Edited version of your private ruling

Authorisation Number: 1012590344719

Ruling

Subject: Fringe benefits tax

Question 1

Is the 'accommodation allowance' paid by you to your employee a living-away-from-home allowance fringe benefit for the purposes of section 30 of the Fringe Benefits Tax Assessment Act 1986?

Answer:

Yes

Question 2

If the answer to Question 1 is yes, do the transitional rules at section 27 of the Tax Laws Amendment (2012 Measures No. 4) Act 2012 apply in the calculation of the taxable value of the living-away-from-home allowance fringe benefit at section 31 of the Fringe Benefits Tax Assessment Act 1986?

Answer:

Yes

This ruling applies for the following periods:

1 April 2012 to 30 June 2014

The scheme commences on:

1 April 2012

Relevant facts and circumstances

The employee applied for a position in mid 2011.

The employee was advised by letter in late 2011 that the application had been approved and was to commence in 2012.

The employee accepted the Position on certain date in early 2012.

The employee receives an accommodation allowance and cost of living allowance.

The employee advised you on in late 2011 of an intention to defer the start date of the Position until early 2013.

Although the scheduled commencement date for the Position was in 2012, in early 2012 the employee made an application for deferment of the Position until early 2013.

On 9 March 2012, the employee was advised that the request to defer the commencement of the Position until early 2013 had been given in-principle approval and that final approval could not be given until letters of support for the deferment from the Australian and overseas supervisors were supplied.

Letters of support for the employee's deferment were subsequently supplied by the employee's Australian and overseas supervisors and final approval for deferral of the commencement of the Position until early 2013 was granted on 29 May 2012.

You provided the employee with an official offer of employment dated in January 2013 which detailed the terms of appointment. The offer confirmed that employment would take effect on certain date early 2013 and continue for x years.

The employee does not maintain a residence in Australia for the purposes of section 31C of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for the time the 'accommodation allowance' is paid.

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 Subsection 136(1)

The Tax Laws Amendment (2012 Measures No. 4) Act 2012 Section 27

Reasons for decision

Question 1

Is the 'accommodation allowance' paid by you to the employee a living-away-from-home allowance fringe benefit for the purposes of section 30 of the Fringe Benefits Tax Assessment Act 1986?

An allowance paid to an employee will only be a living-away-from-home allowance (LAFHA) fringe benefit for the purposes of section 30 of the FBTAA if it meets the requirements of subsection 30(1) of the FBTAA.

The requirements of subsection 30(1) of the FBTAA were amended by the Tax Laws Amendment (2012 Measures No. 4) Act 2012 - Act No. 142 of 2012. The changes relate to allowances paid to an employee who, on or after 1 October 2012, lives away from his or her normal residence.

From 1 October 2012, subsection 30(1) of the FBTAA 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 summary, an allowance will satisfy the requirements of subsection 30(1) of the FBTAA if:

1. the allowance is paid by an employer to an employee in respect of the employee's employment

2. the duties of employment require the employee to live away from his or her normal residence at the time the allowance is paid, and

3. the allowance is paid wholly or partly to compensate the employee for additional, non-deductible expenses incurred because of the requirement to live away from home.

These requirements in relation to the 'accommodation allowance' paid by you to the employee are considered below.

1. Is the 'accommodation allowance' paid to the employee an allowance paid by you in respect of the employee's employment?

The ATO publication, Fringe benefits tax: a guide for employees, (Fringe benefits tax: a guide for employees - A comprehensive guide to fringe benefits tax (FBT) for employers and tax professionals (NAT 1054)) provides guidance on what is meant by the term, 'in respect of employment'.

At Chapter 1 of Fringe benefits tax: a guide for employees it is stated:

… a fringe benefit in respect of employment … effectively means a benefit is provided to somebody because they are an employee …

As a guide to whether a benefit is provided in respect of employment ask yourself whether you would have provided the benefit if the person had not been an employee.

The employee is an employee of yours for the duration of the Position and you pay the employee an 'accommodation allowance' for the first two years of the Position while the employee is overseas.

It is clear that the 'accommodation allowance' is provided by you because the person is an employee of yours and you would not provide the 'accommodation allowance' had the person not been an employee of yours.

Therefore, the 'accommodation allowance' is an allowance paid by you to the employee in respect of the employee's employment and this requirement is satisfied.

2. Do the duties of employment require the employee to live away from the normal residence at the time the allowance is paid?

It is accepted that the employee's normal residence is in Australia. The employee is located overseas for the first x years of the Position during which time an 'accommodation allowance' is paid by you.

Therefore, the duties of the employee's employment require the employee to live away from the normal residence at the time the allowance is paid and this requirement is satisfied.

3. Is the 'accommodation allowance' paid wholly or partly to compensate the employee for additional, non-deductible expenses incurred because of the requirement to live away from the normal residence?

The 'accommodation allowance' is paid to the employee to cover the extra accommodation expenses incurred while located overseas for the first x years of the Position. As the employee's accommodation expenses are private in nature, the employee will not be able to claim an income tax deduction for these expenses.

Therefore, the 'accommodation allowance' is paid wholly or partly to compensate the employee for additional, non-deductible expenses incurred because of the requirement to live away from the normal residence and this requirement is satisfied.

Conclusion

As the 'accommodation allowance' meets the requirements of subsection 30(1) of the FBTAA, it is a LAFHA fringe benefit for the purposes of section 30 of the FBTAA.

Question 2

If the answer to Question 1 is yes, do the transitional rules at section 27 of the Tax Laws Amendment (2012 Measures No. 4) Act 2012 apply in the calculation of the taxable value of the living-away-from-home allowance fringe benefit at section 31 of the Fringe Benefits Tax Assessment Act 1986?

There are three alternate methods that can be used to calculate the taxable value of a living-away-from-home allowance. These methods are set out in sections 31, 31A and 31B. The appropriate method depends upon whether the requirements of either subsection 31(1) or 31A(1) are met.

If the requirements of subsection 31(1) are met, the taxable value under subsection 31(2) will be the amount of the allowance less the exempt food and accommodation components. Subsection 31A(2) also uses this method to calculate the taxable value if the requirements of subsection 31A(1) are met.

However, if the requirements of neither subsection 31(1) or 31A(1) are met, the taxable value under subsection 31B(2) is the amount of the allowance.

Sections 31 to 31F of the FBTAA state:

SECTION 31 TAXABLE VALUE - EMPLOYEE MAINTAINS A HOME IN AUSTRALIA

31(1)

This section applies to a living-away-from-home allowance fringe benefit covered by subsection 30(1) in relation to a year of tax to the extent that the employee satisfies all of the following for the fringe benefit and the period to which it relates:

(a) section 31C (about maintaining an Australian home);

(b) section 31D (about the first 12 months);

(c) section 31F (about declarations).

31(2)

Subject to this Part, the taxable value of the fringe benefit in relation to the year of tax is the amount of the fringe benefit reduced by:

(a) any exempt accommodation component; and

(b) any exempt food component.

…

SECTION 31B TAXABLE VALUE-ANY OTHER CASE

31B(1)

This section applies to a living-away-from-home allowance fringe benefit in relation to a year of tax to the extent that neither section 31 nor 31A applies to the fringe benefit and the period to which it relates.

31B(2)

Subject to this Part, the taxable value of the fringe benefit in relation to the year of tax is the amount of the fringe benefit.

SECTION 31C

31C MAINTAINING A HOME IN AUSTRALIA

The employee satisfies this section 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; and

(b) it is reasonable to expect that the employee will resume living at that place when that period ends.

SECTION 31D FIRST 12 MONTHS EMPLOYEE IS REQUIRED TO LIVE AWAY FROM HOME

31D(1)

The employee satisfies this section 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.

…

SECTION 31F DECLARATIONS

31F(1)

The employee satisfies this section if the employee gives the employer a declaration, in a form approved by the Commissioner, purporting to set out:

(a) for a fringe benefit to which section 31 (about employees who maintain an Australian home) applies:

(i) the address of the place in Australia where the employee usually resides when in Australia; and

(ii) that section 31C is satisfied for that place; and

(iii) the address of each place where the employee actually resided during the period to which the benefit relates; or

….

31F(2)

The employee must give the employer the declaration before the declaration date for the year of tax during which the benefit was provided.

However, the application of section 31 is subject to the transitional provisions contained in sections 27 and 28 of the Tax Laws Amendment (2012 Measures No. 4) Act 2012.

Section 27 of the Tax Laws Amendment (2012 Measures No. 4) Act 2012 states:

27 Transitional - existing employment arrangements

(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.

(2) During the transitional period, disregard section 31D of the Fringe Benefits Tax Assessment Act 1986 if:

(a) the employee is a temporary resident or 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.

(3) In this item:

Budget time means 7.30 pm, by legal time in the Australian Capital Territory, on 8 May 2012.

…

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)(b) or (2)(b) ends; and

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

In summary, if an employee is neither a temporary or a foreign resident and has an eligible employment arrangement in place before 7.30 pm ( Read as 7.30 pm Australian Eastern Standard Time hereafter) on 8 May 2012 and that arrangement was not materially varied or renewed from 7.30 pm on 8 May 2012 up to and including 30 September 2012, then the employee is not required to maintain a home in Australia and is not required to satisfy section 31D of the FBTAA to be eligible for concessional treatment during the transitional period.

These transitional rules will apply during the transitional period being from 1 October 2012 to the earlier of:

• 30 June 2014; and

• the time the eligible employment arrangement ends, and

• the first time that eligible employment arrangement is varied in a material way or renewed.

In relation to your circumstances, the transitional rules will apply during the transitional period if the following conditions are met:

1. the employee is neither a temporary or foreign resident

2. the employee had an eligible employment arrangement in place before 7.30 pm on 8 May 2012 and, if so, that arrangement was not materially varied or renewed during the period from 7.30 pm on 8 May 2012 up to and including 30 September 2012.

These conditions in relation to your circumstances are considered below.

1. Is the employee either a temporary or a foreign resident?

It is accepted that the employee is an Australian resident. Therefore, the employee is not a temporary or a foreign resident and this condition is satisfied.

2. Did the employee have an eligible employment arrangement in place before 7.30 pm on 8 May 2012 and, if so, was that arrangement materially varied or renewed during the period from 7.30 pm on 8 May 2012 up to and including 30 September 2012?

An eligible employment arrangement is defined at subsection 27(3) of the Tax Laws Amendment (2012 Measures No. 4) Act 2012 as follows:

eligible employment arrangement means an arrangement under which:

(a) the employer; or

(b) the associate of the employer;

commits to provide the employee with an allowance or benefit for the employee's accommodation, food or drink while the duties of that employment require the employee to live away from his or her normal residence.

The Commissioner must first consider whether the employee had an eligible employment arrangement in place as at 7.30pm on 8 May 2012. Specifically, the Commissioner must consider whether the employee had an arrangement in place as at 7.30 pm on 8 May 2012 in which you had committed to provide them with an allowance for their accommodation while their duties require the employee to live away for their normal residence.

In order to determine whether the employee had such an arrangement in place as at 7.30 pm on 8 May 2012, the Commissioner will consider the following circumstances:

• the employee applied for the position in mid 2011;

• the employee was advised by letter dated late 2011 that the application had been approved and was for x years commencing in 2012;

• for the first x years the employee is required to live overseas away from their normal residence in Australia;

• you are responsible to pay their a salary for the duration of the appointment and, in addition, an 'accommodation allowance' for the two years they are located overseas;

• the 'accommodation allowance' is provided to cover the extra accommodation expenses incurred while the employee is overseas;

• the employee accepted the position on x February 2012;

• Later that month the employee made an application for deferment of the position until early 2013;

• on 9 March 2012 in-principle approval was granted for the employee's deferment advising that final approval could not be given until letters of support for the employee's deferment were supplied from their Australian and overseas supervisors;

• final approval of the deferral of the commencement of the appointment until early 2013 was granted on 29 May 2012.

In summary, as at 7.30 pm on 8 May 2012, the employee had been officially notified by letter that their appointment had been approved, details and the exact amount of an 'accommodation allowance' to be paid by you had been advised in the letter of approval and the funds for the 'accommodation allowance' had been released. The only detail to be finalised at this time was the exact starting date of the position.

Given the circumstances as detailed above, it is reasonable to conclude that as at 7.30 pm on 8 May 2012, you had committed pay an 'accommodation allowance' to the employee for the two year period that the employee was overseas.

Therefore, it is concluded that the employee was covered by an eligible employment arrangement as at 7.30 pm on 8 May 2012.

The Commissioner must next consider whether this eligible employment arrangement was altered in a material way or renewed between 7.30 pm on 8 May 2012 and 30 September 2012.

Paragraph 11.10 of the Fringe benefits tax: a guide for employees provides guidance on when an employment arrangement is considered to be altered in a material way or renewed:

Material variation or renewal of employment arrangement

A material variation occurs when fundamental changes are made to the employment arrangement.

For the purposes of the transitional rules, an annual salary review is not a material variation to an employment arrangement. Changes to an employment arrangement to reflect other annual adjustments, such as the food component of a LAFHA, do not constitute a material variation.

In the case of promotions, it will be a matter of fact, depending on the circumstances of each case - for example, if an employee is promoted and the underlying terms of their employment arrangement do not change, there has not been a material variation in the employment arrangement. However, if there are fundamental differences to the employment arrangement arising from the promotion, the employment arrangement has been the subject of a material variation.

Where an employer formally extends the employee's secondment period, through issuing a new contract or by letter confirming an extension to a current arrangement, that would constitute a material variation or renewal of an eligible employment arrangement.

The Commissioner has determined above that the employee was covered by an eligible employment arrangement, as at 7.30 pm on 8 May 2012.

During the period between 7.30 pm on 8 May 2012 and 30 September 2012 the only change in circumstance occurred on 29 May 2012 when final approval of the employee's deferral of the commencement date of the position until early 2013 was granted.

Therefore, the only change to the employee's circumstances during this period was that the commencement date of the position was confirmed.

Such a change does not constitute a fundamental change to your commitment to pay an 'accommodation allowance' to the employee for the two year period.

Therefore, it is concluded that the employee was covered by an eligible employment arrangement as at 7.30 pm on 8 May 2012 and that arrangement was not materially varied or renewed during the entire period staring at 7.30 pm on 8 May 2012 and ending on 30 September 2012.

Conclusion

As the employee is neither a temporary or a foreign resident and had an eligible employment arrangement in place as at 7.30 pm on 8 May 2012 and as that arrangement was not materially varied or renewed during the entire period starting at 7.30 pm on 8 May 2012 and ending on 30 September 2012, the transitional rules at section 27 of the Tax Laws Amendment (2012 Measures No. 4) Act 2012 will apply in the calculation of the taxable value of the LAFHA fringe benefit, being the 'accommodation allowance', provided to the employee by you for the period up to 30 June 2014.

Under the transitional provisions paragraph 31C(a) and section 31D are disregarded. therefore, for the period up until 30 June 2014, subsection 31(2) can be used to calculate the taxable value of the living-away-from-home fringe benefit if:

• it is reasonable to expect the employee to resume living at the place in Australia where they usually reside at the end of the appointment; and

• the employee provides you with the relevant declarations.

At the conclusion of the transitional period on 30 June 2014, it will no longer be possible to use subsection 31(2) to calculate the taxable value of the allowance as the requirements of sections 31C(about maintaining an Australian home) and 31D (the 12 month limit) will not be met.