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Ruling

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

Question 1

Is the allowance paid to your employee a living-away-from-home allowance (LAFHA) as defined in subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

This ruling applies for the following periods:

A number of fringe benefits tax years commencing in the relevant fringe benefits tax year.

The scheme commences on:

In the relevant fringe benefits tax year.

Relevant facts and circumstances

In the relevant fringe benefits tax year you appointed a new employee to a senior position.

The employee was initially employed on a fixed term contract for a specified period. The contract has now been extended.

The position is located at your office in a country town.

The employee owns a property in a city suburb.

At the time the employee was offered the position, the employee was residing at their property in the city suburb.

Upon commencing employment with you, the employee and their partner moved into rental accommodation located closer to the new place of employment in the country town.

The employee has indicated that at the end of the contract they intend to resume living at their home in the city suburb with their partner.

A search of Google Maps indicates:

· the distance from the property in the city suburb to your office in the country town is less than 110 kilometres;

· the travelling time between the property in the city suburb and your office in the country town is less than one and a half hours;

· the distance between your office in the country town and the employee's rental property is approximately less than 40 kilometres; and

· the travelling time between your office and the employee's rental property is less than 40 minutes.

The employee is expected to work a standard working week Monday to Friday.

The duties of employment do not require the employee to work on an on call basis and the employee is not expected to work overtime hours or in particular, extended hours of overtime.

The employee's position is offered under the relevant award.

In accordance with the relevant award the employee is entitled to receive a total remuneration package of a specified amount comprised of cash, annual leave loading, superannuation and benefits,

During the negotiation of the employment contract the employee requested a variation to the remuneration package to:

· reduce the amount paid as salary by a certain dollar amount and

· include an allowance equal to the amount the salary is reduced by to cover the food and accommodation expenses of the employee and their partner. The amount of the allowance was calculated on the basis of a certain amount per week for food and a certain amount per week for rent.

You agreed to vary the remuneration package in accordance with this request.

Relevant legislative provisions

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

Fringe Benefits Tax Assessment Act 1986, subsection 136(1)

Fringe Benefits Tax Assessment Act 1986, subparagraph 58B(1)(b)(iii)

Tax Laws Amendment (2012 Measures No. 4) Act 2012 No. 142, 2012

Reasons for decision

Question 1

Is the allowance paid to your employee a living-away-from-home allowance (LAFHA) as defined in subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Under the terms of the employment agreement you are paying the employee an allowance of a specified amount per week.

The conditions that must be met for the allowance to be a living-away-from-home allowance are contained within subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). This subsection was amended by Tax Laws Amendment (2012 Measures No. 4) Act 2012 - Act No. 142 of 2012 in relation to allowance paid to an employee who on or after 1 October 2012 lives away from his or her normal residence.

For the period prior to 1 October 2012, subsection 30(1) stated:

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.

For the period from 1 October 2012, subsection 30(1) states:

Where:

(a) at a particular time, in respect of the employment of the 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.

In summarising the requirements of subsection 30(1), an allowance will be a living-away-from home-allowance if:

1. some or all of the allowance is in the nature of compensation to the employee for additional expenses or additional expenses and other additional disadvantages;

2. the additional expenses are not deductible expenses; and

3. (a) for the period prior to 1 October 2012, the additional expenses and other disadvantages arise because the employee is required to live away from his or her usual place of residence to perform the duties of employment; or

(b) for the period from 1 October 2012, the additional expenses and other disadvantages arise because the duties of employment require the employee to live away from his or her normal residence.

Each of these conditions are considered below:

1. Is the allowance in the nature of compensation for additional expenses incurred by the employee?

The allowance is being paid as compensation for the accommodation and food expenses incurred by the employee while he resides in the rental accommodation. As these expenses would not have been incurred by the employee if he had been living at their property in the city suburb this condition is met.

2. Are the additional expenses deductible expenses?

Subsection 136(1) defines 'deductible expenses' to mean:

expenses incurred by the employee in respect of which a deduction is allowable to the employee under section 8-1 of the Income Tax Assessment Act 1997 (ignoring Divisions 28, 32 and 900 of that Act).

In general terms section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction to be claimed by the employee for a loss or outgoing incurred in gaining or producing assessable income provided the loss or outgoing is not of a capital nature, a domestic nature or incurred in relation to gaining or producing exempt income or non-assessable non-exempt income.

Various court decisions have concluded that, generally, accommodation and food expenses incurred while away from home are essentially living expenses of a private or domestic nature and therefore not deductible (FC of T v Cooper 91 ATC 4396; (1991) 29 FCR 177 (Cooper); Federal Commissioner of Taxation v Toms 20 ATR 466; 89 ATC 4373 (Toms)). However, there are two exceptions to this general rule. These are:

· where the employee is travelling in the course of their employment; or

· where the factual situation is comparable to the situation considered by the Federal Court in Roads and Traffic Authority of NSW v Federal Commissioner of Taxation 26 ATR 76; 93 ATC 4508 (RTA).

The distinction between a situation in which an employee is travelling as compared to an employee who is living away from home is discussed in paragraphs 35 to 43 of Miscellaneous Taxation Ruling MT 2030. The criteria discussed include:

· the nature of the job;

· whether the employee is accompanied by dependants; and

· the length of time spent away from home.

In considering these criteria:

· the allowance is not being paid because the employee is travelling in the course of performing their job;

· the employee is accompanied by their partner; and

· the period of time spent away from the city suburb property cannot be considered to be a relatively short period of time.

Given these factors, the employee can not be considered to be travelling in the course of their employment.

Guidance as to whether food and accommodation expenses are deductible where the employee is not travelling for work purposes is provided by the decision in RTA. Hill J in his judgement referred to the decision of the Full Federal Court in FC of T v Cooper 91 ATC 4396; (1991) 29 FCR 177 (Cooper) before stating at ATC 4521:

Wilcox J, who dissented in Cooper, was of the view that there was a close connection between the outgoings of the taxpayer and his employment as a footballer. However, in referring to living-away-from-home expenses, his Honour said (at ATC pp 4404-4405; FCR 187-188):

``Take the instance of a taxpayer visiting another city for business purposes. The taxpayer incurs expenditure for meals at his or her hotel. On one view, the essential character of the expenditure is the sustenance of the taxpayer. Such a purpose has no connection with the derivation of assessable income; other than in the broad sense - irrelevant because it is applicable to everyone - that one must eat to live and, therefore, to work and to earn assessable income. However, the expenditure may also be characterised as being the cost of sustenance incurred by the taxpayer because of his or her absence from home on business. The difference between the two characterisations is that the latter takes account of the occasion of the expenditure. When this characterisation is adopted, a work-connection immediately appears and a deduction is granted.''

With respect, the same is true in the present case. Where a taxpayer is required by his employer, and for the purposes of his employer, to reside, for periods at a time, away from home and at the work site, and that employee incurs expenditure for the cost of sustenance, or indeed other necessary expenditure which, if the taxpayer had been living at home, would clearly be private expenditure, the circumstance in which the expenditure is incurred, that is to say, the occasion of the outgoing operates to stamp that outgoing as having a business or employment related character.

Hill J then distinguished the situation being considered from that which existed in Federal Commissioner of Taxation v Toms 20 ATR 466; 89 ATC 4373 (Toms). At ATC 4522 Hill J stated:

The facts of the present case are quite different. First, each of the persons deemed hypothetically to have incurred the expenditure are employees. They are not carrying on their own business. Second, they are required, as an incident of their employment, by their employer and for the purposes of the employer to live close by their work site for relatively short periods of time. No question arises of their choosing to live in these places. Each of the persons in question has a permanent house in which he lives when not in camp. None of the employees spend inordinate periods of time in the camps so that the camp becomes their home. Their house is retained and the employees in question travel home at weekends. They do not remain in the camps. The costs in question here are an incident of the employment. The costs in Toms were not.

In applying the criteria referred to by Hill J to the facts of the situation being considered:

· the employer does not require the employee to live close to the work site;

· the place at which employee resides has been chosen by the employee;

· the employee has a permanent residence away from the residence at which he is residing;

· the period of time iwhich cannot be considered to be a relatively short period of time; and

· the employee does not return to the city suburb property on the weekends.

Although the employee has a permanent residence away from the residence at which he is residing, the remaining facts differ from those that existed in RTA. Given these differences, the decision in RTA does not provide a basis for treating the expenses incurred by the employee as deductible expenses.

Therefore, as the employee is not travelling in the course of undertaking their employment duties and the facts of the situation being considered are not comparable to those that existed in RTA the expenses incurred on food and accommodation will not be deductible expenses.

3. Do the additional expenses and other disadvantages arise because the employee is required to live away from their usual place of residence to perform the duties of employment?

In considering this question it is necessary to determine whether the employee is living away from his usual place of residence.

Is the employee living away from his 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) a place at which the person resides; or

(b) 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 [Multimedia], version 5.0.0,01/10/01, 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 MT 2030. Paragraphs 15 to 18 of MT 2030 refer to various decisions of Taxation Boards of Review relating to the former 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.

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.

In applying these principles it is accepted that during the relevant period the property in the city suburb will be the employee's usual place of residence as:

· the position is for a fixed period;

· the employee has retained the property in the city suburb; and

· the employee has an intention to return to reside at the city suburb property at the end of the appointment.

Therefore, during the period in which the employee is residing at the rental property the employee will be living away from his usual place of residence.

Is the employee required to live away from their usual place of residence to perform the duties of employment?

The FBTAA does not provide a definition of the word 'required' in the context of subsection 30(1). Therefore, it is relevant to refer to the ordinary meaning of 'require'.

The Macquarie Dictionary [Multimedia], version 5.0.0,01/10/01, defines 'require' to mean:

1. to have need of; need: he requires medical care.

2. to call on authoritatively, order, or enjoin (a person, etc.) to do something: to require an agent to account for money spent.

3. to ask for authoritatively or imperatively; demand.

4. to impose need or occasion for; make necessary or indispensable: the work required infinite patience.

5. to call for or exact as obligatory: the law requires annual income tax returns.

6. to place under an obligation or necessity.

7. to wish to have: will you require tea at four o'clock?

8. to make demand; impose obligation or need: to do as the law requires.

ATO Interpretative Decision ATO ID 2013/8 Fringe Benefits Tax Employee required to change usual place of residence in order to perform duties of employment (ATO ID 2013/8) discusses the meaning of the term 'required' in the context of subparagraph 58B(1)(b)(iii) of the FBTAA. In considering whether an employee who chose to change their usual place of residence to be closer to their new place of employment had been 'required' to change their usual place of residence ATO ID 2013/8 referred to the dictionary definition of 'require' and concluded:

Therefore, it is considered that the term 'required' as it is used in subparagraph 58B(1)(b)(iii) does not mean that the change of usual place of residence must be compulsory. Rather, the change may be one that is necessary in the circumstances in order for the employee to perform the duties of their employment.

In applying this conclusion the fact that you have not directed the employee to live away from his usual place of residence does not mean the employee is not required to live away from his usual place of residence to perform the duties of employment.

ATO ID 2013/8 then refers to the decision of the Administrative Appeals Tribunal 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 (Compass) to conclude that an employee who is not required to change their usual place of residence by their employer will be required to live away from his or her usual place of residence to perform the duties of employment if the inherent nature of the employment makes it necessary for the employee to change their usual place of residence to perform the duties of employment.

In Compass, an employee who was employed on a casual basis for a minimum of 32 hours a week accepted a more senior position with the same employer which caused his hours to increase by five and a half hours per week. The employee's usual place of residence was approximately 60 kilometres from his place of employment. The employee rented a flat closer to his place of employment for the period that he expected to work the increased hours.

In concluding that the decision to reside in the rental accommodation was a choice made by the employee rather than a requirement, the Tribunal said:

63. … it would seem that the agent requiring the employee to live away from his or her usual place of residence must be the employer, the inherent nature of the employment or a mixture of the two. It would seem that regard must be had to both in order to answer whether the employee is so required.

…

65. The word "require" does not contemplate choice. The distinction is apparent from the passage from Hill J's judgment in Roads and Traffic Authority of New South Wales v Commissioner of Taxation when he said:

"... For the reasons already given, an employee who is required as part of his employment to reside at the work site for periods of time and to bear the cost of his own accommodation, in the circumstances where he has his own private house, will be entitled to a deduction for the cost of that expenditure. ...

... An employee who had no private home and was employed indefinitely to work at a particular site and did in fact work for the whole of his employment at that site, might be said to have chosen to live at the site so that the cost of his accommodation would be private. ..."

The Tribunal then referred to the decisions in Federal Commissioner of Taxation v Charlton (1984) 15 ATR 711; 84 ATC 4415 (Charlton); Toms and Lunney v Federal Commissioner of Taxation; Hayley v Federal Commissioner of Taxation (Lunney) 1958) 100 CLR 478 before stating:

70. Although Lunney was concerned with travelling expenses, the principles are consistent with those established in relation to accommodation expenses. When I consider Mr Brown's situation in light of those principles, I come to the conclusion that a reasonable person would conclude that he was not required to rent premises and to live in Lilydale during the week but chose to. Beyond the fact of the payment of the sum of $15,336.00 itself to Mr Brown, there is no evidence that suggests that his employer required or even requested that he do so in order that he could perform his duties. The payment itself does not take the matter any further. The work itself does not seem to have demanded or required it. Certainly, Mr Brown was required to have greater client contact and so to work longer hours but the hours were not so extended and the commuting distance to Murrindindi not so great that it could be thought that the work itself required it so that he could perform the duties of his employment. Like Dr Charlton, a reasonable person would conclude that Mr Brown chose to reside in accommodation that was closer to his place of work during the week but that he was not required to do so in order to perform the duties of his employment with The Compass Group.

Charlton concerned a doctor whose usual place of residence was in Melbourne but who during the relevant period, worked in Bendigo, approximately 150 kilometres away from his home. In order to avoid making many trips late at night or in the early hours of the morning the doctor rented a flat in Bendigo. Crockett J at 4419 to 4420 stated:

So far as the present case is concerned, it is a question of whether the work demanded that the taxpayer reside from time to time in his Bendigo flat. The question is not whether he required or desired so to reside. There must be something in the nature of the work that demanded that the taxpayer stay in the flat.

….

The Commissioner contends (correctly in my view) that, if the taxpayer should choose to reside so far from the place where it is necessary for him to be in order to gain his income that he not only needs to incur expense in travelling to that place but also to incur expense in the provision to him of some accommodation transitory or discontinuous in its use and secondary to or temporarily supplemental of his actual home, then that expense, too, is for the same reason non-deductible.

At 4420 to 4421 the principles discussed above were used to draw conclusions as follows:

The taxpayer's election to live in Melbourne and not in Bendigo meant that the rental expended on the flat in order to enable him to secure accommodation in which to recuperate from the rigours of travel and the nature of his work was an expenditure dictated not by his work but by private considerations. There was an exception to this in the month of May. He was then required by his employment to work in both Wangaratta and Bendigo. The nature and circumstances of that work made the taking of rest at Bendigo necessary.

Toms' case involved a similar issue to Charlton, where a logging contractor lived during the working week, in a caravan in a bush camp which was approximately 108km from his family home. The contractor claimed that it was too far to travel each day to his work in the forest and as such it was necessary to establish the caravan at the base. He claimed that therefore he was entitled to income tax deductions for maintaining the caravan and for the additional costs of food at the campsite.

Burchett J applied the principles established in Charlton and similarly held that the costs in question were incurred due to the fact that the contractor had chosen to live away from his usual place of residence in the caravan in the forest as opposed to being required to. Burchett J at 4375 to 4377 stated:

… the caravan was rendered necessary as much by the taxpayer's choice of the place of his residence in Grafton as by his choice of employment in the State forest, and its purpose was to enable him to retain his residence at Grafton although employed in the State forest. Had he lived at a town closer to the forest, there is no question the caravan would have been unnecessary.

…

I am unable to distinguish the situation of Mr Toms from Charlton's case. The principles there applied are supported by the authorities to which I have adverted. Those principles require that the exception perceived by the Tribunal in cases of the present kind should be rejected. It follows that it was not open to the Tribunal to find the expenditure proved in this instance deductible under sec. 51(1).

In applying these decisions and the decision in RTA it can be concluded that an employee will be required to live away from the usual place of residence if:

· the employee is required as an incident of their employment by the employer to live away from their usual place of residence; or

· the inherent nature of the employment makes it necessary for the employee to change their usual place of residence so as to be able to effectively perform their duties of employment.

Further, the requirement for the duties of employment to require the employee to live away from their usual place of residence will not be met if the change in residence is the employee's choice.

In the situation being considered:

· the employee is required to undertake their duties of employment at your office in the country town;

· you did not require the employee to change their place of residence;

· the employee is expected to work Monday to Friday, approximately X a.m. to Y p.m. each day

· the employee is not required to work on an on call basis or to work particularly early hours of the morning or late into the evening or night;

· the employee is not expected to work overtime;

· the employee's usual place of residence is located at a distance less than approximately 110 kilometres from the place of employment. By comparison the place at which the employee is residing while undertaking the duties of employment is at a distance less than approximately 40 kilometres from the place of employment; and

· the travelling time between the employee's usual place of residence and the place of employment is less than one and a half hours. By comparison the travelling time between the place at which the employee is residing while undertaking the duties of employment at the place of employment is less than 40 minutes.

These facts indicate the employee is not required as an incident of their employment to live away from their usual place of residence at a place that is closer to the place of employment. The employment contract only requires the employee to undertake the duties of employment at a new place of employment. It does not require a change in the place of residence.

Further, the facts do not indicate that the nature of the employment makes it necessary for the employee to live away from their usual place of residence as neither the commuting distance nor the hours of duty are so great as to require the employee to live closer to the place of employment.

Rather, the decision made by your employee to live away from their usual place of residence appears to be a choice made by the employee and, as set out by the Tribunal in Compass at paragraph 65:

The word 'require' does not contemplate choice

Conclusion

As the employee is not required as an incident of their employment to live away from their usual place of residence and the inherent nature of employment does not make it necessary for the employee to live away from their usual place of residence the conditions contained in paragraph 30(1)(b) of the FBTAA are not met.

Therefore, the allowance will not be a living-away-from-home allowance fringe benefit. Rather, it will be part of the employee's assessable income.

This conclusion applies to both the period before 1 October 2012 and the period since 1 October 2012.