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Living away from home (LAFH) update – amending bill provides more detail

GES Newsflash

Deloitte | GES Newsflash12 July 2012

 

Summary

Our previous GES Newsflash outlined proposed changes to the concessional treatment of living away from home (LAFH) benefits (based on exposure draft legislation circulated in May 2012).

On 28 June 2012, the amending bill was introduced into Parliament. Tax Laws Amendment (2012 Measures No. 4) Bill 2012 (the bill), and the accompanying explanatory memorandum (EM), differ in some significant respects from the exposure draft materials. Our updated outline of how the revised LAFH rules will apply is set out below.

Start date deferred

The changed LAFH arrangements will now take effect from 1 October 2012, instead of from 1 July 2012.

Transitional relief period

For those who are eligible, transitional treatment will apply from 1 October 2012 until the earliest of 30 June 2014, the date that the employment arrangement ends, or the first time that the employment arrangement is varied or renewed.

Salary changes and loss of transitional relief

Eligibility for transitional treatment depends in part on the employee having an employment arrangement that was in place before 7.30 p.m. on 8 May 2012 that is not varied or renewed prior to 1 October 2012 . Furthermore, the duration of any transitional relief may be adversely affected if the arrangement is varied or renewed on or after 1 October 2012. Significantly, the EM identifies a change in salary as a material variation to an existing employment arrangement (other examples include an extension of time of an existing contract, a change to the employee's working hours, and in the case of a contract that covers all employees of an organisation, the alteration or re-signing of that contract). We have raised this issue directly with Treasury and they informed us that a salary increase as part of an annual salary review should not result in an eligible employment contract being varied for the purposes of the transitional rules. However, a pay increase as a result of a promotion may give rise to a variation. We note that his view has not been clearly expressed in the EM.

Operation of the new rules (excluding any transitional relief)

Temporary, foreign and non-temporary (i.e. permanent) residents will be required to maintain a home in Australia which they are living away from in order to be eligible to qualify for concessional treatment for LAFH expenses (among other existing requirements).

LAFH allowances will be taxed as assessable income of the employee, rather than under the Fringe Benefits Tax (FBT) legislation, with deductions allowed for reasonable and substantiated accommodation expenses and food and drink expenses in excess of the 'ordinary weekly food and drink expenses' amounts.

The EM clarifies that LAFH accommodation expenses include rent, lease costs and hotel costs, but exclude mortgage repayments.

Although the exposure draft materials included ordinary weekly food and drink amounts that had been adjusted to reflect 2011-12 values (e.g. $110 per person aged 12 or over), the bill uses amounts equal to the previous 'statutory food component' (e.g. $42 per person aged 12 or over or $21 per child under 12). This means that a greater proportion of food and drink expenses incurred by affected employees will be deductible than previously proposed. LAFH allowances may include a portion to cover the ordinary weekly food and drink expenses incurred by the employee and the employee's family. The new bill states that the employer will continue to be subject to FBT on this portion of the LAFH allowance. This is provided that the employee gives the employer a declaration stating that the employee will incur food and drink expenses that will be deductible expenses. The taxable value of the fringe benefit is the portion of the LAFH allowance that relates to ordinary weekly food and drink expenses reduced by the employee's contribution (if any). That portion of the allowance which exceeds the ordinary weekly food and drink expense amounts will be included in the employee's assessable income and, if eligible, the employee will need to claim deductions for expenses in excess of this amount.

To be eligible for a deduction, the employer must have required the employee to live away from their usual place of residence for work purposes. The bill also permits claiming deductions where it is a future employer that has required the employee to live away from their home.

Concessional LAFH treatment will be limited to a maximum period of 12 months. The 12-month period starts on the first day the employee begins to live away from home, ignoring any temporary relocations between the usual place of residence and the work location. For employees already living away from home on 1 October 2012, the 12-month period starts from that date. The bill recognises that there may be times when the 12-month period pauses (e.g. if the employee takes leave or is required to perform employment duties at the original work location for a short period and resumes living at their usual place of residence). The bill has clarified that while food and drink expenses incurred during the pause are not deductible, LAFH accommodation expenses during the pause can be deducted.

The Australian Taxation Office is yet to announce further guidelines in relation to food amounts and also practical guidance in terms of an employer's withholding obligations in respect of LAFH allowances paid under the new rules.

Where LAFH items are provided as fringe benefits (e.g. rent expenses reimbursed by the employer), the items will be free from FBT to the extent that the employee would have been able to claim an income tax deduction had they incurred the costs themself.

Transitional arrangements

Permanent residents that have LAFH arrangements in place prior to 7.30 p.m. on 8 May 2012 will have transitional relief until 1 July 2014 (or an earlier date if the employment arrangement ends or changes are made to it). They are not required to be living away from a usual place of residence in Australia for work purposes in order to qualify.

Temporary and foreign residents will only be able to qualify for transitional relief if they have LAFH arrangements in place prior to 7.30 p.m. on 8 May 2012 and are also able to demonstrate that, from no later than 1 October 2012, they have a usual place of residence in Australia which their employer has required them to live away from for work purposes. To be the 'usual place of residence' of the employee, the residence must be a dwelling that the employee or his/her spouse owns or rents, and one that remains available for the employee's immediate use and enjoyment during the period the employee lives away from it (for example, the employee cannot let or sublet it).

Where transitional relief is available, the employee is not subject to the 12-month limit on claiming LAFH expenses as deductions.

Other benefits

The tax treatment of other benefits commonly provided to employees who are living away from home (such as the reimbursement of relocation costs, children's education, leasing of household effects and overseas employment holiday transport) are unaffected and retain their existing treatment under the FBT legislation.

Employees on a fly-in-fly-out (FIFO) arrangement from a home in Australia will not be affected by the new 12-month limitation. FIFO arrangements are able to apply to both temporary tax residents and permanent residents.

The tax treatment of travel and meal allowances, which are provided to employees who have to travel away from their usual place of work for short periods (generally business trips up to 21 days) will also not be affected.

Deloitte's view

The passage of the bill in its current form will translate to a higher Australian tax cost for employers with large assignee populations in Australia who are under tax equalisation or tax protection arrangements, as these employees are unlikely to qualify for LAFH deductions under the new rules or the transitional rules.

Employees not under tax-equalised or tax-protected arrangements, who will not qualify for LAFH deductions under the new rules or the transitional rules, should budget for the reduced net income effective from 1 October 2012.

It is important for employers to consider the potential impact on PAYG withholding and other associated employer taxes and on-costs in relation to employees who will be covered by the new or transitional rules, given that LAFH allowances will form part of the employees' taxable income.

Employers may need to consider reviewing their internal policies to align them with the amended legislation.

Contacts

Brisbane

Shelley Nolan
Director | Deloitte Tax Services Pty Ltd
Direct: +61 7 3308 7232
MARN: 0635132

Melbourne

Frank Klasic
Director | Deloitte Tax Services Pty Ltd
Direct: +61 3 9671 7514

Paul Rubinstein
Director | Deloitte Tax Services Pty Ltd
Direct: +61 3 9671 7603

Perth

George Kyriakacis
Director | Deloitte Tax Services Pty Ltd
Direct: +61 8 9365 7112

Sydney

Rob Basker
Director | Deloitte Tax Services Pty Ltd
Direct: +61 2 9322 7551

Elizma Bolt
Director | Deloitte Tax Services Pty Ltd
Direct: +61 2 9322 7614

Stephen Coakley
Director | Deloitte Tax Services Pty Ltd
Direct: +61 2 9322 7814

 

 

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