On 28 June 2012, the federal government introduced the Tax Laws Amendment (2012 Measures No. 4) Bill 2012 (Bill) into parliament which, if passed in its existing form, will drastically alter the tax treatment of living away from home (LAFH) allowances and benefits, with potentially significant financial and workforce impacts on employers. It will mean that some employees who are currently receiving beneficial tax treatment for their LAFH allowances or benefits may no longer continue to do so. As a result, employers will need to review their employment arrangements with employees who currently receive LAFH allowances or benefits, but should be very careful about how they make changes to those arrangements.
Under the proposed changes, set to begin on 1 October 2012, LAFH allowances will generally be treated as assessable income of employees, rather than as fringe benefits and subject to fringe benefits tax (FBT). Tax concessions will instead be in the form of income tax deductions, and their availability will be much more restricted. Transitional rules will apply for certain employees until 1 July 2014, provided specific requirements are met.
In this update, we summarise the employment issues that may arise in the context of the proposed changes. We analyse the potential effect on employers, and provide some tips to ensure your business takes the right steps to deal with the changes if they become law.
EXISTING TAX TREATMENT OF LAFH ALLOWANCES
Under existing laws, a LAFH allowance is a fringe benefit on which employers have to pay FBT. However, the taxable amount of a LAFH allowance is reduced by exempt food and accommodation components, on which no FBT is payable. This has meant, in the past, that a large portion of a LAFH allowance could effectively be provided tax free to eligible employees.
The explanatory memorandum to the Bill states that employees are using these concessions to access tax-free amounts even though they are not incurring additional expenses (that is, the cost of maintaining two homes), and that the amount of the allowance may exceed actual employee expenditure. The negative impact of these practices on government revenue has driven the federal government's proposed reforms.
PROPOSED TAX TREATMENT OF LAFH ALLOWANCES AND BENEFITS
The proposed reforms will generally treat a LAFH allowance as part of an employee's assessable income and subject to income tax, rather than as a fringe benefit subject to FBT in the hands of the employer. However, an income tax deduction will be available for:
- employees who maintain, and have an ownership interest in, a home in Australia for their own personal and immediate use and enjoyment at all times, and from which they are required to live away from in order to work. This requirement will apply irrespective of whether an employee is a permanent Australian resident or a temporary or foreign resident;
- actual substantiated expenses on accommodation, and food and drink beyond "ordinary weekly food and drink expenses", currently $42 per person ($21 for children under 12); and
- a maximum of 12 months for each particular work location.
In other words, the scope of tax concessions available for LAFH allowances and benefits will be much more limited than has previously been the case. Significantly, to access those concessions, employees will need to maintain a residence in Australia for their own use and enjoyment at all times which they live away from. That residence cannot be rented out or sub-let while the employee is living away from home.
Employers will still pay FBT on the "ordinary weekly food and drink expenses" component of the LAFH allowance paid to employees who are eligible to claim an income tax deduction and who provide their employer with a specific declaration.
Where an employer makes direct accommodation, food and expense LAFH payments for an employee who would not be eligible to claim an income tax deduction had they incurred the expenses themselves, then those payments will also be treated as a fringe benefit and be subject to FBT payable by the employer.
The Bill was referred to a parliamentary economics committee for its consideration. After receiving submissions on the Bill, the committee released its advisory report on 15 August 2012 (Report). The Report expressed the committee's broad support for the reforms, but made several recommendations about, amongst other things, the treatment of fly-in fly-out workers, about the need for greater clarification on certain matters, and about the desirability of having LAFH allowances and benefits remain within one tax regime.
"FLY-IN FLY-OUT" AND "DRIVE-IN DRIVE-OUT" WORKERS
Under the proposed changes, the 12 month limitation period will not apply to "fly-in fly-out" or "drive-in drive-out" employees. Those individuals are employees who:
- are provided with residential accommodation at or near their usual place of employment;
- on a regular basis, work for a number of days and have a number of days off, returning to their usual place of residence on their days off;
- are provided with transport on a regular basis between work and their usual place of residence; and
- where it would be unreasonable to expect the employee to travel between their employment and residence on work days on a daily basis.
This means that employees working on fly-in fly-out or drive-in drive-out arrangements, regardless of the work location, will not be subject to the 12 month limitation period.
The Report recommended that drive-in drive-out workers who use their own vehicles be treated the same as drive-in drive-out workers who use vehicles provided by their employer. It also recommended that fly-in fly-out and drive-in drive-out workers be exempt from the requirement to maintain a residence in Australia. This is because it is common for these types of workers to live overseas or with family members.
Although the new rules are set to begin on 1 October 2012, transitional arrangements will apply to:
- temporary or foreign residents that maintain a residence in Australia for their own personal and immediate use and enjoyment at all times, which they are required to live away from in order to work; and
- permanent Australian residents (regardless of whether they maintain a residence in Australia which they are required to live away from in order to work),
who had an employment arrangement for LAFH allowances and benefits in place before 7.30pm (AEST) on 8 May 2012.
For those workers, the restriction on claiming income tax deductions for accommodation and food and drink beyond "ordinary weekly food and drink expenses" for the first 12 months that they are required to live away from home will not apply until the earlier of:
- 1 July 2014;
- the date their existing employment arrangement/contract is varied. The explanatory memorandum to the Bill explains that any "material variation" to the employment arrangement will trigger this, with examples being extensions to existing contracts or changes to salary or working hours; or
- the date a new employment arrangement/contract is entered into with the employee.
Significantly, the transitional arrangements will not apply to temporary or foreign residents who do not currently maintain a residence in Australia from which they are required to live away from for work. From 1 October 2012, such workers will no longer be considered to be living away from home, and will be unable to access the proposed LAFH income tax concessions. This could have a significant impact on employers that are reliant on temporary or foreign residents that currently receive LAFH allowances or benefits, particularly those on 457 visas.
WHAT EFFECT WILL THE PROPOSED CHANGES HAVE ON EMPLOYERS?
The proposed changes, when they become law, will affect all employers that provide LAFH allowances and benefits to their employees. Some of the potential impacts may include:
- higher labour costs - with LAFH allowances to be treated as assessable income, this may result in employers incurring additional payroll tax, superannuation and workers compensation costs;
- increased administration and compliance costs - while the proposed changes seek to migrate LAFH allowances to the income tax regime, it does not do so completely, and so employers will need to understand and deal with both income tax and FBT rules. For these reasons, the Report recommended that the taxation of LAFH allowances should be wholly within the FBT regime;
- greater difficulty, and cost, in attracting and retaining key employees - in an increasingly global and competitive market for skilled employees, the reduced tax concessions may mean employers will have to meet the additional tax burden themselves, or offer more generous remuneration and benefits to those employees in lieu of the lost advantageous tax treatment. This will especially be the case where there is any reduction in the take-home pay for workers, which could make assignments less attractive to them. Indeed, these types of concerns formed a major part of employers' submissions to the parliamentary economics committee that examined the Bill;
- negotiations needing to be had with key employees currently earning LAFH allowances or benefits - where the tax concessions cannot be accessed, or are significantly reduced, employers may need to negotiate with key employees about how the extra cost will be met: will it be shared between the employer and employee, or will one party bear the cost?;
- inducing some employees to terminate their assignment and/or employment - if an employer is unable to come to an agreement that satisfies an employee who has a large component of their remuneration paid as a LAFH allowance, then in some circumstances the economic position of the employee could become untenable, and lead them to prematurely terminate their assignment and/or employment as a result. This could also be the case when the 12 month limit on accessing the tax concessions is reached by an employee at a particular location;
- younger workers may be less willing to live and work away from home - the requirement that an employee (or the employee's spouse) have an ownership interest in their usual place of residence means that adult children living in a family home, for example, may not be eligible for the income tax deduction;
- reduced mobility of skilled workers - if employers are unable to offer additional benefits to attract and retain workers, the changes could effectively act as a disincentive to workers agreeing to live and work away from home; and
- employers being hesitant to make changes to the employment arrangements of workers who had an arrangement in place before 7.30pm on 8 May 2012 to receive a LAFH allowance or benefit - for fear that this could disentitle a worker to the benefit of the transitional provisions, even if the changes contemplated are unrelated to that worker's living away from home arrangements.
TIPS FOR EMPLOYERS IN PREPARING FOR THE PROPOSED CHANGES
- Consider when, and how, to discuss the proposed changes with employees that may be affected.
- Think about whether you will need to provide additional or alternative forms of remuneration and benefits to retain key employees who may be financially disadvantaged under the proposed changes.
- Review your employment arrangements/contracts to see how much flexibility there is to make adjustments to LAFH remuneration components. If LAFH allowances or benefits are "hard-wired" into an employee's remuneration package, or where a LAFH component is expressed on a "net" basis (i.e. after tax), this could reduce the options available to your business to deal with the changes. Also consider whether any promises or representations were made to employees about these matters. Seek advice if you are unsure about the effect of contractual provisions, or of any representations that may have been made to employees currently receiving LAFH allowances or benefits.
- Start preparing for the possible increase in labour costs that may result from the changes, and consider what adjustments may need to be made to workforce, recruitment and for project planning.
- Be mindful of the consequences of making variations to existing employment arrangements/contracts – it may affect the ability of an employee to continue to come under the existing LAFH rules until 1 July 2014. The Treasury Department did indicate to the parliamentary economics committee that it would provide further guidance about what constitutes a "material variation". It may be worth, where possible, delaying making any material changes until the final Bill is passed and there is greater clarity on this issue. Where in doubt, seek advice before making any changes to employment arrangements.
This article is not intended to constitute tax or legal advice, and is for general guidance only. If you have any questions about how the proposed changes to LAFH benefits could affect your existing employment arrangements, please contact us.
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.