Edited version of your private ruling

Authorisation Number: 1012521180027

Ruling

Subject: Living away from home allowance

Question 1

Do the payments received in accordance with the letter dated 5 July 2010 form part of your assessable income?

Answer

No

Please Note: This answer is dependant upon the payments being made under the terms contained in the letter dated 5 July 2010. The answer may change if there has been a change in the terms of the employment agreement since that date.

This ruling applies for the following period:

Year ended 30 June 2013

Relevant facts and circumstances

In 2010 you received an offer to work in Australia for a four year period.

The offer was made on the basis that you would complete a Business Visa subclass 457.

In making the offer, your employer undertook to pay for your services and a subsistence allowance whilst you are in Australia. In addition, your employer offered to arrange your travel and accommodation.

In a letter dated 5 July 2010 which is attached to your employment contract your employer advised the following:

Additional food component calculation after taking into account what you would spend at home according with statutory rates.

Two (2) adults = A$ xxx - (allowance @ A$42.00/adult) (A$84.00)

= A$ xxx per week A$ xx,xxx

Allowance for Accommodation A$ xxx per month A$ xx,xxx

Total = A$ xx,xxx per annum

= A$ x,xxx per month

Effective 01/07/2010

Your employment contract has not been altered, nor renewed since this you received this letter.

When your Business Visa subclass E 457 visa expires you will return to live in the house you own in the overseas country.

During the period you have been in Australia you have lived in rental property with your spouse.

Prior to 1 October 2012, your employer treated the payments made in accordance with the letter as a living-away-from-home allowance. Since then your employer has treated the payments as salary or wages that are subject to Pay As You Go (PAYG) withholding.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 30

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1936 Subsection 23L(1)

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 6-23

Reasons for decision

Do the payments received in accordance with the letter dated 5 July 2010 form part of your assessable income?

Subsection 6(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income consists of ordinary and statutory income. However, this is qualified by subsection 6-15(3) which states:

If an amount is non-assessable non-exempt income, it is not assessable income.

'Non-assessable non-exempt income' is defined in section 6-23 of the ITAA 1997 to be an amount which a provision of the ITAA or another Commonwealth law states is not assessable income and is not exempt income.

An example of income that is not assessable income and not exempt income is contained in subsection 23L(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which states:

Income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer.

In general terms, a 'fringe benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) as a benefit provided to an employee in respect of the 'employment' of the employee. However, paragraph (f) of the 'fringe benefit' definition provides that a payment of 'salary or wages' will not be a fringe benefit.

'Salary or wages' is defined in subsection 136(1) of the FBTAA to mean a payment from which an amount must be withheld under either section 12-35, 12-40, 12-45, 12-115 or 12-120 of Schedule 1 to the Taxation Administration Act 1953 (TAA). The relevant section for the purpose of this ruling is section 12-35 which 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).

However, this is subject to subsection 12-1(2) of the TAA which states:

In working out how much to withhold under section 12-35, … from a payment, disregard so much of the payment as is a living-away-from-home allowance as defined by section 136 of the Fringe Benefits Tax Assessment Act 1986.

Therefore, a payment that is a living-away-from-home allowance will not be salary or wages. Rather, provided the requirements of the fringe benefit definition are met, the payment will be a fringe benefit that will be non-assessable non-exempt income for you.

Were the payments a living-away-from-home allowance?

Section 30 of the FBTAA sets out the circumstances in which a payment to an employee will be a living-away-from-home allowance benefit. This section was amended with effect from 1 October 2012.

Prior to 1 October 2012, subsection 30(1) of the FBTAA 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.

Since 1 October 2012, subsection 30(1) has 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 duties of that employment require the employee to live away from his or her normal place of 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 these requirements, a payment will be a living-away-from-home allowance if:

(a) the payment is an allowance;

(b) 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 non deductible expenses incurred by the employee during a period; or

· additional non deductible expenses and other additional disadvantages to which the employee is subject during a period; and

(c) the additional expenses and other disadvantages arise because the employee is required to live away from his or her normal (or usual prior to 1 October 2012) place of residence in order to perform the duties of employment.

(a) Is the payment an allowance?

Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement (TR 92/15) gives guidance when determining whether a payment is an allowance.

Paragraph 2 of TR 92/15 states:

2. 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.

Under the arrangement your employer was paying you $xxx per week to cover your additional food costs and $xxx per month for accommodation. These amounts were predetermined amounts that were paid regardless of the expected expenses. Therefore, the payment was an allowance.

(b) Was part of the allowance paid for additional non-deductible expenses and other disadvantages?

The application of paragraph 30(1)(b) of the FBTAA was considered by Lee J in Atwood Oceanics Australia Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 742; 89 ATC 4808 (Atwood). At ATC 4816 Lee J said:

The first requirement of para. 30(b) was that it be an allowance in respect of which ``it would be concluded'' that the allowance bore a certain quality. The paragraph did not state by whom such a conclusion would be drawn, unlike the repealed provisions of sec. 51A of the Income Tax Assessment Act 1936 where the nature of the allowance was determined according to the Commissioner's satisfaction. It was the requirement of the paragraph that the circumstances of payment of the allowance be such that a reasonable person would conclude, applying an objective view thereto, that the allowance bore the character described in the paragraph. The required character of the allowance was that it be a payment to an employee in the nature of compensation for additional expenses incurred by the employee during a period of employment, or for additional expenses so incurred and other additional disadvantages to which the employee was subject during that period by reason of the fact that the employee was required to live away from his usual place of residence.

In applying this case to the payments you received in accordance with the letter dated 5 July 2010, it is necessary to consider whether the circumstances of the payments are such that a reasonable person would conclude that the payments bore the character described in paragraph (b).

As the payments are paid in accordance with the letter dated 5 July 2010, the characterisation of the payments will be determined by the terms set out in the letter.

The letter states that the payments are paid to cover the additional food and accommodation expenses incurred during the four year period you will be living in Australia. Given the period of time you will be in Australia, the food and accommodation expenses will not be deductible expenses.

Therefore, it can be concluded that the allowance was paid for additional non-deductible expenses that you incurred whilst living in Australia. This conclusion applies to both the payments paid before 1 October 2012 and the payments paid since that date.

(c) Did your duties of employment require you to live away from your normal or usual place of residence?

Prior to 1 October 2012, paragraph 30(1)(b) of the FBTAA required the employee to live away from their usual place of residence. Since 1 October 2012, the relevant test is whether the employee is required to live away from their normal residence.

The definition of 'normal residence' in subsection 136(1) provides that if your usual place of residence is in Australia your normal residence will be your usual place of residence. However, if the usual place of residence is not in Australia, the normal residence will depend upon whether you are living away from the place at which you usually reside when in Australia. If you are, the normal residence will be the place in Australia at which you usually reside when in Australia. Otherwise, it will be the 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 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, your usual place of residence will be the house you own in the overseas country as:

· the position in Australia is for a fixed four year period;

· you are not permitted to remain in Australia after the expiration date of your 457 visa,

· you have retained the property in the overseas country; and

· you intend to return to reside in the overseas country property at the end of the appointment.

As you are not living away from the rented accommodation at which you reside whilst in Australia the property that you own in the overseas country will also be your normal residence.

Therefore, as you undertake your duties of employment in Australia, it is accepted that the duties of employment require you to live away from your usual place of residence.

Conclusion

As all the required conditions have been met, the payments made in accordance with the letter dated 5 July 2010 will be a living-away-from-home allowance benefit pursuant to subsection 30(1) of the FBTAA.

As the payments are made by your employer as a consequence of your employment, the payments will be a living-away-from-home fringe benefit which is non-assessable non-exempt income under subsection 23L(1) of the ITAA 1936.

Please Note: This conclusion is dependant upon the payments being made under the terms contained in the letter dated 5 July 2010. The conclusion may change if there has been a change in the terms of the employment agreement since that date.