Clements Dunne & Bell Melbourne

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New Living Away From Home Allowance (LAFHA) Rules are Now in Force

23 October 2012

Background

LAFHA are a form of Fringe Benefit that are provided to employees to compensate them 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 receive concessional tax treatment with the whole or 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 Government's 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 was deferred to 1 October, 2012.

On the way through Parliament, several amendments were made and the legislation received Royal Assent on 28 September, 2012.

We bring you this newsletter to update our newsletter of 13 July, 2012 and advise on the legislation in its final form.

What are the changes?

Initially, the LAFHA rules were to be largely removed from the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and replaced with new rules in the Income Tax Assessment Act 1997 (ITAA).

However, this is no longer the case and the rules will remain within the FBTAA.

The effect of the changes is to limit the circumstances in which a reduction of taxable value of LAFHA will be available.  

From 1 October, a reduction in taxable value will only be available for the first 12 months of a LAFHA provided to an Employee:

  • Who maintains a home in Australia at which they usually reside; and
  • Whose duties of employment require them to live away from their normal residence.

The reduction in taxable value will operate in the same way as it has historically.  That is, the exempt accommodation and food components reduce the taxable value of the LAFHA benefit.

All other LAFHA will be fully subject to FBT.

It is important to note that the new legislation requires that the employee (or their spouse):

  • Own or lease the normal residence that they are living away from; and
  • That residence remains available for the use during their absence;
  • Expect that they will resume living at that usual residence when they are no longer required to live away from home.

In other words, the normal residence cannot be rented out during the period of absence.

Under the new rules, it is unlikely that the majority of employees entering Australia from offshore will qualify for a reduction in taxable value of their LAFHA.

The introduction of the new rules also include special rules for determining the taxable value of LAFHA provided to fly-in-fly-out and drive-in-drive-out employees.  Generally, fly-in-fly-out and drive-in-drive-out employees are those who work on a rotational basis at a place where it is not reasonable to travel between home and the workplace daily.  For example, people in the mining industry who work in remote locations.

Broadly, these employees will not be required to maintain a normal residence in Australia and the 12 month limit will not apply.

In the interests of clarity, it is noted that the new legislation does not affect any other benefits such as:

  • The exemption of travel between home and work sites for fly-in-fly-out employees;
  • 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 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.

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 proper assessment of each arrangement 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 material variation, change to or renewal of the employment arrangement between 1 October, 2012 and 1 July, 2014.

The updated Explanatory Memorandum to the legislation confirms that an annual salary review will not constitute a material variation to an employment arrangement.  However, things like a promotion,  change in salary, change in working hours or an extension of an existing contract may constitute 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 are now in operation with effect 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 any affected employees’ salary packages.

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.

 

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Daniel Clements
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Paul Clements
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T: + 61 3 8618 2222