FBT - LAFHA: Proposed changes to ‘reasonable food amount’
The fringe benefits tax law has recently been amended to change the living away from home allowance (LAFHA) rules. The new LAFHA rules took effect on 1 October 2012.
As a consequence of the changes, the Australian Taxation Office (ATO) has released Draft Taxation Determination TD 2012/D8 (Draft Determination), which provides the Commissioner’s proposed “reasonable food amounts” for those employees who qualify as living away from home. Under transitional arrangements, the Draft Determination (once finalised) will only apply from 1 April 2013. For the current FBT year, employers can use the existing reasonable food amounts as released earlier this year in Taxation Determination TD 2012/5.
In summary, the main points in the Draft Determination, as applicable from 1 April 2013, are as follows:
- The reasonable food amount would no longer be determined purely based on family composition. Rather, the annual salary and location of the employee would determine a base reasonable food amount, which would then be multiplied by a factor corresponding to the employee’s family composition. This formula would also take into account the reduced cost of living in overseas countries. While some ambiguity remains as to the definition of the concept of “annual salary”, we project that as a result of these changes, employees who earn an annual salary of less than $186,521 would be entitled to a lesser amount of tax-free LAFH food allowance than is the case under TD 2012/5. For example, an employee earning $100,000 and who has a family grouping of 4 adults would have a reduction in reasonable food allowance of $8,800 per annum under the proposed reasonable food amounts
- In relation to locations within Australia, Table 1 in the Draft Determination outlines reasonable food amounts based on three salary levels. These food amounts apply regardless of the location worked in Australia. For overseas locations, Tables 1 and 2 in Appendix 2 of the Draft Determination set out the reasonable food components which apply to specific countries
- Where a LAFHA is paid to an employee which is equal to or less that the prescribed amounts provided by the Commissioner in the Draft Determination, no substantiation would be required. For amounts paid above these reasonable food limits, the employee would need to substantiate all food and drink costs incurred.
It will be important for employers to consider these new developments in relation to any existing obligations to provide living away from home allowances to their employees, especially once new reasonable food amounts apply from 1 April 2013.
The recent LAFHA changes are complex, and have been modified several times during the consultation phase and legislative process. If you would like to arrange a meeting to discuss the impact of the new LAFHA rules, please contact a member of our Global Employer Services team.