If you have staff from overseas claiming a Living Away From Home Allowance (LAFHA) you need to get up to speed with some changes coming on 1 October.
The Government changes to the Living Away From Home Allowance (LAFHA) will become a reality from October 1, 2012. The changes will affect Australian citizens, permanent residents, temporary visa holders and New Zealanders who are not protected special category visa (SCV) holders.
The concept of providing tax-free housing and food to an employee who is living away from home has largely been scrapped compared to the level Australia has known over the past 25 years. Businesses need to start preparing now for the changes ahead.
From 1 October, the provision of a 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.
The legislation incorporates both of the Government’s earlier announcements regarding LAFHA changes in the Federal Budget on 8 May 2012 and the Mid-Year Economic and Fiscal Outlook in November 2011. The Government also introduced a bill on 28 June 2012, which maintained the former statutory food amounts of $42 for adults and $21 for children as opposed to the higher amounts proposed in the Exposure Draft released on 15 May.
Unfortunately the ability to claim deductions for living away from home will only be available for the first 12 months the employee is living away from home. After this, the employee will be liable to be taxed on the full amount of the allowance, which may make relocation unattractive for some employees.
It is difficult to understand why the Government is limiting the tax concession for a maximum period of 12 months. Most business owners who are relocating employees are trying to encourage them to stay in the area for a minimum of two years in order to offset the cost of relocating the employee in the first place.
Furthermore, the allowance will now fall into the definition of wages for payroll tax and will therefore be subject to payroll tax. This is an unexpected windfall for the state governments, but will increase the cost of labour for employers.
The changes will impose a substantial cost burden on business owners. To compensate employees for the removal of the tax concession, business owners may be forced to pay additional salary and wages to make working in Australia attractive for overseas employees.
For example, a person receiving a $600 weekly LAFHA for accommodation receives the amount tax free. If this tax concession is removed the business owner would be required to pay up to $1,120 in additional salary and wages so that the employee would net $600.
In addition to the $1,120, the business owner would also have to pay additional payroll tax. In total this would effectively double the cost to the business owner of having to provide an accommodation allowance for the employee.
‘Fly in Fly out’ (FIFO) employees will not be affected by these changes, which may lead to an increase in business owners considering FIFO arrangements. However, FIFO arrangements can have their own business and social implications that should be considered by businesses before establishing FIFO arrangements.
It is expected that the Australian Taxation Office (ATO) 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. The otherwise deductable rule states that the taxable value of a benefit may be reduced by the amount that an employee would have been entitled to claim as an income tax deduction in their personal tax return if the benefit was not paid for, reimbursed or provided by you, the employer*.
Under the new rules an employee will be required to report the LAFHA as income in their personal tax return. A deduction would be able to be claimed in their return to the extent the expenditure incurred on food and accommodation is reasonable.
Written evidence will be required to support any deduction claimed for the cost of food and accommodation. In respect of substantiating food costs, an employee may opt for a simpler approach and follow the rules in the ATO publication setting out what is considered ‘reasonable food component’.
Six actions for employers
As we move closer to the commencement of the changes, employers should ensure that employees are alerted to the implications of the changes to avoid confusion:
1. Establish a clear understanding with the employee on who will bear the additional cost from 1 October 2012.
2. Look at the changes with regards to eligibility for the transitional arrangements and assess whether they apply to employees currently receiving a LAFHA. Considerations will need to be made as to what arrangements may be required once the transitional arrangements expire.
3. Consideration will need to be given to employment contracts, or other agreed terms of remuneration arrangements with employees. Businesses need to assess employees’ entitlements under the new rules and consider the renegotiation of employment terms and conditions.
4. Consider the possible responses from employees, including a request for early repatriation, and have a plan in place should this happen.
5. Update payroll systems to include LAFHA as a taxable allowance from 1 October.
6. Ensure LAFHA will be shown on the employee’s PAYG Payment Summary from 1 October.
For those permanent resident employees that had an arrangement in place before the 2012 Federal Budget was announced, the LAFHA exemption will continue to apply until 1 July 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. ‘Home’ means the employee’s usual place of residence in Australia, which can be owned or occupied under a lease. Australians who qualify for the transitional rules are not required to maintain a home in Australia.
With 1 October not too far away it is important for businesses to review their employee structure and policies and procedures to ensure they comply with the changes and can sustain their workforce for the future.