What expatriate employees should consider salary-sacrificing

A number of my clients have brought over employees from overseas. They want to know if there is anything they can do to pay these employees in a tax-effective manner.

Since October 2012 it has been far more difficult for these employees to be paid a living away from home allowance in a tax-effective manner. This is because, in order to access favourable tax treatment, the employee must now, amongst other requirements, maintain a home in Australia at which they usually reside.

However there are still a number of other tax-effective benefits that such employees can receive. This article will outline some of these benefits which an employer could consider providing.

EXEMPT BENEFITS

Relocation consultant costs

A relocation consultant may provide services such as obtaining removalist quotes, finding accommodation, negotiating leases, providing information about transportation to the new location and providing information about education and community services at the new location.

The costs of such a consultant would be exempt from FBT if they were incurred solely because the employee is relocating, whether temporarily or permanently, their place of residence in order to perform their employment duties

Removal and/or storage of household effects

This exemption covers transport, packing, unpacking and insurance of tangible personal property.

To be exempt from FBT, the costs must occur within 12 months of commencing duties at the new place of employment and must arise solely because the employee is relocating, whether temporarily or permanently, their place of residence in order to perform their employment duties.

Sale or acquisition of dwelling as a result of relocation

This exemption covers things like stamp duty, advertising, legal fees, agent’s services, discharge of a mortgage, borrowing expenses and other similar matters. However it would not include loan repayments, loan service fees, insurance or rates.

To be exempt, the sale of the old dwelling must be within two years of the employee commencing duties and the purchase of the new dwelling must be within four years. Furthermore, the costs must arise solely because the employee is required to change their usual place of residence to perform employment duties.

Connection or re-connection of certain utilities

This covers connection and re-connection of telephone and re-connection of gas or electricity.

These costs must be incurred within 12 months of the employee changing their residence. Furthermore, they must be incurred solely because the employee is required to live away from home or change their usual place of residence in order to perform their employment duties

Relocation transport

This exemption covers transport incurred solely because the employee is required to live away from their usual place of residence to perform their employment duties. It also extends to meals and accommodation on the journey (e.g. stopovers) as well as accident insurance, airport or departure taxes, passenger movement charge, a passport, a visa or a vaccination or any similar matter such as residency application costs and immigration agent fees.

This exemption can be very broad. It covers both the trip to Australia and the return journey. It would also cover a trip to visit Australia in order to find suitable accommodation before the secondment and/or a visit back to the employee’s usual residence to arrange the removal of tenants, making repairs or having utilities reconnected before the employee returns.

Compassionate travel

This exemption is for employees who, unfortunately, have a close relative (a parent, parent-in-law, spouse or child) who is seriously ill or has passed away. The transport, as well as meals and accommodation on the journey, incurred solely because to visit the relative or attend their funeral is exempt from FBT. The exemption applies to employees who are travelling or living away from home in the course of performing their employment duties.

BENEFITS ELIGIBLE FOR A REDUCTION IN TAXABLE VALUE (i.e. LESS FBT WILL BE PAYABLE)

‘Overseas employees’

The following two concessions apply only to overseas employees. This is a defined term that includes somebody whose usual place of residence is outside of Australia but is temporarily posted to Australia for work. It could also include Australian employees posted overseas. In order to access the concessions the overseas posting must be for a period of not less than 28 days

Crucially the benefits are only subject to a reduction in taxable value where they are either;

  • Provided under an industrial agreement i.e. a registered Australian workplace agreement, an award or legislation or
  • It is customary in the employer’s industry to provide the same kind of benefit in similar circumstances. The ATO’s view is that such benefits do not need to be provided to a majority of employees in the industry but nor can it be ‘rare or unusual’.

Holiday transport for overseas employees

This exemption covers transport to the holiday destination, as well as accommodation and meals on route, for the employee, their spouse and children. It also covers accident insurance, airport or departure taxes, passport costs, visa fees, vaccinations or other similar costs in connection with the transport.

Other requirements include; the employee must be on holiday and not performing their employment duties and the holiday must be for three or more days. Note also that remote area holiday transport falls under a different provision.

If the travel is the most direct practicable route between the overseas employment place and the employee’s home country then the taxable value is reduced by 50%. If the travel does not meet the above conditions (e.g. it is not a trip home) then it is reduced by the lesser of 50% and the benchmark travel amount – broadly the usual cost of return travel between the overseas employment place and the employee’s usual place of residence (e.g. a return economy air fare).

Education of children of ‘overseas employees’

This includes school, college or university fees, additional tuition costs and other costs (e.g. a car fringe benefit) that are in respect of the full-time education of the employee’s child. The child must be under 25 years and if the the benefit is a property (e.g. a computer) or residual fringe benefit it must be solely for their education.

The taxable value is reduced to the extent that it relates to the period of the overseas posting or the academic period.

Like the exemption for holiday transport the education of children must be provided under an industrial agreement or is customary in the industry.

Temporary accommodation relating to relocation and temporary accommodation meals

This covers temporary accommodation and leasing of furniture and household goods in relation to such accommodation. Temporary accommodation may be a hotel, motel or guesthouse. It must be paid solely because the employee is required to change their usual place of residence to perform their employment duties

The temporary accommodation can be at the former locality because the employee’s home becomes unavailable or unsuitable (e.g. due to furniture removal, storage or other arrangements). In this case the taxable value is reduced to extent that it is attributable to the 21 day period leading up to the employee commencing work at the new locality

The temporary accommodation can also be at the new locality. To be eligible the employee must commence sustained and reasonable efforts to find long-term accommodation as soon as reasonably practicable. A reduction in taxable value is not available if the employee does not occupy a long-term home within four months of commencing work or does not give their employer a declaration that they are making sustained and reasonable efforts to purchase or lease long-term accommodation

Meals consumed at time when employee and their family were in temporary accommodation are only subject to FBT on the first $2 of each meal (adults and children 12 or over) or the first $1 (children under 12).

Disclaimer

This article is intended to be a general introduction to the topic for information purposes only. It does not constitute advice. I strongly urge you to seek professional advice that is tailored to your personal circumstances.

FBT – What’s new in 2015?

The end of the Fringe Benefits Tax year (31st of March) is approaching soon. It is therefore a good time for employers who provide fringe benefits, employees who receive fringe benefits and accountants who advise on FBT to remind themselves (or learn for the first time) what has changed in FBT since this time last year. This article will outline 10 important changes. It assumes some existing knowledge of FBT.

1. New FBT rate

The FBT rate increased on 1 April2014 from 46.5% to 47%.

Employees are likely to be asked to sacrifice additional salary to compensate their employers for the additional FBT liability (due to the higher rate) if they do not make a contribution that fully eliminates the taxable value of the benefits they receive.

2. New gross up rates

The gross up rates have also increased – type 1 to 2.0802 and type 2 to 1.8868. Remember that type 1 benefits are those that the provider can claim any input tax credit with respect to the acquisition of the benefit while with type 2 benefits the provider is not able to claim any input tax credits.

Employees of FBT-exempt (e.g. public hospitals and Public Benevolent Institutions) and FBT-rebatable employers (e.g. private schools and trade unions) should carefully consider how much benefits they can salary sacrifice without exceeding the caps, because they have decreased.

3. Other rates that have changed

The benchmark interest rate has decreased from 6.45% to 5.95%.

The car parking threshold is now $8.26, replacing the previous rate of $8.03.

The reasonable food and drink components of LAFHA’s (Living Away From Home Allowances) has changed, for example for one adult it is now $236 per week. Refer to TD 2014/9 for the rates for multiple people.

4. ATO’s audit focus in 2015.

As always cars, expense payments and meal entertainment will remain a significant focus as these are the most commonly provided fringe benefits. However two particular areas that the ATO have identified where mistakes are being made are situations where business trips are combined with private holidays and when cars are pooled or shared.

Combined business/private trips

It is common for employees who are sent interstate or overseas to attend a business conference or work function to extend their stay and undertake a private holiday before or after the function. Where this is the case it may be necessary to assess the extent to which the trip was for business purposes (and therefore subject to the otherwise deductible rule) and the extent to which it was for private purposes (which will likely be subject to FBT). When it comes to airfares the ATO’s preferred approach is to classify a trip as either 100%, 50% or 0% business related. The ATO’s view is that where the dominant purpose of the travel is for business purposes with only an immaterial private component the airfares are 100% business related, where there is a material private component to the travel they are 50% business related and where the private holiday is the main purpose of the trip the airfares are 0% business related.

In some cases an employee’s spouse or family member might accompany them on the trip. The ATO have confirmed that if the choice of accommodation is not influenced by the fact that they were accompanied by another person(s) and there is no additional charge for the accompanying person then no taxable fringe benefit will arise.

Pooled/shared cars

A car fringe benefit that is provided to more than one employee during an FBT year is referred to as a pooled or shared car. Such cars do not need to be reported on the recipient’s payment summaries. It is therefore not taken into account in determining an employee’s eligibility for various tax offsets and government benefits. The ATO have confirmed that an employer must consent to an employee sharing their salary packaged car with at least one other employee before the reporting exclusion can apply. An employee cannot unilaterally share their care with another to cause the reporting exemption to appply.

5. Employer contributions to staff social clubs

The ATO take the view that no fringe benefit arises when an employer makes a contribution to a staff social club or Employee Remuneration Trust. FBT is only triggered when an employer is said to provide a specific benefit to an identified employee. Therefore a potential liability does not arise until such time as the social club actually provides the benefit to the employee.

6. Car parking benefits near airports and shopping centres

The case of Qantas Airways Limited v FC of T looked at where car parking spaces made available by Qantas to their employees at airports gave rise to a car paring benefit. Qantas argued that they did not because the car parks were not commercial car parking stations on the grounds that they were not being made available ‘principally, or primarily, for use by commuters driving their cars to and from work’ and because the rates they charged were structured in such a way as to discourage all-day parking.

Qantas was unsuccessful in making these arguments. There was no requirement that the car parking station be made available ‘primarily or principally’ for member of the public commuting between home and work. Furthermore their fee structure was reflective of their monopolistic environment and not to discourage all-day parking.

When it comes to shopping centres the NTAA believes that it is highly likely that the ATO will take the approach that penalty rates to discourage shoppers from using their car parks all day (e.g. free for the first four hours and very expensive after that) will mean that their parking lots are not regarded as commercial car parking stations. Therefore employers within a 1km radius of such shopping centres do not need to take them into account in determining whether or not they are providing a car parking fringe benefit to their employees.

7. Employees who are required to change their usual place of residence

There are numerous FBT concessions for employees who are ‘required’ to change their usual place of residence in order to perform their employment duties. The ATO has confirmed that an employee who relocates voluntarily does satisfy this requirement. The term ‘required’ does not mean compulsory, rather the change may be one that is necessary in the circumstances in order for the employee to perform the duties of their employment.

8. Relocation benefits provided to new employees

The ATO also confirmed that an employer was entitled to claim various FBT concessions associated with relocation benefits (e.g. on incidental costs of moving, removal and storage of household effects and connection of utilities) provided to a new employee who was relocating to take up employment with them. It is not a requirement that the employee be an existing employee.

9. In-house property benefits – gift cards/vouchers can qualify in rare circumstances.

Typically store gift cards are not considered tangible property and because of this are not eligible for the $1,000 reduction for in-house property fringe benefits (where the gift card can be used for goods or services normally provided by the employer to the public). However, in very particular circumstances a voucher/card provided by an employer can qualify. This was the case in ATO ID 2014/17 where a voucher could only be redeemed by a particular employee (it could not be sold transferred) and it entitled that employee to a specific number of items (rather than having a monetary value placed on it).

10. Car parking and meal entertainment

The ATO recently concluded that the concept of meal entertainment included an employee’s car parking fees that they incurred in order to attend a social function held by the employer. Therefore if an employer reimburses an employee for such car parking costs it will be valued under the same rules as meal entertainment.

Disclaimer

This article, and all other articles on this blog, is intended to provide information of a general nature only. It is not advice and should not be treated as such. It is important to remember that everybody’s situation is different and what is mentioned in this blog may not apply to you. I urge you to seek professional advice that is tailored to your circumstances.

Please ensure that you also read the full disclaimer on my ‘welcome’ post.