On Tuesday, 29 November 2011, as part of its Mid-Year Economic and Fiscal Outlook 2011-12, the Federal Government announced a package of changes intended to raise A$11.5 billion in new revenue and savings.
Amongst other things, the Government announced changes that effectively will remove the tax free treatment of living away from home allowances (LAFHA) and other accommodation and cost-of-living benefits for international assignees – that is, benefits that typically are provided to expatriate employees working in Australia.
The changes are intended to apply from 1 July 2012 and will apply both to new and to existing arrangements.
What does it mean?
The proposed changes will mean:
- a LAFHA will be taxed as income to the employee – currently LAFHA is exempt from income tax and concessionally taxed under the FBT legislation;
- an employee who receives a LAFHA and is not a 'temporary resident' will be allowed to claim a tax deduction for private expenditure for the accommodation costs and additional food costs they incur while they are living away from home;
- no PAYG tax withholding would be required where the employee is expected to incur deductible living away from home costs; and
- the existing FBT concessions and exemptions will apply to other living away from home benefits, subject to the employee satisfying the new requirements for living away from home.
An employee who is working in Australia under a temporary visa (that is, a 'temporary resident', as defined) will only qualify for living away from home tax concessions where:
- they maintain an Australian residence; and
- they are living away from that Australian residence.
Further, they can only claim a tax deduction for costs that relate to living away from their Australian residence (that is, costs related to the primary Australian residence would not be deductible under the LAFHA provisions).
Finally, the Consultation Paper does not specifically deal with 'overseas employee' benefits such as home leave travel and child education costs (and, indeed, states that 'employees receiving FBT child education expenses concessions' will not be affected by the proposals).
Why is it important?
The proposed changes will significantly increase the tax costs for employees receiving allowances while living away from home from 1 July 2012.
We expect these changes will increase international assignee costs where the assignee is a 'temporary resident' (regardless of whether the benefits are provided as an allowance or 'in kind'), where the assignee is 'tax equalised' to their home jurisdiction.
What should I do?
You need to take account of the proposed changes in any new living away from home arrangements. You also need to consider what to do with existing living away from home arrangements. We can help you to understand and cost these reforms for international assignee packages and other employees receiving LAFHA.
The Government has also called for submissions about the proposals from interested parties, including in relation to:
- whether there are any unintended consequences from the proposed changes;
- what practical aspects need further consideration;
- whether the 'statutory food amount' should be annually indexed; and
- whether transitional arrangements would be appropriate for the community sector.
What happens next?
Submissions are due by 3 February 2012.
Want more information?
Click here for the Consultation Paper, which sets out the changes in detail.