LAFHA changes confirmed

LAFHA to be repealed for ‘inbound’ employees and restricted for ‘domestic’ arrangements

Exposure Draft legislation released by the Treasury yesterday confirms that the number of employees eligible for Living Away from Home Allowance tax concessions (LAHFA) will be significantly reduced.

These changes were previously announced in last week’s 2012/13 Federal Budget.  The Exposure Draft provides additional clarity around the transitional measures proposed.

Summary

In summary, the new law will change the way in which a Living Away From Home Allowance (“LAFHA”) is taxed from 1 July 2012.  The key aspects of the new law are:

  • The current tax free LAFHA arrangements will be repealed, subject to limited transitional provisions
  • LAFHA will be treated as a taxable allowance which needs to be reported on an employee’s payment summary and will be included in the employee’s assessable income
  • An employee will be entitled to claim a deduction for substantiated living away from home expenses if the eligibility conditions are satisfied
  • An employee’s ability to claim a deduction for living away from home expenses will be limited to a period of 12 months (excluding fly-in fly-out workers)

In addition, to be exempt from FBT, other living away from home benefits (for example, expense payment benefits and housing benefits) will also be subject to the new eligibility conditions.

Implications

If the new law is implemented as proposed (which is our expectation), it will significantly reduce the number of employees who will be eligible to receive a living away from home benefit in a tax effective manner.

A key requirement for eligibility for a LAFHA will be maintaining an interest in a usual place of residence situated in Australia.  Further, the employee will not be permitted to lease or sub-lease their usual place of residence during their period of absence.

This requirement will in effect mean:

  • LAFHA benefits will no longer be available for “inbound” employees – i.e. those coming to Australia to work and living away from a usual place of residence located overseas;
  • LAFHA benefits will be available to “outbound” employees – i.e. those travelling overseas to work and living away from a usual place of residence located in Australia.  However the extent of the benefits will be limited under the new rules; and
  • LAFHA benefits will be available to “domestic” arrangements – i.e. Australian based employees required to work at another location within Australia and living away from a usual place of residence located in Australia.  However the extent of the benefits will be limited under the new rules.

Transitional measures

It is proposed that there will be limited transitional arrangements for the new laws.  The transitional provisions will only apply where a living away from home benefit was in place before 7.30pm on 8 May 2012.

These transitional arrangements are:

For permanent residents of Australia who had their agreement in place before that date:

  • The 12 month time limit (as outlined in the summary) does not apply
  • The employee does not need to satisfy the requirement of maintaining a home in Australia

For non-residents or temporary residents who had their agreement in place before that date:

  • The 12 month time limit (as outlined in the summary) does not apply
  • The employee will be required to maintain a usual place of residence in Australia, from which they are required to live away from, in order to claim a deduction for living away from home expenses from 1 July 2012.  This places a significant limit on the number of employees who will be able to utilise the transitional measures

These transitional provisions will have effect until the earlier of 1 July 2014 or the date a new employment arrangement is entered into.

Required actions

To deal with these changes, we would recommend that the following process be adopted.

Categorise affected employees

All employees currently receiving a LAFHA should be identified and categorised based on:

  • Inbound, outbound or domestic arrangements
  • Australian resident, temporary resident or non-resident
  • Pre 8 May 2012 arrangement or post 8 May 2012 arrangements.

Determine how transitional measures will apply

As a second step, those employees who will be able to utilise the transitional measures need to be identified.  It is our expectation that in the vast majority of instances, the only employees who will benefit from the transitional measures will be:

  • Outbound or domestic arrangements
  • Australian residents
  • Pre 8 May 2012 arrangements.

Renegotiate contracts

For all affected employees, but most urgently those not subject to the transitional measures, existing employment contracts need to be reviewed and renegotiated.  A key question is going to be who will bear the additional tax cost of the LAFHA changes post 1 July 2012?  There is no easy fix for this situation.

Future arrangements

These changes will greatly reduce the number of employees who will be eligible to receive living away from home benefits in a tax-effective way.  In order to continue to attract and retain quality employees, employers should ensure that they are making use of all of the exempt benefits that can be available when an employee is required to move for work.

Such benefits include:

  • Temporary accommodation
  • Removals and storage costs for employees
  • Costs associated with the sale or acquisition of a dwelling where the employee is required to relocate
  • Connection of utilities where the employee is required to relocate
  • Other minor relocation benefits.

Each of these benefits has their own complexities but, if applied correctly, can provide advantageous outcomes for employees and employers alike.

Future salary packaging and benefit arrangements for employees “living away from home” will need to be determined on a case by case basis, taking into account the specific circumstances of the particular employee.

More information

If you require any more information on these changes or assistance with reviewing and redesigning the way you deal with LAFHA arrangements, please contact us.

We work with numerous businesses to design commercially focused and tax effective remuneration plans for their employees, including expatriates.  We also assist numerous expatriate employees to negotiate tax effective packaging arrangements.