Private ruling: Expenses – Fringe Benefits Tax
Date of advice: 11 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2016.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Is the Family Trust able to claim all expenses incurred by employees seconded from overseas? | A1: No | Q2: Is the Family Trust subjected to Fringe Benefits Tax? | A2: Yes | Q3: Are the accommodation expenses paid by the Family Trust an allowable tax deduction for the Family Trust? | A3: No | Q4: Can the Family Trust claim living expenses such as meals, electricity and rental amenities paid by the Family Trust for its employees? | A4: No

Relevant facts and circumstances: The Family Trust is a family trust with the trustees being Trustee A and Trustee B. Trustee A and Trustee B are also employees of the Family Trust. The Family Trust secured contract work to be performed in Australia. Currently the Family Trust has only one Australian client, Client Z. There is no formal agreement or contract between the Family Trust and Client Z. The applicant advised that Trustee A obtained the work because Trustee A knew someone from Client Z. The Family Trust will send tax invoices to Client Z for payment of materials and labour for attending to any jobs. The trustee’s principal place of residence is Country JKL, they have owned this property for more than 35 years. They do not have a place of residence in Australia although they may consider purchasing a property in the future if business “picks up”. Trustee A travels from Country JKL to perform work in Australia for Client Z. Trustee B travels with Trustee A and occasionally performs office and admin duties for the Family Trust. It is expected that the employees will be in Australia for greater than 183 days. The Family Trust chooses to rent accommodation in City MM for their employees, rather than pay hotel fees, due to the length of time they are in Australia. Rent is paid from an Australian bank account in Trustee A’s name and is reimbursed by the Family Trust. Trustee A and Trustee B return to Country JKL approximately every 8 weeks. The applicant’s response to our request for information advised that they return to maintain rental investment properties and also to meet with potential business clients as they are attempting to build up the business in Country JKL. Currently the business does not have any clients in Country JKL and does not have any business premises (it operates from the trustee’s family home in Country JKL). The Family Trust will pay or reimburse the following expenses on behalf of the employees working in Australia: ● Air fares to/from Country JKL ● Accommodation rental ● Utilities ● Meals ● Motor vehicle hire (if required to travel outside of City MM) Other expenses are paid with a Country JKL credit card in Trustee A’s name and are also reimbursed by the Family Trust. These expenses include air fares to and from Country JKL, utilities (such as electricity, water, phone and internet), public transport around City MM, and meals for the employees. The trustees envisage that car hire will be required only in the event that Trustee A is required to work outside of City MM. This car hire is only expected to be short term (i.e. for the duration of the journey) and will not be available for Trustee A and Trustee B to use for private purposes whilst they remain in City MM. In the event that Trustee A is required to work outside the normal place of work (i.e. if Trustee A is expected to travel out of City MM) then it is anticipated that Trustee A will receive a travel allowance from the Family Trust and the Family Trust will then not reimburse any expenses that are expected to be covered by the travel allowance.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Division 5 | Fringe Benefits Tax Assessment Act 1986 Division 6 | Fringe Benefits Tax Assessment Act 1986 Division 12 | Fringe Benefits Tax Assessment Act 1986 section 31C | Fringe Benefits Tax Assessment Act 1986 section 47(5) | Fringe Benefits Tax Assessment Act 1986 section 61G

Reasons for decision: Summary: As the PSI rules apply to the Family Trust, the Family Trust cannot claim all expenses incurred by employees seconded from Country JKL. | Detailed Reasoning - Detailed reasoning: A special tax regime for personal services income (PSI) applies to prevent individuals from reducing their tax by alienating their PSI to an interposed entity or associated person, or by claiming inappropriate “business” deductions. The interposed entity (known as a personal services entity) can be either a company, partnership, or trust. Examples of PSI include salary or wages, income payable under a contract which is wholly or principally for the labour or services of a person, and income derived by consultants from the exercise of personal expertise. It is income which is mainly a reward for an individual’s personal Efforts or skills, regardless of whether the income is payable under contract to another entity. Where it applies, PSI is included in the assessable income of the individual whose personal efforts or skills generated the income. There are also restrictions on deductions that may be claimed by the individual or interposed entity so that they broadly correspond to the deductions available to employees (e.g., restrictions on certain payments relating to the individual’s private residence, payments to spouses and some travel expenses, which would not be deductible to an individual). If the income is derived as part of a personal services business then the PSI regime does not apply. There is a series of tests to determine whether such a business exists (see Taxation Ruling TR 2001/8 for further information). The information available shows that Trustee A provides professional and personal skills and expertise to perform work for Client Z, and Trustee A is, in effect, no different to an employee of Client Z. Whilst Trustee B is employed by the Family Trust, doing the occasional administration work, Trustee B does not perform any work directly for Client Z. | Detailed Reasoning - Conclusion: Based on the evidence available, the Commissioner understands that the Family Trust is a personal services entity, and therefore the PSI rules apply to income earned by Trustee A from Client Z, received through the Family Trust. As the PSI rules apply the Family Trust cannot claim all expenses incurred by employees seconded from Country JKL. | Summary: The Family Trust is subject to Fringe Benefits Tax. | Detailed Reasoning - The relationship between Personal Services Income and Fringe Benefits Tax (FBT): In accordance with section 61G of the Fringe Benefits Tax Assessment Act 1985 (FBTAA), if you have to pay FBT on an expense that is non-deductible under the PSI rules, the taxable value of the fringe benefit is reduced by the non-deductible amount. Effectively, the rules of PSI will restrict many of the private expenses from being claimed by the Family Trust, and therefore the value of the FBT will be reduced accordingly. It is unlikely that there will be a significant FBT liability if the PSI regime applies, however FBT may still need to be considered for some benefits. If the Trust obtains other contracts and can show it meets the unrelated clients test, or you can otherwise determine that the Family Trust is not subject to the PSI rules due to meeting the other tests, then FBT must be considered fully. | Detailed Reasoning - Conclusion: As the PSI rules apply to the Family Trust many of the private expenses paid by the Family Trust for its employees will be subject to Fringe Benefit Tax. | Summary: Are the accommodation expenses paid by the Family Trust an allowable tax deduction for the Family Trust? | Detailed Reasoning - FBT: FBT is a tax payable by employers on the value of certain benefits they provide to their employees, including the employee’s family or other associates, in respect of their employment. The benefits may be in addition to, or part of, their salary or wages. In your situation, as the Family Trust provides benefits (accommodation, meals, payment of airfares, payment of utilities etc.) to Trustee A and Trustee B, both employees of the Family Trust, then fringe benefits arise in respect of these benefits provided. Each of these benefits must be considered separately and calculated in accordance with the relevant provisions contained within the FBTAA. | Detailed Reasoning - Fringe Benefit on Accommodation: Pursuant to Division 6 of the FBTAA, a housing fringe benefit may arise when you provide accommodation to your employee rent free, or at a reduced rent, where that accommodation is their usual place of residence. If the unit of accommodation is not the employee’s usual place of residence, the right to use the unit is not a housing fringe benefit, however it may give rise to a residual fringe benefit under Division 12 of the FBTAA. A residual fringe benefit consisting of a lease or licence in respect of a unit of accommodation provided to an employee who is required to live away from their normal residence may be exempt from FBT under certain conditions (subsection 47(5) of the FBTAA). One of these conditions is in section 31C of the FBTAA and requires that the employee maintains a usual place of residence in Australia and will be expected to return to that residence at the cessation of the requirement to live away from home. You have stated that Trustee A and Trustee B’s usual place of residence is maintained Country Z and that they do not have a residence in Australia. Because the trustees do not have a usual place of residence in Australia then the residual fringe benefit is not an exempt benefit. A residual fringe benefit will therefore arise in respect of the accommodation the Family Trust rents in City MM for the use of the employees. | Detailed Reasoning - Car Fringe Benefits: You have advised that the Trustee may hire a vehicle for short term journeys when Trustee A is required to travel outside City MM for work. You have advised that this vehicle will not be available to either trustee for private purposes whilst they remain in City MM. This is not a fringe benefit to Trustee A as the vehicle is not available for private use. | Detailed Reasoning - Conclusion: Accommodation expenses paid by the Family Trust are not tax deductible to the Family Trust. | Summary: The travel and living expenses are not deductible to the Family Trust as the Commissioner considers that the trustees are choosing to relocate from Country JKL to Australia Therefore, any expenses relating to the travel to and from Country JKL, and the expenses incurred living in City MM, are of a private nature. | Detailed Reasoning - Expense Payment Fringe Benefits: An expense payment fringe benefit (Division 5 of the FBTAA) may arise in either of two ways: ● where the employer reimburses an employee for expenses they incur, or ● where the employee pays a third party in satisfaction of expenses incurred by an employee. In this situation, Trustee A is incurring expenses on his personal credit card for the employees’ travel to/from Country JKL, public transport around City MM, meals, and for any utility costs in respect to the rental accommodation (e.g. water, electricity, internet, telephone). The Family Trust is then reimbursing the employees for these expenses. Therefore, expense payment fringe benefits will arise in respect of these expenses. Expense payment fringe benefits allow for a reduction in the taxable value of the benefit provided if employees would have been able to claim an income tax deduction for the expense had they incurred it themselves. This is known as the 'otherwise deductible’ rule. In order to determine if the 'otherwise deductible’ rule applies to the expense payment fringe benefits, consideration must be given to whether the employees are travelling for work, as a continuation of their business activities in Country JKL, or whether they are in fact relocating (even if only temporarily) for the purposes of undertaking work in Australia. Expenses incurred in getting a job, or in changing jobs (e.g. travel expenses or moving expenses) are generally not deductible as they are considered to come at a point in time too early to be regarded as gaining assessable income ( Federal Commissioner of Taxation v Maddalena 71 ATC 4161). In this instance, although Trustee A has a business entity in Country JKL, it does not appear to have any income earning clients in Country JKL and does not appear to be operating at this time. The opportunity to work in Australia appears to have arisen because someone in Client Z knew Trustee A personally; it was not something that arose because of his business entity in Country JKL. A clear nexus between a continuing business activity in Country A and working for Client Z as part of that business cannot therefore be established. The trustees will be in Australia on a long term basis (at least 183 days in the year of income). They will fly back to Country A every couple of months to maintain investment properties and to meet potential business clients. Trustee A will be paid a travel allowance by the Family Trust, but only when Trustee A is required to travel outside of City MM. This is another indication that Trustee A is not travelling for work when Trustee A simply remains in City MM as the Family Trust does not consider Trustee A is outside Trustee A’s usual place of work at that location. Trustee A is, effectively, an employee of Client Z in Australia, possibly subject to the PSI regime as mentioned above, and the work Trustee A is required to do for Client Z is based in Australia. The Commissioner considers that the trustees are not travelling to City MM for work as part of business operations in Country JKL, but instead are choosing to relocate from Country JKL to Australia in order for Trustee A to take up an employment opportunity with Client Z that is distinctly separate to any activities in Country JKL. Therefore, any expenses relating to the travel to and from Country JKL, and the expenses incurred living in City MM, are of a private nature and would not be deductible to them if they incurred those expenses personally. Airfares Because the Commissioner does not accept that the employees are travelling for work, but instead are relocating temporarily to Australia to commence work, then the airfare expenses reimbursed to Trustee A by the Family Trust are not 'otherwise deductible’ and will be expense payment fringe benefits. Meals The trustees pay for their meals in City MM and the cost is reimbursed by the Family Trust. None of the information provided indicates that the meals are provided as a form of Entertainment Benefit. It is also not considered that the meals are part of a living away from home arrangement. Although the trustees are living away from their normal place of residence in Country JKL, a requirement in section 31C of the FBTAA for a living away from home benefit requires that the employee maintains a usual place of residence in Australia and will be expected to return to that residence at the cessation of the requirement to live away from home. As neither entertainment nor living away from home benefits are applicable in this situation, it is considered that the reimbursement of meals by the Family Trust is an expense payment fringe benefit. As the Commissioner considers that the trustees are not travelling for work, but have instead relocated to City MM in order for Trustee A to undertake employment with Client Z, the cost of meals are a private expense and would not be 'otherwise deductible’. An FBT liability will therefore arise as a result of the reimbursement of the cost of meals as an expense payment fringe benefit. Utilities The Commissioner accepts that a proportion of some of the utilities expenses (particularly telephone and internet costs) would be deductible to the employees if they both undertake some work activities from their rental accommodation. The Family Trust will need to proportion these expenses on a reasonable basis (see https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Home-office-expenses/ for further information), and this amount will reduce any FBT liability in accordance with the 'otherwise deductible’ rule. The remaining amount is personal or private in nature and will be subject to FBT as an expense payment fringe benefit. Travel expenses around City MM There may be an allowable deduction for some amount of travel by Trustee A between jobs undertaken for Client Z. Whilst Trustee A would not be entitled to a deduction for home to work travel (from his City MM accommodation to the offices of Client Z), Trustee A would be entitled to a deduction for the cost of travelling to clients’ premises as part of Trustee A’s work, as would be allowable to any other employee. The Family Trust will be able to reduce the FBT liability for the travel that is 'otherwise deductible’ and the remaining travel will be an expense payment fringe benefit. | Detailed Reasoning - Conclusion: The travel and living expenses are not deductible to the Family Trust as the Commissioner considers that the trustees are not travelling to City MM for work as part of business operations in Country JKL, but instead are choosing to relocate from Country JKL to Australia in order for Trustee A to take up an employment opportunity with Client Z that is distinctly separate to any activities in Country JKL. Therefore, any expenses relating to the travel to and from Country JKL, and the expenses incurred living in City MM, are of a private nature and would not be deductible to them if they incurred those expenses personally.