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Living away from home allowances (LAFHA) reform, the changes and what employers and employees need to do

Background

LAFHA are a form of Fringe Benefit that are provided to employees to compensate for additional expenses incurred and disadvantages suffered because the employee is required to live away from their usual place of residence to perform their employment duties. 

LAFHA are concessionally taxed with the whole or the substantially the whole amount of the LAFHA being provided tax free.  Consequently, LAFHA are seen to be a very attractive, tax beneficial arrangement for employees who are required to live away from their usual residence for work.

Reform agenda

The reform of LAFHA was put on the agenda in the Federal Governments Mid-Year Economic Outlook (MYEFO). Further details were then announced as part of the 2012-13 Federal Budget handed down on  8 May 2012.

 

Subsequently, draft legislation was released for comment on 15 May 2012 with Tax Laws Amendment (2012 Measures No.4) Bill 2012 introduced to Parliament on 28 June 2012.

 

In introducing the legislation, the foreshadowed start date of 1 July 2012 has been deferred to 1 October 2012.

 

The legislation will not be debated until after Parliament resumes on 14 August, 2012 and has been referred to the House of Representatives Standing Committee on Economics for report.

 

Although these changes are not yet law, it seems likely that they will be passed without substantial amendment.

What are the changes?

The rules will be largely removed from the Fringe Benefits Tax Assessment Act 1986 and will be replaced with new rules in the Income Tax Assessment Act 1997.

 

The effect of the change will be to make the LAFHA assessable income to be declared in the income tax return of the employee.  Where the requirements can be satisfied, the employee will be entitled to an income tax deduction against the LAFHA for eligible accommodation, food and drink costs.

 

Notwithstanding the above, Fringe Benefits Tax may still be assessed to the employer on certain payments made under the LAFHA arrangement.

 

To qualify for a tax deduction

  • The employee will need to be maintaining a home for their own use in Australia that they are required to live away from for work; and
  • There will be a 12 month time limit on how long the LAFHA tax concession can be accessed.

The new legislation also requires that the employee or their spouse either own or lease the residence and that said residence continues to be available for use.  In other words, the residence  cannot be rented during the period of absence.

 

There must also be a reasonable expectation that the employee will return to the residence upon completion of the posting.

 

Under the new rules, it is likely that the majority of employees entering Australian from offshore will not be able to satisfy the requirements to claim a deduction.  This being the case, the LAFHA will be taxed in the employees hands.

 

Given the above changes, Pay As You Go (PAYG) withholding obligations will arise for employers.


In the interests of clarity, it is noted that the new legislation does not affect:

  • The tax concession for fly-in-fly-out arrangements;
  • The tax treatment of travel and meal allowances provided to employees who travel from their usual place of work for short periods (generally up to 21 days);
  • The tax concessions that are provided for remote area fringe benefits;
  • Exemptions/reductions available for certain relocation costs; and
  • The reduction for education costs of overseas employees.

Transitional measures

As of 1 October 2012, the new rules will apply to LAFHA arrangements for:

  • Permanent residents entering into LAFHA arrangements  after 8 May 2012; and
  • Temporary residents or foreign residents who are not maintaining a residence in Australia for their own personal and immediate use and enjoyment at all times, that they are required to live away from for work. 

Based on our experience, the majority of skilled workers coming to Australia under a subclass 457 visa (or similar) will not be able to access the transitional provisions and will come under the new rules as of 1 October 2012.  Naturally, a case by case assessment is required.

 

All other arrangements will be covered by the transitional provisions and will come under the new rules on 1 July 2014 provided that there is no a material variation to the existing employment arrangement after 8 May 2012.

 

The Explanatory Memorandum to the legislation suggest that a change in salary of an employee, change in working hours or an extension of an existing contract are all material variations that would trigger the application of the new rules prior to 1 July 2014.  As such, LAFHA arrangements subject to the transitional rules will require careful monitoring.

What should employers & employees do?

The new rules can have immediate application from 1 October 2012.  Accordingly, it is imperative that all existing LAFHA arrangements are reviewed in order to ascertain their status and the implications for the affected employee’s salary package.

 

Arrangements should also be put in place to monitor and convert transitional arrangements to the new rules at the required time.

 

Lastly, arrangements should be put in place to ensure that the new rules are complied with and that the maximum benefit is derived by both employer and employee.

Disclaimer

This document is provided for illustrative purposes and should not be construed as advice. It is general in nature and is no substitute for specific advice which is strongly recommended for any person who may potentially be affected by the changes to the taxation of LAFHA.

 

For further information on the changes to the taxation of LAFHA please contact our office:

 

Clements Dunne & Bell Pty Ltd, Chartered Accountants

Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Ph: +61 (0)3 8618 2222

Level 14, 350 Queen Street, Melbourne, Victoria, 3000

 

 

 

 

 

 

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