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Ruling

Subject: remote area housing benefits

Question 1

Will housing accommodation provided to an employee be an exempt remote area housing benefit under section 58ZC of the Fringe Benefits Tax Assessment Act 1986 FBTAA) if the lease is terminated at the lessee's request at some date prior to the fixed term expiring and then be re-drawn to employer?.

Answer

No.

Question 2

Will housing accommodation provided to an employee be an exempt remote area housing benefit under section 58ZC of the FBTAA if the lease is terminated when the fixed term expires and then be re-drawn to the employer?.

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

The scheme commences on:

1 April 2011.

Relevant facts and circumstances

The employer is based principally in a town of listed as a remote area in ATO Practice Statement Law Administration PS LA 2000/6 Fringe benefits tax: what is considered to be remote for the purposes of the remote area housing benefit.

The provision of subsidised housing to staff is considered customary within employer's industry and the employer has previously and is currently providing subsidised housing to staff.

To commence employment the employee had to relocate more than 250 kilometres.

The employee is employed on a fixed term contract and the nature of employment and of the workforce industry is that it is not considered reasonable to expect the employee to purchase long term accommodation. However it is expected that the employee will remain in the position for an extended period and that the accommodation is considered to the employee's usual place of residence.

In an oversight during the contract negotiation process, the employee was not offered housing benefit as part of the initial salary package and the employee secured their own private rental accommodation upon commencement. There is a fixed term to this lease which expires on date X.

The employee's contract of employment is currently being renegotiated and the employer wishes to provide the employee with housing benefits as part of a revised employment package.

To do this it is intended to terminate the existing lease and have the employer entering into a new lease on the premises and then granting the employee the right to use the premises.

The employee will enter into a salary sacrifice arrangement (SSA) with the employer and will forego part of their total remuneration which otherwise would have been received as salary or wages; in return for the right to use the house.

The employer will ensure that the SSA will be an effective SSA as described in Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements.

Relevant legislative provisions

FBTAA section 20

FBTAA section 58ZC

FBTAA subsection 136(1).

Reasons for decision

Question 1

Summary

The benefit would not be exempt as part of the arrangement would be for the purpose of obtaining the benefit of the exemption because the employee is not moving even though they terminated the lease on that property before the fixed term of the lease expired.

Detailed reasoning

Section 58ZC of the FBTAA provide for an exemption where an employer provides a remote area housing benefit.

For a housing benefit to be a remote area housing benefit (for the whole of the tenancy period):

· the unit of accommodation is in a remote area (that is, it is not located in or adjacent to an eligible urban area); and

· the accommodation is occupied by a person who is a current employee, and the usual place of employment of the employee is in the remote area.

· In addition it must be necessary that the employer provide accommodation because:

· the nature of the employers business is such that employees are liable to move frequently from one residential location to another:

· there is insufficient suitable residential accommodation otherwise available at or near the place or places where the employees are employed, or

· it is customary for employers in that industry to provide free or subsidised accommodation for employees

However the exemption does not apply if the right to use the house was granted:

· under a non-arms length arrangement; or

· under an arrangement entered into by any of the parties to the arrangement for the purpose, or for purposes including the purpose, of enabling the employer to obtain the benefit of the exemption.

In this case, the employer wishes to renegotiate the employee's salary package to provide the employee with a housing benefit via a SSA.

The housing is being provided in a remote area, the employer has stated that it is customary for them to provide housing and, by providing the housing under a SSA, it could be concluded that the employee is a current employee (a current employee is defined in subsection 136(1) of the FBTAA as being a person entitled to receive salary or wages).

The issue in this case is whether by the employee terminating a fixed term lease early, and at the same time the employer leases the same property then allowing the employee to remain in the house via the SSA, it is an arrangement that has been entered into in order to obtain the exemption.

In respect of the SSA, ATO Interpretative Decision ATO ID 2010/182 Fringe benefits tax: exempt benefits - remote area housing benefits - salary sacrifice arrangement looks at a housing benefit provided to an employee upon engagement via an effective SSA. In this ATO ID it was concluded that the SSA arrangement was not arrangement entered into for the purpose of obtaining the benefit of the exemption.

In this case the employer has said that an oversight during the contract negotiation process, the employee was not offered housing benefit as part of the initial salary package and the employee secured their own private rental accommodation. Had the housing been offered as part of the original salary package then the facts of this case would have been on all fours with that of ATO ID 2010/182.

However the employee leased the property themselves and now the employee intends to terminate the lease with the employer immediately renting the same property and then providing it back to the employee. This type of arrangement is addressed in ATO Interpretative Decision ATO ID 2002/412 Fringe Benefits Tax: Exempt remote area housing benefits and it concludes that this type of arrangement will not necessarily represent an arrangement entered into for the purposes of obtaining the exemption.

However this does not mean that every arrangement involving an employer leasing a property after an employee's lease is terminated by an employee and then providing the house to an employee is acceptable. What is required is an examination of the arrangement itself which in this case involves the termination of a fixed term lease before the fixed term expires.

Under the lease agreement the employee has an obligation to lease the property until date X at which time they are free to terminate the lease at any time. In other words they have an obligation to make periodic rental payments until date x which if the employer paid on their behalf would constitute an expense payment benefit under section 20 of the FBTAA.

By terminating the lease early the employee is effectively stating they do not wish to retain their rights as a tenant for the full length of the lease. However at the same time the employer enters into a new lease on the property and then provides the employee with similar rights of occupation of the same property. What the arrangement does in this case is transfer an existing obligation to pay the rent on the property from the employee to the employer whilst the employee continues to benefit from the use of the property as they would have if they had not terminated the lease early.

In FBTAA terms this has the effect of changing what could have been an expense payment benefit into a housing a benefit. The difference being that the taxable value of expense payment benefit (if made) would only be reduced by 50% whereas the housing benefit would be exempt.

An individual would not generally terminate a fixed period lease before the fixed period expired and then remain in the house. They would normally terminate the lease because they wish to vacate the property. However under this arrangement the employee will not be vacating the premises and will continue to enjoy full use of the property.

Although the main purpose in this case may be to rectify an oversight in not offering a housing benefit when the employee began employment, the fact is the employee did enter into a fixed term lease on a property. Under that fixed term lease the employee has an obligation to lease (and pay rent on) the property until date x. An arrangement entered into that transfers an existing obligation to lease that property from an employee to an employer whilst allowing the employee to continue to use the same property is in part an arrangement entered into to obtain the exemption. The employer could just as easily provide housing assistance by paying the existing (or part of) rental obligations of the employee under the lease.

Question 2

Summary

The benefit is exempt as the purpose of the arrangement is to provide an employee with a housing benefit and although previously leased by the employee the lease had expired when the arrangement was entered into.

Detailed reasoning

In this case the facts are the same as that for question 1 except the employee will terminate the lease when the fixed period ends in date X.

Once the fixed term has expired the employee is free to terminate the lease at any time and free to move anywhere without any further obligations in respect of rental payments on the property.

If the employer then leases the property and provides it back to the same employee there is no exchange of obligations between the employer and employee and is essentially the same as if the employee giving notice and then moving to any another property owned or leased by the employer.

As a result it is not an arrangement entered into for the purpose of obtaining the exemption.

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