From October 1, 2012 the provision of a Living Away From Home Allowance (LAFHA) will be treated as income to employees. If employees meet the criteria for LAFHA there will be no tax exposure for food and accommodation provided they can substantiate the expenditure.
It is expected that the Australian Taxation Office will put in place a PAYG-Withholding variation for employers, so they do not have to withhold tax when an employee intends to claim deductible expenses against the allowance.
Where an employer pays the LAFHA costs directly on behalf of employees, there will be an exemption from fringe benefits tax (FBT) where the ‘otherwise deductible’ rule would apply to the employee.
Businesses need to assess employees’ entitlements under the new rules and consider the renegotiation of employment terms and conditions. Payroll systems need to be updated to include LAFHA as a taxable allowance and LAFHA will need to be shown on the employee’s PAYG Payment Summary.
For those employees that had an arrangement in place before the 2012 Federal Budget was announced, the LAFHA exemption will continue to apply until July 1, 2014 or the date of a new employment contract, whichever occurs first. If an employee is a temporary resident, the transitional rules will not apply unless they are maintaining a home in Australia which they are living away from. For Australians who qualify for the transitional rules, they are not required to maintain a home in Australia.
A recent survey by Robert Walters of over 300 professionals looked at how the proposed LAFHA changes were going to affect their decisions.
“The reaction of the removal of their LAFHA benefits for some international professionals might be to look elsewhere for higher remuneration, or pressure current employers for a pay increase,” said Sinead Hourigan, Brisbane director of Robert Walters.
The decision to abolish the LAFHA was handed down in this year’s federal budget, and was meant to come into effect on 1 July.
Over 70 percent of professionals currently receiving the LAFHA believed that losing the benefit would have made it harder for them to live in Australia, with over half of these stating they would have considered moving to a country to better tax breaks if the changes were implemented. Despite this, many employees expressed a desire to continue working in Australia.