The ABC of LAFHA
Tax Telegraph, February 2013
The Living Away From Home Allowance (LAFHA) provisions have been on a see-saw ride in the past year, with numerous changes being introduced changing the treatment and taxation of these very popular benefits provided to employees by companies.
Changes and rules were announced, however only some of the changes were actually legislated. This has led to a great deal of confusion with many taxpayers and practitioners being unsure as to the current position on LAFHAs.
Below, we aim to provide a brief overview of the current position on LAFHAs and some key issues that taxpayers and tax practitioners need to be mindful of when dealing with LAFHAs.
The history of LAFHA
The LAFHA is an allowance paid to employees to compensate them for additional expenses incurred and other disadvantages suffered, because the employee is required to live away from their usual place of residence in order to perform duties of their employment.
Historically, the taxable value of a LAFHA was a fringe benefit and was largely structured to be ‘FBT free’ in the hands of the employers.
In late 2011, Treasury indicated some concern that the tax concessions for LAFH benefits were being used to inappropriately re-characterise salary and wages into a tax-free form of remuneration. There also appeared to be concern that temporary residents had advantage over permanent Australian residents as temporary residents have access to the tax concessions for LAFH benefits because most of them are working away from their usual place of residence.
In November 2011, changes were announced which proposed to bring the treatment of LAFHA into the income tax regime (and taxed in the hands of the employees) rather than being taxed under FBT. Other proposed changes included the introduction of substantiation rules and the requirement for temporary residents to maintain their own home in Australia. This ensures that any tax concessions available under LAFHA provisions are effectively limited to Australian residents and limited temporary residents.
However, when the bill containing the changes was re-introduced into the House of Representatives on 21 August 2012, several amendments were made to the original bill, the major one being bringing the taxation of LAFHAs back into the FBT regime.
Below, we discuss briefly the current position and rules which will apply to LAFHAs going forward.
The current position on LAFHAs is that they will continue to be taxed under the FBT regime in the hands of the employer.
The other changes which were introduced effective 1 October 2012 still apply. That is, the concessional tax treatment of LAFHA is limited to employees (other than those working on a ‘fly-in fly-out’ or ‘drive-in drive-out’ basis) for a maximum period of 12 months who:
- Maintain a home in Australia (at which they usually reside) for their immediate use and enjoyment at all times while living away from that home for their work
- Have provided their employer with a declaration about living away from home.
In these circumstances, the taxable value of LAFHA fringe benefits can be reduced by the employer by:
- The amount of the employee’s actual accommodation expenditure incurred in relation to living away from home that is substantiated
- The amounts incurred by the employee for food or drink costs incurred in relation to living away from home less a statutory amount if applicable.
Special rules apply to employees who are working on a fly-in fly-out (FIFO) or drive-in drive-out (DIDO) basis. These employees do not have to maintain a home in Australia and the 12-month limit on concessional tax treatment does not apply.
An employee will be considered to be working on a FIFO or DIDO basis where the following conditions are satisfied:
- On a regular and rotational basis, the employee works for a number of days and has a number of days off that are not the same days in consecutive weeks (such as a standard five-day working week and weekend)
- The employee returns to their normal residence during their days off (noting that the normal residence does not need to be in Australia)
- It is customary in the industry in which the employee works, for employees performing similar duties to work on a rotational basis and return to their normal residence during their days off
- It is unreasonable to expect the employee to travel to and from work and the normal residence on a daily basis given the location of their work and their normal residence
- It is reasonable to expect that the employee will resume living at their normal residence when the employment duties no longer require them to live away from home.
These employees will be required to provide their employer with a LAFH declaration (in a form approved by the Commissioner) and must substantiate expenses incurred on accommodation, food, and beverages (beyond the reasonable amount determined by the Commissioner of Taxation).
Maintenance of home in Australia
- The employee must maintain a home in Australia (the place in Australia where the employee usually resides)
- This can be a house, flat, home unit, caravan or accommodation in living quarters
- The employee, or their spouse, must have an ownership interest in a unit of accommodation and that home must be available for their immediate use and enjoyment at all times while they are living away from it. It must also be reasonable to expect that the employee will resume living at that home when they are no longer living away from home for the purposes of their employment
- Ownership interest includes both a legal or equitable interest and a licence or right to occupy a dwelling. Therefore, an employee, or their spouse, can have an ownership interest in a home they own or rent
- Adult children living in the family home generally do not have an ownership interest in the home. Therefore, an employee living with their parents does not have an ownership interest in the home and therefore is not maintaining a home as required
- For the employee to maintain a home for their immediate use and enjoyment at all times, the home cannot be rented out or sub‑let while they are living away from it. That is, the employee must incur the ongoing costs of maintaining the residence such as mortgage or rental payments and rates. The employee must be able to return to the home at any time and take up immediate occupancy
- If an individual has a boarder or tenant staying with them in their normal residence, the employee can still be considered to be maintaining the home for their own use and enjoyment. However, the boarder’s stay must not impinge on the availability of the residence for the individual’s immediate and reasonable use and enjoyment. Likewise, if an employee has a house-sitter in their home while they are living away from it, they will be maintaining the home when the house-sitter is either required to vacate the residence or their stay does not impinge on the employee’s use and enjoyment of it whenever the employee returns home, for example, during temporary visits.
Substantiation requirements must be met for the purposes of any exempt accommodation component and any exempt food component.
The accommodation expenses incurred by an employee for living away from home must be substantiated in full; while food or drink expenses need only be substantiated where the expenses incurred while living away from home exceed an amount considered reasonable by the Commissioner. That is, if the employee’s food or drink expenses incurred exceed the Commissioner’s reasonable amount, the full amount of the expenses incurred needs to be substantiated, not just the excess amount. The Commissioner will issue advice specifying reasonable amounts for food or drink expenses.
An employee satisfies the substantiation requirements if the employee gives the employer, before the declaration date for the relevant FBT year, either:
- Documentary evidence of the expense - that is, either the actual receipt or other evidence as appropriate (for example, credit card or bank statements), or a copy of these documents
- A declaration in a form approved by the Commissioner setting out information about the expense.
Little guidance exists as to how the taxpayer confirms that their real home is being maintained. The better view seems to be that the taxpayer includes this in the declaration provided to the Tax Office.
Transitional rules apply to permanent residents who have employment arrangements for LAFHA and benefits in place prior to 7.30 pm (AEST) on 8 May 2012. These employees are not required to maintain a home in Australia for their immediate use and enjoyment at all times for the concessional treatment to apply and the concession is not limited to a maximum period of 12 months until the earlier of 1 July 2014 or the date a new employment contract is entered into, or the existing contract is varied in a material way.
Transitional rules also apply to temporary residents who are required to live away from a their normal home in Australia and that home is available for their immediate use and enjoyment at all times, and have employment arrangements for LAFH allowances and benefits in place prior to 7.30 pm (AEST) on 8 May 2012. These employees will have until the earlier of 1 July 2014 or the date a new employment contract is entered into or the existing contract is varied in a material way before the concessional treatment is limited to a maximum period of 12 months.
There is mixed sentiment regarding the treatment of LAFHAs solely under the FBT regime. In the case of employees who are not on the top marginal rate of tax, the treatment of LAFHAs under the FBT regime will result in an increased overall cost to the employer. Furthermore, to the extent an employee is liable to foreign taxes on the LAFHA, there will be an inability to claim foreign income tax offset relief in respect of FBT paid on the LAFHA.
The amendments applicable to employees who are working on a FIFO or DIDO basis are welcomed as the new amendments effectively remove the requirement for these employees to maintain a home in Australia. The amendments will result in many FIFO or DIDO employees now being eligible for LAFHA, particularly where the employees do not have an ownership interest in a home in Australia or whose 'home' is in a country other than Australia.
The amendments apply from 1 October 2012. Employers will need to consider a review of the structure and provision of benefits and allowances to be provided to employees to align them with the amended legislation.
Contact your local Deloitte Private Advisor if you are unsure how the amendments apply to you or how employee packages can be structured in a tax effective manner taking into account these changes.
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