Proposed changes to Living-away-from-home allowances (LAFHA)
Posted on: 30/11/2011
The Government has announced that the fringe benefits tax (FBT) treatment of Living-away-from-home allowances (‘LAFHA’) will be reformed. The proposed changes are proposed to apply from 1 July 2012 for both new and existing arrangements. All benefits and allowances provided in respect of the period commencing 1 July 2012 will be subject to the new arrangements. We have summarised broadly the proposed changes below.
Eligibility
The eligibility to receive tax concessions under the LAFHA provisions will be amended significantly.
The changes are broadly as follows:
- - temporary resident employees will now be required to maintain a home for their own use in Australia, for which they are living away from for work to access the concessions. In those cases the expenses will also need to be substantiated; and
- - all other employees will be required to substantiate their LAFHA expenses.
This means that in order for a temporary resident moving to Australia to access the tax concessions, they must acquire a home in Australia (either owned or rented) which must be maintained for private use and they must be required to live away from that home for work. A temporary resident will be considered to be maintaining a home in Australia for their own use when that home is available for their personal use and enjoyment at all times, even though they are living away from it for their work.
Temporary resident employees will be required to provide documentary evidence to their employers that they are maintaining a home for their own use. The evidence could include lease agreements, mortgage documents and receipts for accommodation. The documents must show that the accommodation is available for the employee’s use at the time for which the LAFH benefits are being paid.
Changes to the tax treatment
The taxation treatment of LAFHA will also be amended. Under the proposed changes, an allowance paid to an employee as compensation for being required to live away from their usual place of residence will no longer be a fringe benefit. Instead, the allowance will be assessable income of the employee, consistent with other employment allowances.
However, eligible employees (as above) will be able to claim an income tax deduction for accommodation expenses they can substantiate and for food expenses beyond a statutory amount in their own tax returns. Please note that based on the Consultation Paper, we believe that the deduction will be limited to the accommodation and food expenses incurred only during the time when the employee is living away from their home in Australia for work purposes.
Allowances for non-eligible employees will be taxed like other forms of income under the income tax system (e.g. assessable income). No deduction will be available.
Employers who provide LAFH benefits directly (e.g. pay for rent or food directly) to eligible employees will continue to be exempt from FBT on those benefits.
Employers who provide direct LAFH benefits to non-eligible employees will be liable for FBT on those benefits.
Example 1
Max (a US resident) comes to Australia on a 457 visa to work in the mining sector in Western Australia. He rents a home in Perth. He works eight days on and six days off at a mine site in the Pilbara. The employer provides a LAFHA to Max.
Max’s home in Perth is available for his use even when he is working at the mine site. He provides a declaration to his employer that this is his Australian home and that he is maintaining it for his use.
The LAFHA will be assessable income in the hands of Max, however he will be entitled to deductions under the LAFHA tax concessions. He will be able to claim a deduction for expenses incurred for accommodation and food for the period only while he is living away from home.
Example 2
The same as above, except the employer pays for Max’s accommodation and food directly.
Max will be entitled to the LAFHA tax concessions. His employer does not have to pay FBT on the accommodation and food benefits provided to Max during the time he is living at the mine site only.
Example 3
Fiona (a UK resident) comes to Australia on a 457 visa working for an international firm. She is paid LAFHA for the duration of her three year contract. She lives and works in Perth.
Fiona will not be entitled to the LAFHA tax concessions as she is not living away from a residence in Australia. She will have the LAFHA included in her assessable income. She will not be able to claim a deduction for any expenses incurred from living away from home. There is no FBT obligation for her employer.
The proposed changes are yet to be passed as legislation and there is a consultation process which will occur. We will continue to monitor the progress of these changes and advise of any developments as and when they arise. In the meantime it would be advisable to prepare for these changes, particularly in respect to LAFHAs currently being paid to foreign residents working in Australia, as these employees are the ones most likely to be affected.
Please let me know should you require any assistance with these changes.