A.1.1 Prior to the introduction of the fringe benefits tax regime, living-away-from-home allowances were taxed in the hands of employees under the income tax laws. Section 51A of the Income Tax Assessment Act 1936 (ITAA 1936) provided that the amount of any living-away-from-home allowance was an allowable deduction from the assessable income of an employee taxpayer.5
A.1.2 The fringe benefits tax legislation was enacted in 1986 to overcome the perceived inadequacies of section 26(e) of the ITAA 1936. This section sought to tax, in the hands of the employee, the value of non-cash benefits received by employees as a consequence of their employment. At the time of enactment of the fringe benefit tax legislation the then Treasurer, the Hon Paul Keating, commented that the need for the introduction of a fringe benefits tax was aggravated by the inability of the existing income tax system to exact tax effectively from recipients of fringe benefits. The then Treasurer went on to say:
Before turning to the main features of the Fringe Benefits Tax, I remind Honourable Members of the background. There has over the years been a very strong movement towards the remuneration of employees — especially higher income earners — by fringe benefits packages which allowed income tax to be avoided on substantial parts of the overall remuneration.
So called tax-free perks came to dominate salary package negotiations and packages were openly advertised in the market place. Increasingly innovative deals were emerging particularly after the demise of the 'paper' tax avoidance schemes in the early 1980s.
All of this was aggravated by the inability of the existing income tax system to exact tax effectively from recipients of fringe benefits. Several factors contributed to this.
First there were deficiencies in the income tax law itself. A major one was that it called for case by case subjective judgments to be made as to the value of fringe benefits in the hands of individual employees.
That kind of requirement is simply incompatible with the efficient assessment and collection of tax on a mass scale and invites disputation.
A.1.3 A fundamental difference between section 26(e) of the ITAA 1936 and the fringe benefits tax legislation is that employers are now liable to taxation in respect of benefits provided to employees.
A.1.4 Fringe benefits tax (FBT) is a tax payable by employers on the value of certain benefits, known as 'fringe benefits' that have been provided to their employees or to associates of those employees in respect of their employment. The principle legislation dealing with FBT is the Fringe Benefit Tax Assessment Act 1986 (the FBTAA) and its regulations.
A.1.5 The legislation sets out a number of different categories of 'fringe benefit', including a living-away-from-home allowance (LAFHA) benefit, and the valuation rules for calculating the taxable value of these categories of fringe benefit.
A.1.6 The terms 'benefit', 'fringe benefit', 'living-away-from-home allowance benefit' and 'living-away-from-home allowance fringe benefit' are defined in s 136(1) of the FBTAA. The term 'living-away-from-home allowance fringe benefit' means a fringe benefit that is a living-away-from-home allowance benefit.
A.1.7 Where a living-away-from-home allowance is a fringe benefit and assessable to the employer under the FBTAA the allowance is not taxed in the hands of the employee.6 However, where an allowance is not a LAFHA benefit it will form part of the employee's income against which appropriate income tax deductions may be claimed.7
A.1.8 Section 30(1) of the FBTAA sets out the general requirements for a LAFHA to be subject to FBT. Section 30(2) was later inserted with application after 10 October 1991, to, in effect, include as a taxable LAFHA fringe benefit certain allowances paid to offshore oil and gas rig workers which were found by the Federal Court to not otherwise be a LAFHA benefit under s 30(1).
A.1.9 A LAFHA benefit is a payment of money that satisfies the following conditions:
- the payment is an allowance paid by the employer to an employee in respect of the employee's employment; and
- it would be concluded that the whole or a part of the allowance is in the nature of compensation to the employee for:
- additional expenses (not being deductible expenses) incurred by the employee during a period; or
- 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 employee is required to live away from the employee's usual place of residence in order to perform the duties of employment.8
A.1.10 A living-away-from-home allowance is to be distinguished from an allowance that is paid by an employer to cover additional expenses which are 'deductible expenses' under the general deductibility provisions of the tax laws. In Roads and Traffic Authority v FC of T 93 ATC 4508, the Federal Court held that a camping allowance paid to employees for additional costs of food and other expenses was not a living-away-from-home allowance benefit because the allowance was intended to compensate for additional outgoings which, had they been incurred by the employees, would have been deductible.
Value of a LAFHA
A.1.11 In general terms, the taxable value of a living-away-from-home fringe benefit is the amount of the allowance reduced by:
- the reasonable cost of additional accommodation for the employee during the relevant period (the 'exempt accommodation component'); and
- the reasonable cost for food during the period less ordinary food expenses that would be expected to be paid by an employee in any event during that period if the employee were not living away from home (the 'exempt food component').
A.1.12 Section 136(1) of the FBTAA defines the terms 'exempt accommodation component' and 'exempt food component'.
Exempt accommodation component
A.1.13 The 'exempt accommodation component' of a LAFHA fringe benefit will be nil, unless the employer obtains a declaration in an approved form from the employee before the declaration date (the date of lodgment of the employer's FBT return for the relevant FBT year, although the Commissioner may grant an extension of time).
A.1.14 If the declaration is completed, the amount of the exempt accommodation component by which the taxable value of a taxable LAFHA fringe benefit will be reduced is the amount of the exempt accommodation component in the nature of compensation to the employee for additional expenses that might reasonably be expected to be incurred by the employee in respect of the subsistence during the recipients allowance period of a lease or licence in respect of a unit of accommodation for the accommodation of eligible family members.
Exempt food component
A.1.15 The 'exempt food component' of a LAFHA fringe benefit will be nil unless the employer has obtained a declaration in an approved form from the employee before the declaration date. The approved form of the declaration is the same as for the 'exempt accommodation component' and therefore only one declaration need be obtained for the period.
Other living away from home benefits
A.1.16 An employer may also provide other accommodation related living away from home benefits, which do not involve the payment of an allowance. Such benefits include:
- The payment or reimbursement of rental costs on accommodation leased by the employee (section 21 of the FBTAA).
- The provision of the use of accommodation that is owned or leased by the employer (subsection 47(5) of the FBTAA).
A.1.17 Both of these benefits are exempt benefits where the employee is living away from home and has provided a living away from home declaration to the employer. Importantly, neither of these exempt benefits requires a 'reasonableness' test nor are they required to be for additional expenses suffered by the employee as is required under the LAFHA benefit provisions.
A.1.18 Similar provisions also apply in relation to food related living away from home benefits where the employer either pays or reimburses an employee for food expenses or directly provides food to the employee.
A.1.19 Miscellaneous Taxation Ruling MT 2030, which issued on 30 September 1986, sets out the Tax Office's view on LAFHA benefits including references to case law (mostly involving section 51A of the ITAA 1936). It prescribes guidelines for determining the circumstances in which an allowance is to be treated as a living-away-from-home allowance.
Usual place of residence
A.1.20 'Place of residence' is defined in subsection 136(1) of the FBTAA as a place at which the person resides or a place at which the person has sleeping accommodation, whether on a permanent or temporary basis and whether or not on a shared basis. There is no statutory definition of 'usual place of residence' for FBT purposes.
A.1.21 According to MT 2030 the following principles are relevant:
- Whether an employee is living away from his or her usual place of residence normally involves a choice between two places of residence.
- A person is regarded as living away from his or her usual place of residence if the employee would have continued to live at the former place of residence but for having to change residence in order to work temporarily for their employer at another locality. It is relevant in reaching that view that there is an intention or expectation of the employee returning to live at the former place of residence upon cessation of work at the temporary job locality.
- It is relevant that there is an intention or expectation of the employee returning to live at the former place of residence on cessation of work at the temporary job locality.
A.1.22 Paragraphs 19 to 25 of MT 2030 set out general rules relevant to determining whether an employee is living away from home and arrives at a number of conclusions:
- An underlying theme of the cases is a general presumption that a person's usual place of residence will be close to the place where he or she is permanently employed.
- An employee that changes his or her place of residence because of a change in the location of a permanent job, whether by reason of a transfer with the same employer or a change of employment, would not usually be living away from home on moving to a new place of residence close to the new job location.
- Employees who move to a new locality to take up a position of limited duration with an intention to return to the old locality at the end of the appointment would generally be treated as living away from their usual place of residence unless they have abandoned the former place of residence.
- Some employees may be unable to establish that they are living away from their usual place of residence because the transitory nature of their lifestyle means that their usual place of residence is wherever they happen to sleep at night.
- An employee may be treated as living away from his or her usual place of residence provided the appointment is for a limited period and the employee can be expected in the normal course to return to the same city or district of the home country to live. This would include foreign nationals employed in Australia on a temporary basis and Australian residents, such as overseas appointments and expatriates.
- The same applies where an employee transfers to a new locality within Australia on an appointment of fixed duration provided the permanent job location does not change. Paragraph 25 of MT 2030 sets out a number of situations where an employee would be regarded as living away from a usual place of residence.
- Certain kinds of occupations have a career structure which brings with it the necessity to accept regular transfers from one location to another, for example, police officers, school teachers, members of the defence force and bank employees. Employees in these situations will generally not be treated as living away from home when they move or transfer to live in proximity to the current work place even if the employee owns a home elsewhere in which he or she eventually intends to reside.
Additional expenses on food and accommodation
A.1.23 Miscellaneous Ruling MT 2030, at paragraphs 26 to 34, gives the following guidelines in determining whether an allowance may qualify as a LAFHA:
- There is no requirement that an employee must actually have incurred additional expenses on accommodation and food before an allowance paid to an employee is regarded as a LAFHA.
- As the payment is in nature of an allowance, it will not ordinarily be a precise measure of actual expenses of the employee as a LAFHA.
- An employer will pay an allowance, perhaps on the basis of a survey of accommodation and living costs at the employee's temporary work location – in order to compensate the employee for accommodation and additional living expenses that the employee might be expected to incur. There is no requirement that the employer must have regard to an individual employee's actual outlays.
- There is no express requirement for an employer to establish, before an allowance paid to an employee may qualify as a LAFHA, whether the employee does in fact have a residence at a place other than the locality in which the employee is temporarily located.
- If the employee is one of a class of employees who could reasonably be expected by the employer to satisfy the test set out in paragraphs 11 to 25 of living away from their usual place of residence, and the allowance is paid to compensate for additional costs that the employees could be expected to incur through living away from home, the allowance will constitute a LAFHA.
- It is necessary that the employer obtain from the employee a declaration, in an approved form, as to the particulars of employee's usual place of residence and actual place of residence. Paragraph 32 of MT 2030 sets out an approved format for such a declaration.
- There may be instances where an employee eligible to make such a declaration will not be able to indicate that residential premises are being kept at the place where he or she usually resides. For example, for financial reasons an expatriate coming to Australia for a limited but substantial period may have terminated the lease on a house, flat or apartment where he or she lived in the home country intending to release it or lease another home on return. Similarly, a home could have been sold with the intention of acquiring another.
- In these instances, provided that the test set out in paragraphs 11 to 25 are satisfied and the expatriate intends to return to the same city or district to live upon resuming residence in the home country, he or she would be entitled to declare that his or her usual place of residence is that city or district.
Distinction between travelling and living-away-from-home allowances
A.1.24 Living-away-from-home allowances are taxable fringe benefits and therefore exempt from tax in the hands of the employee, whereas travelling allowances form part of the employee's assessable income against which appropriate deductions may be allowed for the costs of meals, accommodation and incidental expenses incurred while the employee is travelling in the course of carrying out the duties of employment. It states that unlike LAFHAs, there is generally no change of employment location in relation to the payment of travelling allowances and that while the expenses that they are intended to compensate may be similar (meals and accommodation) the circumstances in which the allowances are paid are different.
A.1.25 Paragraph 38 of MT 2030 provides further detail on this difference:
A living-away-from-home allowance is paid where the employee has moved and taken up temporary residence away from his or her usual place of residence so as to be able to carry out employment duties for a time at the new (but temporary) workplace. A travelling allowance, on the other hand, is paid because the employee is travelling in the course of performing his or her job. In the former case, there is a change of job location and an actual change of residence to a place at or near that location. In the latter, the employee does not change job locations but simply travels in order to carry out the requirements of the job.
A.1.26 Miscellaneous Taxation Ruling MT 2030 also indicates that there will be circumstances, when an employee is away from his/her home base for a brief period in which it may be difficult to conclude whether the employee is LAFHA or travelling. As a practical general rule the Commissioner has determined that where the period away does not exceed 21 days the allowance will be treated as a travelling allowance rather than a LAFHA. For longer periods, it will be necessary to determine the nature of the allowance with the guidance provided by Miscellaneous Taxation Ruling MT 2030.
5 A living-away-from-home allowance was defined in s 51A(3) as: '…so much of any allowance or benefit paid or granted in money or otherwise as the Commissioner is satisfied is in the nature of compensation to the employee for the additional expenses (not being expenses which are allowable as a deduction under section 51) incurred by him, or which would be incurred by him if the allowance or benefit were not received, through having to live away from his usual place of abode in order to perform his duties as an employee'.
6 Prior to 2003/04, employment related benefits that were fringe benefits were treated as exempt income from the employee perspective: former subsection 23L(1) of the ITAA 1936. From 2003/04, an employment related benefit that is in the form of a fringe benefit within the meaning of the FBTAA is not assessable income and is not exempt income of the taxpayer: subsection 23L(1) of the ITAA 1936.
7 The definition of 'salary or wages' is contained in Schedule 1 of the Taxation Administration Act 1953 (TAA). Subsection 12-1(2) of Schedule 1 of the TAA, specifically disregards a payment which is a living-away-from-home allowance benefit as defined in the FBTAA. The application of fringe benefits tax to LAFHAs has in effect been made in direct substitution for those benefits being subject to income tax in the hands of the employee. The consequence of this is that if it is determined that an allowance paid does not constitute a LAFHA benefit then the allowance would constitute salary or wages of the individual employee to whom it is paid.
8 Pursuant to section 30(1) of the Fringe Benefits Tax Assessment Act 1986.