Living Away From Home Allowance (LAFHA) Reforms - Legislation Introduced to Parliament
The Federal Government finally introduced a Bill including the LAFHA changes into Parliament on 28 June 2012. This followed announcements of the intention to change the law back in November 2011 and May 2012.
The major news from the Bill was the deferral of the proposed start date until 1 October 2012 (previously 1 July 2012). This is a positive result for employers who would otherwise struggle to understand the rules and implement changes within time to pay employees from 1 July 2012.
As previously announced, the Government intends to move the taxation point for LAFHA from the Fringe Benefits Tax (FBT) system to the income tax system.
Income of Employees
If the law is enacted, from 1 October 2012, a LAFHA will be assessable in the hands of an employee with the exception of the 'ordinary weekly food and drink expenses' part of the food component.
The amount of 'ordinary weekly food and drink expenses' is the same as what used to be known as 'statutory' food expenses being a weekly amount of $42 for each of the employee, their spouse and children aged 12 and over and $21 for children aged younger than 12.
To complicate matters, where a LAFHA includes an amount for 'ordinary weekly food and drink expenses', then that amount is subject to FBT and is excluded from an employee's assessable income. Only amounts for food expenses over and above the 'ordinary weekly amount' will be included in an employee's assessable income.
Eg a LAFHA paid to 'Tom' includes an amount of $100 per week to compensate an employee for all food and drink expenses. The first $42 will be subject to FBT. The next $58 will be assessable to the employee.
It is expected that this split between FBT and income tax will cause much confusion for employers.
Deductions for Employees
Employees who are living away from their normal residence for up to 12 months (or indefinitely if living in remote areas under 'fly in, fly out' arrangements) and the residence is located in Australia and which continues to be available to them while they are living away from home will be able to claim a tax deduction as follows:
a) For accommodation – so much of the expense as is reasonable; and
b) For food and drink – so much of the expense as is reasonable and exceeds the 'ordinary weekly food and drink expenses' amount.
The 'normal residence located in Australia' rules will mean that many ex-pats who currently receive a LAFHA may not be able to claim a deduction for the accommodation and food expenditure.
In addition to the 'ordinary weekly food and drink expenses' part of a LAFHA being included as a fringe benefit, additional FBT liabilities may arise if the accommodation, food and drink is provided directly by the employer.
Where employers provide the accommodation, food and drink directly, the previous exemptions will be removed from the FBT Act, so the value of the benefits provided will be subject to FBT. However, the 'otherwise deductible rule' may reduce the taxable value to nil if the employee would have obtained a deduction if they had incurred the expenses directly.
Transitional rules have been provided for employees who receive a LAFHA continuously under an arrangement commencing before 8 May 2012 (budget night) and the employment arrangement is not varied and continues after 1 October 2012.
Australian residents who satisfy the criteria do not have to maintain another residence in Australia and can disregard the 12 month maximum rule.
Non-residents or temporary residents can disregard the 12 month rule, but need to maintain a residence in Australia. The transitional rules apply until 30 June 2014.
Now that the intended law is known, we recommend employers review employment contracts for employees and consider how the proposed changes will affect their business. While the changes may impact on the net take-home pay of employees, it may also affect the employer.
As the LAFHA changes from a largely exempt fringe benefit to taxable wages, employers may be adversely affected through increases in payroll tax, workers compensation and other employment on-costs.
Affected employees who are eligible to claim a deduction for accommodation and food expenses should be able to apply for a PAYG withholding variation to ensure no tax is withheld from the allowance.
The above provides a general summary of the intended changes to the Living Away from Home Allowance rules only. At the time of publishing, the changes had not passed through Parliament so should not be considered law. We recommend you seek professional advice that pertains to your own affairs in relation to this matter.
For any queries in relation to this tax alert, please contact Jamie Towers or your usual Hanrick Curran advisor.