Australia: Changes to the living away from home allowance

Proposed changes (to apply from 1 October 2012) will greatly reduce availability of the living away from home allowance.

On 15 May 2012, the Federal Government released an Exposure Draft of proposed amendments which will significantly reduce the ability to receive a tax concession for the living away from home allowance (LAFHA) and living away from home (LAFH) benefits.

The amendments have subsequently been incorporated into the Tax Laws Amendment (2012 Measures No. 4) Bill 2012, introduced on 28 June 2012 and currently before Parliament.

The suggested changes will fundamentally alter the way the LAFHA and LAFH benefits are calculated, by:

  • deeming all such allowances and benefits to be part of the employee's assessable income; and
  • allowing a deduction to eligible employees for "reasonable" expenses incurred (and substantiated by means of receipts, etc) for accommodation and food beyond a minimum statutory amount.

The changes were originally scheduled for commencement on 1 July 2012 but have been delayed until 1 October 2012 following intense lobbying from both employers and employees.

The current law...

Until 30 September 2012, the LAFHA will be treated as a fringe benefit and taxable to employers under the FBT regime, subject to concessions allowable for the "exempt accommodation" and "exempt food" components of a LAFHA (on which no FBT is payable).

Under the current law, any part of a LAFHA that is taxable, is reduced by any reasonable costs incurred for food and accommodation.

The result is that the lion's share of any LAFHA ends up not being taxable either to the employer or the employee. Additionally, the LAFHA is a deductible expense to the employer.

This is regardless of whether the employee is an Australian resident or not, or whether their usual residence is in Australia or overseas.

From 1 October 2012...

The effect of the amendments is to remove the treatment of LAFH benefits from the FBT regime completely, and instead, include any LAFHA or the value of any LAFH benefit in the assessable income of the employee.

This means, in effect, that a LAFH benefit ceases being the concern of the employer and instead, becomes taxable to the employee.

A limited concession is available for substantiated food and accommodation expenses (i.e. those for which the employee has kept the receipt). Employees will be able to deduct such expenses, provided:

  • the expenses are:
    • more than $110 per (7 day) week for each person 12 or over and $55 per week for each child under 12; and
    • "reasonable"; and
  • the employee:
    • maintains a home in Australia for his or her own use; and
    • is required to live away from that home in order to perform their employment duties.

The deduction is subject to a 12 month limit – meaning that the employee will only be able to deduct expenses for the first 12 months that their employer requires them to live away from home (starting on the first day that the employee moves away).

The changes mean that foreign residents working in Australia (such as those on "457 visas") will need to maintain a home in Australia, which they will need to live away from in order to do their work.

Further, to access the exemption the home must not be rented out while the employee is absent from it, but must remain available for the employee's own use.

Transitional arrangements

The new rules apply from 1 October 2012 but there are transitional arrangements:

  • Permanent residents

Permanent residents who had employment arrangements in place (including a LAFHA) before 7.30 pm (AEST) on 8 May 2012 will not be required to 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 that a new employment arrangement is entered into.
  • Foreign & temporary residents

The 12 month deduction limit will also not apply to those employees who are temporary residents, or foreign residents who are maintaining a home in Australia, until the earlier of:

  • 1 July 2014; or
  • the date that a new employment arrangement is entered into.

However, foreign and temporary residents will need to maintain a home in Australia (which they live away from) in order to deduct expenses, from the time that the new law commences (ie. 1 October 2012).

Who will be affected?

All employers currently providing remuneration which includes a LAFHA will be affected, along with the employees in receipt of the allowance.

Those particularly affected will be non-residents who do not maintain a permanent home in Australia. Currently, the practice is that foreign nationals employed in Australia are considered to be living away from home. From 1 October 2012, this will no longer be the case.

Also, younger workers in receipt of a LAFHA who may not maintain an "ownership interest" in the home in which they live when not at work will not be able to deduct expenses.

Existing employment arrangements will need to be considered. Many large employers have already indicated they foresee difficulties in attracting or retaining foreign workers.

The main issue will be who will bear the additional cost as a result of the loss of the concession – the employee or the employer?

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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