Edited version of your written advice

Authorisation Number: 1012903221401

Date of advice: 4 November 2015

Ruling

Subject: Remote area housing assistance

Question 1

Can the taxable value of an expense payment fringe benefit in respect of remote area housing loan interest be reduced by 50% by the application of subsection 60(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes. The taxable value of remote area housing loan interest payments may be reduced by 50%.

Question 2

Can the taxable value of an expense payment fringe benefit in respect of remote area housing rent be reduced by 50% by the application of subsection 60(2A) of the FBTAA?

Answer

Yes. The taxable value of remote area rental assistance may be reduced by 50%.

This ruling applies for the following periods:

1 July 2015 to 30 June 2020.

Relevant facts and circumstances

The Smalltown Pre-School Association Inc. is a registered charity, is income tax exempt and is eligible for the FBT rebate. The pre-school is located in a remote area according to list 1 on the ATO website.

The pre-school would like to offer existing and potential staff the FBT exempt benefit of being able to salary sacrifice 50% of either their mortgage interest or rental payments, without financially impacting the pre-school. Pre-school teachers in NSW currently are not paid the same as teachers paid under the NSW Education system. Pre-school teachers have to negotiate their wages with the committee of management and due to pre-school funding cuts paying higher wages to try to keep staff is proving very difficult. Some pre-schools have to fund raise to cover wages. The pre-school has an ongoing challenge to attract and retain quality staff.

This ruling request is in relation to the Fringe Benefits Tax Assessment Act 1986, subsection 60(2) - remote area housing interest and subsection 60(2A) - remote area housing rent.

We have applied for a private ruling in regard to remote area housing benefits the mortgage interest / rent claimed for a housing loan for a dwelling in a remote area. Smalltown does fall within a remote area (for this purpose) and we would be under the impression that it would be determined that this benefit is 'customary in the industry'. The reasoning to why we have applied for the ruling is not only to attract but also more importantly keep our valued staff. Our teachers are not paid by the government directly as are teachers in the NSW education system, but both have exactly the same qualifications. We have an EBA where the teachers have to negotiate their pay rate with the executive management committee which is very difficult due to a limited budget.

To attract teachers to our preschool is a constant battle as they could get a job in the school system and get paid a higher wage rate and also if they choose to live in a larger town they would have to travel.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986

Section 20

Paragraph 20(b)

Section 23

Section 60

Subsection 60(2)

Subsection 60(2A)

Section 136

Section 140

Section 142

Subsection 142(1A)

Subsection 142(2E)

Reasons for decision

Remote area

A location is considered remote if it is situated in a State or internal Territory and was not at a location in, or adjacent to, an eligible urban area.

Section 140 of the FBTAA provides a definition of the term 'eligible urban area' and sets out the criteria for a location to be considered a remote area. Chapter 19 of ATO Fringe benefits tax - a guide for employers (NAT 1054) summarises the requirements applicable to most employers for a location to be considered remote as follows:

It is located in a remote area if it is not in or near an urban centre. This means the accommodation must be located at least 40 kilometres from a town with a census population between 14,000 and 130,000, and at least 100 kilometres from a town with a census population of 130,000 or more (population figures based on the 1981 Census).

If the accommodation is in Zone A or B (for income tax purposes), it must be located at least 40 kilometres from a town with a census population between 28,000 and 130,0000, and at least 100 kilometres from a town with a census population of 130,000 or more.

Where the shortest practical surface route between a locality and an eligible urban area includes a route by water, the distance travelled by water is doubled for the purposes of working out how remote that locality is from the eligible urban area.

Lists of towns that are in remote areas according to these criteria can be found in the ATO fact sheet Fringe benefits tax - remote areas. List one of the ATO fact sheet and attachment one of PS LA 2000/6 is the relevant list for your circumstances. Smalltown is listed as being in a remote area as its location is:

• Not in Zone A or Zone B for income tax purposes

• At least 40 kms from an urban centre with a population of 14,000 or more

• At least 100 kms from a urban centre with a population of 130,000.

Expense payment fringe benefits

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 20 of the FBTAA. Section 20 of the FBTAA determines that an expense payment benefit may arise in either of two ways, that being either a payment by the employer to a third party on behalf of the employee (paragraph 20(a) of the FBTAA) or the employer reimburses the employee for expenses incurred (paragraph 20(b) of the FBTAA).

Section 23 of the FBTAA provides the method of valuation for an external expense payment fringe benefit as follows:

Subject to this part, the taxable value in relation to a year of tax of an external expense payment fringe benefit provided during the year of tax is the amount of the payment referred to in paragraph 20(a), or the reimbursement referred to in paragraph 20(b), as the case requires, reduced, in a case to which paragraph 20(a) applies, by the amount of the recipients contributions.

Therefore, the taxable value of an external expense payment fringe benefit is the amount of either the provider's reimbursement to the recipient, or the providers payment to a third party reduced by any recipients contribution.

Section 60 of the FBTAA

Section 60 of the FBTAA 1986 provides for a 50% reduction in the taxable value of certain housing benefits provided to employees in remote areas. These include the following expense payment fringe benefits:

1. An expense payment fringe benefit where the recipients expenditure is in respect of interest in respect of a remote area housing loan - subsection 60(2) of the FBTAA

2. An expense payment fringe benefit where the recipients expenditure is in respect of remote area housing rent connected with a unit of accommodation - subsection 60(2A) of the FBTAA

The 50% reduction in the taxable value of the expense payment fringe is subject to a number of conditions, including:

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.

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 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.'

The benefit is not provided under a non-arm's length transaction

Paragraphs 60(2)(d)(i) and 60(2A)(d)(i) of the FBTAA stipulate that the benefits cannot be provided under a non-arm's length arrangement.

Subsection 136(1) of the FBTAA defines 'non-arm's length arrangement' as an arrangement other than an arm's length arrangement. The term 'arm's length arrangement' is not defined in the FBTAA. However subsection 136(1) of the FBTAA defines 'arm's length transaction' to mean a transaction where the parties to the transaction are dealing with each other at arm's length in relation to the transaction.

The expression 'at arm's length' is defined in The CCH Macquarie Concise Dictionary of Modern Law, 1998 as meaning that the parties to a transaction are not connected in such a way as to bring into question the ability of one to act independently of the other.

In Granby Pty Ltd v FC of T (1995) 30 ATR 400; 95 ATC 420, where the expression dealing with each other at arm's length in section 160ZH of the Income Tax Assessment Act 1936 was in question, Lee J said (at ATR 403; ATC 4243):

"The expression "dealing with each other at arm's length" involves an analysis of the manner in which the parties to the transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not at arm's length the inference may be drawn that they did not deal with each other at arm's length."

The benefit is not provided under an arrangement for the purpose of the employer obtaining a benefit

Subparagraphs 60(2)(d)(ii) and 60(2A)(d)(ii) of the FBTAA are identically worded and require that the fringe benefit is not provided under:

(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 this section;

Arrangement

The term 'arrangement' is defined in subsection 136(1) of the FBTAA as:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceeding; and

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

For the purpose of obtaining the benefit

Guidance on what is meant by an arrangement that was entered into by any of the parties of the arrangement for the purpose, or for purposes that included the purpose, of enabling the employer to obtain the benefit of the section, is provided in ATO Interpretative Decision ATO ID 2010/182 Fringe Benefits Tax: exempt benefits - remote area housing benefits - salary sacrifice arrangement (ATO ID 2010/182). Although ATO ID 2010/182 discusses the phrase in regards to obtaining the benefit of section 58ZC of the FBTAA, the interpretation is applicable to your situation as the phrase is used in the same way in both section 58ZC and section 60 of the FBTAA.

In discussing the meaning of the phrase ATO ID 2010/182 states:

In Newton v. Federal Commissioner of Taxation (1958) 98 CLR 1; (1958) 11 ATD 442; (1958) 7 AITR 298, the Privy Council examined the meaning of the word 'purpose'.

Lord Denning said at page number CLR 8; ATD 445; AITR 304,

The word "purpose" means, not motive, but the effect which is sought to achieve - the end in view.

Lord Denning also said (at the same page),

In order to bring an arrangement within the section, you must be able to predicate by looking at the overt acts by which it was implemented that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.

In this arrangement which provides or grants the 'recipient's overall housing right', the arrangement is entered into by each of the parties for the purpose of enabling the employer to provide the benefit of housing its employee. There are no overt acts by which one could predicate that the arrangement has been implemented by any of the parties for the purpose of allowing the employer to enjoy the benefits of the tax exemption. The arrangement can be explained as being one of ordinary business dealings as it is customary in the employer's industry.

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.

Is it customary for employers in the industry in which your employees are employed to provide housing assistance for their employees?

'Housing assistance' is defined in subsection 142(3) of the FBTAA to include

…

(aa) the making of payments in discharge or reimbursement of rent or other consideration incurred by a person in respect of the subsistence of a lease or licence in respect of a unit of accommodation;

…

(c) the making of payments in discharge or reimbursement of expenditure incurred by a person in respect of interest incurred in respect of a housing loan in relation to a dwelling;

Under your proposed arrangement you will be providing housing assistance to your employees.

Customary in the industry to provide housing assistance

The meaning of the phrase 'customary for employers in the industry' is discussed in Taxation Determination TD 94/97 Fringe benefits tax: what does the phrase 'customary for employers in the industry' mean in relation to the provision of fringe benefits to employees? (TD 94/97)

TD 94/97 states:

2. 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 it has been a long standing practice for schools to provide school teachers with free or subsidised accommodation in remote areas. The provision of housing assistance to employees in remote areas is not considered to be unique, rare or unusual.

Is it necessary for an employer to provide housing assistance for employees?

Under paragraph 142(2E)(b) of the FBTAA it is necessary for an employer to provide housing assistance to employees for the following reasons:

• the nature of the employer's business is such that employees are liable to frequent movement from one residential location to another;

• in the area in which the employee is employed there is not sufficient suitable residential accommodation otherwise available; or

• because of the custom in the employer's industry to provide housing assistance to employees.

In this instance it is necessary to provide housing assistance as it is custom in the industry to do so. It is also necessary to provide subsidised housing as an incentive to attract and retain teachers.

Conclusion

As you satisfy the requirements of sections 60 and 142 of the FBTAA, the taxable value of expense payment fringe benefits provided in the form of rent subsidies and interest payments may be reduced by 50%.