SENATE

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)

Chapter 2 - Living away from home allowance benefits

Overview

2.1 Schedule 2 of this Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to change the rules relating to living away from home allowance (LAFHA) benefits. The rules that determine whether an allowance received by an employee is a LAFHA fringe benefit will be modified.

2.2 The definitions of 'exempt accommodation component' and 'exempt food component', which are the amounts by which the taxable value of a LAFHA fringe benefit can be reduced, will be amended.

2.3 Complementary changes will be made to the exemption from fringe benefits tax (FBT) for accommodation and food provided to employees living away from home where the benefit is provided other than by cash allowance.

Summary of the amendments

Purpose of the amendments

2.4 The rules in Division 7 of the FBTAA that determine whether an allowance received by an employee is a LAFHA benefit will be amended.

2.5 An allowance paid by an employer to an employee will only be a LAFHA benefit where the employee is living away from his or her usual place of residence for a definite period. To evidence this, supporting documentation will be required from the employer and the employee.

2.6 The definitions of the terms 'exempt accommodation component' and 'exempt food component' will be amended so that the taxable value of a LAFHA fringe benefit can be reduced by:

•

the amounts actually expended by the employee on accommodation while living away from his or her usual place of residence; and

•

reasonable amounts to cover the additional cost of food less a statutory food amount.

2.7 Consequential changes will be made to the provisions that exempt from FBT accommodation provided to employees living away from their usual place of residence by way of expense payment fringe benefit or residual fringe benefit. The rule that reduces the value of living away from home food fringe benefits will also be changed to reflect the principle amendments.

Date of effect

2.8 These amendments will apply to benefits for employees who start to live away from their usual place of residence after 30 June 1995. [Item 14]

Background to the legislation

2.9 A LAFHA benefit is created under Division 7 of Part III of the FBTAA. Where an allowance is paid to an employee for living away from home and the allowance does not fall within Division 7, it will generally be taxable in the hands of the employee for income tax purposes.

2.10 Section 30 sets out the circumstances in which an allowance paid by an employer to an employee will qualify as a LAFHA benefit. It is an allowance paid to an employee that is in the nature of compensation for additional expenses incurred, and other disadvantages suffered, because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment. Additional expenses do not include expenses for which the employee would be entitled to an income tax deduction.

2.11 The term 'place of residence' is defined in subsection 136(1) to mean, in relation to a person, 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.

2.12 The taxable value of the LAFHA fringe benefit is calculated in accordance with rules set out in section 31 of the FBTAA. The taxable value is the amount of the LAFHA fringe benefit reduced by either or both of two components, the 'exempt accommodation component' and the 'exempt food component'. These terms are defined in subsection 136(1):

•

'exempt accommodation component' is so much of the allowance that is in the nature of compensation for additional expenses on accommodation that the employee could reasonably be expected to incur.

•

'exempt food component' is so much of the allowance as is reasonable compensation for additional expenses on food.

2.13 To determine what is reasonable compensation for increased expenditure on food, the following terms are defined in subsection 136(1):

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'food component', which is so much of the allowance as is in the nature of compensation for expenses the employee could reasonably be expected to incur on food and drink (it can represent either additional food expenses or total food expenses); and

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'statutory food amount', which is set at $42 for persons aged 12 and over and $21 for persons less than 12 years of age.

2.14 Under the definition of 'exempt food component', only so much of the food component of the allowance that exceeds the statutory amount for home food costs is treated as an exempt food component.

2.15 If the amount of the food component of the allowance which is set to cover additional food costs has been determined after estimating the normal cost of food at the employee's home, and the estimated home food cost for this purpose is at least equal to the $42 statutory amount, the 'exempt food component' will be the full amount of the food component of the allowance.

2.16 If the estimated home food cost adopted in paying the allowance was less than the $42 statutory amount, so much of the food component as exceeds the difference between the estimated home food cost and the $42 statutory amount will apply to reduce the taxable value of the LAFHA fringe benefit.

2.17 The purpose of the definition is to only tax that part of the food component that covers expenses on food that the employee would have incurred anyway while living at home.

2.18 Where the food component of the allowance is paid to compensate for the cost of food purchased for the employee and a spouse or child, the above rules apply on an equivalent basis by reference to the aggregate of the statutory food amounts applicable to the employee and family members who also moved with the employee.

2.19 The taxable value of a LAFHA fringe benefit may not be reduced by the 'exempt accommodation component' and the 'exempt food component' unless the employee gives the employer a declaration that sets out particulars of the employee's usual place of residence and actual place of residence for the period during which the LAFHA was paid in the year of tax.

Accommodation expense payment benefit

2.20 Under section 21 of the FBTAA, an expense payment benefit which relates to expenditure incurred by an employee on accommodation because the employee was required to live away from home is exempt from FBT. This provision complements the LAFHA fringe benefit provisions.

2.21 The employee provides the employer with a declaration for the exemption to apply. The declaration must be in an approved form setting out:

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the employee's usual place of residence; and

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the place at which the employee actually resided while living away from his or her usual place of residence.

Living away from home allowance - residual fringe benefits

2.22 Under subsection 47(5) of the FBTAA, a residual benefit which consists of a lease of residential accommodation granted to an employee who is required to live away from his or her usual place of residence in order to perform employment duties is exempt from FBT. This provision complements the LAFHA fringe benefit provisions.

2.23 In order to qualify for the exemption, either the accommodation must have been provided under a 'fly-in fly-out' arrangement or the employee must give the employer a declaration specifying both the employee's usual place of residence and the place at which the employee is residing while living away from his or her usual place of residence.

Living away from home food fringe benefits

2.24 Under section 63 of the FBTAA, the taxable value of a property benefit which consists of giving, or selling food at a subsidised cost, to employees who are required to live away from their usual place of residence can be reduced by the amount that the 'food component' exceeds the statutory food amounts for the employee and family members. This provision complements the LAFHA fringe benefit provisions.

2.25 Before the employer can claim a reduction in the taxable value under this provision, the employee must give the employer a declaration which states:

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the employee's usual place of residence; and

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the place at which the employee actually resided while living away from his or her usual place of residence.

Explanation of the amendments

2.26 This Bill will amend subsections 21(1), 30(1), 47(5) and 63(1) of the FBTAA to include additional conditions that need to be satisfied for the purpose of those provisions.

2.27 As explained above, subsection 30(1) of the FBTAA sets out when an allowance paid by an employer to an employee will be a LAFHA benefit. Subsections 21(1), 47(2) and 63(1) complement this provision to provide comparable FBT treatment where accommodation and food benefits are provided by another type of benefit.

What new conditions need to be satisfied before a LAFHA benefit arises?

2.28 Subsection 30(1) will be amended to set out the conditions that need to be satisfied before an employee is considered to be living away from his or her usual place of residence [items 3 and 4] . Corresponding changes will also be made to subsections 21(1), 47(2) and 63(1) [items 1, 2, 6, 7, 8 and 9] .

2.29 The first condition is that the total unbroken residence period for which the employee has lived, or is required to live away from his or her usual place of residence does not exceed a maximum residence period . [New paragraphs 21(2)(a), 30(1A)(a), 47(5A)(a), 63(3)(a)]

2.30 New section 140A sets out the maximum residence period for various groups of employees. Broadly, if the employee is a person working in Australia on a temporary entry permit or an Australian working overseas, the maximum residence period will be 4 years. If the employee is an Australian resident relocated elsewhere in Australia, the maximum residence period will be 12 months unless the employee is living in a remote area, in which case the period will be 2 years. [Item 13]

2.31 The term total unbroken residence period will be defined in subsection 136(1) of the FBTAA. The total unbroken period will start at the time that the employee began to live away from his or her usual place of residence. It will end at the time that the employee is no longer required to live away from his or her usual place of residence [item 12] . Any break of six months or less will be disregarded. [New section 65HC]

2.32

Example 1:

An employee is required to live in Sydney for a period of 15 months. The employee's usual place of residence is Melbourne. As the total unbroken residence period of 15 months exceeds the maximum residence period of 12 months, any allowance received by the employee for living away from home will not be a LAFHA benefit. The allowance would be assessable to the employee under the income tax law.

2.33

Example 2:

A US expatriate employee is contracted to work in Australia for 3 years. However, at the end of the three 3 years, the employee enters into another contract to stay for a further 2 years. At the time of entering into the first contract, the total unbroken residence period (of 3 years) did not exceed the maximum residence period (of 4 years). Any living away from home allowance paid to the employee during the period of the first contract will be dealt with under the LAFHA fringe benefit provisions of the FBT law. Once the second contract was entered into, the total unbroken residence period (of 5 years) exceeded the maximum residence period. Thus, from the time of entering into the second contract, any allowance would not be treated as a LAFHA benefit for FBT purposes.

2.34

Example 3:

An employee is required to live in Darwin for 7 months. The employee's usual place of residence is Perth. At the end of 7 months he returns to Perth. Eight months later his employer requires him to return to Darwin for a further eight months. Even though the employee resides in Darwin for a total period which exceeds the maximum residence period of 12 months the period has been broken by the employee returning to his usual place of residence for eight months. Accordingly, neither of the two periods spent in Darwin exceed the maximum residence period and any allowance paid will qualify as a LAFHA benefit for FBT purposes.

2.35 The second condition is that the employer and employee will need to make declarations under new section 65HA. [Item 10, new paragraphs 21(2)(b), 30(1A)(b), 47(5A)(b), 63(3)(b)]

2.36 Under new section 65HA the employer must make a written declaration stating that:

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the employee is required to live away from home for a period not exceeding the maximum residence period;

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the allowance paid or accommodation or food provided (where either subsections 21(1), 47(2) or 63(1) applies) is an allowance paid or accommodation or food provided for the purpose of those provisions. [New subsection 65HA(2)]

2.37 In addition, an employee must give the employer a declaration stating that he or she has lived, or intends to live, away from his or her usual place of residence for a total unbroken residence period that does not exceed the maximum residence period. The declaration must be given to the employer for each year that the expenses were incurred. [New subsection 65HA(3)]

2.38 A declaration made by an employer under subsection 65HA(2) will not be effective unless the employer has the supporting documentation required by new subsection 65HB(1) .

Employees working on a fly-in fly-out basis

2.39 New subsection 30(1B) provides that an allowance as described in subsection 30(1) will always be a LAFHA benefit when provided to employees who work on a fly-in fly-out basis [item 4] . Generally, an employee will be working on a fly-in fly-out basis where the employee's usual place of employment is an oil rig or another remote location and the employee returns to his or her usual place of residence on scheduled days off.

2.40 Corresponding amendments will be made to subsections 21(1), 47(5) and 63(1). [Items 2, 7 and 9]

Record keeping requirements - employees

2.41 New section 31A provides that where an employer pays a LAFHA to an employee, the employee must keep documentary evidence of the amount spent or paid on behalf of the employee and his or her family on accommodation for the period for which the allowance was paid. [Item 5]

2.42 The employee must give this evidence to the employer before the declaration date for each FBT year for which the allowance is paid [new subsection 31A(1)] . If the documentary evidence is not provided by the declaration date, then no reduction in the taxable value of the benefit is allowable.

Exempt food component and exempt accommodation component

2.43 For the purposes of reducing the taxable value of a LAFHA fringe benefit under section 31, the definitions of 'exempt accommodation component' and 'exempt food component' in subsection 136(1) will be amended:

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the amount of the 'exempt accommodation component' will be limited to the 'recipients allowance' that has actually been expended by the employee (including amounts paid by or on behalf of an 'eligible family member') on accommodation during the 'recipients allowance period'. The terms 'eligible family member', 'recipients allowance' and 'recipients allowance period' are defined in subsection 136(1).

•

the amount of the 'exempt food component' will be the difference between a 'reasonable food component' and the 'statutory food amount' [item 11] . The term 'statutory' food component' is defined in subsection 136(1). The 'reasonable food component' will be defined in subsection 136(1) as an amount determined by the Commissioner. [Item 12]

2.44 As outlined above, the 'exempt food component' is to be the 'reasonable food component' less the 'statutory food amount'. The Commissioner will issue a Tax Determination notifying taxpayers of the 'reasonable food component.'