Edited version of your written advice

Authorisation Number: 1051360768999

Date of advice: 20 April 2018

Ruling

Subject: Travel expenses and allowances

Question 1

Is Fringe Benefits Tax (FBT) payable by X Corporation on meals and accommodation provided to assignees who work on short term assignments in Australia under temporary work visas?

Answer

No. The provision of meals and accommodation to short term assignees will be exempt benefits. Alternatively, the taxable value of the benefits may be reduced to nil by the operation of the ‘otherwise deductible rule’.

Question 2

Are ‘per diem’ amounts paid to the assignees subject to the PAYG withholding provisions in Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No. Provided the amounts paid do not exceed the reasonable travel allowance expense amounts published by the Commissioner from time to time.

This ruling applies for the following periods:

Year ended 31 March 2019

Year ended 31 March 2020

Year ended 31 March 2021

Year ended 31 March 2022

Relevant facts and circumstances

X Corporation provides custom information technology, consulting and business process outsourcing services. These include business and technology consulting, systems integration, application development and maintenance, IT infrastructure services, analytics, business intelligence, data warehousing, supply chain management, engineering and manufacturing solutions, research and development outsourcing and testing solutions.

Nature of employment

X Corporation has a variety of projects with different work structures. Where consulting projects are concerned, much of the work can be performed by assignees based outside of Australia, For other projects, a proportion of the work is done at onsite locations (X Corporation’s office location or client office location) while the rest of the work is executed by teams based in global delivery centres across the world. The work done at the Australian locations may involve either project management, business development or highly skilled technical work.

The assignees working on the project are drawn from an international pool of technical experts or specialists. They are either chosen by the internal resourcing team, client interfacing team or sometimes by the client themselves. The length of the projects varies from a few weeks to long contracts that span several years. Assignee periods to Australia are decided by the project teams based on the project requirements and assignee’s expertise as well as the availability of local talent that can fulfil the need.

The typical nature of the projects can be classified into traditional IT application development and maintenance, testing of IT software and systems, package implementation, business consulting, IT infrastructure and business process services.

Fact Pattern of Business Travel to and from Australia

The fact pattern of the relevant assignees for the purposes of this ruling request is as follows:

● Assignees are required where an X Corporation project needs company specific knowledge which has been developed elsewhere and now need to bring to Australia.

● There is a requirement for highly skilled professionals with computer science and engineering type backgrounds that are in short supply in the domestic labour market.

● There is a demand from X Corporation clients to bring them the best practices and knowledge developed overseas in to Australia in order to assist them to build more efficient and innovative businesses.

● Assignees have company specific knowledge developed elsewhere which needs to be brought to Australia.

● Assignees are highly skilled computer science and engineering professionals that are in short supply in Australia

● Applications for the Temporary Work Visas are initiated through the internet portal

● Visas are applied for non-ongoing activities for three months or less.

● Travel bookings are made by the internet portal to ensure all travellers are clearly identified and their travel pattern can be tracked. This includes flights, accommodation etc.

● Expense reports are submitted and are validated and approved by managers. These can be scrutinized when needed.

● Assignees continue to be employed by their Home entity.

● Assignees retain their home country accommodation.

● Payroll and social security continue to run in the Home Country and there is no change in the home benefits.

● Assignees receive accommodation and meals support at the Host location.

● The actual cost of accommodation incurred by the assignees is reimbursed and the assignees are required to choose the accommodation based on an approved list of hotel accommodation maintained by X Corporation.

● Assignees may alternatively be provided with a per diem to offset the meals and incidentals costs associated with the assignment, as a contribution towards the difference in the cost of living in Australia and in recognition of expense duplication.

● X Corporation facilitates the assignee’s compliance with Australian tax obligations and provide tax briefings and tax return support to ensure that the assignees and comply with their Australian tax obligations.

Assignees on the Temporary Work Visas will primarily be in Australia for up to three months and are the category of assignees that are relevant to this ruling request.

Conditions of Business Travel to and from Australia

The assignees (the subject of this ruling) travel to Australia to work on X Corporation’s projects based in Australia. They provide a short term specialist resource to fill a gap that cannot be filled by locally based employees. The inbound assignees will generally be present in Australia for a period of up to three months. In all cases the following commonalities exist:

Policy: For the inbound assignees, the assignment is subject to X Corporation’s policies that are expressed to have a global effect.

Employment: All assignees remain employed by their home location employer.

Salary: Salary is paid by the home location employer the entire time that the assignee works in a location that is not their home location. In order to comply with Australian tax obligations a shadow payroll is utilised.

Taxes: Australian taxes are borne by X Corporation via the shadow payroll process.

Home location Housing: Assignees typically retain their place of residence in the home location and are living in temporary accommodation whilst away from their home location.

Home Country Tax and Social Security Liability: Assignees remain tax resident of their home country and subject to tax and social security in their home country.

Per diems: Per diems may be provided to assignees to offset meals and other costs incidental to the assignment.

Relationship between X Corporation and the Home Country Employer

X Corporation and the home country entity together identify the assignees who are required to work on projects in Australia as described above. The primary objective of the extended travel is to meet project needs for customers in Australia.

Direction and Control

The relevant inbound assignees are provided with instructions prior to departure pertaining to the location at which they will be working and the activities to be undertaken which will be carried out under the control and responsibility of X Corporation.

While working away from their home location, the Assignees will need to comply with the Australian entities’ regulations, risk management and quality control protocols.

Assignees will undertake to work for X Corporation in the location they are travelling to. X Corporation bears the responsibility for any work produced by the assignees and would be responsible for claims arising out of any defective work produced by the assignees or for any act of fraud or negligence while the assignee is working in their jurisdiction.

Assignee Meals and Accommodation Arrangements

Most of the assignees are provided with a corporate credit card to take care of the expenses while travelling on business. The assignees can use the corporate credit card or personal card for paying accommodation and meals.

Whilst the actual cost of accommodation incurred is reimbursed to the assignees, the meals are reimbursed based on varying rates. The assignees must prepare expense reports to claim reimbursement of accommodation and meals.

The accommodation provided to the assignees is usually in the form of a hotel (or equivalent) in Australia. X Corporation maintains a list of hotel accommodation (or equivalent) where assignees can book their accommodation talking into account the cost and convenience.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 6-5

Subsection 6-5(2)

Section 8-1

Section 15-2

Fringe Benefits Tax Assessment Act 1986

Section 20

Section 20A

Subsection 20A(2)

Section 21

Section 30

Section 31B

Section 40

Section 41

Section 44

Section 45

Section 47

Subsection 47(5)

Section 47A

Section 52

Subsection 136(1)

Section 137

Taxation Administration Act 1953

Schedule 1

Section 12-1

Section 12-35

Section 12-45

Reasons for decision

Question 1

Summary

A fringe benefits tax liability will arise when a fringe benefit is provided to an employee or associate. However, a liability will not arise if the fringe benefit is an exempt benefit or if the taxable value of the fringe benefit is reduced to nil by the operation of the ‘otherwise deductible rule’.

Detailed reasoning

Fringe benefit

A ‘fringe benefit’ is defined as follows in subsection 136(1) of the FBTAA:

fringe benefit , in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:

(f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936; or

(g) a benefit that is an exempt benefit in relation to the year of tax; or

(h) …

For this definition to apply there must be a benefit provided to an employee or an associate of an employee.

Provision of a benefit

The definition of the term ‘benefit’ in subsection 136(1) of the FBTAA provides that a benefit includes:

any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

Under the arrangement X Corporation will provide the assignees with accommodation or will reimburse the assignees for their accommodation expenses. X Corporation will also pay for or reimburse the assignees for the cost of meals. The provision of accommodation and meals will constitute a benefit.

Benefit provided to an employee or an associate of an employee

The term 'employee' is defined under subsection 136(1) of the FBTAA as:

(a) a current employee;

(b) a future employee; or

(c) a former employee.

A 'current' employee is defined under subsection 136(1) of the FBTAA as 'a person who receives, or is entitled to receive, salary or wages.’

Salary or wages is defined in subsection 136(1) of the FBTAA to mean:

(a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; …

The table referred to in the definition of salary or wages includes section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA) 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).

X Corporation has an obligation to withhold amounts under Schedule 1 to the TAA as the assignees are employees and have completed TFN Declaration Forms. Accordingly, the assignees are current employees of a.

Benefit provided by an employer

The term 'employer' is defined under subsection 136(1) of the FBTAA as:

(a) a current employer;

(b) a future employer; or

(c) a former employer….

A 'current' employer' is defined under subsection 136(1) of the FBTAA to mean 'a person (including a government body) who pays, or is liable to pay, salary or wages, and includes: …’

X Corporation does not pay salaries or wages to the assignees, but instead only pays for or reimburses the costs of accommodation and meals.

However, section 137 of the FBTAA extends the circumstances in which a person will be deemed to be an employee. Subsection 137(1) of the FBTAA states:

For the purpose only of ascertaining whether a person is an employee or an employer within the meaning of this Act, where:

(a) a benefit is provided by a person (in this subsection referred to as the "first person") to, or to an associate of, another person (in this subsection referred to as the "second person");

(b) but for this subsection, the benefit would not be regarded as having been provided in respect of the employment of the second person; and

(c) either of the following conditions is satisfied:

(i) if the benefit were provided by the first person by way of a cash payment to the second person, the payment would constitute salary or wages paid by the first person to the second person;

(ii) all of the following conditions are satisfied:

(A) subparagraph (i) does not apply in relation to the benefit;

(B) the first person is an associate of a third person or the benefit is provided under an arrangement between the first person and a third person;

(C) if the benefit were provided by the third person by way of a cash payment to the second person, the payment would constitute salary or wages paid by the third person to the second person;

a definition in subsection 136(1) applies as if the benefit were salary or wages paid to the second person by

In applying section 137 of the FBTAA, an assignee will be considered to be an employee if X Corporation were to made a cash payment to the assignee (instead of providing accommodation and meals or a reimbursement of those costs).

X Corporation is therefore the current employer of the assignees.

Benefit provided in respect of the employment of the employee

The phrase ‘in respect of’ in relation to the employment of an employee is defined in subsection 136(1) of the FBTAA to include ‘by reason of, by virtue of, for or in relation directly or indirectly to, that employment’.

The meaning of this phrase was considered by the Federal Court in J & G Knowles v. Federal Commissioner of Taxation [2002] 96 FCR 402; 2000 ATC 4151; 44 ATR 22 (Knowles) and Starrim Pty Ltd v. Federal Commissioner of Taxation [2000] FCA 952; 2000 ATC 4460; 44 ATR 487 (Starrim).

In Knowles the Full Federal Court considered the judgements in Smith v. FCT (1987) 164 CLR 513; 19 ATR 274; 87 ATC 4883 and Federal Commissioner of Taxation v. Rowe (1995) 60 FCR 99; 31 ATR 392; 95 ATC 4691 before concluding that it is not sufficient for the purposes of the FBTAA to conclude that there is a causal connection between the benefit and the employment.

At paragraph 26 the Court said:

Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship between the benefit and the employment

The provision or reimbursement of the cost of the accommodation and meals of the assignees whilst they are undertaking employment duties for X Corporation provides the necessary material connection referred to in Knowles. Therefore, the benefit has been provided in respect of the employment of the employee.

Exempt benefits- accommodation

A benefit that comes within paragraphs (f) to (s) of the definition of fringe benefit in subsection 136(1) of the FBTAA will not be a fringe benefit. Paragraph 136(1)(g) of the FBTAA provides that an exempt benefit will not be a fringe benefit.

Under the agreement X Corporation will either provide accommodation to the assignees or will reimburse the accommodation expenses paid by the assignees.

The provision of accommodation to an employee who is living away from their usual place of residence will be a residual benefit as defined in section 45 of the FBTAA as it does not come within a provision of Subdivision A of Divisions 2 to 11 of the FBTAA. Alternatively, a reimbursement will be an expense payment benefit as it comes within paragraph 20(b) of the FBTAA.

A benefit that is either an expense payment benefit or a residual benefit may be an exempt benefit where it is provided to an employee who is required to live away from his or her normal residence to perform their duties of employment. For the purpose of this Ruling the relevant exemptions are contained within section 21 of the FBTAA (expense payment benefit) and subsection 47(5) of the FBTAA (residual benefit).

Alternatively, the benefits may be an exempt benefit under either section 20A of the FBTAA or section 47A of the FBTAA if they are covered by a no-private-use declaration.

Will the benefits be exempt benefits under either section 21 or subsection 47(5) of the FBTAA?

Since 1 October 2012, for either section 21 or subsection 47(5) of the FBTAA to apply it is necessary for the employee to satisfy:

● sections 31C and 31D of the FBTAA; or

● section 31E of the FBTAA if the employee is a fly-in fly-out and drive-in drive-out employee.

Section 31C of the FBTAA requires the employee to maintain a home in Australia that continues to be available for the employee’s immediate use and enjoyment during the period that the duties of employment require the employee to live away from it.

As the assignees do not have a home in Australia that they are required to live away from, the exemptions in section 21 and subsection 47(5) of the FBTAA will not apply.

Will the benefits be exempt benefits under either section 20A or section 47A of the FBTAA?

Subsection 20A(2) of the FBTAA enables an employer to make a no-private-use declaration for expense payment benefits that arise from payments or reimbursements for which the employee would have been able to claim an income tax deduction if the cost had not been paid or reimbursed by the employer. Similarly, section 47A of the FBTAA enables an employer to make a no-private-use declaration for residual benefits that the employee would have been able to claim an income tax deduction for.

A consequence of making a no-private-use declaration is that the employer is not required to obtain specific declarations from employees for any fringe benefit covered by the declaration. The declaration must be made in a form approved by the Commissioner by the declaration date of the FBT year covered by the declaration.

Exempt benefits – meals

The payment or reimbursement of the cost of meals and other expenses incidental to travel are a fringe benefit as defined in section 136(1) of the FBTAA. The payment or reimbursement of those costs constitutes an expense payment fringe benefit as defined in section 20 of the FBTAA.

The taxable value of an external expense payment fringe benefit is calculated in accordance with section 23 of the FBTAA. In this instance the taxable value will generally be the amount of the payment or reimbursement in respect of the benefit.

As with the provision of accommodation, subsection 20A(2) of the FBTAA also enables an employer to make a no-private-use declaration for expense payment benefits that arise from payments or reimbursements for which the employee would have been able to claim an income tax deduction if the cost had not been paid or reimbursed by the employer. Similarly, section 47A of the FBTAA enables an employer to make a no-private-use declaration for residual benefits that the employee would have been able to claim an income tax deduction for.

Provision of food and drink not entertainment

Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food and drink (TR 97/17) looks at the concept of entertainment in relation to the provision of food and drink, for the purposes of the relevant provisions in the FBTAA and the ITAA 1997.

TR 97/17 explains that where food and drink is provided to employees travelling in the course of performing their employment duties, the food and drink is not provided by the employer in order to confer entertainment on that employee. In the absence of some supplementary entertainment (such as a floor show), the employee’s meal does not have the character of entertainment (paragraph 21).

Further, although alcohol generally has social connotations, providing alcohol will not automatically amount to the provision of meal entertainment (TR 97/17, paragraphs 63-67). As discussed in paragraph 67, where a travelling employee consumes wine with an evening meal at a restaurant, it is impractical to suggest that the drinking of wine changes the nature and purpose of the meal to that of entertainment.

Use of corporate credit cards

Where an employer provides an employee with a credit card issued to the employer, but able to be used by an employee, a residual fringe benefit will arise unless a more specific category of fringe benefits applies.

The use of a credit card to purchase food, drink and incidentals whilst the employee is travelling in the course of their employment will be a property fringe benefit. However the application of the ‘otherwise deductible rule’ in section 44 of the FBTAA may reduce the taxable value of the benefit to nil.

The use of a corporate credit card to purchase accommodation whilst the employee is travelling in the course of their employment will be a residual fringe benefit. However the application of the ‘otherwise deductible rule’ in section 52 of the FBTAA may reduce the taxable value of the benefit to nil.

Reduction in taxable value – the otherwise deductible rule

The taxable value of certain fringe benefits may be reduced in accordance with the otherwise deductible rule (ODR) under section 24 (expense payment fringe benefits), section 44 (property fringe benefits) and section 52 of the FBTAA (residual fringe benefits). In each instance certain substantiation requirements must be met to allow the provisions to operate – e.g. paragraph 52(1)(c) of the FBTAA requires an employee to supply a residual benefit declaration form to the employer to substantiate the extent to which the residual fringe benefit would have been otherwise deductible to the employee..

Broadly, this means that the taxable value of a fringe benefit may be reduced by an amount an employee would hypothetically have been entitled to claim as an income tax deduction if the employee had incurred expenditure in respect of the provision of the benefit.

However, the ODR only applies where the employee would have been entitled to a ‘once-only deduction’ for the expenditure incurred. A ‘once-only deduction’ is defined in subsection 136(1) of the FBTAA to mean a deduction that is wholly or partly allowable under the income tax law in only one year.

The Commissioner’s current views on what travel, accommodation and meal expenses an employee can deduct are set out in Draft Taxation Ruling TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? (TR 2017/D6).

Deductibility of expenses

An expense is deductible under section 8-1 of the ITAA 1997 if, and to the extent to which, it is incurred in gaining or producing your assessable income or in carrying on a business for that purpose. However you cannot claim a deduction for an expense that is of a capital, private or domestic nature.

More specifically, TR 2017/D6 states:

An employee can deduct a travel expense under section 8-1 to the extent that:

● they incur the expense in gaining or producing their assessable income, and

● the expense is not of a capital, private or domestic nature.

Where travel expenses are incurred in performing the employee’s work activities and no part of them is of a private, domestic or capital nature, the expenses are fully deductible.

To determine whether travel is undertaken in performing an employee’s work activities, TR 2017/D6 sets out the following factors to consider:

(a) whether the work activities require the employee to undertake the travel

(b) whether the employee is paid, directly or indirectly, to undertake the travel

(c) whether the employee is subject to the direction and control of their employer for the period of the travel, and

(d) whether the above factors have been contrived to give a private journey the appearance of work travel.

Accommodation, meal and incidental expenses incurred by an employee in performing an employee’s work activities are therefore deductible only where:

● the employee’s work activities require them to undertake the travel

● the work requires the employee to sleep away from home overnight

● the employee has a permanent home elsewhere, and

● the employee does not incur the expenses in the course of relocating or living away from home.

The substantiation provisions of Division 900 of the ITAA 1997 require that certain written evidence be maintained in respect of work-related expenses. If the required written evidence is not available, generally the expenses cannot be claimed as deductions.

Question 2

Summary

If X Corporation provides a ‘per diem’ allowance to non-resident assignees temporarily working in Australia on a short term assignment for up to 90 days, PAYG withholding amounts do not have to be withheld, provided the amount of the allowance does not exceed the reasonable allowances amount published by the Commissioner from time to time.

Detailed reasoning

In certain instances ‘per diems’ may be provided by X Corporation to assignees to offset meals and other costs incidental to the assignment. The per diem is an allowance intended to cover the cost of meals and incidentals such as snacks, beverages and tips and gratuities incurred at hotels and restaurants etc. The per diems are paid at or below the reasonable travel rates as provided by the ATO each year. The per diem would come within the definition of ‘salary or wages’ and would be assessable income under section 6-5 of the ITAA 1997.

Under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) an entity must withhold an amount from salary, wages and allowances it pays to an individual as an employee (whether of that or another entity).

Accordingly, X Corporation will have, prima facie, an obligation to withhold tax under section 12-35 of Schedule 1 to the TAA 1953 because the allowance is paid by X Corporation to its employees whilst they are in Australia on assignment.

Subsection 900-30(3) of the ITAA 1997 defines a travel allowance as:

'…an allowance your employer pays or is to pay to you to cover the losses or outgoings:

(a) that you incur for travel away from your ordinary residence that you undertake

in the course of your duties as an employee; and

(b) that are losses or outgoings for accommodation or for food or drink, or are incidental to the travel.

The travel may be within or outside Australia.'

In 2015 the Commissioner issued a legislative instrument not requiring employers to withhold PAYG tax where it is expected that the allowance would be fully expended in the course of an employee providing their services and the employee is not required to substantiate their expenses: see Legislative Instrument F2015L01047.

The per diems meet these requirements as, in the circumstances, Taxation Ruling TR 2004/6 Income tax: substantiation exception for reasonable and overtime meal allowance expenses (and Taxation Determination TD 2017/19 Income Tax: what are the reasonable travel and overtime meal allowance expense amounts for 2017-18 income year?) apply and would not require the employees to substantiate their expenses.

Therefore, provided the per diem does not exceed the reasonable amounts published by the Commissioner for the relevant income year, X Corporation will not be required to withhold tax from the amounts paid to employees travelling to Australia on assignment for up to 90 days.

Furthermore, Table 1 on ATO Fact Sheet – Withholding for allowances (QC 51680) provides that employers are not required to include a travel allowance on an employee’s payment summary if the allowance is likely to be fully spent by the employees on deductible expenses – that is, expenses they incur in the course of gaining or producing their employment income.

As the per diems paid to the assignees are likely to be fully expended in the course of performing their employment duties there is no requirement to show these amounts on payment summaries.