Private ruling: Deduction for business expenses and FBT implications
Date of advice: 14 September 2017
Published: January 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2017

Ruling: A3: Yes

Relevant facts and circumstances: The company is an Australian registered company based in state A. The director/employee of the company and their partner maintain a home in state A. The director/employee of the company often travels to State B to interview prospective employees for their clients and to meet with new prospective clients. The frequency of the trips to State B vary from twice a week to once in a two week period. The company does not have an office in State B. To date the director/employee of the company has stayed in hotels while travelling to State B and used hotel facilities to conduct business activities. The company is considering renting a two room apartment in State B which has sleeping accommodation in one room for the director/employee and a living area which could be used for office space and holding meetings with clients and prospective employees for the clients. The apartment address will be supplied to clients and prospective employees of clients as the business location of the company in State B. The director does not intend to have their partner accompany them to State B or to use the apartment for private purposes. The apartment is not big enough to rent out to unrelated parties when it is not being used by the employee on business in State B.

Relevant legislative provisions: Income Tax Assessment Act 1997 – section 8-1 | Fringe Benefits Tax Assessment Act 1986 – section 45 | Fringe Benefits Tax Assessment Act 1986 – section 51 | Fringe Benefits Tax Assessment Act 1986 – section 52

Reasons for decision: Detailed Reasoning - Question 1: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA) allows a deduction for all outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for that purpose. However, a deduction is not allowable for outgoings that are of a capital, private or domestic nature. In relation to the facts of your circumstance we have considered that the company is renting an apartment in State B in order to provide both a dedicated space for business activities such as meetings with clients and to provide accommodation for your director/employee when required to stay overnight in State B in order to carry out these meetings. The director/employer is not intending to take their family with them to stay in the apartment when they are staying there and they will be using the apartment for business and income producing purposes. As such it is determined that while these circumstances apply the cost of the rent for the apartment is a deductible business expense for the company under section 8-1 of the ITAA. | Detailed Reasoning - Question 1 and Question 2: A “fringe benefit” is defined in section 136(1) of the FBTAA as a benefit provided by the employer of an employee or by an associate of the employer, to the employee in respect of their employment. As the employee is employed by the company to perform work and the provision of the accommodation by the company is in respect of the employee’s employment duties, there is a fringe benefit. On the basis that the provision of the accommodation is a fringe benefit provided by the company to the employee, the benefit will be a residual fringe benefit as defined in section 45 of the FBTAA. (Section 45 provides that a benefit is a residual benefit for the purposes of the FBTAA if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive)). The residual fringe benefit will be an “external period residual fringe benefit” under section 51 of the FBTAA as the benefit is not of a kind that the company provides to members of the public and it is provided in relation to a period exceeding 1 day. As the accommodation will be provided by the company under an arm’s length transaction, prima facie the taxable value of the residual fringe benefit will be equal to the amount paid or payable by the company in respect of the benefit (section 51(a)). However, the taxable value of the residual fringe benefit will be reduced where the “otherwise deductible rule” in section 52(1) applies. This rule will apply where: (a) The recipient of the benefit in relation to an employer in relation to a year of tax is an employee of the employer; and (b) If the recipient of the benefit had incurred and paid unreimbursed expenditure, in respect of the provision of the benefit, a once-only deduction (referred to as “Gross Deduction” or “GD”) would have been allowable to the recipient under, inter alia, the Income Tax Assessment Act 1997 (ITAA 1997)); and (ba)The amount calculated in accordance with the following formula exceeds nil: GD – RD “RD” is nil where there is no contribution by the recipient to the benefit (as is the case for the employee here); and (c) Either of the below applies: (i) The fringe benefit is an “exclusive employee residual benefit” as defined in section 136 because it is a benefit where, if the recipient had incurred expenditure in relation to the provision of the recipient’s benefit, that expenditure would have been exclusively incurred in gaining or producing the salary or wages of the recipient in respect of the employment to which the fringe benefit relates; or (ii) The recipient gives the employer, before the declaration date, a declaration in a form approved by the Commissioner, in respect of the recipient’s benefit and (d) Where the fringe benefit is an extended travel residual benefit (being a benefit in respect to travel outside Australia and involves the recipient being away from the recipient’s usual place of residence for a continuous period including more than 5 nights), the recipient gives to the employer, before the declaration date (being the date of lodgement of the FBT return for the relevant year) a travel diary in relation to the travel undertaken by the recipient to which the fringe benefit relates. In applying the above to the accommodation provided by the employer to the director/employee: (a) The recipient of the benefit (the director) is an employee of the company. (b) In respect of the benefit, if the employee had incurred and paid the unreimbursed expenditure, they would be able to claim a deduction under section 8-1 of the ITAA 1997 on the basis that the expense was necessarily incurred in producing their assessable income. (c) The accommodation is an “exclusive employee residual benefit” because if the director/employee had incurred the accommodation expenditure, the expenditure would have been exclusively incurred in gaining or producing the salary or wage income in respect of the employment to which the fringe benefit relates. Therefore section 52(1)(c)(i) applies and the employee should not be required to provide a declaration in a form approved by the Commissioner in respect of the benefit received by the employee. (d) The employee will not need to give the company, before the declaration date, a travel diary, as the accommodation provided is not in respect of travel away from the employee’s usual place of residence for a continuous period of 5 nights or more (the employee stays in the apartment overnight from twice a week to once in a two week period). In relation to whether the employee would be able to claim a deduction for the cost of accommodation while they are undertaking travel on business for the company, paragraph 54 of Draft Taxation Ruling TR 2017/D6 states that accommodation expenses are incurred by an employee in performing an employee’s work activities, and 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 expense in the course of relocating or living away from home. Paragraph 72 of Draft Taxation Ruling TR 2017/D6 also states that whether an employee is living away from home depends on the facts of each case. Relevant factors are: ● The time spent working away from home; ● Whether the employee has a usual place of residence at a previous location; ● The nature of the accommodation; and ● Whether the employee is, or can be accompanied by family or visited by family or friends. Furthermore, paragraph 55 of Draft Taxation Ruling TR 2017/D6 states that expenses must be apportioned to the extent that they are of a private nature or are not incurred in producing assessable income. In applying the above factors to the facts, the following conclusions may be made: ● The nature of the employee’s work and the scope of their duties require them to undertake the travel; ● From a practical point of view, the work requires the employee to sleep away from home overnight in State B from twice a week to once in a two week period; ● The employee has a permanent home in State A; ● The facts indicate that the employee does not incur the expense in the course of relocating or living away from home as: - The employee stays in the apartment overnight from twice a week to once in a two week period; - The employee has a usual place of residence in State A, where they live with their partner; - The employee works away from home and stays in settled accommodation (the apartment), but not for a considerable period (from twice a week to once in a fortnight) (paragraph 80 of Draft Taxation Ruling TR 2017/D6); and - The employee does not intend to be accompanied by their partner when they stay in the apartment. Based on these factors, the employee has been travelling while performing their employer, the company’s work activities. Further, if the employee had incurred expenses in relation to accommodation, they would be entitled to a deduction for the costs of accommodation. Therefore, the benefit will be an “exclusive employee residual benefit” under section 52(1)(c)(i) and the application of section 52(1) will reduce the taxable value of the benefit to nil.

Issue 1 Question 1: Is the rent on an apartment in Sydney, which is used on an approximately weekly basis for business purposes by the employee/director of the company for conducting business interviews and as overnight accommodation fully deductible as a business expense for the company? | Issue 2 Question 1: Is the provision of the accommodation by the employer a fringe benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | Issue 2 Question 1: Will be the value of the provision of the accommodation as a fringe benefit be reducible to nil based on the application of the otherwise deductible rule?