Edited version of your written advice

Authorisation Number: 1012982208771

Date of advice: 10 March 2016

Ruling

Subject: Remote area housing rent fringe benefit

Question 1

Would the provision of the remote area housing fringe benefit described below be subject to fringe benefits tax (FBT) as an expense payment benefit under Division 5 of Part III of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

Question 2

Will the taxable value of the Remote Area Housing fringe benefit, as described below, be reduced by 50% of the gross rent incurred by the employee pursuant to subsection 60(2A) of the FBTAA?

Answer

No.

This ruling applies for the following periods:

• Year ended 31 March 2016

• Year ended 31 March 2017

The scheme commences on:

1 April 20YY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The employee commenced employment with the employer in April 20XX and he/she is a current employee of the employer.

The employee is seeking to enter into an arrangement with the employer to allow him/her to receive a remote area housing rent expense payment fringe benefit in accordance to with subsection 60(2A) of the FBTAA. The rental property under this arrangement is situated in location B (the rental property). It is customary for the employer to provide housing benefits to its employees as an incentive to attract and retain staff to regional employment.

The owner of the rental property is Owner Pty Ltd as trustee for The Private Trust. The employee and his/her spouse are directors of Owner Pty Ltd. The employee's spouse is also a beneficiary of the Private Trust.

In early December 20YY, the employee signed a Tenancy Agreement with Owner Pty Ltd atf The Private Trust for the lease of the rental property for the relevant period at an agreed rent payable amount of $X per fortnight.

The employee is currently living at the rental property as his/her usual place of residence with his/her spouse and their children. The travelling distance from the rental property to the employee's place of employment in Location A is approximately 75-80kms. He/she travels to work on a daily basis.

Both Location A and Location B are listed as eligible remote areas for housing fringe benefit. The employee's spouse also owns another property located in the town of Location A.

The employee is seeking to receive 50% of the rent expense from you as remote area housing fringe benefit under subsection 60(2A) of the FBTAA.

The employee previously sought to receive a remote housing fringe benefit from the employer under section 58ZC of the FBTAA. Under this arrangement it was proposed that the employer enter into a residential tenancy agreement with Owner Pty Ltd for a relevant lease period and provide the property to the employee to use as his/her usual place of residence. It is noted that the rental amount stated in that residential tenancy agreement was less than $700 per week. That proposed arrangement did not proceed as the employer was not in a position of bargaining with the property owner in the leasing of the rental property.

Relevant legislative provisions

Fringe Benefit Tax Assessment Act 1986 Section 20,

Fringe Benefit Tax Assessment Act 1986 Subsection 60(2A),

Fringe Benefit Tax Assessment Act 1986 Subsection 136(1),

Fringe Benefit Tax Assessment Act 1986 Subsection 142(1A) and

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

To be subject to FBT a benefit must be a "fringe benefit" as defined in subsection 136(1) of the FBTAA. That definition requires, among other things, that the benefit must be provided to an employee or to an associate of the employee, by the employer, an associate of the employer or by some other person under an arrangement with the employer. It also requires the benefit to be provided in respect of employment but does not include, among other things, salary and wages or an exempt benefit.

The term 'employee' is defined in the FBTAA to mean a current employee, a future employee or a former employee with the term 'current employee' further defined to mean a person who is entitled to receive salary or wages.

A salary packaging set up form completed by the employee shows that he/she commenced employment in early April 20XX and he/she is not a former employee. The employee is therefore, a current employee. A benefit provided under a salary packaging arrangement must be 'in respect of employment'.

The employee signed a Tenancy Agreement with Owner Pty Ltd to rent the rental property for the rent amount of $X per fortnight. The employee is seeking to have 50% of the rent expense paid by his/her employer.

Part III of the FBTAA outlines the types of fringe benefit that are subject to FBT. Under section 20, expenditures incurred by an employee can give rise to an expense payment fringe benefit where it is wholly or partly reimbursed or paid by an employer.

As the relevant benefit in this case arises from the employer paying or reimbursing 50% of the rent expense incurred by the employee in respect of his/her employment and the benefit is not an exempt fringe benefit, such benefit is an expense payment fringe benefit.

With the rental property being rented by the employee for the relevant period, the provision of such expense payment benefit will be subject to FBT for the FBT years ending 31 March 2016 and 31 March 2017.

50% reduction in taxable value of fringe benefit

Subsection 60(2A) of the FBTAA enables the taxable value of expense payment fringe benefit (the rent amount) relating to remote area housing assistance to be reduced by 50% where the following conditions are satisfied:

1. 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;

2. the recipient's expenditure is in respect of remote area housing rent connected with a unit of accommodation;

3. the recipient occupied or used the unit of accommodation as his or her usual place of residence during a period (the "occupation period") during which the rent accrued; and

4. the fringe benefit was not provided under a non-arm's length arrangement, or an arrangement entered into by any of the parties for the purpose, or for purposes that included enabling the employer to obtain the benefit of the application of section 60.

Expense payment fringe benefit to the employee of employer

Essentially the first condition requires that an expense payment benefit must be provided to an employee in respect of the employment of the employee and it is not an exempt benefit. For the purpose of subsection 60(2A), the recipient of the expense payment fringe benefit must not be an associate of an employee or a third party.

The employer advised that the employee is seeking to enter into a salary packaging arrangement to receive a remote area housing expense benefit. Under this arrangement it is proposed that the employer would agree to pay 50% of the rent expense incurred in connection to the employee's accommodation.

The rent paid is an expense payment benefit paid to a current employee in respect to his/her employment. The benefit is not an exempt benefit and it is not paid to an associate of the employee or a third party. This condition is therefore satisfied.

Remote area housing rent connected with a unit of accommodation

In relation to the second and third conditions, subsection 60(2A) has to be read with subsection 142(1A) of the FBTAA.

Subsection 142(1A) specifies what is meant by remote area housing rent connected with a unit of accommodation for the purposes of the 50% reduction under subsection 60(2A). In general terms, a remote area housing rent connected with a unit of accommodation is rent or other consideration payable in respect of a lease or licence in respect of the unit of accommodation where:

(a) during the period in the year of tax when the employee occupied or used the unit of accommodation as his or her usual place of residence:

(i) the unit of accommodation was in a remote area; and

(ii) the employee was a current employee of the employer and the usual place of employment of the employee was in a remote area; and

(b) it is customary for employers in the industry to provide housing assistance to their employees; and

(c) the lease or licence was not granted under a non-arm's length arrangement or an arrangement to enable the employer to obtain the benefit of the reduction under section 60

For the meaning of the phrase "customary for employers in the industry'' see 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?

The employer advised that the employee is seeking to receive remote area housing benefit for rent expense in relation his/her accommodation. The employee is proposing to receive the benefit through a salary packaging arrangement where the employer would agree to pay 50% of the rent expense incurred.

In relation to the rental accommodation, the employee has entered into a tenancy agreement, to lease the rental property. The lease period is for a relevant period. During this time, the accommodation will be occupy/use by the employee as his/her usual place of residence. The town of Location B in which the rental property is located and the town of Location A in which the employee's usual place of employment is located are both listed as remote areas for the FBT purposes.

The employer advised that it is customary that remote area housing benefit is provided to employees as incentive to attract and retain staff. The Commissioner accepts that in the employer's circumstances, it would not be uncommon for employees to be provided such benefits. Therefore, the Commissioner considers that the first two conditions under subsection 142(1A) for remote area housing rent are satisfied.

Not provided under a non-arm's length arrangement

The condition relating to a non-arm's length arrangement is similarly worded to the integrity paragraph in subsection 60(2A). However, unlike paragraph 60(2A)(d)(i), the conditions dealing with a non-arm's length arrangement under subsection 142(1A) refers to the "the lease or licence" in reference to considering what would qualify as remote area housing rent connected with a unit of accommodation. In this case, it would be the tenancy agreement between the owner of the unit of accommodation and the employee who enters into the agreement to rent the accommodation. In basic terms, remote area housing rent for the purpose of obtaining a 50% reduction in the taxable value of the fringe benefit under subsection 60(2A) excludes any arrangement where the lease or licence was granted under a non-arm's length arrangement.

The term arm's length transaction is defined in subsection 136(1) of the FBTAA to mean a transaction, where the parties to the transaction are dealing with each other at arm's length. Further, an "arrangement" is defined in subsection 136(1) 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 proceedings; and

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

Therefore, the term "arrangement", for the purpose of subsection 60(2A) and subsection 142(1A), would include the tenancy agreement between Owner Pty Ltd atf The Private Trust (owner/landlord) and the employee as the tenant. However, in this case an arrangement would also extend to include the arrangement of providing a remote area housing benefit to the employee by the employer.

There are no specific guidance in determining whether parties to a transaction are dealing with each other "at arm's length" notwithstanding that the concept is an important element for a number of provisions in both the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997). Insofar as applying the concept under income tax law, section 136AD of Division 13 in the ITAA 1936 is an example of a provision that deals with the concept of arm's length. It merely states that the Commissioner may have regard to (i) any connection between any two or more parties to the agreement, or (ii) any other relevant circumstances when determining whether the parties are dealing at arm's length. While section 136AD is now repealed, the aspect of determining the arm's length arrangement between the parties is now adopted as a definition of the term arm's length under section 995-1 of ITAA 1997.

Australian Law Dictionary 2^nd edition defines the term at arm's length as "a relationship between strangers or parties on equal footing who are unaffected by existing mutual duties, liabilities, obligations or identity of interests that may cause either party to influence or control the other or act as an inducement to serve that common interest, or which might operate to modify the terms on which such persons would normally deal."

Therefore, whether parties have dealt at arm's length depends not only on the relationship between the parties themselves but also on the nature of the dealing: Barnsdall v FCT (1988) 81 ALR 173. Therefore, it is a question of fact as to whether the parties are dealing with each other at arm's length.

In Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204 at 213 (AXA) Dowsett J summarised propositions which emerge from the numerous cases in which the expression 'not dealing with each other at arm's length' or similar expressions have been considered, as follows:

• in determining whether parties have dealt with each other at arm's length in a particular transaction, one may have regard to the relationship between them;

• one must also examine the circumstances of the transaction and the context in which it occurred;

• one should do so with a view to determining whether or not the parties have conducted the transaction in a way which one would expect of parties dealing at arm's length in such a transaction;

• relevant factors which may emerge include existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which might enable either party to influence or control the other, or induce either party to serve a common interest and so modify the terms on which strangers would deal;

• where the parties are not in an arm's length relationship, one may infer that they did not deal with each other at arm's length, and that the resultant transaction is not at arm's length;

• however related parties may, in some circumstances, so conduct a dealing as to displace any inference based on the relationship;

• unrelated parties may, on occasions, deal with each other in such a way that the resultant transaction may not properly be considered to be at arm's length.

In that case Edmonds and Gordon JJ, who did not disapprove of Dowsett J's summary of those propositions, further stated at 231 that:

Any assessment of whether parties were dealing at arm's length involves 'an assessment [of] whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining'...

In this case, the question of whether Owner Pty Ltd and the employee are dealing with each other at arm's length when entering into the tenancy agreement in relation to the unit of accommodation will turn on the following relevant factors:

• A beneficiary of The Private Trust and the employee are related;

• Owner Pty Ltd acts as trustee for The Private Trust and lists the employee's spouse as its director;

• The Private Trust is a discretionary trust and the employee's spouse is a beneficiary of the trust;

• The trust purchased the rental property on in November 20YY;

• The employee signed a tenancy agreement on in December 20YY to lease the rental property in the town of Location B from Owner Pty Ltd as trustee for The Private Trust;

• The rent amount payable stated on the tenancy agreement is $1,000 per fortnight. In a separate unsigned tenancy agreement between Owner Pty Ltd and the employee's employer, the rent amount payable is less than $700 per week. That arrangement did not proceed as the employer considered that it had no prior bargaining opportunity. The agreement was superseded by the current arrangement where the employee signed a tenancy agreement with Owner Pty Ltd;

• The employee resides at the rental property as his/her usual place of residence with his/her spouse and children;

• The rental property is approximately 75km to 80km from the employee's usual place of employment located in the town of Location A;

• The employee's spouse owns another property in the town of Location A.

Assessing the circumstances holistically, the Commissioner agrees that the parties may not be dealing with each other in relation to the tenancy agreement as parties who are dealing at arm's length would normally do. When taken together, aspects which lead the Commissioner to that conclusion include:

• The arrangement between Owner Pty Ltd as the landlord and the employee as the tenant lacks independence. The employee's spouse is a director of the corporate trustee whereby in addition, they are also a beneficiary of the trust who owns the rental property. As the parties are related, they are bound by mutual duties, liabilities, obligations and interests that may cause either party to influence or control the other or act as an inducement to serve that common interest, or which might operate to modify the terms on which such persons would normally deal. This is evident from the variation in the rent amount payable which was a higher amount in the first tenancy agreement whereby the employer was listed as the tenant. The amount was lower in the second agreement where the employee is listed as the tenant. With no explanation offered for the decrease in the rent payable, particularly where the parties are related, there is speculation in relation to whether the rent amount is reflective of market rent at the time.

• The rental property was purchased by Owner Pty Ltd on a specific date. It is not certain if the property was advertised for rent to the public in the weeks prior to entering into the tenancy agreement with the employee. It is therefore, not clear whether the property was acquired for investment purposes, given that the employee's spouse had already owned another property in the Town of Location A, or it was intended to be an owner occupier property. Accordingly, there may be concerns relating to income tax issues if the property is in fact an investment property but used as a family home.

• Another aspect of a related party arrangement, not dissimilar to the present circumstances, is whether each party is being influenced or control by the other in respect to the underlying property. While the existence of a tenancy agreement gives the parties the rights and obligations that are legally enforceable, concerns arise where the beneficial owner is related to the legal tenant and both are living together at the property. The concerns may include which bank account are rent payments received and who has control of the account, whether the terms of the agreement be fully enforced if a breach occurs or how the rental income and expenses are brought to account for income tax purposes. The lack of independence and clarity in relation these issues give strength to the inference that the parties are not dealing at arm's length and therefore, the agreement is not an arm's length agreement.

Having considered these aspects, the Commissioner is of the view that the parties to the "lease or licence" have not dealt with each other as arm's length parties would normally do.

As an alternative, if the employee had done nothing, that is he/she did not enter into a tenancy agreement to lease the rental property for accommodation purposes, his/her status as a spouse of the beneficial owner of the property would afford him/her certain legal rights to have access and free use of the property for private and residential purposes. In other words, the employee and his/her family simply occupy the property through his spouse's beneficial ownership of the property and it would not be necessary for the employer to provide remote area housing benefit. Another alternative would be to seek another rental property from a non-related third party with whom either the employer or the employee can enter into a tenancy agreement. Rather, as it appears from the circumstances outlined, the employee had deliberately taken steps to create a contrive arrangement for the purpose or for purposes that included the purpose, of enabling the employer to obtain the benefit of the application of subsection 60(2A).

Looking at the construct of paragraph 60(2A)(d)(ii) of FBTAA, it is not necessary that the employer having the purpose or purposes nor is it necessary for the employer to enter into the arrangement or carrying it out. It is only necessary that any 'parties' entering into the arrangement or carrying it out should have the relevant purpose. In this case, an objective view of the actions taken by the employee in respect to creating an impression that the requirements under subsection 60(2A) are satisfied indicates that the employee is the party that holds the purpose of obtaining a benefit under that subsection.

Therefore, the third condition under subsection 142(1A) as well as the requirement under paragraph 60(2A)(d)(ii) have not been satisfied. The taxable value of any remote area housing rent benefit provided by the employer in respect of the tenancy agreement between Owner Pty Ltd and the employee will therefore, not be reduced by 50% under subsection 60(2A) of the FBTAA.