun

4. that which is usual or habitual.

phrase

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

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

Paragraphs 15 to 18 refer to various decision of Taxation Boards of Review relating to the former 51A of the 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.

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

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

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.

In considering the factors referred to by the AAT the following factors indicate that your employee is living away from their usual place of residence:

§ they maintain a home in City Y to which they intend to return

§ they have returned to City Y whilst working in City X

§ their employment in City X is of a finite duration

§ their household and personal affects remain in City Y

§ their driver's licence and motor vehicle registration are maintained in City Y

§ they are maintaining their electoral roll registration in City Y and voted in the most recent state election as a temporary absentee.

In applying the factors listed above we consider that the accommodation, in City X, provided to your employee is not their usual place of residence. Your employee's usual place of residence is their home in City Y. Therefore the benefit provided will be a residual benefit.

2. Is the accommodation provided as the employee is required to live away from their usual place of residence?

Your employee is required to perform their duties of employment in City X, therefore the accommodation is provided as they are required to live away from their usual place of residence.

3. Is the employee travelling while performing their employment duties?

Your employee is not travelling in the course of their employment duties.

4. Will the employee provide you with a declaration in the approved form?

You have advised that your employee has provided you with a declaration advising that they are living away from home. If this declaration is in the form required by subparagraph 47(5)(d)(ii) of the FBTAA then this criteria will be met.

Subparagraph 47(5)(d)(ii) requires the declaration to be in a form approved by the Commissioner purporting to set out the employee's usual place of residence and the place at which the employee actually resided while living away from his or her usual place of residence.

Providing the declaration provided by your employee is in the form required by subparagraph 47(5)(d)(ii) of the FBTAA then all of the criteria will be met and the provision of the accommodation in Melbourne will be an exempt benefit under subsection 47(5) of the FBTAA.

Conclusion

You are not able to claim an income tax deduction for the cost of the rental, and a fringe benefits tax liability will not arise where all the conditions under subsection 47(5) of the FBTAA are met.

b) Cost of reimbursing the employee's food expenses as listed on their personal credit card?

Generally an employer can claim an income tax deduction for the cost of reimbursing employee's food expenses.

There is no specific provision in Divisions 85 and 86 of the ITAA 1997 that prevents a deduction being claimed for the cost of reimbursing food expenses. However, section 86-60 provides:

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 services income in the course of conducting a personal services business.

Taxation Ruling TR 2003/10 Income tax: deductions that relate to personal services income provides guidance on the application of section 86-60. Paragraphs 100 to 102 state:

Section 86-60 hypothesises that the circumstances giving rise to the entitlement to a deduction by the personal services entity apply instead to the individual. (It is important to note that this does not mean the individual's circumstances are applied to the entity.) It is only the circumstances giving rise to the entitlement of the entity to a deduction that are to be treated as applying instead to the individual. The acts of the entity that give rise to the entitlement to a deduction are treated as if they are the acts of the individual. Thus, if the personal services entity is carrying on a business, and that is a circumstance from which the entitlement to a deduction arises (as it usually is), the individual is treated as notionally carrying on that business. If incurring an outgoing is relevant to entitlement to a deduction, the individual is taken to have incurred an outgoing. If the character of the outgoing is relevant, as again it usually is, and the outgoing is not capital, private or domestic in character in the circumstances of the personal services entity, neither is it taken to be capital, private or domestic in character for the individual. Section 86-60 does not permit any change in the circumstances of entitlement to a deduction, with the sole exception of the substitution of an individual taxpayer for the entity.

Consequently, section 86-60 will most commonly only prevent a deduction where it causes a disentitling provision applicable only to individuals to be applied to the relevant loss or outgoing. However, the section also potentially applies where the loss or outgoing is made deductible by a provision only applicable to a company, trust or partnership. (There are such provisions, but they are unlikely to apply in respect of personal services income, and therefore are not discussed further.)

Transactions between test individual and personal services entity

Section 86-60 does not have the effect of denying a deduction to the personal services entity in respect of a transaction between the entity and the test individual merely because it is with the test individual. Generally, where a company, for example, pays or incurs a liability to pay an amount to an individual and claims a deduction for it, the identity of the individual is not a circumstance relevant to the entitlement to the deduction. Thus if a company is entitled to a deduction for a payment for services rendered, it is nearly always irrelevant who rendered them. This means if a company is entitled to a deduction for wages paid to the test individual one is not required to suppose that the test individual is paying himself or herself a wage. Rather, one is required to assume that the test individual is paying a wage to an employee of his or hers who renders the service that he or she in fact rendered. Besides, denying a deduction to the personal services entity in such a case would have no practical effect, since it merely results in the test individual deriving more personal services income and less wages with the same taxable income resulting.

Therefore the question to consider is whether your employee, if they were an employer, would have been able to claim an income tax deduction for the cost of reimbursing an employee's food expenses.

As the reimbursement of an employee's expenses is an expense payment benefit, for which your employee, as an employer, could have claimed an income tax deduction, section 86-60 does not prevent you from claiming an income tax deduction for the reimbursement.

Will a fringe benefit arise from the reimbursement of food expenses? You have reimbursed your employee for the cost of his food and drink expenses only. You have therefore provided an expense payment benefit.

Section 20 of the FBTAA provides:

Where a person (in this section referred to as the "provider"):

(a) makes a payment in discharge, in whole or in part of an obligation of another person (in this section referred to as the "recipient") to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the "recipient"), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

No exemptions apply in relation to expense payment benefits, Therefore the benefit will be a fringe benefit.

Under section 23 of the FBTAA the taxable value of a reimbursement generally is the amount of the payment. However, the value may be able to be reduced under section 63 of the FBTAA if the benefit is a living-away-from-home food fringe benefit.

A living-away-from-home food fringe benefit is defined in subsection 136(1) of the FBTAA 1986 as:

(a) an expense payment fringe benefit provided in respect of the employment of an employee where:

(i) the recipients expenditure was incurred in respect of food and drink;

(ii) the food or drink was not for consumption while the employee was undertaking travel in the course of performing the duties of that employment; and

(iii) the food or drink was for consumption by eligible family members at a time when the employee was required to live away form his or her usual place of residence in order to perform the duties of that employment; or

(b) …..

Therefore the benefit will be a living-away-from-home food fringe benefit where the following criteria are met:

(a) the benefit is an expense payment benefit

(b) the employee's expenditure was incurred in respect of food and drink

(c) the food and drink was not for consumption while the employee was travelling on work

(d) the food and drink was for consumption by eligible family members while the employee was living away from his usual place of residence while performing his employment duties.

(1) Is the benefit an expense payment benefit?

As discussed above the benefit is an expense payment benefit.

(2) Is the employee's expenditure incurred in respect of food and drink?

You have reimbursed the employee for food and drink costs only.

(3) Is the food and drink for consumption while the employee is travelling on work?

The employee is not travelling on work.

(4) Is the food and drink for consumption by eligible family members while the employee was living away from his usu al place of residence while performing his employment duties?

'Eligible family member' is defined under subsection 136(1) of the FBTAA and includes the employee.

As in question 1(a) above, we consider the employee to be living away from his usual place of residence.

Therefore as all the criteria above has been met the benefit is a living-away-from-home food fringe benefit.

Can the value of the living-away-from-home food fringe benefit be reduced under section 63 of the FBTAA?

Section 63 states the rules for reduction are where:

(a) a living-away-from-home food fringe benefit, or 2 or more living-away from home food fringe benefits, in relation to an employer in relation to a year of tax relates or relate to a particular employee;

(b) the fringe benefit or fringe benefits are equivalent to the food component of a living-away-from-home allowance fringe benefit in respect of a particular period in the year of tax;

(c) that food component exceeds the sum of the statutory food amounts in respect of eligible family members in respect of that period; and

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

(i) the employee's usual place of residence during that period; and

(ii) the place at which the employee actually resided during that period,

the following provisions apply:

(a) if there is only one living-away-from-home fringe benefit-the amount that, but for this section and section 62 and the recipients contribution, would be the taxable value of that fringe benefit, shall be reduced by the amount of the excess referred to in paragraph (c);

(b) if there are 2 or more living-away-from-home food fringe benefits-the amount that, but for this section and section 62 and the recipients contribution, would be the taxable values of those fringe benefits shall be reduced by amounts proportionate to those taxable values and equal in total to the amount of the excess referred to in paragraph (c).

As stated above the reimbursement of your employees food and drink costs are living-away-from-home food fringe benefits. Therefore, the taxable value of the benefit will be reduced if the following criteria are met:

(a) the fringe benefit is equivalent to the food component of a living-away-from-home allowance fringe benefit

(b) the food component exceeds the sum of the statutory food amount

(c) the employee has provided a declaration in the approved form

(a) Is the fringe benefit equivalent to the food component of a living-away-from-home allowance fringe benefit?

'Food component' is defined in subsection 136(1) of the FBTAA as follows:

In relation to the recipients allowance in relation to a living-away-from-home allowance fringe benefit in relation to an employee of an employer, means so much (if any) of the recipients allowance as it would be concluded is in the nature of compensation for expenses that the employee might reasonably be expected to incur, in respect of the recipients allowance period, in respect of food or drink for eligible family members.

You have reimbursed only your employee's food costs while they are working in City X. As they are considered to be living away from their usual place of residence it can be concluded that the reimbursement is compensation for the food and drink expenses incurred by the employee. Therefore the fringe benefit is considered to be equivalent to the food component of a living away from home allowance fringe benefit.

(b) Does the food component exceed the sum of the statutory food amount?

The 'statutory food amount' is defined in subsection 136(1) of the FBTAA 1986 as follows:

In relation to a person, in relation to a period in relation to a year of tax, means the amount calculated in respect of that period:

(a) in a case where the person had attained the age of 12 years before the beginning of the year of tax- at the rate of $42 per week; and

in any other case- at the rate of $21 per week.

You have reimbursed your employee for his expenditure on food, however, you have not provided details as to the value of the reimbursement.

(c) Has the employee provided a declaration in the approved form

You have advised that the employee has provided you with a declaration to the effect that they are living away from home. However, this is not sufficient to conclude that the declaration is in the form required by paragraph 63(d) of the FBTAA.

Conclusion

The living-away-from-home food fringe benefit can be reduced where:

§ the reimbursement of the food expenses is more than $42 per week per adult and $21 per week per child. The reduction of the taxable value would be to the equivalent of $42 a week for each adult and $21 a week for each child, and

§ a declaration in the form required by sub paragraph 63(d) of the FBTAA is received from the employee.

Question 2

Alternatively, if you were to pay your employee an allowance to cover their additional accommodation and food expenses whilst working in City X, would the allowance be a living-away-from-home allowance?

Detailed reasoning

Section 30 of the FBTAA sets out the circumstances in which a payment to an employee will be a living-away-from-home allowance benefit.

Subsection 30(1) states:

Where:

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

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

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

(ii) additional expenses (not being deductible expenses) incurred by the employee, and other additional disadvantages to which the employee is subject, during a period;

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

the payment of the whole, or of the part, as the case may be, of the allowance constitutes a benefit provided by the employer to the employee at that time.

In summarising the requirements of subsection 30(1), an allowance will be a living-away-from home-allowance if:

(a) it is reasonable to conclude from all the surrounding circumstances that some or all of the allowance is in the nature of compensation to the employee for:

· additional non deductible expenses incurred by the employee during a period; or

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

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

(a) Is the 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. As the employee would not be able to claim an income tax deduction for these expenses this requirement is satisfied.

(b) 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?

As discussed in question 1(a) above the employee is considered to be living away from their usual place of residence.

Therefore as both requirements above have been met the allowance would be a living-away-from-home allowance.

Will the living-away-from-home allowance be a fringe benefit?

No exemption applies to the provision of a living-away-from-home allowance, however, the taxable value of the fringe benefit can be reduced under section 31 of the FBTAA.

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.

Where the accommodation component is equal to the annual rent being paid the amount of the accommodation component will be the exempt accommodation component if the employee provides the necessary declaration.

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.

Conclusion

If the employee provides a declaration the taxable value of the living-away-from-home allowance will be reduced by the exempt accommodation and food components.

Question 3

Are you entitled to an income tax deduction for the cost of reimbursing the employee's airfare from City Y to City X?

You will reimburse your employee's expenditure on airfares between City Y and City X.

Generally an employer can claim an income tax deduction for the cost of reimbursing an employee's airfares.

As discussed in question 1 in determining whether you are able to claim an income tax deduction it is necessary to consider the PSI deduction rules covered in Divisions 85 and 86 of the ITAA 1997.

The reasoning applied to question 1 b) equally applies to this question therefore the reimbursement of your employees airfares will be income tax deductible.

Will a fringe benefit arise from the reimbursement of your employee's air fares?

As discussed in question 1 b) the reimbursement of an employee's expenses is an expense payment benefit. Further as no exemptions apply in relation to expense payment benefits the benefit will be a fringe benefit.

Under section 24 of the FBTAA the taxable value of the expense payment fringe benefit can be reduced by the amount the employee would have been entitled to claim as an income tax deduction if you did not reimburse him. In your situation the employee could not have claimed an income tax deduction for the airfares therefore the taxable value of the benefit cannot be reduced.

A fringe benefits tax liability will arise from the reimbursement of the air fares.