FACTS OF THE COMPASS CASE
a)    The taxpayer (Mr. Brown) was an employee accountant working for the Compass Group Pty Ltd (as trustee for the White Roche & Associates Hybrid Unit Trust) ('the Compass Group' or 'the employer'), which had its office in Lilydale (Victoria).

b)    During the period 7 May 2003 and July 2006, the taxpayer worked for the Compass Group on a casual basis for a minimum of 32 hours each week. Initially, the taxpayer commuted to Lilydale from his house in Boronia. He then moved to a farm he purchased at Murrindindi (approximately 60 kilometres from Lilydale) and continued to commute to Lilydale.

c)    At the end of July 2006, the taxpayer accepted a temporary position as a Senior Accountant for the Compass Group, pending a more suitable person being engaged to fill the position. As a result, the taxpayer's casual employment was terminated and his working hours significantly increased to around 42 hours per week by August 2006.

d)    Given the taxpayer's increased working hours, the taxpayer leased and furnished a property in Lilydale for a period of around 13 months. There was no requirement by the employer for the taxpayer to lease the property, and he intended to return to his farm in Murrindindi when the arrangements regarding his extended working hours finished.

e)    The taxpayer maintained his association with the Murrindindi property by:

a)    keeping most of his belongings at the property;

b)    visiting the property from time to time (i.e ., generally at least once per week, including some weekends); and

c)    engaging a caretaker who worked and lived on the property.

f)    On 30 June 2008, the Compass Group paid the taxpayer a retrospective allowance of $15,336 in respect of the additional expenses he incurred in renting the Lilydale property.

g)    Private ruling application to ATO - prior to the payment of the retrospective allowance, the Compass Group (i.e., the employer) had sought a private ruling as to whether it could pay a LAFH allowance to the taxpayer (Mr. Brown) under S.30 of the FBT Act, without there being a change in the taxpayer's work location (i.e., the work location remained as the Compass Group's office in Lilydale).
The ATO ruled that the allowance would not be considered a LAFH allowance under S.30, and the Compass Group (i.e., the employer) objected to the ATO's decision.

h)    Argument that allowance was a LAFH allowance - it was argued that the allowance had been paid to the taxpayer (Mr. Brown) as compensation for additional expenses he incurred by reason that he was required to live away from his usual place of residence (i.e., LAFH) in order to perform the duties of his employment with the Compass Group.
It was also submitted that the taxpayer was required to do this by virtue of the increase in the hours he was required to attend his place of work.

i)     ATO's argument - the ATO took the view that the allowance would not be considered a LAFH allowance under S.30, essentially because of the following :

a)    The additional expenses (in leasing the Lilydale property) were not incurred as a result of the taxpayer (Mr. Brown) required to live away from his usual place of residence; and

b)    in any event, the taxpayer was not living away from his 'usual place of residence' on the basis that, according to the ATO, the Lilydale property had become the taxpayer's 'usual place of residence' during the period he 'resided' in that property.

When the ATO denied the employer's objection, the employer sought a review of the ATO's decision (i.e., the matter was referred to the Tribunal).

THE TRIBUNAL'S DECISION
The Tribunal held that the Compass Group (as the employer) had paid the taxpayer (Mr. Brown) an allowance in respect of his employment which was in the nature of compensation for additional expenses he incurred during the relevant period (i.e., whilst leasing the Lilydale property).
Therefore, the issue that had to be considered (in determining whether the allowance qualified as a LAFH allowance benefit within the meaning of S.30(1)) was whether the taxpayer had incurred those additional expenses "by reason that...[he was] required to live away from his ... usual place of residence in order to perform the duties of that employment".
In addressing the above issue, the Tribunal had to consider the following two sub-issues:
a)    Whether the Murrindindi property was the taxpayer's "usual place of residence "; and

b)    If so, whether the taxpayer was "required" to live away from that property "in order to perform the duties of that employment ..... ".

IDENTIFYING THE TAXPAYER'S 'USUAL PLACE OF RESIDENCE' - THE LILYDALE PROPERTY VS. THE MURRINDINDI PROPERTY
The Tribunal held that both the taxpayer's Lilydale property (i.e., the leased property) and the Murrindindi property were considered to be his "place of residence". This was because, based on the definition of "place of residence" in S.136(1), each property remained a place at which the taxpayer either 'resided' or had 'sleeping accommodation' (whether temporary or permanent).
However, the Tribunal concluded that the Murrindindi property (and not the Lilydale property) was the taxpayer's "usual place of residence" during the relevant period. This was because the taxpayer (Mr. Brown) continued to maintain his association with the Murrindindi property after moving to the Lilydale property, as follows:
a)    It was the property at which he kept most of his belongings;
b)    It was the property to which he often returned (particularly on weekends);
c)    It was the property that he regarded as his home; and
d)    The taxpayer had engaged a caretaker to care for and live at the Murrindindi property.

In making its conclusion, the Tribunal referred to a number of previous Board of Review and Tribunal cases which considered the concept of a taxpayer's "usual place of residence" for the purposes of determining whether a taxpayer was LAFH. For example, refer to Case 847 (1951) 2 TBRD 201 , Case 4 (1952) 3 CTBR (NS) 21 , and more recently, Case X41 (1990) 90 ATC 347, Case Y40(1991) 91 ATC 393 and Case Y51 (1991) 91 ATC453.

FBT TIP - Common factors considered by previous tribunal decisions
All the above cases looked at a taxpayer's (first) place of residence before the taxpayer had acquired another place of residence on moving to a new (but temporary) work location. In particular, when determining which place was the taxpayer's "usual place of residence" (i.e., whether the taxpayer was LAFH), each case considered the following two broad factors:

(a)    The taxpayer's continuing connection with the first place of residence, including: whether the taxpayer's family continues to live there; the frequency of the taxpayer's visits to the first place of residence, and whether or not that was a place to which the taxpayer could return at will if he or she so wished; and

(b)     The nature of the taxpayer's employment and whether the move to another place was a temporary or permanent move.

WHETHER THE TAXPAYER WAS 'REQUIRED' TO LIVE AWAY FROM THEIR USUAL PLACE OF RESIDENCE (I.E., THE MURRINDINDI PROPERTY)
On the one hand, the Tribunal held that the taxpayer (Mr. Brown) was living away from his usual place of residence (i.e., the Murrindindi property) during the period that he stayed in the leased premises in Lilydale (i.e., whilst performing his more senior duties for the Compass Group). However, on the other hand, the Tribunal went on to say that the taxpayer was not 'required' to live away from his usual place of residence in order to perform the duties of his employment.
In making this conclusion, it is important to highlight the following points noted by the Tribunal:

a)    It would appear that the requirement for an employee to be living away from their usual place of residence must be necessitated by the employer, the inherent nature of the employment, or by a combination of the two.

b)    The taxpayer (Mr. Brown) was not required to rent premises and to live in Lilydale during the week, but chose to do so. Furthermore, there was no evidence to suggest that the employer required or even requested that the taxpayer live in Lilydale in order to perform his duties.

c)    Furthermore, the work itself does not seem to have demanded or required that the taxpayer live in Lilydale. That is, on the one hand, the taxpayer was required to have greater client contact and, therefore, to work longer hours. However, on the other hand, the hours were not so extended, and the commuting distance to Murrindindi (i.e., approximately 60 kilometres) was not so great, to suggest that the work itself required the taxpayer live in Lilydale so that he could perform the duties of his employment.

d)    In summary, a reasonable person would conclude that the taxpayer cho.se to reside in accommodation that was closer to his place of work during the week, but-that he was not required to do so in order to perform the duties of his employment with the Compass Group.
As a result, the Tribunal concluded that the allowance paid to the taxpayer (Mr. Brown) of $15,336 did not constitute a LAFH allowance benefit under S.30.

IMPLICATIONS OF THE TRIBUNAL'S DECISION
1)    The Tribunal's decision in the Compass case will have significant implications for those employers who pay LAFH allowances to their employees, particularly in those circumstances where there has been no change in the employee's job location (e .g., an employee chooses to reside closer to their existing work location).

2)    In particular, the Tribunal 's decision confirms that, before an allowance paid to an employee can qualify as a LAFH allowance, not only must the employee be LAFH (i.e., living away from their 'usual place of residence') but the employee must also be required to LAFH because, for example:
•    the 'employer requires the employee to LAFH; and/or
•    the nature of the employee's work-related duties makes it necessary for them to LAFH.

3)    The Tribunal's decision highlights that the above condition will not be satisfied where an employee merely chooses to LAFH as a matter of convenience (e.g., to be closer to their existing work location) rather than because of an employer requirement and/or the demands of the relevant job. This was further supported by the following comments made by the Tribunal:
" .. .. he was not required to rent premises and to live in Lilydale during the week but chose to .... there is no evidence that suggests that his employer required or even requested that he do so in order that he could perform his duties .... the hours were not so extended and the commuting distance to Murrindindi not so great that it could be thought that the work itself required it.. ... Mr Brown chose to reside in accommodation that was closer to his place of work during the week but was not required to do so in order to perform the duties of his employment ... "

FBT WARNING - Factors which influenced Tribunal's conclusion
It appears that the Tribunal made its conclusion that the taxpayer (Mr. Brown) was not required to LAFH for work purposes on the basis of the following key factors:
•    The employer did not require the taxpayer to live closer to his place of work in Lilydale;
•    The employee's original place of residence (i.e., the Murrindindi property) was within a normal commuting distance to his place of work in Lilydale (i.e., within approximately 60 kilometres); and
•    The nature of the taxpayer's work duties (e.g ., the extended hours) did not necessitate the taxpayer having to live closer to his work in Lilydale.

4)    Finally, the Tribunal's decision will not only have implications for LAFH allowances, but also for other LAFH-related benefits which are provided to employees who are LAFH. This is because the concessional FBT -treatment of other LAFH-related benefits is generally also conditional upon the employee (in respect of whose employment the relevant benefit has been provided) being required to LAFH in order to perform their employment duties.

Other LAFH-related benefits whose FBT concessional treatment is conditional upon an employee being 'required' to LAFH for work purposes include the following:
a)    LAFH accommodation (S.21 and S.47(5)) - an FBT exemption basically applies where:
•    an employer pays or reimburses the accommodation costs of an employee (and any family members); or
•    an employee is provided with the use of accommodation;

in circumstances where the employee is required to LAFH in order to carry out their employment duties.
b)    LAFH leasing of household goods (S.58E) - broadly, an FBT exemption applies where:
•    an expense payment or residual benefit is provided to an employee in connection with the cost of leasing household goods used mainly for domestic purposes; and
•    the benefit is provided in relation to FBT-exempt LAFH accommodation under S.21 or S.47(5) (refer above).

c)    LAFH removal and storage of household effects (S.588) - broadly, an FBT exemption applies where an employer pays for the costs of removing and storing an employee's household effects, to enable the employee (and any family members) to take up residence at or near the place where the employee will be performing their employment duties whilst being required to LAFH

d)    LAFH connection and reconnection of utilities (S.580) - broadly, an FBT exemption applies where an employer pays for the cost of connecting or reconnecting a telephone, gas or electricity service to an employee's new place of residence, as a result of the employee been required to LAFH in order to perform the duties of their employment.

e)    LAFH transport (S.58F) - broadly, an FBT exemption applies where an employer provides transport assistance (e.g., the employer pays for the cost of airfares) and any meals and accommodation, en route, to an employee (and any family members) to enable the employee (and any family members) to take up residence at or near the place where the employee will be performing their employment duties whilst being required to LAFH.

COMMON QUESTIONS IN RELATION TO AN EMPLOYEE LAFH FOR WORK PURPOSES
The following questions address the more common issues raised by tax practitioners and employers in relation to an employee LAFH (i.e. living away from their 'usual place of residence') for the purposes of providing FBT concessionally taxed (including FBT -exempt) LAFH-related benefits (particularly a LAFH allowance).

QUESTION 1 - IS IT POSSIBLE TO PAY A LAFH ALLOWANCE (OR OTHER LAFH· RELATED BENEFIT) TO AN EMPLOYEE WHERE THERE IS NO CHANGE IN THE EMPLOYEE'S WORK LOCATION?
Yes.
As previously noted, an employee will generally be considered to be LAFH where the employee moves away from their 'usual place of residence' (or home) in order to take up temporary residence (or live close to) a new (but temporary) work location to carry out their work duties.
As a result, an important factor that would indicate that an employee is LAFH is that the employee has established a second (alternative and temporary) work location, and has moved to take up temporary residence close to this new work location in order to perform their work duties.
Despite the above, there will be circumstances where an employee can be considered to be LAFH even though there is no change in the employee's work location. For example:
•    An employee normally travels 60 kilometres (each way) between home and work each day. During a two month period , the employee chooses to live closer to their existing work location whilst being involved in a special project requiring the employee to work between 13 to 15 hours each day. Refer also to the Compass case (discussed above).

•    An employee (with his family) moves interstate for personal reasons, but the employee is required to continue to work at their existing work location for a three month period, so that the employer can find a suitable replacement for the employee's position.

FBT WARNING - Employee must be 'required' to LAFH
However, as previously noted, before a LAFH-related benefit (including a LAFH allowance) can be provided to an employee in these circumstances, the employee must generally be required to LAFH in order to perform the duties of their employment.
Based on the Tribunal's recent decision in the Compass case, an employee will basically satisfy this condition where, for example:
•    the employer requires the employee to LAFH; and/or
•    the nature of the employee's work-related duties makes it necessary for them to LAFH.
The ATO has also recently confirmed that an employee can be 'required to LAFH in order to perform the duties of their employment' (in which case, LAFH-related benefits can generally be provided to the employee) even though there has been no change in their work location. Refer to the FBT Sub-committee minutes of meeting dated 13 November 2008.

EXAMPLE - Employee LAFH without a change in work location
Harry is a senior employee working in Melbourne. For personal reasons, Harry relocated his family to Sydney to live, but his employer required him to continue working in Melbourne for a six month period to enable the employer to find a suitable replacement for Harry's position.
Harry took out a six month lease on a two bedroom apartment to enable him to continue working in Melbourne. Harry's employer pays for the monthly rental cost of the apartment whilst Harry is required to work in Melbourne for the six month period.

Is the accommodation benefit provided to Harry exempt from FBT under 5 .21?
Prima facie, Yes. Under 5 .21, an expense payment benefit in respect of accommodation is basically exempt from FBT where the accommodation is required solely by reason that the employee is required to live away from his or her usual place of residence in order to perform the duties of their employment.
On relocating to Sydney, it would be argued that, prima facie, Harry has changed his usual place of residence (i.e., from Melbourne to Sydney) and, therefore, Harry is LAFH whilst performing his employment duties in Melbourne. It would also be argued that Harry is required to LAFH in order to perform these duties (i.e ., the accommodation is required solely by reason that Harry is required to LAFH in order to perform the duties of his employment).

As a result, prima facie, Harry's accommodation benefit would qualify for the FBT exemption under S.21 , provided the declaration requirements have also been satisfied.

QUESTION 2 - CAN AN EMPLOYEE BE CONSIDERED TO BE LAFH WHERE THEY LEASE THEIR EXISTING RESIDENTIAL PREMISES WHILST LIVING AWAY FROM THOSE PREMISES FOR WORK PURPOSES?
Yes.

By way of background, it will be common for an employee to lease out their existing residential premises during a period that the employee is required to live away from those premises in order to perform their employment duties (i.e., during a period that the employee has taken up temporary residence at a new but temporary work location for work purposes).
In the recent Compass case, the Tribunal indicated that in these circumstances, the employee's existing residential premises can no longer be regarded as their 'usual place of residence' (in which case, the employee could not be LAFH), as follows:
"That this is so follows from the fact that a person may be required to live away from his or her usual place of residence in order to perform the duties of his or her employment at the outset but circumstances may change. The person may, for example, decide to lease the place that is his or her usual place of residence so that, even if initially required to work away from it, that place can no longer be regarded as his or her usual place of residence for it is no longer a place to which he or she has access let alone able to reside."
However, in MT 2030, the ATO takes the view that an employee can still be regarded as being required to live away from their 'usual place of residence' (i.e ., LAFH) in order to perform their employment duties, where the employee does not actually have such a residence. For example:
•    the employee has terminated the lease on a house, flat or apartment where they lived in the old location intending to re-lease it or another home on return to the old location; or

•    the employee has sold their former home (in the old location) intending to purchase another home on retum to the old location.
In these circumstances, the ATO takes the view that an employee will generally be able to declare that their 'usual place of residence' is the old location (e.g., the old city or district) provided they intend to return to that location (e.g., city or district) to live upon resuming residence in that location.

FBT TIP - ATO confirms it will continue to apply its views in MT 2030
The ATO has recently confirmed (in the FBT Sub-committee minutes of meeting dated 13 November 2008) that it will continue to apply its views outlined in MT 2030 (noted above), as supported by the following comments:
" .. . the view expressed in MT 2030 is that it may not always be the case that an employee can make a declaration on the basis that they have an actual residence to return to; they may have an intention to return to the same city or district to live upon resuming residence in the home country which will suffice."

QUESTION 3 - CAN AN EMPLOYEE ALREADY IN AUSTRALIA WORKING FOR AN INITIAL ('FIRST') EMPLOYER STILL BE CONSIDERED LAFH WHERE THEY COMMENCE EMPLOYMENT WITH A SECOND EMPLOYER?
Yes.
Situations will arise where an overseas employee is in Australia working for an employer (‘first employer') and receiving a LAFH allowance (or other LAFH-related benefits) on the basis that the employee is required to LAFH in order to perform the duties of their employment, and the employee then takes up a fixed term employment with a second employer.
In these circumstances, the issue that arises is whether the employee can still be considered to be LAFH (i.e ., living away from their 'usual place of residence') assuming they intend to return to their home country (i.e ., their usual place of residence) after the fixed term contract expires with the second employer.
In the FBT Sub-committee minutes of meeting dated 8 May 2008, the ATO basically confirmed that in undertaking the duties of employment with the second employer, the employee can still be considered to be required to· LAFH in order to perform the duties of their employment. The ATO also confirmed that the employee's 'usual place of residence' would not, prima facie, have been altered in these circumstances.

QUESTION 4 - IS AN EMPLOYER REQUIRED TO VERIFY THE ACTUAL EXPENDITURE INCURRED BY AN EMPLOYEE WHO IS LAFH AND RECEIVING A LAFH ALLOWANCE?
Basically, No.
By way of background, as previously noted, before an allowance that is paid to an employee can qualify as a LAFH allowance under S.30, it must be reasonable to conclude that the whole or part of the allowance compensates the employee for at least additional (non-deductible) expenses incurred by the employee whilst they are required to LAFH for work purposes.
Furthermore, the taxable value of a LAFH allowance can be reduced under S.31 by the following two components (if any) of the allowance:
a)    Exempt accommodation component - this is basically that portion of the allowance that is reasonable compensation for additional accommodation costs the employee is expected to incur during the period they are required to LAFH for work purposes.

b)    Exempt food component - this is basically so much (if any) of the allowance that is reasonable compensation for additional expenditure on food whilst the employee is LAFH. It is initially calculated by determining the 'food component' of the allowance, which is so much of the allowance that is in the nature of compensation for expenses the employee could reasonably be expected to incur on food and drink whilst LAFH.

Before the taxable value of a LAFH allowance fringe benefit can be reduced by the above components, the employee must generally give the employer (usually by the date of lodgement of the employer's FBT return) a LAFH allowance declaration which sets out their usual place of residence and their actual place of residence during the period of the allowance.
Many tax practitioners and employers have questioned whether an employee must have actually incurred additional expenses on accommodation and/or food and drink before an allowance paid to the employee can qualify as a LAFH allowance. In other words, what level of documentation or depth of inquiry does an employer need to make to ensure the food and/or accommodation components of the allowance have actually been spent by the employee?

FBT TIP - Employers are not required to verify actual expenditure
In the FBT Sub-committee minutes of meeting dated 8 February 2007, the ATO advised that an employer is not required to identify actual expenditure incurred by an employee. This is largely because the allowance is designed to compensate an employee for expenditure they might be expected to incur (i.e., the nature of an allowance is such that it will not ordinarily be a precise measure of actual expenses incurred by the recipient). The ATO's approach is further supported by paragraphs 26 to 28 of MT 2030.
However, the ATO also advised that an employer is required to maintain records which support how a LAFH allowance is calculated (i.e., its relevant components) and also that the allowance is reasonable in the circumstances (e.g., it was paid on the basis of a survey of accommodation and living costs at the employee's temporary work location).

EXAMPLE - EMPLOYEE SPENDS LESS THAN THE ALLOWANCE AMOUNT
Barry, an employee, has been asked to move from Sydney to Melbourne for a 12 month assignment commencing 1 April 2008. Barry's family (i.e., spouse and two children aged 8 and 10) will accompany him to Melbourne.
Under the terms of the transfer, Barry will receive a LAFH allowance of $850 per week (over the 12 month period), made up of the following:
Accommodation component (per week)    $ 500
Food component (per week)    $ 350
Total weekly allowance    $ 850

It is assumed the $500 accommodation component reasonably reflects the weekly rental cost of a 3 bedroom dwelling within the vicinity of Barry's new (but temporary) work location in Melbourne. Furthermore, the weekly food component of $350 falls within the reasonable amount prescribed by the Commissioner in TD 2008/3 (i.e. , $379 for 2 adults and 2 children).
On moving to Melbourne, Barry secures a 12 month lease on a 3 bedroom home (which is about a 15 minute drive from Barry's new work location) for $400 per week. Also, the food component is generally fully expended each week.

Does the allowance paid to Barry qualify as a LAFH allowance?
The allowance would qualify as a LAFH allowance despite the fact that Barry does not fully expend the $500 accommodation component of the allowance. However, the challenge for Barry's employer will be to keep records (e.g. , working papers) to support how the allowance paid to Barry (i.e., its components) was calculated and that the allowance is reasonable (particularly in relation to the accommodation component).