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Ruling

Subject: Remote area housing benefits

Issue 1

Question 1

Will the provision of the housing benefits by the entity to its employees be exempt from fringe benefits tax in accordance with section 58ZC of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Issue 2

Question 1

Will the provision of an expense payment benefit by the entity to an employee, where the employee's expenditure is in relation to rent, be reducible in accordance with subsection 60(2A) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Question 2

Will the provision of an expense benefit payment benefit by the entity to an employee, where the employee's expenditure is in relation to interest on a loan, be reducible in accordance with subsection 60(2) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

This ruling applies for the following period:

1 April 2011 to 30 June 2012.

The scheme commences on:

1 April 2011.

Relevant facts and circumstances

The entity is a resource corporation that supplies resource services to customers within its regional service area.

There are four levels of employees:

1. Senior management

2. Middle management

3. Specific skill employees

4. Other employees

Some employees have been recruited locally, whereas some have been recruited from outside the local region.

All employees are employed in the entity's service area.

As a result of a previous private ruling issued by the ATO ('the previous private ruling'), the entity implemented the following arrangements which are still current:

Arrangement one: The entity owns the residential properties in its service area that are, from time to time, provided to employees as their usual place of residence at less than market rent.

The employee foregoes salary to the amount of the rent. As per the previous private ruling, this arrangement involves the provision of a housing benefit.

The provision of the residential properties is not linked to any particular position or employee level.

Arrangement two: The entity rents residential properties via unrelated third parties and they are provided to employees as their usual place of residence.

The employee foregoes salary to the amount of the rent paid to the third party. As per the previous private ruling, this arrangement involves the provision of a housing benefit.

Housing benefits have been provided only to those employees who have been recruited from outside of the local region and are employed at the levels of 1 to 3.

Arrangement three: Employees rent their accommodation directly, which is their usual place of residence, via a third party. The entity pays the rent to the unrelated third party on the employee's behalf. The employee foregoes salary to the amount of the rent. All of these residential properties are within the entity's service area. As per the previous private ruling, this arrangement involves the provision of an expense payment benefit.

Housing assistance has been provided only to those employees who have been recruited from outside of the local region and are employed at the levels of 1 to 3.

Arrangement four: Employees own their own accommodation, which is their usual place of residence. The entity reimburses the interest component of the mortgage to the employee. The employee foregoes salary to the amount of the interest reimbursed. All of these residential properties are within the entity's service area. As per the previous private ruling, this arrangement involves the provision of an expense payment benefit.

Housing assistance has been provided only to those employees who have been recruited from outside of the local region and are employed at the levels of 1 to 3.

In the previous private ruling, the ATO accepted that it was necessary for the entity to provide residential accommodation to its employees, as it was customary for employers in the industry to provide this to its employees in senior management, middle management and specific skill employees free of charge or for a nominal rent in order to attract and retain skilled and qualified employees.

The entity is seeking to expand the coverage of the arrangements to include all employees, as they face pressure to retain existing employees from a number of areas.

With respect to housing benefits (being arrangements one and two):

· the entity will be providing housing benefits or housing assistance to potentially all employees

· it is/will be necessary to provide, or to arrange for the provision of residential accommodation for all employees as it is customary for employers in the industry to provide residential accommodation for employees free of charge or for a rent that is less than market value, and

· in relation to accommodation that the entity will be renting, in no circumstances will the third party providing the accommodation be related to the employee.

With respect to expense payment benefits (being arrangements three and four):

· the entity will be providing housing assistance to potentially all employees

· it is/will be necessary to provide, or to arrange for the provision of residential accommodation for all employees as it is customary for employers in the industry to provide residential accommodation for employees free of charge or for a rent that is less than market value

· all of the residential properties that are or will be owned and rented by employees will be within the entity's service area, and

· in relation to accommodation that the entity will be renting, in no circumstances will the third party providing the accommodation be related to the employee.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20,

Fringe Benefits Tax Assessment Act 1986 section 25,

Fringe Benefits Tax Assessment Act 1986 subsection 58ZC(1),

Fringe Benefits Tax Assessment Act 1986 subsection 58ZC(2),

Fringe Benefits Tax Assessment Act 1986 subsection 60(2),

Fringe Benefits Tax Assessment Act 1986 subsection 60(2A),

Fringe Benefits Tax Assessment Act 1986 subsection 136(1),

Fringe Benefits Tax Assessment Act 1986 paragraph 140(1)(a) and

Fringe Benefits Tax Assessment Act 1986 paragraph 140(1)(b).

Reasons for decision

Issue 1 Question 1

Summary

The provision of the housing benefits by the entity to its employees will be exempt from fringe benefits tax in accordance with section 58ZC of the Fringe Benefits Tax Assessment Act 1986.

Detailed reasoning

A housing benefit is defined by section 25 as being a housing right granted by a person to another person. A housing right is defined by subsection 136(1) to mean a lease or license granted to the person to occupy or use a unit of accommodation, which will be their usual place of residence.

Subsection 136(1) defines a unit of accommodation to include a house, flat or home unit, and accommodation in house, flat or home unit. The Commissioner's view on what is meant by 'usual place of residence' is considered in Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits. The relevant paragraphs of MT 2030 are paragraphs 12, 14 and 19. From these paragraphs a person's 'usual place of residence':

· must be a place of residence that they dwell permanently, and not temporarily, and

· is presumed to be near where they are employed permanently.

As per arrangement one, the residential properties that the entity owns are, from time to time, provided to employees as their usual place of residence at less than market rent. As such, arrangement one satisfies the housing benefit definition in accordance within section 25.

Furthermore arrangement two, where the entity rents residential properties via unrelated third parties and they are provided to employees as their usual place of residence, will also satisfy the housing benefit definition within section 25.

Under subsection 58ZC(1), a housing benefit that is a remote area housing benefit is an exempt benefit. The conditions for a housing benefit to be a remote area housing benefit are set out in subsection 58ZC(2) as follows.

A housing benefit in relation to an employer for a year of tax and for a unit of accommodation, being a benefit provided to an employee of the employer in respect of the employee's employment, is a remote area housing benefit if:

(a) during the whole of the tenancy period, the unit of accommodation was located in a State or internal Territory and was not at a location in, or adjacent to, an eligible urban area; and

(b) during the whole of the tenancy period, the recipient was a current employee of the employer and the usual place of employment of the recipient was not at a location in, or adjacent to, an eligible urban area; and

(c) (Repealed by No 77 of 2005)

(d) it would be concluded that it was necessary for the employer, during the year of tax, to provide, or to arrange for the provision of, residential accommodation for employees of the employer because:

(i) the nature of the employer's business was such that employees of the employer were liable to be frequently required to change their places of residence; or

(ii) there was not, at or near the place or places at which the employees of the employer were employed, sufficient suitable residential accommodation for those employees (other than residential accommodation provided by or on behalf of the employer); or

(iii) it is customary for employers in the industry in which the recipient was employed during the tenancy period to provide residential accommodation for their employees free of charge or for a rent or other consideration that is less than the market value of the right to occupy or use the accommodation concerned; and

(e) the recipients overall housing right was not granted to the recipient under:

(i) a non-arm's length arrangement; or

(ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of this section.

Paragraph 58ZC(2)(a)

A unit of accommodation will be treated as being in a remote area if it is not in or adjacent to an eligible urban area. Law Administration Practice Statement PS LA 2000/6 Fringe benefits tax: what is considered to be remote for the purposes of the remote area housing benefit provides guidance to tax officers on whether a location will be considered remote.

PS LA 2000/6 summarises paragraphs 140(1)(a) and 140(1)(b) to conclude that a location will be in a remote area (and not near an eligible urban area) where it is:

· 40 kilometres or more from a town or city with a census population of 14,000 or more, if that town is not in Zone A or B for income tax purposes

· 40 kilometres or more from a town or city with a census population of 28,000 or more, if that town is in Zone A or B for income tax purposes, and

· 100 kilometres or more from a town or city with a census population of 130,000 or more.

All of the towns in the entity's service area are considered to be locations in a remote area.

Therefore it is accepted that the residential properties referred to in arrangements one and two are in a remote area, and as such the requirements of this paragraph are satisfied.

Paragraph 58ZC(2)(b)

As all of the entity's employees are employed in the entity's service area, it is accepted that the employees' usual place of employment is in a remote area, and that the employees who occupy the residential properties referred to in arrangements one and two are current employees of the entity.

Paragraph 58ZC(2)(d)

From the facts provided, both subparagraphs 58ZC(2)(d)(i) and 58ZC(2)(d)(ii) are not required to be considered.

Taxation Determination TD 94/97 Fringe benefits tax: what does the phrase 'customary for employers in the industry' mean in relation to the provision of fringe benefits to employees? explains what is meant by the phrase 'customary for employees in the industry' in subparagraph 58ZC(2)(d)(iii). Paragraph 2 of TD 94/97 states:

A benefit will be accepted as being customary where it is normal or common for employees of that class or job description in that industry to be provided with the same or similar benefits. It is not necessary that all or even the majority of employees in the industry receive the benefit. Where the provision of the benefit is unique, rare or unusual within an industry it would not be accepted as being customary.

We note that in the previous private ruling, we ruled that it is necessary for the entity to provide residential accommodation to its employees, as it was customary for employers in that industry to provide this to its employees in senior management, middle management and specific skill employees free of charge or for a nominal rent in order to attract and retain skilled and qualified employees.

Furthermore, we note that another entity in the same industry offers to provide remote area housing benefits to all of its employees via salary sacrifice.

Therefore it is accepted that it is necessary for the entity to provide residential accommodation to its employees, as it is customary for employers in the industry to provide residential accommodation to its employees free of charge or for a rent that is less than market value.

Paragraph 58ZC(2)(e)

Subsection 136(1) defines a 'non-arm's length arrangement' to mean an arrangement other than an arm's length arrangement. As the term 'arm's length arrangement' is not defined in the FBTAA, the Commissioner determined the term's meaning in ATO Interpretative Decision ATO ID 2005/156 Exempt benefits: remote area housing - non-arm's length arrangement for the purposes of subparagraph 58ZC(2)(e)(i) as follows:

Subsection 136(1) defines 'arm's length transaction' to mean a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction.

Parties will be dealing with each other 'at arm's length' in relation to the transaction, where:

· they are not connected in such a way as to bring the question the ability of one to act independently of the other, and

· they have behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs.

All employees who elect to be subject to arrangements one or two do so by entering into a salary sacrifice agreement with the entity where they forego an amount of salary equal to the amount of the housing benefits granted by the entity. Therefore it is accepted that the entity will grant the housing benefits to its employees under arrangements one and two under an arm's length arrangement.

In ATO Interpretative Decision ATO ID 2010/182 Fringe benefits tax: exempt benefits - remote area housing benefits - salary sacrifice, the Commissioner considered that the provision of housing benefits by an employer to a new employee under a salary sacrifice agreement to be for the purpose of enabling the employer to provide the benefit of housing to its employer, and not for the purpose of obtaining the benefit of the application of section 58ZC.

Therefore it is accepted that when arrangements one or two are entered into by the entity and its employees, they are not entered into for the purpose of obtaining the benefit of section 58ZC.

Issue 2 Question 1

Summary

The provision of an expense payment benefit by the entity to an employee, where the employee's expenditure is in relation to rent, will be reducible in accordance with subsection 60(2A).

Detailed reasoning

Expense payment benefits are defined by section 20 as follows:

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.

Where the entity pays the rent of an employee to an unrelated third party under a salary sacrifice agreement, an expense payment benefit is provided under paragraph 20(a).

The taxable value of an expense payment benefit shall be reduced by 50% under subsection 60(2A) as follows:

Where:

(a) the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer;

(b) the recipients expenditure is in respect of remote area housing rent connected with a unit of accommodation;

(c) the recipient occupied or used the unit of accommodation as his or her usual place of residence during a period (in this subsection called the ``occupation period'') during which the rent accrued; and

(d) the fringe benefit was not provided under:

(i) a non-arm's length arrangement; or

(ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of this section;

the amount that, but for this subsection, would be the taxable value of the fringe benefit in relation to the year of tax shall be reduced by 50% of so much of the recipients expenditure as relates to the occupation period.

Paragraph 60(2A)(a)

The entity will provide this benefit to employees. Therefore this paragraph is satisfied.

Paragraph 60(2A)(b)

As the accommodation rented by the entity's employees will be within the entity's service area, the entity will pay the employees' rent in relation to accommodation in a remote area. Therefore this paragraph is satisfied.

Paragraph 60(2A)(c)

All rented accommodation will be the usual place of residence of the entity's employees in accordance with the Commissioner's view in MT 2030. Therefore this paragraph is satisfied.

Paragraph 60(2A)(d)

In ATO Interpretative Decision ATO ID 2003/159 Remote area housing: reduction of taxable value - remote area housing rent the Commissioner considered that paragraph 60(2A)(d) did not apply to a similar arrangement to arrangement three. Therefore this paragraph is satisfied.

Issue 2 Question 2

Summary

The provision of an expense benefit payment benefit by the entity to an employee, where the employee's expenditure is in relation to interest on a loan, will be reducible in accordance with subsection 60(2).

Detailed reasoning

Expense payment benefits are defined by section 20 as follows:

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.

Where the entity reimburses an employee the interest incurred on a housing loan under a salary sacrifice agreement, an expense payment benefit is provided under paragraph 20(a).

The taxable value of an expense payment benefit shall be reduced by 50% under subsection 60(2) as follows:

Where:

(a) the recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer;

(b) the recipients expenditure is in respect of interest in respect of a remote area housing loan connected with a dwelling;

(c) the recipient occupied or used the dwelling as his or her usual place of residence during a period (in this subsection called the ``occupation period'') during which the interest accrued; and

(d) the fringe benefit was not provided under:

(i) a non-arm's length arrangement; or

(ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of this section;

the amount that, but for this subsection, would be the taxable value of the fringe benefit in relation to the year of tax shall be reduced by 50% of so much of the recipients expenditure as relates to the occupation period.

Paragraph 60(2)(a)

The entity will provide this benefit to employees. Therefore this paragraph is satisfied.

Paragraph 60(2)(b)

A dwelling is defined by subsection 136(1) to mean a unit of accommodation (defined earlier to include a house, flat or home unit, and accommodation in house, flat or home unit).

As the residential properties that are or will be owned by the entity's employees will be within the entity's service area, the entity will reimburse to the employee the interest paid in respect of the remote area housing loans connected with the residential properties. Therefore this paragraph is satisfied.

Paragraph 60(2)(c)

All owned residential properties are or will be the usual place of residence of the entity's employees in accordance with the Commissioner's view in MT 2030. Therefore this paragraph is satisfied.

Paragraph 60(2)(d)

In ATO Interpretative Decision ATO ID 2003/157 Remote area housing: reduction of taxable value - remote area housing loan interest the Commissioner considered that paragraph 60(2)(d) did not apply to a similar arrangement to arrangement four. Therefore this paragraph is satisfied.