Private ruling: Personal Services Income and Living-Away-From-Home-Allowance
Date of advice: 1 July 2015
Published: July 2015
Ruling period: The income tax year ending 30 June 20XX
Date scheme commenced: March 20XX

Ruling: Q1: Are the amounts paid by the personal services entity (the Company) for food and accommodation, because the director/employee was required to work away from home, deductible to the company? | A1: Yes | Q2: Can the amount of personal services income (PSI) attributed to the PSI individual be reduced by food and accommodation expenses incurred by the Company? | A2: Yes

Relevant facts and circumstances: The PSI individual is a consulting engineer who contracts through his/her company (the Company). The Company is a personal services entity. All the personal services income earned by the company is attributable to the PSI individual. On a specific date in 20XX the Company commenced work for its client based in a state different from the PSI individual's permanent home. Later in 20XX the PSI individual and his/her spouse departed for the PSI individual's work location and stayed there for the duration of the contract. They returned home on the mid 20XX. The PSI individual stayed at the same location and didn't make any trips home during the term of his/her contract. He/she leased an apartment which was part of a hotel complex. The apartment was owned by individual owners, but managed by the hotel staff. The PSI individual maintained a house at their previous location while away. The house was left vacant under monitored security. The Company paid for the PSI individual's accommodation directly to the landlord. It also reimbursed the PSI individual and his/her spouse's food expenses. No other regular payments were made by the company to the PSI individual or his/her spouse.

Relevant legislative provisions: Section 8-1 of Income Tax Assessment Act 1997 | Subsection 85-10(1) of Income Tax Assessment Act 1997 | Section 85-15 of Income Tax Assessment Act 1997 | Subsection 86-15(1) of Income Tax Assessment Act 1997 | Section 86-20 of Income Tax Assessment Act 1997 | Section 86-60 of Income Tax Assessment Act 1997 | Section 86-85 of Income Tax Assessment Act 1997 | Subsection 30(1) of Fringe Benefits Tax Assessment Act 1986 | Subsection 136(1) of Fringe Benefits Tax Assessment Act 1986

Reasons for decision: Detailed Reasoning - Question 1: Are the amounts paid by the Company for food and accommodation, because the director/employee was required to work away from home, deductible to the company? | Summary: For an expense to be deductible to a personal services entity, the expense must be an allowable deduction in the hands of a PSI individual. The individual is effectively placed in the shoes of the entity to see if the deduction would be deductible to them under the same circumstance. As the relevant meals and accommodation expenses would be deductible to the PSI individual under section 8-1 of Income Tax Assessment Act 1997 (ITAA 1997), they are deductible to the Company under section 86-60 of ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under subsection 86 - 60 (a) of the ITAA 1997 an entity can deduct amounts related to gaining or producing individual's personal services income, provided the same amounts would have been deductible under this Act under the same circumstances in the hands of the individual producing the personal services income. In other words, subsection 86-60(a) of the ITAA 1997 puts the individual in the "shoes" of the entity and asks whether that individual would be entitled to the deductions under any other provisions of the ITAA Act 1997. You can generally deduct an expense under section 8-1 of the ITAA 1997 if the essential character of the expense is sufficiently connected with activities you carry out to gain or produce your assessable income, and provided the expense is not capital, private or domestic in nature. The essential character of an expense is a question of fact to be determined by reference to all the circumstances. Taxation Ruling TR 98/9 (TR 98/9) specifically deals with accommodation and meal expenses as part of travel expenses. While meals and accommodation expenditure normally is of private or domestic nature, TR 98/9 discusses examples where the particular set of circumstances may give the expense an income-producing character. Being away from home overnight on a work-related activity is mentioned as one of those occasions. In some instances a person might establish a new home at their work location. This makes food and accommodation expenses private or domestic in nature and therefore not allowable under section 8-1 of ITAA 1997. TR 98/9 lists a number of factors which need to be taken into account in determining whether a new home has been established: • the total duration of the travel The PSI individual lived at the work location for 4 months ; • whether the person stays in one place or moves frequently from place to place The PSI individual stayed at the same place and didn't travel around during the above period ; • the nature of the accommodation, e.g., hotel, motel, long term accommodation The PSI individual stayed in an apartment located in a complex, part of which was a hotel and part was owned by individual investors, while the hotel management retained the rights to the whole complex, including the leasing of the apartments; • whether the person is accompanied by his or her family The PSI individual was accompanied by their spouse ; • whether the person is maintaining a home at the previous location while away The PSI individual maintained a house in their previous location while away. The house was left vacant under monitored security ; • the frequency and duration of return trips to the previous location The PSI individual did not make any return trips to their previous location while at work location . On the balance of the above facts, given a relatively short stay, a temporary nature of the accommodation and the fact that the PSI individual maintained their home at the previous location we can conclude that the PSI individual didn't establish a new home at their work location. Therefore, the food and accommodation expenses would have been deductible against the PSI individual's income if the expenses had been incurred by them personally. Section 85-15 of ITAA 1997 precludes you from deducting rent expenses for some or all of your residence to the extent that the amount relates to gaining or producing your personal services income. The impact of this section was considered in Park v. FC of T [2011] AATA 567; 2011 ATC 10-198 where residence was defined as "the place… in which one resides; dwelling place; dwelling". In this case we consider the PSI individual's house at the previous location their "residence", while the apartment at their work location was simply their temporary accommodation. Therefore, in our view, section 85-15 of ITAA 1997 doesn't apply. The food and accommodation expenses are deductible to the Company under subsection 86-60 (a) of ITAA 1997. | Detailed Reasoning - Question 2: Can the amount of personal services income (PSI) attributed to the PSI individual be reduced by food and accommodation expenses incurred by the Company? | Summary: The net assessable income of a personal services entity must be included in the individual's own assessable income. | Detailed Reasoning - Detailed reasoning: As noted in Taxation Ruling TR 2003/10, the main purpose of Division 86 of the ITAA 1997 is to include the net assessable income of a personal services entity in the individual's own assessable income and to exclude it from the assessable income of the entity. As a result, the net income is taxed at the individual's marginal rate of tax. Subsection 86-15(1) of ITAA 1997 prescribes that the assessable income of the individual should include the amount of the individual's personal services income earned through the personal services entity. Subsection 86-20(1) allows for the amount of the personal services income under subsection 85-15(1) to be reduced (but not below nil) by the amount of the relevant deductions to which the personal services entity is entitled. Subsection 86-20(2) of the ITAA 1997 provides Method statement to use when working out the net amount included in the individual's assessable income. Please also see Example 4: Personal services entity's entitlement to deduction of Taxation Ruling Income tax: deductions that relate to personal services income TR 2003/10. | Detailed Reasoning - Question 1: Can the food and accommodation expenses incurred by the Company in relation to PSI attributable to the PSI individual be treated as Living Away From Home Allowance (LAFHA)? | Summary: No regular or consistent amounts were paid by the Company to the PSI individual. The amounts paid by the Company for the PSI individual's food and accommodation do not have the character of an allowance and are more likely to be reimbursements. | Detailed Reasoning - Detailed reasoning: Based on the evidence provided by the taxpayer we conclude that no regular or consistent amounts were paid by the Company to the PSI individual. The amounts used to cover the PSI individual's accommodation expenses were paid directly to the landlord, while the food expenses were reimbursed by the Company to the PSI individual in bulk. Taxation Ruling TR 92/15 defines an allowance as "a definite predetermined amount to cover an estimated expense". An allowance is paid regardless of whether the recipient incurs the expense. In Park v. FC of T [2011] AATA 567; 2011 ATC 10-198 irregular and inconsistent amounts drawn from PSI Entity's account by the PSI individual were not considered a living away from home allowance but "simply withdrawals". In your case, the amounts paid by the Company for the PSI individual's food and accommodation do not have the character of an allowance as defined in TR 92/15 and are more likely to be reimbursements. Therefore, we believe that the Company didn't pay the PSI individual a living-away-from-home allowance.

Issue 1: Income Tax. Deductions. Personal Services Entities. | Issue 2: Fringe Benefits Tax (FBT). Living-away-from-home-allowance benefits. | Can the food and accommodation expenses incurred by the Company in relation to PSI attributable the PSI individual be treated as Living Away From Home Allowance (LAFHA)? | This ruling applies for the following periods: The FBT year ending 31 March 2014 | The FBT year ending 31 March 2015