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Ruling
Subject: FBT living away from home allowances
Question 1
Can an employer retrospectively reclassify prior salary paid to an employee as a living away from home allowance?
Answer
No
This ruling applies for the following periods:
1 April 2006 to 31 March 2011
The scheme commences on:
On or after 1 July 2006
Relevant facts and circumstances
An employee was not a citizen of Australia. The employee was successful applying for an employment in Australia. The employment commenced on or after 1 July 2006.
The employee was granted a four year sub class 457 temporary resident visa.
The employment contract did not specify if it was a permanent position or for a fixed period. There was an implied understanding that the employee would have to return to her/his country after the expiry date of her visa or otherwise have her/his visa extended or her residential status changed.
The employment contract also did not include the provision for a living-away-from-home allowance (LAFHA) to be paid to the employee. Your employee agreed to the contract to work for the employer.
The employment contract specified an amount that would be paid each month and that tax would be deducted from the total remuneration.
The employee was not married and did not have any family members accompanying her/his to Australia. The employee did not purchase any property in Australia during the tenure of her/his sub class 457 temporary visa.
Relevant legislative provisions
Subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986
Reasons for decision
The payment of a LAFHA is a fringe benefit under section 30 of the Fringe Benefits Tax Assessment Act 1986(FBTAA).
For fringe benefits tax (FBT) purposes, a LAFHA is an allowance an employer pays to an employee to compensate for additional expenses incurred and any disadvantages suffered because the employee is required to live away from their usual place of residence in order to perform their employment-related duties.
For an amount paid to an employee to be considered as a LAFHA, the parties should turn their minds to the issue of additional expenses at the time of signing the employment contract or agreeing to the conditions of employment.
Further paragraph 2 of Miscellaneous Taxation Ruling MT 2030: Fringe benefits tax: living-away-from-home allowance benefits states:
A living-away-from-home allowance exists 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 expenses incurred, or additional expenses incurred and other disadvantages suffered, because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment.
This paragraph indicates that an allowance must be actually paid to an employee for an amount of his/her remuneration to be considered a LAFHA.
As no allowance was paid, there was no LAFHA within the meaning of section 30 of the FBTAA 1986.
The employment contract also did not specify any provision of LAFHA for the employment of the employee from the commencement date. The employee was contracted to work for the employer for remuneration which did not include an allowance.
The employment contract specified an amount that would be paid each month and that tax would be deducted from the total remuneration. This is evidence that you did not turn your mind to the issue of additional expenses at the time the employment contract was entered into.
Turning your mind now to the issue of additional expenses being occurred by your employee, because she/he had been living away from her usual place of residence, does not entitle you to retrospectively pay them a LAFHA, by reclassify part of the salary already received as a LAFHA.
Paragraph 48 of MT 2030 states:
A pre-condition for the application of section 23, sub-section 47(5) and section 63 in the manner described above is that the employee gives to the employer a declaration of the kind specified in paragraph 32 by the date of lodgement of the employer's annual fringe benefits tax return or, where applicable, the date of lodgement of instalment statements for the transitional year quarters ending on 30 September and 31 December 1986.
The pre-condition explained in paragraph 48 of MT 2030 has the effect of precluding you from retrospectively reclassify salary as a LAFHA.
Therefore, as no allowance was paid to your employee, and no declaration was obtained from the employee by the date of lodgement of your fringe benefits tax returns for the relevant years, no LAFHA can now be paid for these years.