ATO to crack down on Living Away From Home Allowances

The Australian Taxation Office (ATO) announced on 16 March that they will be reviewing living away from home allowance (LAFHA) benefits as it believes some employers may be claiming excessive amounts for exempt accommodation and food components.

The ATO will write to some employers in April 2011, who are paying this allowance, requesting information for each employee receiving the allowance, including:

• a copy of their Living away from home declaration;
• their tax file number;
• the amount of salary and wages paid to them;
• the total value of the allowance paid to them;
• the amount of exempt accommodation and food allowances paid; and
• the basis used for ascertaining any exempt accommodation and food component amounts.

It would appear that the review is aimed at ensuring the LAFHA is being correctly calculated and the associated supporting documentation is present.

Going forward it is essential that employers understand how the LAFHA rules operate.

We can assist in reviewing your current and prior year FBT returns to ensure that your LAFHA meet the guidelines.

Background

Under Australian tax laws a LAFHA is a "fringe benefit" and if structured correctly is exempt from both income tax and fringe benefits tax and are therefore attractive from an Australian taxation viewpoint.

In broad terms, a LAFHA is an allowance paid by an employer to an employee where it would be concluded that the whole or part of the allowance is in nature of compensation to the employee for additional non-deductible expenses incurred by the employee and/or other additional disadvantages to which the employee is subject by reason that that the employee is required to live away from his or her usual place of residence in order to perform the duties of their employment.

The fundamental factual prerequisite is that the employee will be living away from their usual place of residence to perform employment duties for the employer and that the employee has an intention to return to that location at the end of the assignment.

The ATO's leading guidance as to when this requirement is satisfied can be found in Miscellaneous Tax Ruling MT 2030. In paragraph 2, the ATO states the following general proposition:

Key focus areas

1. LAFHA declaration – in order for the employer to reduce the LAFHA by the exempt accommodation component and/or the exempt food component, it must obtain from the employee a declaration. If a declaration is not obtained, the whole amount of the LAFHA will be fully taxable for FBT purposes.

2. Determining the exempt accommodation component amounts - The ATO has not released any dollar cap of what amount of a LAFHA will be considered to be a reasonable accommodation component.

   The ATO in its publication "Fringe benefits tax: a guide for employers" (NAT 1054-08.2006) states at paragraph 11.4:"There are no strict guidelines concerning how the amount of reasonable accommodation costs should be calculated."

   Factors you could take into account when determining the accommodation costs include:

   • whether the employee will be accompanied by family members;
   • the position held by the employee in the workplace;
   • the location where the employee will be living;
   • whether or not the accommodation will be furnished;
   • the employee's current living standards.
3. Determining the exempt food component - In broad terms it is the component of the LAFHA that is intended to compensate the employee for additional food costs. The amount of the exempt food component depends upon how the food component of the allowance is set. We recommend that the food component of the LAFHA be set to only compensate the employee for additional non deductible food costs that might reasonably be expected to incur over the statutory food amount.

Questions

Please contact Michael van Schaik, Associate Director, Employment & Remuneration Services - phone 61 (03) 8635 1835.

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