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Ruling

Subject: FBT-Living Away From Home Allowance.

Question 1:

Will the payment you describe as an allowance paid by you to the trainee be an exempt benefit under the Fringe Benefits Tax Assessment Act 1986?

Answer:

No

Question 2:

Will the payment you describe as an allowance paid by you to the trainee be a living-away-from-home allowance benefit pursuant to subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer:

No

Question 3:

Will the payment you describe as an allowance paid to the trainee be subject to Pay as You Go withholding under section 12-35 of Schedule 1 to the Taxation Administration Act 1953?

Answer:

Yes

Question 4:

Will the payment of incentive bonus/wages or other type of extra allowance during the last three months of the training be subject to Pay as You Go withholding tax under section 12-35 of Schedule 1 to the Taxation Administration Act 1953?

Answer:

Yes

Question 5:

If the answers to question 3 and 4 are yes, what is the rate of PAYG withholding required to be withheld from the payment(s)?

Answer:

This question does not form part of the ruling. However, general advice/information in relation to question 5 is provided below.

This ruling applies for the following periods:

01 April 2012 -31 March 2014

Relevant facts and circumstances

You have sponsored a trainee. The trainee is currently undergoing training with you. Under this training program, as the trainee visa application was an unpaid placement application, the trainee is not considered your employee. The terms of the visa state the only payments to be received by the trainee are:

· Reimbursements of reasonable expenses incurred by the trainee in doing the work activity; or

· Or prize or an allowance

The trainee has been on the training program with you for some time.

You state you will be paying the trainee a living allowance (not wage) over the 12 months training period. The living allowance you will be paying is to cover food, accommodation, transport (including return flight ticket) and miscellaneous (migration agent's fee and etc) expenses while undergoing training.

The trainee intends to apply for permanent resident visa. If successful in obtaining permanent resident visa the trainee may stay in Australia for more than 12 months.

You are impressed with the trainee's good performance and are considering paying an incentive bonus/wages or other type of extra allowance during the last three months of training.

The training, over the 12 month period, would be mainly undertaken on the job by instruction, observation and actually performing the required work. Duties include the normal types of work carried out by employees in your industry.

There could be a small component of class room type training. But mainly the work hours are spent doing actual work similar to the duties of an employee.

The amount you would be paying the trainee is to cover accommodation, food transport (including return flight) and miscellaneous expenses.

The amount paid has been set at a level in line with the basic level pay rate/minimum wage under award conditions.

The amount paid was not determined by calculating additional expenses that the trainee would incur because of the requirement to live away from their usual place of residence.

The living allowance is not paid to compensate for additional expenses incurred because of living away from usual place of residence but to cover accommodation, food transport (including return flight) and miscellaneous expenses.

The trainee has rented accommodation in a shared house and does not have or maintain any other place of residence in Australia.

You do not receive any grants or payments from the government for sponsoring and taking on the overseas trainee on the work placed based training program.

Relevant legislative provisions

Subsection 6(1) Income Tax Assessment Act 1936

Section 6-5 Income Tax Assessment Act 1997

Section 995-1 Income Tax Assessment Act 1997

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953

Section 30 Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Questions 1 and 2

Summary

The exempt provisions in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) do not apply to the payment described by you as an allowance.

Section 30 FBTAA relating to Living Away From Home Allowance will not apply to the payments described as a living allowance as the requirements contained in that section are not satisfied.

Detailed Reasoning

A living-away-from-home allowance is, in substance, additional remuneration paid to an employee to compensate for increased expenditure which the employee was obliged to incur through having to live away from their usual place of residence in order to perform his duties as an employee.

The payment described by you as a living allowance could not be categorised as a living-away-from-home allowance within the meaning of section 30 FBTAA because it is not in the nature of compensation for additional expenses. It was not paid to compensate for additional expenses that would be incurred because the trainee was living away from their usual place of residence. It was paid to cover accommodation, food transport (including return flight) and miscellaneous expenses.

The payment amount has been set at a level in line with the basic level pay rate/minimum wage under award conditions. In any wage earner's case salary/wages paid to them as an employee are used by the individual to meet their living expenses. The payment described as a living allowance is not additional to the basic level pay rate/minimum wage under award conditions.

Accordingly, the amount paid as an allowance will be treated as assessable income under section 6-5 of the ITAA 1997 and not a living away from home allowance fringe benefit under section 30 FBTAA.

Note: The above reasoning applies to both the amount paid as an allowance and any bonus/additional wages paid during the last three months of the trainee's placement.

Questions 3 and 4

Summary

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that:

· An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

· The relationship existing between you and the trainee has been determined to be one of employer and employee and the payment of amounts described as living allowance are payments for services rendered for an employer. Therefore, Pay As You Go (PAYG) withholding needs to be withheld from the payments.

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA 1953 states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). Therefore, it is necessary to determine, if for taxation purposes there is an employer-employee relationship between you and the trainee.

Employer-Employee Relationship:

How an individual worker is described does not determine their status as employee or not an employee. Whether an individual is an employee or not depends on the facts/circumstances surrounding their relationship with the organisation.

Likewise, how a payment by an entity to an individual is described does not determine its assessability. Why a payment is made will determine this.

You have described the payments that are to be made as a living allowance

It is important to determine whether the trainee is an employee for taxation purposes. Regardless of their status, it is the totality of the facts and circumstances involved that will determine whether the trainee is an employee for taxation purposes.

Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). That section imposes an obligation on the paying entity to withhold an amount from the relevant payment (salary, wages, commission, bonuses or allowances) it pays to an individual as an employee.

The Ruling also considers the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term.

There are a number of factors to consider in determining whether a worker is an employee with no one factor necessarily conclusive. The main factors to consider within the context of the relationship between the parties in determining whether a worker is an employee are summarised below. As stated earlier, the totality of the relationship between the parties must be considered.

A worker whether a trainee or otherwise would be considered an employee if they:

· are paid a set amount per period representing payment for providing their personal services they agreed to provide

· perform the duties of their position for remuneration

· work hours that are agreed/expected

· perform their duties during the required hours

· are recognised as working for the payer's organisation

The payments will have an element of periodicity, recurrence or regularity

A key factor in deciding if a worker is an employee is the degree of control that can be exercised over the worker. If the payer has the right to direct how, when, where and who is to perform the work, the worker is likely to be an employee. A common law employee is told not only what work is to be done, but how and where it is to be done. These directions may be verbal or in writing, or simply understood between the parties.

The importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it. As stated by Dixon J in Humberstone v. Northern Timber Mills:

The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter's orders and directions.

Your circumstances strongly indicate that you will have a significant degree of control over what type of training and work activities the trainee will undertake and perform, the hours of work and how, when, where the work will be performed. Again as stated, this is an important factor leading to the conclusion that the trainee is a common law employee of your business.

The training over a 12 month period would be mainly undertaken on the job by instruction, observation and actually performing the required work.

These conditions can be found commonly in most employer-employee relationships.

The duties/services the trainee would be carrying out are similar to that of an employee in your industry.

The payments described by you as allowances have the following characteristics.

They are not reimbursements of reasonable expenses incurred in performing work activities.

They have a direct connection to the recipient's training and work activities/services as a trainee/worker.

They are for the performance of duties and services provided by the trainee worker.

The payments can be related to the trainee's duties and services rendered and in substance a product of their income-earning capacity.

The payments are remuneration and a reward for personal services performed for you by the trainee in their capacity as a trainee/worker.

The payments are based on the minimum wages.

The training and work activities will be part of your production programme. The payment the trainee receives would cease if they ceased to provide their services as a trainee/worker. The trainee understands and agrees to perform the services expected of them by you during the work hours agreed. Consequently, a work agreement (written or verbal) is considered to exist.

The payment is a form of reward/remuneration for services performed by the trainee for your organisation. It is difficult not to regard the payment as a reward for services carried out in employment.

Generally, an arrangement between parties that is structured in a way that gives rise to a payment for services rendered will give rise to an employer/employee relationship for the purposes of the TAA 1953.

All the above factors point to the true nature of the relationship between you and the trainee being that of an employer-employee. Consequently, the trainee will be treated as an employee engaged by you for taxation purposes. The payments would be considered salary and wages paid their capacity as an employee.

The payment would constitute salary and wages amount paid to an employee for personal services/duties rendered and be subject to withholding tax at resident rates.

The above factors also indicate that the payments would constitute ordinary income.

Merely describing a payment as a living allowance does not mean that the payment is not assessable income. Under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) an amount is assessable income if it is income according to ordinary concepts (ordinary income). Ordinary income has generally been held by the courts to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

In addition, the payment of incentive bonus/wages or other type of extra allowance during the last three months of the training would also constitute an amount to an employee for personal services/duties rendered and be subject to withholding tax.