In an earlier edition of Border Crossing - 1st Quarter 2012 - we reported on significant and adverse changes to the Living Away From Home Allowance (LAFHA) provisions. Those changes have now been legislated, with effect from 1 October 2012.
The scope is extended from expatriates to include all local Australian employees’ and the cost burden of the changes falls entirely to the employers. The final version is fundamentally different to the initial version announced in the Federal budget in May 2012.
- LAFHA and benefits will be taxed only under the fringe benefits tax (FBT) system – the concept of taxing the allowance to the employee under the income tax legislation has been scrapped
- Employees will not be financially disadvantaged by significant reductions to their take home salary, in contrast to what was previously advised
- Employers will face increased costs of human capital as they can be liable for FBT at 46.5% on grossed up taxable value of the allowance
- Employers will be liable for other employment taxes (such as workcover and payroll tax) on the taxable value of the LAFHA (if it does not qualify for the exemption)
- The tax concessions for LAFHA or LAFH benefits will generally only be available for a 12 month period, unless the employee is working on a ‘Fly in Fly out’ or ‘Drive in Drive out’ basis
- There are limited circumstances under which transitional rules allow existing LAFHA arrangements to be continued and taxed under the old regime
- It will be extremely difficult for expatriate employees working in Australia, on a temporary basis, to be eligible to be provided with any tax free LAFH benefits or LAFHA, from 1 October 2012
The new rules – a final verdict
The key objective of the LAFHA reforms was to close the loophole that allowed individuals to receive benefits despite not genuinely incurring the costs associated with maintaining two homes.
After months of uncertainty legislators have back-flipped on their initial indications and chosen to address the issue by shifting the tax burden of the amendments onto employers. This means that arrangements that do not represent bona-fide LAFH arrangements as newly defined will be subject to FBT in the hands of the employers.
Fringe Benefits Tax
FBT is levied at 46.5% (being the highest marginal individual tax rate) on the grossed up taxable value of benefits provided to employees or their associates by an employer under an arrangement in respect of their employment. The liability accrues to employers and falls due on 28 April in respect to a 31 March year end.
Example Rent $30,000 paid on behalf of an employee who does not qualify as LAFH, the FBT payable is ($30,000 x gross up factor (1.8692)) x 46.5% = $26,075
All LAFHA will now be captured within this definition and will form part of the calculation of the ‘taxable value’ of the benefit provided for FBT purposes.
The taxable value of the LAFHA can be reduced by:
- Any exempt accommodation component
- Any exempt food component
If the employee qualifies as LAFH under the new rules (see below), then the taxable value of providing the LAFHA will be reduced to nil and no FBT liability will arise.
Only arrangements that satisfy the following criteria will be eligible for the above reductions:
- The place the employee usually resides i.e. a unit of accommodation in Australia in which the employee or their spouse has an ownership interest (includes a lease)
- This unit of accommodation continues to be available for the employee’s immediate use (i.e. it is not rented out during their absence) and enjoyment during the period they are required to live away from it
- It is reasonable to expect that the employee will return to their usual place of residence upon completion of the job
- The LAFHA relates to all or part of the first 12 months that the employee is required to live away
- The employee gives their employer a declaration in a form approved by the Commissioner setting out specified elements of their living away from home scenario; and
- The accommodation expenses incurred by the employee whilst living away must be substantiated in full; while the food/drink expenses are to be substantiated for amounts that exceed the reasonable limits (as determined by the Commissioner of Taxation each FBT year).
Transitional arrangements – permanent residents of Australia and Australian citizens
To reduce the immediate burden of the reforms for Australian employees (i.e. citizen of Australia or permanent residency in Australia), transitional rules apply to employees who have employment arrangements for LAFHA in place prior to 7:30pm on 8 May 2012. Under the transitional arrangements, the conditions to:
- Maintain a home in Australia; and
- Limit the concessional treatment to a maximum period of 12 months
will not apply until the earlier of 1 July 2014 or the date a new or materially amended employment contract is entered into.
It is important to note that if there is a material change to, or renewal of, an employment arrangement between 8 May 2012 and 1 July 2014, the new rules apply in full from the latter of 1 October 2012 and the date of the change or renewal. For clarity, a material variation is a change to the underlying terms of the agreement. Changes that reflect annual remuneration adjustments are not captured under this definition.
Taxpayers holding temporary residents visas will generally not be able to benefit from the LAFHA tax concessions, as they will not be maintaining two homes in Australia.
The new legislation will have immediate impacts from 1 October 2012 for businesses who have:
- Temporary resident employees that do not maintain a residence in Australia from which they live away
- Entered into any new LAFHA arrangements with employees
Impact to employees:
- No change to their regular gross salary
- No change to their taxable circumstances
- May impact take home pay, if the FBT cost associated with the LAFHA is charged to the employee’s remuneration package
Impact to employers:
- Increased overall employment costs associated with paying LAFHA to employees that are ineligible for the concessional treatment
- The cost to employers will be equal to 46.5% of the grossed up value of the taxable benefit provided
- Restricted timeframe in which these concessional benefits may be offered
Considerations for employers – mitigation
The following can be considered to reduce the employer’s exposure to the increased costs:
- Removing LAFHA as a component of the remuneration of employees that are not eligible for the concessional treatments
- Substituting the LAFHA for an increased gross salary or another type of allowance may prove more cost effective than incurring FBT at the top marginal rate. This will typically hold true for employees who earn under AUD$180,000 (although consideration needs to be given to the employer superannuation contributions required on any increase in gross salary or taxable allowances).