On 15 May 2012, the government released draft legislation to implement reforms to the tax concession for the living away from home allowance (LAFHA) and living away from home (LAFH) benefits, as announced in the 2012-13 federal budget.
The amendments, which will apply from 1 July 2012, will significantly restrict the number of employees who are eligible for the LAFH concessions.
The current law
The payment of a LAFHA is a fringe benefit. This differs from most allowances paid to an employee, which are assessable income to the employee. Under the fringe benefits tax (FBT) law, LAFHA is an allowance paid by an employer to an employee for additional expenses incurred and disadvantages suffered because the employee is required to live away from their usual place of residence in order to perform their employment duties.
No FBT is payable on the exempt accommodation or exempt food components of a LAFHA. The part of a LAFHA that is taxed is generally minimal, as the taxable part of the benefit is reduced by any reasonable amounts paid in compensation for accommodation and increased expenditure on food. The FBT law also provides concessional tax treatment for LAFH benefits for accommodation and food.
Therefore the provision of a LAFHA will generally be deductible to the employer, with the vast majority of the benefit not being subject to tax either to the employer or employee. This is regardless of whether the employee's usual residence is in Australia or overseas, and regardless of their residency status.
The proposed amendments
The FBT rules dealing with LAFHA and LAFH benefits will be abolished. Under the proposed changes, any allowance paid to an employee as compensation for being required to live away from home will be included in the employee's assessable income.
Employees who maintain a home in Australia for their own use, and who are required to live away from that home to perform their employment duties, will be able to claim an income tax deduction for reasonable substantiated expenditure incurred on food and accommodation. The deduction will be limited to a period of 12 months (other than for fly-in fly-out workers).
In order to be eligible for the deduction, the employee's usual place of residence in Australia in which they have an ownership interest (or their spouse has an ownership interest) must continue to be available for their use and enjoyment at all times while they are living away from it. The employee must incur the ongoing cost of maintaining their residence, such as mortgage or rental payments and rates. The property cannot be rented or sub-let.
The taxable value of LAFH benefits will be determined under the normal FBT rules. If an employee meets the conditions in the income tax law for claiming a deduction for LAFH benefits, their employer can reduce the taxable value of the fringe benefits due to the operation of the "otherwise deductible rule". This rule allows employers to reduce the taxable value of a benefit provided to an employee if the employee would be able to claim as a tax deduction if they had incurred the expense of acquiring the benefit themselves.
The reforms will apply from 1 July 2012, with transitional rules applying to permanent residents who had employment arrangements including a LAFHA in place before 7.30pm (AEST) on 8 May 2012. These employees will not need to meet the requirement that they maintain a home in Australia, and will not be subject to the 12-month deduction limit, until the earlier of 1 July 2014 or the date a new employment arrangement is entered into.
The 12-month limit will not apply to temporary residents or foreign residents maintaining a home in Australia until the earlier of 1 July 2014 or the date a new employment arrangement is entered into.
The government has stated that the changes are intended to prevent the exploitation and misuse of the current law by a narrow group of people, particularly high-paid executives and foreign workers. There is industry concern that the measures go beyond what is necessary to address the integrity concerns.
The removal of the concession will potentially impose a large financial burden on affected employers and employees. In order to compensate employees for the removal of the tax concession, it is likely that employers will need to provide staff with additional salary and wages. Further, the change may impact the fundamental economics of businesses with large numbers of foreign workers in Australia.
The requirement that the employee's usual place of residence not be rented out is a major factor that will limit the eligibility to the deduction. This will also raise concerns for employees as to the security of their homes, where they are left vacant for up to 12 months. Further, adult children living in the family home, who do not have an ownership interest in the dwelling, will be ineligible for the deduction. As it is common for younger employees to live with their parents, the cost of accommodation while on secondment programs will be a hindrance to these staff.
The requirement to maintain a home in Australia means that non-resident visitors to Australia will not qualify for the deduction. Employers who seek to attract quality employees from offshore will accordingly be negatively impacted by the changes. These employers can currently offer a guaranteed net income and factor in a high cost of living in Australia, in order to entice foreign workers. The current law has assisted in ensuring such arrangements are cost effective for employers.
The 12-month limit on the deduction is problematic, as employers who relocate staff generally encourage them to stay for at least two years in order to offset the cost of initial relocation.
In light of the proposed law, employers that provide the LAFHA and LAFH benefits to employees will need to review how the proposed changes will impact on their FBT, superannuation guarantee, PAYG withholding and payroll tax obligations.
For all impacted staff, especially those not subject to the transitional measures, existing employment contracts need to be reviewed and renegotiated. The key issue will be who will bear the additional tax costs of the amendments.
Middletons can assist you in ensuring compliance with the new measures. Our Tax & Revenue Group can ensure you comply with your federal and state tax obligations, and our Workplace Relations & Safety Group can assist you in reviewing employment contracts and undertaking negotiations with staff.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.