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LIVING AWAY FROM HOME ALLOWANCE (LAFHA) REFORM LEGISLATION PASSED BY PARLIAMENT - APPLIES FROM 1 OCTOBER 2012

On 18 September 2012, the Federal Government finally passed changes to the Living Away From Home Allowance (LAFHA) rules which are to take effect from 1 October 2012.

The original Bill introducing the new law was significantly changed after consultation with the professional bodies. Originally, the LAFHA was proposed to be taxed under a combination of personal income tax and Fringe Benefits Tax (FBT). Common sense has prevailed and LAFHA will now only be taxed under the FBT regime.

Currently, a LAFHA paid to an employee who is living away from home is exempt from income tax and FBT to the extent it represents an exempt accommodation component and any exempt food component.

From 1 October 2012 these rules will change such that the LAFHA will only be exempt under two scenarios:

1) Maintaining a Home in Australia

The employee (or spouse) owns or leases accommodation within Australia and that accommodation continues to be available for use by the employee during the period they are living away from it (i.e. they cannot rent the property to another person). The employee must provide a declaration to the employer that they are living away from home.

The benefit will be exempt for a maximum of 12 months.

2) Fly-in, Fly-out or Drive-in, Drive-out

The employee must have accommodation available at or near the usual place of employment (but not necessarily own or lease it) (for example this could apply to young people continuing to live with their parents). The employee works under a fly-in, fly-out (or drive-in, drive-out) arrangement that is customary for the industry and they must provide a declaration to the employer that they are living away from home.

Exemption

If either of the above conditions are satisfied, the taxable value of the fringe benefit (amount paid) is reduced by an exempt accommodation component and an exempt food component.

The exempt accommodation component is the amount which the employee (or spouse) incurs in relation to actual accommodation expenditure relating to living away from home that is substantiated to the employer (i.e. the employee must provide evidence of the cost of the accommodation to the employer).

The exempt food component is similar to the current practice. There is a statutory food amount of $42 per week per adult (or $21 per child under 12). If the food component of the allowance includes the 'statutory' amount, then only the excess above the statutory amount will be exempt. If the LAFHA is designed to only compensate employees for additional costs above the statutory amount, then the whole food component should be exempt.

However, substantiation rules apply if the total of food or drink expenses "exceeds the amount that the Commissioner considers is reasonable". The Australian Taxation Office (ATO) have not yet released details of the 'reasonable' food costs, but we assume these will be released before 1 October 2012.

If the above conditions are not satisfied, the taxable value of the LAFHA will be the amount paid. This will represent a significant cost to employers since the FBT rate is 46.5%. Where a non-exempt LAFHA is currently paid to employees earning less than $180,000 per annum, it may be prudent to discontinue the LAFHA and just pay additional salary and wages as this may lower the overall tax burden.

Example 1 – Keep employee's after tax pay the same

The below example assumes LAFHA is not exempt, but the employer will maintain the same after-tax salary of the employee after 1 October 2012 (i.e. employer pays the FBT).

Current  New Rules All Salary
Salary  100,000  100,000  148,780
 LAFHA (exempt pre 1/10/12)  30,000  30,000  
 Total Gross Income  130,000  130,000  148,780
 Income Tax  26,447  26,447  45,227
 FBT  26,075
 Total Tax  26,447  52,522  45,227
 Take Home Pay  103,553  103,553  103,553
 Total Cost to employer #  143,750  171,250  169,237
 # includes superannuation and Qld payroll tax

While keeping the after tax salary consistent, the total cost to the employer (including FBT and increased payroll tax) increases by $27,500. By changing the LAFHA to additional salary and taxing all under the income tax system, there is a saving to the employer of $2,013.

Example 2 – Pass on the increased tax to employee

The below example assumes LAFHA is not exempt and the employer passes on the additional tax costs (FBT) to the employee after 1 October 2012.

Current New Rules All Salary
Salary 100,000 100,000  130,000
LAFHA (exempt pre 1/10/12) 30,000 30,000
Total Gross Income 130,000 130,000  130,000
Income Tax 26,447  16,681  37,997
FBT  26,075
Total Tax  26,447  42,757  37,997
Take Home Pay 103,553  87,243  92,003
Total Cost to employer #  143,750  145,175  147,875
# includes superannuation and Qld payroll tax

In this example, the employee's gross pay is reduced by the amount of FBT. The after tax pay reduces by $16,310, but the cost to the employer only increases by $1,425 (being the additional payroll tax). Converting the LAFHA to normal salary in this instance increases the take home pay by $4,760, but increases the cost to the employer by $2,700 (superannuation).

It is obvious that structuring the employee's package going forward will affect the cash flows of both the employer and employee, so we suggest that all employees' salary packages be reviewed to assess the impact.

Direct Benefits – Housing & Food Benefits

If the employer chooses to provide food and accommodation benefits directly rather than pay an allowance, the rules have been changed to mirror the LAFHA rules (i.e. the employee must maintain a home in Australia, or operate under a fly-in, fly-out arrangement in order for the direct benefit to be exempt).

Transitional Rules

Transitional rules will apply if an employee had a LAFHA under a contract commencing before 8 May 2012 (Federal Government budget night) and continuing through until 1 October 2012 without material variation. The transitional rules apply for the period commencing 1 October 2012 and ending at the earlier of 30 June 2014 or the ending or material variation of the employment contract.

Under the transitional rules, Australian residents (excluding temporary residents) can disregard the 'maintaining a residence' rule and the 12 month rule, so their LAFHA can continue to be exempt providing they can substantiate the expenses.

Non-residents and temporary residents can disregard the 12 month rule only.

This means all employees working in Australia using temporary visas will be unable to access the transitional rules unless they maintain another home in Australia, or work under a fly-in, fly-out arrangement.

These rules are expected to have a significant effect on the costs of businesses employing workers with a LAFHA component to their salary.

Employers should immediately review the employment agreements of the affected employees and decide on action to take. If you wish to have assistance in relation to the HR rules in this area, please contact Kelly Langdon who can assist you in this regard.

Employers should also adjust their budgets for additional cash flow imposts for additional FBT payable and potential increases in employee on-costs such as superannuation, payroll tax and workers compensation insurance.

The above provides a general summary of the changes to the Living Away from Home Allowance rules only and should not be relied upon without seeking 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.

For a pdf version of this tax update please click here.