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Ruling

Subject: Fringe Benefits Tax - Living Away From Home Allowance (LAFHA)

Question 1

Is the allowance to be paid to your employee, a living-away-from-home allowance benefit pursuant to subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If the answer to Question 1 is yes, would the LAFHA payments be able to be backdated to your employee's commencement date?

Answer

No

This ruling is based on the living-away-from-home allowance provisions that are currently contained in section 30 and 31 of the FTBAA. 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. These reforms 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 related 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.

The Treasurer also announced the living-away-from-home allowance reforms in the May 2012 budget with legislative amendments to apply from 1 July 2012.

More information regarding the proposed reforms is available in:

· The Treasurer's Media Release No. 148 of 2011, 'Tax Measures in Mid-Year Economic and Fiscal Outlook', 29 November 2011; and

· The Consultation Paper titled 'Fringe Benefits Tax (FBT) Reform Living-away-from-home benefits', 29 November 2011.

You should note that 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 periods:

1 July 2011 to 30 June 2012

The scheme commences on:

Within the year ended 30 June 2012

Relevant facts and circumstances

You are located in Australia.

Your employee is a citizen of Country A. Your employee's parents, siblings and all relatives reside in Country A.

Your employee first arrived in Australia after 1 July 2007, to commence a secondment with Company A, original expected duration of X years, as specified in a letter of offer. After such time, the employee was to be repatriated to Country A.

Given the business requirements, following the completion of X years, the employment contract was extended by Company A until after 1 July 2012.

Your employee is currently working in Australia on a business sub-class 457 visa which was recently extended until after 1 September 2015.

Whilst under employment with another employer, your employee was receiving a LAFHA to compensate for the additional expenses and/or disadvantages associated with being required to live away from their usual place of residence (Country A).

In 2011, your employee was offered a position with Company B, which commenced in 2011. Your employee ceased employment with Company A in 2011. The duration of this contract is for the length of your employee's current business sub-class 457 visa. Your employee's position is a similar role as to that held previously by your employee at Company A.

It is your employee's intention to remain working in Australia for X years, after which time it is their express intention to return to Country A having also completed further studies at University.

Your employee's place of residence, whilst working and residing, is in Australia. This place of residence is fully furnished rental accommodation acquired on 6 month lease terms.

Your employee jointly owns a property with their partner in Country A, and this has been rented out since your employee commenced their first assignment with Company A in Australia.

Your employee has retained bank accounts, a property loan, an education loan and credit cards in Country A. These bank accounts are used during trips to Country A, and your employee plans to keep them open indefinitely.

Your employee also remains a member of social clubs and professional associations in Country A.

Your employee has maintained their Country A pension plan and is not planning to transfer the funds to Australia, due to their intention to return to Country A upon completion of a further X years.

Your employee has returned to Country A on an annual basis in order to maintain their personal ties with family and friends, as your employee has a close group of friends built up during their time of residing in Country A. The network of valuable friendships and family in Country A is your employee's reasoning for their intention to return to Country A after the completion of a further X year's work.

The LAFHA accommodation component is derived from your internal finance policy which provides for the lower of actual rent incurred or amounts referenced from the Real Estate Institute of Australia Market Facts - December quarter 2010.

The LAFHA food component is derived from the limits set out by the Australian Taxation Office TD 2011/4.

In line with your internal living away from home allowance procedure, a LAFHA will commence at the time that you deem your employee is eligible for the allowance under the procedure and is agreed with your employee as evidenced by the execution of a new employment letter.

Your employee's salary is not covered by a Collective Agreement or Award.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 30(1),

Fringe Benefits Tax Assessment Act 1986 Section 31 and

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1).

Reasons for decision

Issue 1

Question 1

Summary

An allowance constitutes a LAFHA benefit under subsection 30(1) of the FBTAA where:

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

· 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.

As your employee's salary is not covered by a pre-existing award or Collective Agreement, which would prevent a LAFHA being paid, and will be under a new employment letter, both of these conditions will have been met and the allowance paid will be a LAFHA.

Detailed reasoning

Section 30 of the FBTAA sets out the circumstances in which a payment to an employee will be a LAFHA 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 these requirements an allowance will be a living-away-from home-allowance if:

· 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

· 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 allowance to be paid for additional non-deductible expenses and other disadvantages?

Under the new letter of offer (contract of employment) you will pay an allowance to your employee for their additional private accommodation and food costs. As your employee would not be able to claim an income tax deduction for these expenses, this requirement is satisfied.

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?

In determining whether the additional expenses arise as a result of the employee being required to live away from their 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) 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.

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 (MT 2030).

Paragraphs 15 to 18 of MT 2030 refer to various decisions of the Taxation Boards of Review relating to the former section 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 of MT 2030. 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 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.

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 (AAT) 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 your employee's usual place of residence is in Country A:

· your employee is a citizen of Country A;

· your employee is in Australia on a business sub-class 457 visa, which has been extended until after 1 July 2015, the same date for which their contract with you ceases;

· your employee has retained their joint ownership with their partner of their residence in Country A;

· your employee has retained bank accounts, a property loan, an education loan and credit cards in Country A, as well as maintaining memberships with social clubs and professional associations and their pension plan in Country A;

· it is your employee's intention to return to Country A upon completion of a further X year's work, shy of the contracted employment finish date after 1 July 2015; and

· your employee is considered to be currently living away from their usual place of residence. Given their usual place of residence is in Country A and their employment duties are being performed in Australia it is accepted that your employee is required to live away from their usual place of residence in order to perform their duties of employment.

Conclusion

As all the required conditions have been met, the allowance paid to your employee is a living-away-from-home allowance benefit pursuant to section 30(1) of the FBTAA.

Question 2

Summary

LAFHA payments are not able to be made retrospectively in accordance with the guidelines set out in Taxation Ruling TR 2001/10 (TR 2001/10). This is due to not being able to change the character of salary and wages once the entitlement has been earned and income derived.

Detailed reasoning

LAFHA payments proposed to be paid to your employee are salary sacrifices. TR 2001/10 explains a salary sacrifice arrangement to mean:

· an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value.

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 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 premises underlying TR 2001/10 include a premise 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 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.

Paragraph 23 of TR 2001/10 provides that personal services remuneration arrangements usually provide that the employee is entitled to be paid salary or wages at fixed intervals when he or she has performed services for the employer over a fixed period. To the extent that services for that period have been performed, everything has been done by the employee in earning the entitlement to salary or wages.

TR 2001/10 does not prevent a LAFHA from forming part of the remuneration paid to an employee however, it does provide restrictions on the situations in which it can occur.

For example, it is indicated 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 as a LAFHA.

However, by contrast, where the level of remuneration is not subject to an existing award or collective agreement (as discussed in response to question 1) which governs the amount of salary or wage that is to be paid and the level of remuneration is negotiated by the employee and the employer prior to the employee commencing their duties, it is possible for a LAFHA to form part of the remuneration paid to the employee.

Further, it is stated in your internal living away from home allowance procedure that 'under no circumstances is a LAFHA to be backdated'. Further stating that 'a LAFHA will commence at the time that Company B deems the employee is eligible for the allowance under this procedure and is agreed with the employee as evidenced by the execution of a new employment letter'.

Conclusion

Your employee is unable to re-characterise payments received as salary or wages as a LAFHA, due to the entitlement for the salary or wage payments already having been earned and derived. Therefore, the LAFHA is only able to be paid to your employee from a future point in time, and not backdated.