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Ruling

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

Question 1

Will the allowance to be paid by the employer to the employee be considered a living-away-from-home allowance (LAFHA) pursuant to section 30 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

Question 2

If the answer to question 1 is yes, is the taxable value of the LAFHA fringe benefit reduced by the exempt food component and the exempt accommodation component pursuant to section 31 of the FBTAA?

Answer

Yes.

This ruling is based on the living-away-from-home allowance provisions that are currently contained in sections 30 and 31 of the FBTAA. Under these provisions, an employer who pays a living-away-from-home allowance to an employee may be liable to pay fringe benefits tax on the taxable value of a living-away-from-home allowance. Currently, the taxable value on which the employer pays tax is the amount of the allowance less the exempt accommodation component and the exempt food component.

The Treasurer as part of the Mid-Year Economic and Fiscal Outlook announced that the Government will introduce reforms to these provisions. Under the reforms which are proposed to apply from 1 July 2012:

§ access to the exemptions that apply in relation to the food and accommodation components of a living-away-from-home allowance that is paid to a temporary resident will be limited to those temporary residents who maintain a residence for their own use in Australia, which they are living away from for work purposes, such as 'fly-in fly-out' workers; and

§ individuals will be required to substantiate their actual expenditure on accommodation and food beyond a statutory amount.

However, if the law has been substantively changed, the part of the private ruling dealing with the changed law ceases to apply.

This ruling applies for the following period:

01/04/2011 to 31/03/2015

The scheme commences on:

During 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have employed a person from Country A (the employee) who is in Australia on a Subclass 457 temporary resident visa. The employee has taken up a position of limited duration and intends to return to Country A when the position is terminated.

The employee's entire family lives in Country A and he has maintained connections with Country A.

The employee lives in rental accommodation in Australia, and has no intention of acquiring any property in Australia.

Prior to leaving Country A to work in Australia, the employee lived in an apartment in Country A. The employee's partner also owns a house in Country A. The employee and the employee's partner continue to maintain ownership of their property in Country A.

The employee maintains professional accreditation in Country A. The employee visited Country A in 2011 and will do so in 2012 to maintain this accreditation and visit family members.

The employee arranged employment prior to relocating to Australia.

The employee came to Australia under a Temporary Business Entry (Class UC) Business (Long Stay) (Subclass 457) Visa. The visa is valid to 2014 and the employee intends to return to Country A when their current visa expires.

The employee commenced working with the employer during 2010.

The employer wishes to pay the employee an allowance described as a LAFHA in respect of accommodation factoring reasonable rent and in respect of additional food costs factoring reasonable food reduced by the statutory food amounts in respect of eligible family members.

The reason for paying the LAFHA is to compensate the employee for additional costs incurred because the employee is required to live away from their usual place of residence in order to perform their employment-related duties.

No provision was made in the original employment contract for a LAFHA. However, in accordance with the contract it is contemplated that by agreement between the employer and the employee, the remuneration components may be changed.

Under the amended employment contract the LAFHA will be in addition to the employee's salary entitlement and not a component of the employee's salary entitlement.

The employee will be required to give the employer a declaration as to the particulars of their usual place and actual place of residence for the fringe benefits tax year during which the allowance is paid.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 30

Fringe Benefits Tax Assessment Act 1986 section 31

Fringe Benefits Tax Assessment Act 1986 subsection 136(I)

Reasons for decision

Question 1

Summary

The employee is required to live away from their usual place of residence in order to perform the duties of employment. The proposed allowance will be in the nature of compensation for additional expenses for accommodation and food. Consequently, the conditions in paragraph 30(1)(b) of the FBTAA will be satisfied and the allowance is a LAFHA.

Detailed reasoning

Section 30 of the FBTAA sets out the circumstances in which an allowance is a LAFHA.

Subsection 30(1) states:

Where:

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

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

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

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

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

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

In summarising the requirements of subsection 30(1), an allowance will be a LAFHA if:

(i) 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

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

Is the employee required to live away from their 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, subsection 136(1) 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.

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 (MT2030).

Paragraphs 15 to 18 of MT 2030 refer to various decisions 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.

Paragraph 20 of MT 2030 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.

As an example of the application of this general rule paragraph 22 of MT 2030 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.

The following facts indicate that the employee's usual place of residence is in Country A:

§ The employee is a citizen of Country A

§ the employee is in Australia on a Subclass 457 temporary visa for a period of four years

§ the employee intends to return to Country A either at the end of their visa or on cessation of employment whichever occurs first

§ the employee continues to maintain ownership of their residence in Country A

§ the employee maintains professional accreditation in Country A

§ the employee returned to Country A in 2011 to maintain their professional accreditation and will also return in 2012

§ the employee lives in rental accommodation in Australia, and has no intention of acquiring any property in Australia

§ other than the employee's partner who will be living with him in Australia, no other members of the employee's family are in Australia, they are in Country A

§ the employee still has a number of economic ties to Country A.

We therefore accept that the employee is required to live away from their usual place of residence in order to perform the duties of employment.

Can it be concluded that the proposed allowance will be paid to the employee to compensate them for additional non-deductible expenses and other disadvantages?

Although the employee may be incurring additional non-deductible expenses it needs to be concluded that some or all of the allowance is in the nature of compensation to the employee for those additional expenses.

The reason for paying the LAFHA is to compensate the employee for additional costs incurred because the employee is required to live away from their usual place of residence in order to perform their employment-related duties.

No provision was made in the original employment contract for a LAFHA. However, in accordance with the contract it is contemplated that by agreement between the employer and the employee, the remuneration components may be changed.

Under the amended employment contract the proposed LAFHA will be in addition to the employee's salary entitlement and not a component of the employee's salary entitlement.

As the amount of the proposed allowance will be in addition to the employee's salary, this supports the conclusion that the proposed allowance is in the nature of compensation for the employee's additional accommodation and food expenses as described.

The proposed allowance will be in the nature of compensation for additional expenses for accommodation and food. Consequently, the conditions in paragraph 30(1)(b) of the FBTAA will be satisfied and the allowance is a LAFHA.

Question 2

Summary

The taxable value of the LAFHA fringe benefit may be reduced by the exempt food component and the exempt accommodation component pursuant to section 31 of the FBTAA.

Detailed reasoning

The proposed LAFHA of $B per annum will be made up of:

§ $C in respect of accommodation factoring reasonable rent of $D a week, and

§ $E in respect of additional food costs factoring reasonable food of $F a week reduced by the statutory food amounts in respect of eligible family members.

Section 31 of the FBTAA sets out the method for calculating the taxable value of a living-away-from-home allowance. 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 component

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.

As the accommodation component will be based on the annual reasonable rent of $D a week, 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.

The $E in respect of the annual additional food costs factors in a reasonable food component of $F a week (based on the Commissioner's annual Taxation Determination TD 2010/4) reduced by the statutory food amounts in respect of eligible family members.

As the food component of the allowance is the excess over what the employee and the employee's partner would normally spend on food if he was not living away from home, the amount of the food component will be the exempt food component.

If the employee gives the employer a living-away-from-home allowance declaration as to the particulars of their usual place and actual place of residence for the fringe benefits tax year during which the allowance is paid, the taxable value of the LAFHA fringe benefit may be reduced by the exempt food component and the exempt accommodation component pursuant to section 31 of the FBTAA.