Non-arms length remote area housing arrangements?
In 2020, in a three-part series (*links listed at the end of this article) we looked at the various remote area related housing concessions available under the Fringe Benefits Tax Assessment Act 1986 (‘FBT Act’).
One of those concessions was the remote area housing exemption. The remote area housing exemption in section 58ZC of the FBT Act provides for a full FBT exemption where the following conditions are satisfied:
- For the whole of the tenancy period, the unit of accommodation is in a remote area (that is, it is not located in or adjacent to an eligible urban area).
- For the whole of the tenancy period, the accommodation is occupied by a person who is your current employee, and the usual place of employment of the employee is in the remote area.
- It would be concluded that it must be necessary for you to provide accommodation for employees or to arrange to provide such accommodation for any of the following reasons:
- the nature of your business is such that employees are liable to move frequently from one residential location to another,
- there is insufficient suitable residential accommodation otherwise available at or near the place or places where the employees are employed, or
- it is customary for employers in that industry to provide free or subsidised accommodation for employees.
- The benefit was not provided to the employee under either:
- a non-arm’s length arrangement, or
- an arrangement that was entered into by any of the parties for the purpose, or partial purpose, to obtain the concession.
This article focuses on condition 4 and what is a ‘non-arms length arrangement’.
The word ‘arrangement’ is widely defined in subsection 136(1) of the FBT Act to mean:
(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
The expression ‘non-arm’s length arrangement’ is defined ( in subsection 136(1)) to mean:
‘an arrangement other than an arm’s length arrangement’.
The term arm’s length arrangement is not defined in the FBT Act.
However, section 136(1) defines ‘arm’s length transaction’ to mean:
‘a transaction where the parties to the transaction are dealing with each other at arm’s length in relation to the transaction’.
Confused? Don’t worry, so are we!!
Consider the following facts as outline in ATO Interpretative Decision ID 2002/412:
- An employer customarily provides residential accommodation to staff in remote areas.
- The employer employs a manager under a contract basis.
- The employee currently leases a house privately and pays the rent from after tax earnings.
- The employer proposes to enter into a new rental agreement with the landlord immediately after the completion of the employee’s rental agreement on the same property with the same landlord and provide a housing benefit to the employee as the employee’s usual place of residence.
Does the above arrangement fail condition 4 above? Not according the ATO:
‘A housing benefit provided to an employee by an employer, as a result of the completion of an existing rental agreement between the employee and the landlord and entering into a new lease agreement between the employer and the same landlord on an arm’s length basis on the same property, will not invoke the application of subparagraph 58ZC(2)(e)(ii) of the FBTAA to disentitle the remote area housing benefit exemption provided under section 58ZC of the FBTAA.
The housing right acquired by the employer through the new rental agreement entered into with the landlord and subsequently provided to the employee will not represent an arrangement that was entered into for the purpose or for the purposes that included the purpose of enabling the employer to obtain the benefit of the application of this section’.
This outcome can be compared with the situation where an employee seeks to novate their current lease over a remote area property to their employer (and in so doing obtain FBT exemption). The ATO, in Interpretative Decision ID 2001/761 consider that the creation of a housing right, emanating from the decision to novate a lease, is an arrangement which would be inclusive of the purposes to obtain the benefit of the application of this section. In other words, the anti-avoidance rules in condition 4 of section 58ZC would be invoked.
Another arrangement that would appear to fall foul of the anti-avoidance rules would be:
- An employee is employed in a remote area;
- The employee either buys or leases a residential property in that area; and
- The employee leases the property to his or her employer and receives rent from the employer. The property is then provided to the employee rent-free by the employer until such time as the employee ceases to be in employment or moves to another location.
In Taxation Determination TD 2004/26, the ATO have indicated that from an income tax perspective, the anti-avoidance provisions of Part IVA would be invoked to deny the employee any deductions associated with the arrangement.
By association, the anti-avoidance flavour of the arrangement would not pass the arms length requirements of s58ZC and so the remote area housing exemption would not be available.
TaxEd members should be cautious of any arrangements that may not quite pass the ‘smell’ test when it comes to providing remote area accommodation to employees. Particularly if an employee/external salary packaging provider is pushing for remote area housing arrangements to be put in place.
As always, when in doubt, advice should be obtained or an ATO ruling sought before proceeding.
*2020 remote housing area concessions series
- Remote housing area concessions: Part I
- Remote housing area concessions: Part II
- Remote housing area concessions: Part III