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Ruling

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

Question 1

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

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/accommodation components pursuant to section 31 of the FBTAA 1986?

Answer: Yes

Question 3

If the answer to Question 1 is no, and your employee is reimbursed for the cost of their accommodation, will the reimbursement be an exempt benefit under section 21 of the FBTAA 1986?

Answer:

As the answer to question 1 is yes, this question has not been addressed.

This ruling is based on the living-away-from-home allowance provisions that are currently contained in sections 30 and 31 of the FBTAA 1986. 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 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.

The Treasurer also announced LAFHA reforms in the May 2012 budget with legislative amendment to apply from 1 July 2012.

More information regarding the proposed reforms is available in the following documents which we have attached for your information:

· 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.

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:

Year ended 30 June 2012.

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The employee moved to Australia` Date X' and commenced employment with Employer X on a Temporary Business (Long Stay) (Class UC) (Subclass 457) Visa with a validity period of X.

You offered the Employee a full-time position commencing on `Date Y', as confirmed in your letter. In this letter you confirm the salary and superannuation fund contributions per annum along with the following information:

You advise the flexibility of your salary packaging, and that the employee may be eligible to receive a LAFHA paid in accordance with reasonable amounts set by the Australian Tax Office, to provide compensation for the additional cost of food whilst living away from home, and in addition compensation for accommodation up to your upper limits (based on location and family size) whilst living away from home, should he be eligible. You provide the salary package calculation showing the maximum LAFHA entitlement the employee may receive, based on X number of adults.

The LAFHA accommodation component you provide is the maximum entitlement amount that may be provided, however the LAFHA accommodation entitlement you will receive will be based on the actual amount of your rental payments up to this maximum amount.

The employee is a non-award employee, the remuneration of the employee is negotiated between the employer and employee.

You applied for a ruling concerning the proposed allowance after the employee commenced employment with you. If the Commissioner provides a ruling that the employee is eligible for a LAFHA, you and your employee will enter into a new agreement providing that the salary and superannuation contributions including the LAFHA will be paid to the employee.

You derived the LAFHA food component from the limits set out by the Australian Tax Office for X number of adults and the LAFHA accommodation component from the employees actual rent of $X per week as per their `Living Away from Home Declaration'.

Your application to nominate the employee for a Temporary Business (Long Stay) (Class UC) (Subclass 457) Visa has been approved.

The employee:

is a Citizen and resident of Country X, living in a house that he owns as per the address shown on his `Living Away from Home Declaration', until moving to Country X in Period X and then moving to Australia in Period X.

is residing in a rented apartment located at Address X Australia, with his family, as provided by the `Living Away from Home Declaration'.

has expressed his intention to return to Country X, upon completion of his assignment with you, and to work in Australia for no more than X years. The fact that he is changing employers does not change his intention to return to his home country which he submits is his usual place of residence, the new position will allow him to gain more experience and expertise in his professional career before returning to Country X.

has consistently returned to Country X in order to maintain his personal ties with his family and friends.

does not own a property in Australia and hasn't applied for permanent residence in Australia.

used his bank accounts during his trips to Country X and plans to keep them open indefinitely.

maintained his Country X pension plan and is not planning to transfer the funds to Australia as his intention is to return to Country when he finishes his employment assignment.

has retained in Country X:

· Bank accounts;

· Property loan;

· Credit card;

· Retirement fund;

· Insurances;

· Personal effects; and

· A vehicle

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 21

Fringe Benefits Tax Assessment Act 1986 Subsection 30(1)

Fringe Benefits Tax Assessment Act 1986 Section 31

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1936 Section 23L

Reasons for decision

Question 1

Summary

The allowance to be paid to your 'employee' will be a living-away-from-home allowance benefit pursuant to subsection 30(1) of the FBTAA 1986?

Detailed reasoning

Discussion of law

Section 30 of the FBTAA 1986 sets out the circumstances, in which a payment, by an employer to an employee, will qualify as a living-away-from-home allowance (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.

A payment by an employer to an employee will, therefore, constitute a LAFHA if all of the following conditions are met:

(a) the payment is an allowance in respect of the employment of the employee;

(b) the whole, or a part of the allowance is in the nature of compensation for:

non-deductible additional expenses incurred by the employee; or

non-deductible additional expenses incurred by the employee and other disadvantages to which the employee is subject; and

(c) the non-deductible additional expenses and other disadvantages arise because the employee is required to live away from their usual place of residence in order to perform the duties of that employment.

(a) Is the payment an allowance?

Taxation Ruling TR 92/15 discusses the difference between an allowance and a reimbursement.

Paragraph 2 of TR 92/15 states:

A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

You propose to pay your employee an allowance should the outcome of this ruling determine eligibility.

You have derived the LAFHA food component from the limits set out by the Australian Tax Office for X number of adults and the LAFHA accommodation component from the employees actual rent of $X per week as per the `Living Away from Home Declaration'.

We agree that the payment will be an allowance.

(b) Is the allowance compensation for non-deductible additional expenses or for both non-deductible additional expenses and other disadvantages to which the employee is subject?

To determine whether this condition is satisfied it is necessary to determine:

the reason for paying the allowance, and

if the allowance is paid to compensate the employee for additional expenses incurred by the employee, and whether the expenses were deductible expenses.

Paragraph 30(1)(b) of the FBTAA 1986 specifies the reasons for which the allowance must be paid. These requirements were considered by the Federal Court in Atwood Oceanics Australia Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 742; (1989) 30 IR 58; 89 ATC 4808; which provided the following propositions at ATC 4816 - 4817:

The circumstances of the payment of the allowance must be such that a reasonable person would conclude, applying an objective view thereto, that the allowance bore the character described in paragraph 30(1)(b) of the FBTAA 1986.

The section does not require the allowance to be paid as compensation. It is sufficient that in the eyes of an objective observer the allowance was in the nature of compensation to the employer.

The allowance in the nature of compensation must relate to additional expenses incurred by an employee during a period, or to additional expenses incurred and additional disadvantages to which the employee was subject during a period.

In stipulating that the additional expenses and disadvantages be incurred or suffered by reason of the employee being required to live away from his or her usual place of residence to perform the duties of employment, the Act required demonstration of some causal connection between the likelihood of additional expenses and disadvantages and the requirement to live away from home for a period. An obvious example of such additional expenses would be extra costs for food and accommodation that would not be incurred if the employee were not required to live away from home.

It is the underlying purpose of the allowance that determines the applicability of the Act and the fact that in addition to the allowance an employee may have enjoyed countervailing savings which offset his or her additional expenses would be irrelevant.

Effective Salary Sacrifice Arrangements

Taxation Ruling TR 2001/10 provides guidelines for the treatment of benefits provided as part of a Salary Sacrifice Arrangement (SSA).

An effective SSA 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 an non-assessable, non-exempt income (section 23L of the Income Tax Assessment Act 1936 (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 remuneration paid to an employee. However it provides restrictions on the situations in which it can occur.

For example, TR 2001/10 indicates 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 which governs the amount of salary or wage that is to be paid and the level of remuneration is negotiated by the employee and employer prior to the employee commencing their duties it is possible for a living-away-from-home allowance to form part of the remuneration paid to the employee.

The circumstances of the proposed payments to the employee are:

the employee moved to Australia in period X and commenced employment with Employer X under a Temporary Business (Long Stay) (Class UC) (Subclass 457) Visa with a validity period of X.

You offered your employee a full-time position commencing on X date confirming the salary and superannuation fund contributions per annum together with the following information:

You advise the flexibility of your salary packaging, and that the employee may be eligible to receive a LAFHA paid in accordance with reasonable amounts set by the Australian Tax Office, to provide compensation for the additional cost of food whilst living away from home, and in addition compensation for accommodation up to your upper limits (based on location and family size) whilst living away from home, should he be eligible. You provide the salary package calculation showing the maximum LAFHA entitlement the employee may receive, based on X number of adults:

The LAFHA accommodation component you advise is the maximum entitlement amount that may be provided, however the LAFHA accommodation entitlement you will receive will be based on the actual amount of your rental payments up to this maximum amount.

You applied for a ruling concerning the proposed allowance after the employee commenced employment with you. If the Commissioner provides a ruling that the employee is eligible for a LAFHA, you and your employee will enter into a new agreement providing that the salary and superannuation contributions including the LAFHA will be paid to the employee.

You derived the LAFHA food component from the limits set out by the Australian Tax Office for X number of adults and the LAFHA accommodation component from the employees actual rent of $X per week as per the `Living Away from Home Declaration'.

The employee is a non-award employee, the remuneration of the employer is negotiated between the employer and employee.

In applying TR 2001/10 to these facts it can be seen that there is no pre existing award that prevents a LAFHA from being paid.

However, as the agreement specifies an amount of salary there is a pre-determined salary or wage. Rather than involving a reclassification of existing salary or wages the facts as provided indicate you reached an agreement with the employee as to the amount of total remuneration that was to be paid. Although the remuneration was specified as salary, the employee remuneration is subject to further negotiation in relation to the payment of a LAFHA.

This negotiation has now resulted in an agreement being reached for a payment of $289 per week for food, and $X per week for accommodation, to be paid to the employee if the Commissioner provides a ruling that the employee is eligible for a LAFHA.

As these are additional non deductible expenses which paragraph 30(1)(b) of (FBTAA 1986) refer, this condition will be satisfied provided the payment is made in accordance with guidelines provided by Taxation Ruling TR 2001/10. That is, the agreement to pay the allowance must be entered into before the employee has earned the entitlement to receive that amount as salary or wages.

For a SSA to be effective the arrangement has to be entered into before you perform the work. If the arrangement is put into place after the work has been performed it will be ineffective. You have advised that if the Commissioner provides a ruling that the employee is entitled to receive a LAFHA, you and your employee will enter into a new agreement providing that a LAFHA will be paid to the employee and that it will be deducted as part of a SSA.

You will need to treat any payments in respect of work performed prior to the implementation of a new agreement in accordance with the wording of your original contract, your letter to the employee dated X confirms that the employees package comprises of a base salary and employer superannuation contributions. As the payments were treated as salary and wages prior to any new agreement then they will remain salary and wages.

Information provided by you indicates that a new agreement would be entered into once negotiations regarding the payment of a LAFHA were complete and confirmation from the Commissioner that the payment will be a LAFHA had been received. In this situation the payments will be considered to be compensation for non-deductible additional expenses or for both non-deductible additional expenses and other disadvantages to which the employee is subject.

(c) Is the employee required to live away from their usual place of residence?

The term 'usual place of residence' is not defined in the FBTAA 1986, however 'place of residence' is defined in subsection 136(1) to be, 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.

Miscellaneous Taxation ruling MT 2030: Fringe benefits tax: living-away-from-home allowance benefits, discusses what is meant by the term usual place of residence at paragraphs 11 to 25.

Paragraph 12 states:

A place of residence of a person is thus the place where he or she resides or has some form of sleeping accommodation. The customary meaning of the word reside is to dwell permanently or for a considerable time, or have ones abode for a time. In turn residence means the place, especially the house, in which one resides; a dwelling, or a dwelling.

Paragraph 14 states:

.... 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 22 discusses the situation where an employee is a foreign national who obtains employment in Australia for a limited time. 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 time 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.

Your employee is in a similar situation. He has come to Australia from Country X on a 457 temporary visa and he intends to return to Country X at the conclusion of his employment assignment with you.

Under these circumstances we consider the employee is living away from his usual place of residence.

Question 2

Summary

The taxable value of the LAFHA fringe benefit will be reduced by the exempt food/accommodation components pursuant to section 31 of the FBTAA 1986.

Detailed reasoning

Section 31 of the FBTAA 1986 explains how to determine the taxable value of a LAFHA. In general terms the taxable value is the amount of the allowance less the exempt accommodation component and/or exempt food component.

Exempt accommodation component

The definition of exempt accommodation component in subsection 136(1) of the FBTAA 1986 provides that the value of this component will depend upon whether the relevant declaration is provided to the employer before the date on which the fringe benefits tax return is lodged.

As the employee has provided you with the relevant declaration the exempt accommodation component will be the amount of the allowance that is reasonable compensation for additional expenses on accommodation.

The employee is to be paid an allowance of $X per annum, which equates to $X per week, in respect of the accommodation. Given that the employee is currently paying $X per week for accommodation this part of the allowance paid is considered to be reasonable compensation for the employee having to incur additional accommodation expenditure.

Exempt food component

The definition of exempt food component in subsection 136(1) of the FBTAA 1986 provides that the value of this component will depend upon:

Whether the relevant declaration has been provided to the employer before the date at which the fringe benefits tax return is lodged: and

How the food component of the allowance has been calculated.

As set out above, the relevant declaration has been provided to the employer.

Therefore, the amount of the exempt food component will be on dependant how the food component of the allowance has been set. This is explained in paragraphs 6 to 8 of MT 2030 which states:

6. If the amount of the food component is set with the intention that it cover all food costs of the employee and (where applicable) his or her family, the exempt food component is the excess of that component over what the employee would normally expend on food if he or she were not living away from home. Those normal home food costs, referred to as the "statutory food amounts", are set in the Act at $42 per week for each adult and $21 for each child who is under 12 at the beginning of the relevant year of tax. Thus, if an employee with a wife and one child under 12 is receiving $130 a week to cover all food costs, the exempt food component is $130 reduced by $105, i.e., $25 of the allowance is exempt from fringe benefits tax.

7. If the food component of the allowance has been set to reflect any 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.

8. If, however, the estimated home food costs taken into account in setting the allowance are less than the statutory food amounts, the food component reduced by the amount by which the statutory food amounts exceed the estimated home food costs is the exempt food component. For example, if the food component for a single person has been set at $100 after allowing for estimated home food costs of $30, the exempt food component would be $100 - ($42-30), i.e., $88.

In this case, the proposed allowance amount for food is $X per annum which equates to $X per week, the LAFHA food component is derived from the limits set out by the Australian Taxation Office in Tax Determination (TD) 2011/4 which lists $373 as the amount that is acceptable as a food component for the FBT year commencing on 1 April 2011 for two adults.

However, the amount listed in this determination does not take into account amounts normally spent on food if the employee was not living-away-from-home. This is explained in paragraph 6 of MT 2040 Fringe Benefits tax: living-away-from-home allowance benefits; reasonable food component for expatriate employees (the figures in TD 2011/4 are indexed from those contained in MT 2040), which states:

In applying the living-away-from-home allowance rules to expatriate employees working in Australia during the year of tax ended 31 March 1988, a family consisting of 2 adults and 2 children under 12 will be treated as spending $188 per week on food and drink. That is, $188 per week of a living-away-from-home allowance benefit received by an expatriate employee in Australia with a spouse and 2 children under 12 will be treated as the food component of the allowance, on the basis that it was intended to cover the total cost of the family's weekly food bill. In that case, the exempt food component would be $188 minus $126 ($42 + $42 + $21 + $21), i.e., $62, with the remaining $126 of the food component being exposed to fringe benefits tax.

For this employee the food component represents the additional food only and a reduction has already been made for the statutory food component by the employer.

Therefore, as the amount to be paid to the employee is equal to the amount set in the Taxation Determination and the employee has given the relevant declaration to the employer the exempt food component will be the amount paid to the employee.

Question 3

Summary

If the answer to Question 1 is no, and your employee is reimbursed for the cost of their accommodation, will the reimbursement be an exempt benefit under section 21 of the FBTAA 1986?

Detailed reasoning

As the answer to Question 1 is yes, this questioned has not been addressed.