Good News or Bad News?
Article from: Webbmartinconsulting.com.au admin on 29 May 2012
Eligible living-away-from-home allowances (LAFHA) currently enjoy concessional tax treatment.
The Government announced in its 2012/13 Federal Budget that further reforms to LAFHA would be made. In line with that announcement, on 15 May 2012, exposure draft legislation was published for public consultation.
Effective from 1 July 2012, LAFHA payments will be assessed to all employees at their marginal tax rate.
For many families, this means a loss of 46.5% of their allowance otherwise intended for food and accommodation.
The transitional rules provide that resident employees, currently eligible to claim LAFHA concessions will continue to do so until the earlier of 1 July 2014 or there is a change in their employment arrangement. Without any known indication as to whether the Coalition intends to support this reform, resident employees maybe better off adopting a wait and see approach.
For temporary residents (e.g. those on visa 457) and foreign residents, the news is not so good. The “catch” is that they must maintain a home in Australia that they are living away from for work purposes in order to access the 2-year transitional tax concessions.
Whether the LAFHA Reforms is Good News or Bad News will depend on an employee perspective.
This article provides a broad overview of the key proposed reforms and their implications to both employees and employers.
Key summary of the proposed reforms
• LAFHA will be treated as income of the employee and is assessed at their marginal tax rate.
• Employees can claim a tax deduction for so much of the actual expenditure on accommodation that is reasonable and able to be substantiated.
• The tax deduction for actual food and drink expenses is limited to so much that is reasonable and exceeds a statutory weekly limit. For the 2011/12 year, those limits are A$110 per adult (including children over 12) and A$55 per child, to be indexed annually. To relieve the compliance burden, substantiation for food expenses will not be required unless the expenses exceed an amount specified by the Commissioner (amount yet to be specified).
• Employee must maintain a home (whether owned or leased) in Australia that they are living-away-from for work purposes. The home must continue to be available for the employee’s use and enjoyment at all times while they are living away (i.e. it cannot be rented or sub-leased).
• Tax deduction will be limited to the first 12-months for an individual employee, other than fly-in-fly-out workers, for any work location. That 12-month period will restart where the employee’s work location changes.
• Payment of food and accommodation by employers (whether directly or indirectly by way of reimbursement) will be subject to fringe benefit tax (FBT) unless the ‘otherwise deductible rule’ applies.
Proposed commencement date
• The proposed reforms will apply effective from 1 July 2012.
Transitional Rules for Resident Employees
• The condition to maintain a home in Australia and the 12-month deduction limit will not apply to resident employees with pre-existing employment arrangements in place prior to 7.30pm (AEST) on 8 May 2012 (i.e., pre-8 May contracts).
• This means concessional tax treatment will apply to LAFHA expenses until the earlier of 1 July 2014 or there is a change in the employment arrangement.
Transitional Rules for Temporary and Foreign Residents Employees
• Concessional tax treatment for temporary and foreign residents with pre-8 May contracts will be limited to those who maintain a home for their own use in Australia that they are living away from for work.
• The transitional rules can be summarised as follows.
|Maintain a home in Australia?
||Is tax deduction subject to 12-month limit?
| Permanent Resident
| Temporary Resident
| Foreign Resident
Implication to employees
Note that the requirement to substantiate expenditure against the allowance will come into effect 1st July 2012 for ALL employees.
• All employees will be required to demonstrate that the home that they are living away from is maintained for their own personal use. Renting the home or cancelling the lease of the premises at the home location is likely to fail the ‘maintained for personal use’ criteria.
• The tax concession can only be accessed for a maximum period of 12 months for an employee for any particular work location. Who will bear the extra tax cost will depend on the terms of the employee’s existing employment arrangement.
• Maybe it is time to consider some of the specific benefits that are given concessional FBT treatment (e.g. payments for overseas employment holiday transport, relocation costs associated with the removal and storage of household goods, visa application costs, education costs of overseas employees’ children, etc).
Implication to employer
• The costs to employers will also rise, particularly for those that pay tax equalised salaries or guaranteed net salaries.
• The shift from assessing LAFHA as fringe benefit to treating them as assessable income will have a significant impact on other employment on costs such as payroll tax, workcover and superannuation guarantee. Are employers able to absorb these higher costs of employment or would it be passed on to the ultimate end consumers by way of higher costs of services and goods?
Although the transitional provisions may preserve the tax concessions for LAFHA payments under pre-8 May contracts for up to 2 years, employers and employees should review the impact of the proposed changes now and should seek professional assistance where necessary.
‘The Assessment’ is intended to provide general information or comments on the particular topic. The content is not intended to exhaustively deal with all issues relating to that topic. As the content is general in nature, they are not to be used, relied or acted upon without seeking further professional advice. Webb Martin Consulting accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.