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Ruling

Subject: Fringe Benefits Tax - Living away from home allowance fringe benefits

Question 1

Can the $x/week living allowance be treated as a Living away from home allowance (LAFHA) benefit under section 30 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If the answer to question 1 above is no, will the $x/week living allowance be subject to PAYG withholding under section 12-35 of Schedule 1 to the Taxation Administration Act 1953?

Answer

A response to question 2 is not required because the answer to Question 1 is yes.

Question 3

If the answer to question 1 above is yes, can the employer reduce the taxable value of the LAFHA benefit by any exempt accommodation component and any exempt food component in relation to the period 01/04/2011 to 30/09/2012 under section 31 FBTAA?

Answer

Yes

Question 4

If the answer to question 1 above is yes, can the employer reduce the taxable value the LAFHA benefit by any exempt accommodation component and any exempt food component in relation to the period 01/10/2012 to 31/03/2014 under section 31 FBTAA?

Answer

No

This ruling applies for the following period:

01 April 2012 to 31 March 2014

The scheme commenced in:

2011

Relevant facts and circumstances

The employee is from overseas and was living alone in a house overseas before coming to work in Australia. The employee now lives and works in Australia but continues to maintain the house in the employee's home country.

In Australia, the employee has rented from the employer a semi-furnished house on the property where the employee works. The employee has rented the house at market value in an arm's length transaction.

The employee does not maintain another home in Australia other than the semi-furnished house.

The employee will be going back to their home country annually for holidays.

The employee holds a Temporary Business (Long Stay) Sub class 457 Visa.

The employee's employment contract states that the employee will be paid a guaranteed annual salary/wages for a 38 Hr week plus 9% superannuation under an award.

However, after the employee's arrival in Australia an agreement was entered into for the employee to receive a higher salary than the award minimum plus a living allowance to cover expenses for food and accommodation (including accommodation set-up cost) during the employee's stay in Australia, and a yearly return air-ticket to return to their country of origin for holidays. The salary/living allowance agreement letter was signed and dated prior to Budget time on 8 May 2012.

Since the agreement was entered into the employee has had three salary increases but with no increase in the living allowance which has remained the same.

In the 2012 income tax year, when preparing the payroll the employer had mistakenly posted the LAFHA paid as wages. The employer had treated the full weekly payment amount including living allowance as salary/wages and deducted PAYG.

The employment arrangement was not materially varied or renewed between Budget time on 8 May 2012 and 1 October 2012.

The employee will for the purposes of section 31 FBTAA provide the employer with a living away from home declaration by the declaration date.

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 Section 31C

Fringe Benefits Tax Assessment Act 1986 Section 31C(a)

Fringe Benefits Tax Assessment Act 1986 Section 31D

Fringe Benefits Tax Assessment Act 1986 Subsection 31D(1)

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Reasons for decision

Question 1

Summary

The payment of the living allowance to the employee is a LAFHA under section 30 FBTAA as the requirements of that section are satisfied.

Detailed reasoning

Subsection 30(1) FBTAA states:

30(1) [Provision of benefit] 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 duties of that employment require the employee to live away from his or her normal residence;

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.

The employer pays the employee a living away allowance of $x/week to cover additional expenses for food and accommodation.

The employee continues to maintain their normal residence overseas and will be going back annually for holidays. The employee holds a Temporary Business (Long Stay) Sub class 457 Visa. The employee is living and working in Australia temporarily.

The employee is required to live away from her normal residence in home country order to be able to perform employment-related duties in Australia.

It is concluded that the weekly living allowance is paid to compensate the employee for additional expenses incurred and any disadvantages suffered because the employee is required to live away from their normal residence in her home country order to perform her employment-related duties.

Accordingly, the weekly living allowance paid to the employee would constitute a LAFHA benefit under section 30 FBTAA.

Question 2

A response to question 2 is not required as the answer to Question 1 is yes.

Question 3

Summary

For the period 1 April 2011 to 30 Sept 2012 inclusive, the employer can reduce the taxable value of the LAFHA fringe benefit under section 31 FBTAA.

Detailed reasoning

As the allowance paid to the employee is a LAFHA fringe benefit, section 31 FBTAA is used to determine the taxable value of this fringe benefit.

Under section 31 FBTAA the taxable value is the amount of the allowance paid less either or both of the following:

· the exempt accommodation component

· the exempt food component.

The employer may reduce the taxable value of the LAFHA fringe benefit by the above exempt components up to 30/09/2012 as up to and including that date there is no requirement for the employee to maintain more than one home in Australia in order for the employer to be able to make these reductions.

Please note that in order to make these reductions, the employee is required (generally 21 May of each year) a LAFHA declaration. The relevant facts for this ruling indicate that this requirement will be satisfied.

Chapter 11 of the 'Fringe benefits tax - a guide for employers' contains explanations and examples of how to calculate the taxable value of LAFHA. It also contains the approved format of the LAFHA declaration. The guide can be accessed on ATO website at ato.gov.au.

Question 4

Summary

The transitional rules will not apply because the employee does not maintain a normal residence in Australia that they are required to live away from.

Detailed reasoning:

Changes have been made to the concessional tax treatment of fringe benefits tax (FBT) for living-away-from-home allowances and benefits.

The changes came into effect on 1 October 2012. However, there are transitional rules that may apply to employment arrangements for living-away-from-home allowances and benefits in place prior to Budget time at 7.30pm (AEST) on 8 May 2012.

Under the new rules, the taxable value of a LAFHA fringe benefit can be calculated under section 31 FBTAA where the employee satisfies sections 31C (about maintaining a home in Australia), 31D (about the first 12 months) and 31F (about declarations).

Section 31C is satisfied if:

(a) the place in Australia where the employee usually resides when in Australia:

i. is a unit of accommodation in which the employee or the employee's spouse has an ownership interest (within the meaning of the Income Tax Assessment Act 1997); and

ii. continues to be available for the employee's immediate use and enjoyment during the period that the duties of that employment require the employee to live away from it;

According to subsection 31D(1), the employee satisfies section 31D if:

…the fringe benefit relates only to all or part of the first 12 months that the duties of that employment require the employee to live away from the place in Australia where he or she usually resides when in Australia.

The new rules apply generally to employees who are living away from their normal residence on or after 1 October 2012 in respect of all allowances and benefits provided in relation to the periods commencing on or after 1 October 2012.

Paragraph 1.62 of the Explanatory Memorandum to the Tax Laws Amendment (2012 Measures No. 4) Act 2012 (EM) states that the transitional rules apply to:

Employees who are permanent residents with employment arrangements in place prior to 7:30pm (AEST) on 8 May 2012 (Budget time); and

The employment arrangement was not materially varied or renewed between Budget time and 1 October 2012.

The legislation for the transitional arrangements is in Part 3 of Schedule 1 to the Tax Laws Amendment (2012 Measures No. 4) Act 2012. Specifically, subsection 27(1) of that Part states that:

(1) During the transitional period, disregard paragraph 31C(a) and section 31D of the Fringe Benefits Tax Assessment Act 1986 if:

a) the employee is neither a temporary resident nor a foreign resident; and

b) during the entire period:

i. starting at the Budget time; and

ii. ending on 30 September 2012;

that employment was covered by an eligible employment arrangement that was neither varied in a material way nor renewed.

The transitional period means the period:

a) starting on 1 October 2012; and

b) ending at the earliest of:

i. 30 June 2014; and

ii. The time the eligible employment arrangement referred to in paragraph (1)(a) or (2)(b) ends; and

iii. The first time that eligible employment arrangement is varied in a material way or renewed.

Further, in accordance with subsection 27(2) in Part 3 of Schedule 1 to the Tax Laws Amendment (2012 Measures No. 4) Act 2012, an employer may not disregard paragraph 31C(a) during the transitional period if the employee is either a 'temporary resident' or 'foreign resident'. Both of these terms are defined in the Tax Laws Amendment (2012 Measures No. 4) Act 2012.

The EM uses the terminology 'permanent resident' but the amending legislation does not.

'Temporary resident' and 'foreign resident' have the same meaning as in the Income Tax Assessment Act 1997.

As defined in section 995-1 of the ITAA 1997 you are a temporary resident if:

(a) you hold a temporary visa granted under the Migration Act 1958; and

(b) you are not an Australian resident within the meaning of the Social Security Act 1991; and

(c) your spouse is not an Australian resident within the meaning of the Social Security Act 1991

However you are not a temporary resident if you have been an Australian resident (within the meaning of this Act), and any of paragraphs (a), (b) and (c) are not satisfied, at any time after the commencement of this definition.

An "Australian resident" for the purposes of the Social Security Act 1991 is defined in section 7(2) of that Act. Section 7(2) states that a person will be an Australian resident if he or she resides in Australia and is:

(a) an Australian citizen;

(b) the holder of an Australian permanent resident visa; or

(c) the holder of a special category visa and is a "protected SCV holder" (generally applicable to New Zealand citizens who entered Australia before 27 February 2001).

The employee does not satisfy the definition of 'Australian resident" within the meaning of the Social Security Act 1991as the employee is not:

(a) an Australian citizen;

(b) the holder of an Australian permanent resident visa; or

(c) the holder of a special category visa and is a "protected SCV holder" (generally applicable to New Zealand citizens who entered Australia before 27 February 2001).

The employee meets the first two requirements in the definition of temporary resident in section 995-1 of the ITAA 1997 as stated above as:

(a) the employee holds a temporary 457 visa granted under the Migration Act 1958; and

(b) is not an Australian resident within the meaning of the Social Security Act 1991; and

the third requirement (c) does not apply to the employee as the employee is single.

Applying the provisions referred to above to the relevant facts for this ruling, we have determined that the employee is a temporary resident as defined in section 995-1 of the ITAA 1997 and therefore the employer may not disregard paragraph 31C(a) FBTAA about maintaining a home in Australia.

Consequently, as the employee does not maintain a normal residence in Australia that they are required to live away from, the taxable value of the LAFHA fringe benefit from 01/10/2012 will be calculated using section 31B FBTAA. The taxable value of the fringe benefit being the amount of the LAFHA in accordance with subsection 31B(2) FBTAA.

From 01/10/2012 for LAFHA fringe benefit provided to the employee, the employer will not be able to reduce the taxable value of these LAFHA fringe benefits by any exempt accommodation component and any exempt food component under section 31 FBTAA.

ATO publication 'Changes to the tax treatment of living-away-from-home allowances and benefits' contains information/explanations about the reforms to the living-away-from-home allowances and benefits. It can be accessed on the ATO website at ato.gov.au.