The new living away from home allowance (LAFHA) tax legislation was introduced into Parliament on 28 June 2012. It is not expected to be enacted into law until Parliament resumes in August.
While the legislation is generally consistent with previous announcements (read our May 2012 Australian Tax Brief on the LAFHA proposals), there are several important changes that taxpayers need to be aware of.
The changes will now apply from 1 October 2012, and not from 1 July 2012. Existing tax rules will continue to apply until 30 September 2012, but the 'transitional' concessions will still expire at the latest on 30 June 2014. This will hopefully allow taxpayers some additional time to 'process' the new rules.
Also, the non-deductible amount of food costs (previously referred to in the FBT legislation as 'statutory food amounts', but now described as 'ordinary weekly food and drink expenses') will remain at $42 per adult and $21 per child. These amounts were determined in 1987 and not revised during the intervening 25 years. The government had proposed to 'index' these amounts to account for movements in the Consumer Price Index (CPI) for the intervening period (to $110 and $55 respectively) but this approach has now been abandoned.
The announcements on Budget night that:
- LAFHA concessions would be 'capped' at 12 months, and
- Australian citizens and permanent residents would not be entitled to the LAFHA concessions unless they maintained an Australian home while on assignment,
are subject to a transitional concession, and do not apply to employment arrangements in place at 7:30pm on 8 May 2012, until the earlier of 1 July 2014 or such time as the employment arrangements are changed or varied.
However the Explanatory Memorandum to the LAFHA legislation states that a change in salary would be a sufficient 'variation' to end the employee's entitlement to this transitional concession. With salary reviews typically applying from July, this interpretation may result in the transitional 'concessions' having little or no application.
Strange news and additional FBT compliance
While the whole of a LAFHA will generally be taxable as income to the employee, FBT will instead be imposed on the employer on the 'ordinary weekly food and drink expenses' component of a LAFHA, provided the employee gives to their employer a 'deductible food and drink expense declaration'.
- Income tax will not apply to the 'ordinary weekly food and drink expenses' component, and
- the employee will not be permitted a tax deduction against that amount.
And unlike under the current FBT rules, it will not be possible to eliminate this FBT liability by calculating the LAFHA on a 'net' basis (that is, by reducing the 'food' component of the LAFHA by this non-deductible component and only paying the 'additional' food costs).
This arrangement seems to allow an employee to pass on a tax burden to their employer, at the (high) FBT tax rate!
Summary of new rules from 1 October 2012
Overall this means that, from 1 October 2012, the tax rules for LAFH allowances and benefits provided to employees who are required to live away from their usual place of residence will broadly operate as follows:
||Implications for LAFHA concessions, LAFH accommodation benefits|
||Australian citizen, permanent resident or 'temporary resident' employee, who is living away from an Australian usual residence, and maintains that residence for their use.
||If the arrangement was in place before 7.30pm (AEST) on 8 May 2012 – LAFH concessions available at the latest until 30 June 2014 (or earlier variation or change in employment arrangements); |
Otherwise – LAFH tax concession available for maximum 12 months; no LAFH concession thereafter.
||Australian citizen or permanent resident employee, who is living away from an Australian usual residence, but does not maintain that residence (eg. the residence rented out to earn income), but the employee has on-going intention to re-occupy that residence at the end of the assignment.
||If the arrangement was in place before 7.30pm (AEST) on 8 May 2012 – LAFH tax concessions available at the latest until 30 June 2014 (or earlier variation or change in employment arrangements); |
Otherwise – LAFH tax concessions not available after 30 September 2012.
||'Temporary resident' employee who is living away from an Australian usual residence, but does not maintain that residence (eg. the residence rented out to earn income), but the employee has on-going intention to re-occupy that residence at the end of the assignment.
||No LAFH tax concession after 30 September 2012.|
||A 'temporary resident' employee who is living away from a foreign usual residence only (not from an Australian residence)
||No LAFH tax concession after 30 September 2012|
||Employee not living away from their usual place of residence
||No change (ie. no LAFH concession)|
Implications for employers and employees
- The deferred start date will be welcomed by 'expats' and other seconded employees, as will the reduction in the 'non-deductible' food component (from $110 to $42 per week, for a single adult).
- However, while the new tax rules were intended to simplify the tax treatment of LAFHA, the potential residual FBT liability on part of the LAFHA is an additional compliance burden on employers, and appears to be an unnecessary complication in the legislation.
- The LAFHA 'transitional' concession may also be of very limited benefit, if an employee's entitlement to the concession can be terminated by a simple pay rise (including, presumably, an adjustment to the accommodation component of a LAFHA as a result of an increase in LAFH rental costs).
Importantly, the three-month delay in the start date for the new rules will provide employers with an opportunity to consider how best to provide financial assistance to their seconded employees, while providing 'temporary residents' in particular with a brief respite before they potentially lose the benefit of the LAFH tax concessions.
We would be pleased to provide you with any specific advice on the new tax rules for LAFHA, given the complexity of these new arrangements. Please contact us if you would like us to meet with you and your team, to explain the new rules in more detail or to assist you prepare a response given your existing remuneration and compensation strategy for employees on assignment.