Edited version of your written advice

Authorisation Number: 1012833802885

Date of advice: 6 July 2015

Ruling

Subject: Fringe Benefits Tax - Remote Area Housing

Question 1

Is the Trustee entitled to a 50% reduction in the taxable value of certain expense payment fringe benefits under subsection 60(4) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where the recipient's expenditure is in respect of remote area residential property?

Answer

Yes. The Trustee is entitled to a 50% reduction in the taxable of value of a reimbursement made to a current employee in respect of expenditure incurred in acquiring land and the construction of a dwelling.

This ruling applies for the following period:

1 April 20EE to 31 March 2016

Relevant facts and circumstances

After commencing employment with the employer, the employees Y and Z acquired land in state X and constructed a house on the land (the 'property). The property is located in a remote area. The land was acquired under a contract of sale.

Y was a full time employee of the employer, which is engaged in farming activities, until 30/06/20AA. For the years ended 30/06/20BB and 20CC Y was retired. Y recommenced full time employment in the year ended 30 June 20DD.

Z is a full time employee of the employer and has worked in a casual outside position since July 20VV. Z works approximately 10 hours a week in this role.

The employer is proposing to reimburse the employee all (or part) of the purchase price of the property including the construction cost of the house on the land. The expenditure is $xxxxx. The reimbursement will be made with reference to the purchase price of the land and the construction cost of the house, being the expenditure incurred by the employee.

The reimbursement is an 'expense payment fringe benefit' as defined in subsection 136(1) of the FBTAA.

Additional information provided in response to request dated April 20EE

1. Prior to a specific date where was the usual place of residence of Y and Z?

The usual place of residence was on the Farm.

2. In what capacity was Y employed by the trust - was Y engaged in the farming business or was Y employed by the trustee in some other capacity (e.g. provision of trustee services)?

Y was/is actually farming the land and Y is also a director of the Trustee Company.

3. An explanation as to why Y chose to end his/her retirement and re-commence employment. Is Y currently an employee, or if not, when did employment cease?

Due to economic reasons, Y needed to return to work on the farm, where Y is still currently working full-time.

4. Were Y and Z current employees at the time expenditure was incurred in relation to the construction of the residence?

Z was an employee at the time the construction expenditure was incurred, whereas Y was retired. At the time of the settlement of the land, both Y and Z were current employees of the trust.

5. Evidence to demonstrate that sustained reasonable efforts had been made to commence construction and occupy the dwelling within prescribed timeframes.

Due to previous building commitments, the builder could not commence the house construction before June 20AA and the earliest time the builder could start construction of the house was April 20BB. See the attached letter from the builder confirming this.

6. In which FBT year will the expense payment fringe benefit will be provided? At the time of the purchase of the land or at the time of the construction of the dwelling was it envisaged that a benefit would be provided?

The Trust is waiting for the outcome/result of the private tax ruling before the expense will be made.

7. Does the Trustee employee any persons who are not members of the family and if so, does the Trustee provide housing benefits to these employees?

The Trust currently has one fulltime unrelated farm hand/employee who is supplied with a housing benefit.

Information provided 20EE

1. The intent of the original acquisition of the land was to build a house for the farm business/ accommodation for employees as the other farm houses were used for other employees.

2. Y returned to work for economic reasons as the Trust could not afford to employ another employee.  I am further advised that the Trust incurred trading losses for the years ended 20BB and 20CC.

Information provided 20EE

• The Trust had trading losses in the20BB and 20CC financial years

• The Trust bank account was at its overdraft limit and the Trust was unable to pay for the house and land costs.

• Therefore Y and Z had to pay for the land and house costs from their personal monies.

• In respect of the 20CC and 20DD financial years, Y and Z received no or minimal wages from the Trust and had little or no income in their personal tax returns. In the 20DD financial year the Trust did not make a trading profit. However due to prior year losses it did not distribute any income to family members but intends to reimburse Y and Z the cost of the house and land, subject to the outcome of the tax ruling.

• The intention of Y and Z has not changed in relation to the house and land and remains as set out in the original application for a private ruling

• Reference to "employees" in the email dated 20EE includes Y and Z.

• When the house was completed, Y and Z moved into this, their child and their spouse moved into Y and Z's house on the farm and the full time employee moved into the house on the farm vacated by Y and Z their child and spouse.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986

Section 20

Paragraph 20(b)

Section 23

Section 60

Subsection 60(4)

Section 136

Section 140

Section 142

Subsection 142(2C)

Subsection 142(2E)

Reasons for decision

Section 60 of the FBTAA 1986 provides for a reduction in the taxable value of certain housing benefits provided to employees in remote areas. Subsection 60(4) of the FBTAA states that:

'Where:

a) The recipient of an expense payment fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

b) The recipients expenditure is in respect of remote area residential property;

the amount that, but for this subsection, would be the taxable value of the fringe benefit in relation to the year of tax shall be reduced by 50%'

The 50% reduction in the taxable value of the expense payment fringe is subject to three conditions:

1) The recipient of the benefit is an employee of the employer

The term 'employee' is defined in subsection 136(1) of the FBTAA to mean a current employee, future employee or a former employee. The term 'current employee' is further defined in subsection 136(1) of the FBTAA to mean a person who receives, or is entitled to receive, salary or wages.

2) The benefit provided is an expense payment fringe benefit

The term 'expense payment fringe benefit' is defined in subsection 136(1) of the FBTAA to mean a fringe benefit that is an expense payment benefit. The term 'expense payment benefit' is also defined in subsection 136(1) of the FBTAA by reference to section to section 20 of the FBTAA which states:

''Where a person (in this section referred to as the "provider"):

a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the "recipient") to pay an amount to a third person in respect of expenditure incurred by the recipient; or

b) reimburses another person (in this section also referred to as the "recipient"), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.'

Under the proposed scheme the employer will reimburse the expenses incurred by the employees in acquiring land and building a residential property. The reimbursement meets the definition of expense payment benefit in paragraph 20(b) of the FBTAA.

Section 23 of the FBTAA states that the taxable value of an external expense payment fringe benefit is generally the amount paid or reimbursed, reduced by the recipient's contribution.

3) The recipients expenditure is in respect of remote area residential property

Subsection 142(2C) of the FBTAA sets out the requirements that satisfy the term 'recipients expenditure in respect of remote area residential property'. In this case the relevant employee expenditure was incurred:

"…to enable the employee to acquire an estate or interest in land on which a dwelling was subsequently to be constructed or to acquire an estate or interest in land and construct, or complete the construction of, a dwelling on the land."

(paragraph 142(2C)(a) of the FBTAA)

Additional conditions are set out in paragraphs 142(2C)(e) to 142(2c)(j) of the FBTAA:

(e) if paragraph (a) or (b) applies:

(i) at the time the recipients expenditure was incurred, the employee proposed to occupy or use the dwelling as his or her usual place of residence; and

(ii) the Commissioner is satisfied that the employee has pursued sustained reasonable efforts to:


(A) commence the construction, or commence the completion of the construction, of the building constituting or containing the dwelling within 6 months after the time the recipients expenditure was incurred; and


(B) occupy or use the dwelling concerned as his or her usual place of residence within 18 months after the time the recipients expenditure was incurred;

(f) if paragraph (c) or (d) applies - as soon as reasonably practicable after the time the recipients expenditure was incurred, the dwelling concerned was occupied or used by the employee as his or her usual place of residence;

(g) at the time the recipients expenditure was incurred:

(i) the land was situated in a State or internal Territory and was not at a location in, or adjacent to, an eligible urban area; and


(ii) the employee was a current employee of the employer and the usual place of employment of the employee was not at a location in, or adjacent to, an eligible urban area;

(h) the common conditions set out in subsection (2E) are satisfied in relation to the time the recipients expenditure was incurred; and

(j) the fringe benefit was not provided to the employee under:

(i) a non-arm's length arrangement; or

(ii) an arrangement that was entered into by any of the parties to the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of section 60 or Division 14A of Part III.

Subsection 142(2E) of the FBTAA sets out the common conditions that must be satisfied in respect of the provision of remote area housing benefits under section 142 of the FBTAA;

For the purposes of the application of this section to a fringe benefit in relation to a year of tax in relation to an employee of an employer, the common conditions in relation to a particular period or in relation to a particular time are as follows:

(a) it is customary for employers in the industry in which the employee was employed during that period or at that time, as the case may be, to provide housing assistance for their employees;

(b) it would be concluded that it was necessary for the employer, during the year of tax, to provide or arrange for the provision of housing assistance for employees of the employer because:


(i) the nature of the employer's business was such that employees of the employer were liable to be frequently required to change their places of residence;


(ii) there was not, at or near the place or places at which the employees of the employer were employed, sufficient suitable residential accommodation for those employees (other than residential accommodation provided by or on behalf of the employer); or


(iii) it is customary for employers in the industry in which the employee was employed during that period or at that time, as the case may be, to provide housing assistance for their employees.

Application to your circumstances

At all times during the relevant period Z has been a full time employee of the Trust which carries on a farming business. Z is also employed by a local business on a part-time basis. Y retired from his/her employment during the year ended 30 June 20AA, but recommenced employment during the year ended 30 June 20DD. Accordingly, the recipients of the proposed benefit are employees of the employer.

Y and Z have incurred expenditure in acquiring land and in subsequently constructing a dwelling on that land. Under the proposed arrangement the employer (the Trustee) intends to reimburse the employees for the expenses they have incurred. An expense payment benefit arises under paragraph 20(b) of the FBTAA when an employer reimburses an employee for expenses incurred.

In order to qualify for the 50% reduction in the taxable value of the fringe benefit, the recipients' expenditure must be in respect of remote area residential property - refer paragraph 60(4)(b) of the FBTAA. In this instance the expenditure was incurred to enable the employees to obtain an interest or estate in land on which a dwelling was subsequently to be constructed.

Subparagraph 142(2C)(e)(i) of the FBTAA provides that at the time the recipients expenditure was incurred, the employee proposed to occupy or use the dwelling as his/her or the usual place of residence. In this instance Y and Z acquired the land with the intention of using it as their usual place of residence. When the house was completed, Y and Z moved into this and their child and spouse moved into Y and Z's house on the farm. The full time employee moved into the house on the farm vacated by Y and Z's child and spouse.

A further requirement is that the Commissioner must be satisfied that the employee has pursued reasonable sustained efforts to commenced construction of the dwelling within 6 months after the time the recipient's expenditure was incurred.

Y and Z entered into a contract to purchase the land in 20GG. This was settled in 20GG. It was difficult to find a suitable builder willing to work in a remote area. Discussions with a builder commenced in 20AA, with construction starting 20BB. The builder was unable to commence construction sooner due to previous commitments. This was confirmed by a letter from the builder.

It is accepted that reasonable efforts were made to construct a dwelling on the land as soon as practicable, which satisfies paragraph 142(2C)(e)(ii) of the FBTAA.

Subparagraph 142(2C)(g)(i) of the FBTAA requires that at the time the recipient's expenditure was incurred, the land was situated in a remote area and the employee's place of employment was situated in a remote area. It is accepted that the property and the farming property, are not near or adjacent to an eligible urban area and are therefore considered to be remote.

Subparagraph 142(2C)(h) of the FBTAA requires that the common conditions set out in subsection 142(2E) of the FBTAA be satisfied at the time the recipient's expenditure was incurred. This subsection concerns the provision of free or subsidised housing being customary in the industry in which the employee is employed and the necessity for the employer to provide housing assistance to employees due to the shortage of suitable residential accommodation.

Paragraph 2 of Taxation Determination TD 94/97 states that:

'A benefit will be accepted as being customary where it is normal or common for employees of that class or job description in that industry to be provided with the same or similar benefits. It is not necessary that all or even the majority of employees in the industry receive the benefit. Where the provision of the benefit is unique, rare or unusual within an industry it would not be accepted as being customary.

It is accepted that in the farming industry it is necessary or customary to provide housing assistance to employees.

Paragraph 142(2C)(j)(i) provides that the fringe benefit must not be provided under a non-arm's length arrangement. Subsection 136(1) of the FBTAA 1986 defines the expression "non-arm's length arrangement" as meaning an arrangement other than an arm's length arrangement. In this instance the employer is the corporate trustee of the trust. The directors of the company are the employees, and other family members. Y and Z are therefore associates of the Trust.

Prior to the acquisition of the land and the construction of the residential property, Y and Z resided in a house on the farming property. At that time, housing assistance was provided to other employees, and still is. However, given the views expressed in paragraph 2 of TD 94/97, it is accepted that the benefit will be provided under an arm's length arrangement. It is also accepted that the benefit will not be provided under an arrangement for the purpose of enabling the employer to obtain the benefit of the reduction in taxable value under section 60 of the FBTAA.

Paragraph 142(2)(C)(g) of the FBTAA states that at the time the recipient's expenditure was incurred the employee was a current employee of the employer and the usual place of employment was not at a location in, or adjacent to, an eligible urban area.

As noted above Z was in continuous employment for the period prior to the purchase of the land up until the present time. Y ceased employment during the year ended 30 June 20AA and re-commenced employment during the year ended 30 June 20DD.

As Z was at all times a current employee, a reimbursement of her/his expenditure in relation to the specific property will be eligible for a 50% reduction in the taxable value of the benefit.

Any reimbursement of expenses incurred by Y during the period he was not a current employee will not be eligible for a 50% reduction in the taxable value under subsection 60(4) of the FBTAA.