For a number of years now there have been quiet murmurings within the ATO as to exploitation – perceived in the ATO’s eyes – of the living away from home allowance provisions.
The payment of a living‑away‑from‑home allowance (LAFHA) is treated as a fringe benefit under the current tax system. A LAFHA does not form part of the employee’s assessable income.
The payment of a LAFHA is an extremely tax effective proposition where an employee is required to relocate temporarily from their usual place of residence in order to fulfil the duties of a particular role for their employer. The ability to pay a LAFHA applies equally to both employees temporarily relocating within Australia as well as those temporarily relocating to Australia from an overseas country.
On the 29th of November 2011, Treasury released a consultation paper titled - ‘Fringe Benefits Tax (FBT) Reform – Living Away From Home Benefits’. A copy of the paper can be found at the following link:
http://www.treasury.gov.au/contentitem.asp?NavId=002&ContentID=2235
The new proposed treatment
The taxation treatment of LAFHA will return to the income tax system as it was prior to the introduction of the FBT law in 1986. Any allowance paid by an employer to an employee as compensation for being required to live away from home will be included in the assessable income of the employee.
The fringe benefit tax (FBT) treatment of LAFH benefits will be reformed so:
- temporary resident employees (i.e. expatriates) will be required to maintain a home for their own use in Australia (which they are living away from for work) to access the concession, and in those cases the expenses will need to be substantiated; and
- all other employees will be required to substantiate their LAFH expenses.
The proposed changes will apply from 1 July 2012 for both new and existing arrangements. There do not appear to be any general transitional rules at this stage and so all benefits and allowances provided in respect of the period commencing 1 July 2012 will be subject to the new arrangements.
Flow on effects for income tests
Should the proposed revised treatment proceed as planned, the inclusion in an employee’s assessable income of a LAFH without a corresponding deduction is likely to be taken into account for Centrelink and various other income testing purposes.
Employment on-costs
For the employer entity, a LAFHA paid to an employee in an assessable income form is likely to be regarded as salary and wages for Workcover, payroll tax and superannuation guarantee purposes thereby increasing the cost of employment in respect of the particular employee.
Increased paperwork requirements
Employee LAFHA recipients will be required to substantiate their accommodation and food costs beyond a yet to be determined statutory threshold if deductions are to be claimed.
Presumably the current proscriptive work related deduction substantiation rules will apply adding an additional record keeping burden on employees. Given the material nature of LAFHA’s this will also presumably make LAFHA recipients more susceptible to ATO desk audits.
Impact on employee satisfaction and retention
Employees facing the prospect of paying additional tax or losing Centrelink and other entitlements are likely to be resistant to the proposed reforms and this could indirectly lead to employee dissatisfaction and loss of productivity.
In extreme cases employers may lose staff or find it difficult in attracting staff and this could be a highly likely scenario where expatriate staff are concerned.
What should employers do?
All employers with LAFHA arrangements in place with staff should review the impact the proposed changes will have on staff. Employers will need to openly discuss the changes and should seek professional assistance where necessary.
If no transitional rules are put in place (which appears to be the case) employers should consider whether prepaying 12 months of LAFHA prior to 1 July 2012 is an option to at least extend the current LAFHA benefits for another year.
As more details in respect to the proposed measures are released we will inform our Assessment subscribers accordingly.
Any specific enquiries relating to this article can be directed to Rob Power on 03 8662 3200 or robp@webbmartinconsulting.com.au
Disclaimer
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