For many years the tax concessions associated with living away from home allowance (LAFHA) meant it was an integral feature of the mobile workforce. Recent federal government changes will affect all employees who receive it as part of their remuneration arrangements. The biggest impact is likely to be experienced by employees who are temporary residents, including those who hold subclass 457 visas.
The generous tax concessions associated with LAFHA encouraged employers to use it to sweeten the remuneration packages offered to employees who were required to live away from home as part of their job. The Commonwealth Treasury has noted its popularity. It considers that “the current law is being interpreted broadly and the concession is being used in a manner that is outside the original policy intent.
Employees are using the concessions to access tax-free amounts, even though they are not incurring additional expenses…”. That combined with the extended period of time employees could claim the allowance for, added to the costs of funding LAFHA.
The Tax Laws Amendment (2012 Measures No. 4) Bill 2012, from where this quote was taken, aims to restrict LAFHA tax concessions to those employees legitimately maintaining a second home in addition to their usual place of residence for a maximum period of 12 months.
Amounts paid as LAFHA will no longer be treated as a fringe benefit and will be included in the recipient employee’s tax assessable income. The employee will be able to claim a tax deduction for expenses incurred while living away from home. If an employee is not eligible to make the deductions the allowance will be subject to income tax. An employer providing accommodation and food for an employee living away from home will attract tax on living away from home fringe benefits, unless the employee would have been eligible to claim an income tax deduction had they incurred the expenses directly.
An employee will be able to claim a deduction for accommodation, food and drink expenses incurred in living away from home when:
- They are required by their employer to live away from their usual place of residence in Australia to perform the duties of their employment.
- Their usual place of residence in Australia in they or their spouse either own or lease, continues to be available for the employee’s immediate use and enjoyment at all times while they are living away from it.
- The expenses are for accommodation, food or drink for the employee, their spouse or their child.
- It is reasonable to expect that the employee will return to their usual place of residence when the job is finished.
An allowance may also contain an amount to compensate the employee for general disadvantages of living in the temporary location.
The changes will affect many temporary residents (such as 457 visa holders) who were previously entitled to LAFHA in circumstances where they maintained a home overseas. Under the proposed new arrangements, these visa holders can only receive LAFHA after 1 October 2012 if they maintain a home for their own use in Australia, but are living away in order to work. In these circumstances, a 457 visa holder may claim a tax deduction for “reasonable” expenses.
Permanent residents who had LAFHA arrangements in place prior to 7.30pm (AEST) on 8 May will not be required to maintain a home in Australia for their own personal and immediate use and enjoyment and the concession will not be limited to a maximum of 12 months until the earlier of either 1 July 2014 or the date that a new or altered employment contract is entered into.
Temporary residents who had LAFHA arrangements in place prior to this same cut-off time and maintain a home in Australia, which they are required to live away from, will have until 1 July 2014 or the date that a new or altered employment contract is entered into before the concessions are limited to a maximum of 12 months.
Just how employers will be affected depends upon their particular arrangements with employees.
As LAFHA amounts will now be taxed as income in the hands of employees, this will have impacts on employer costs such as payroll tax, superannuation contributions, and workers’ compensation insurance.