Yesterday the Australian Government Treasury released Exposure Draft legislation for the changes to the taxation of living away from home benefits. These changes were previously announced in the 2011 Mid-Year Economic and Fiscal Update and the 2012/13 Federal Budget.
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- The current tax free LAFHA arrangements will be repealed, subject to limited transitional provisions;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; and
- 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.
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.
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 employee does not need to satisfy the requirement of maintaining a home in Australia; and
- The 12 month time limit does not apply; and
- For non-residents or temporary residents who had their agreement in place before that date, the 12 month time limit will not apply. However, non-residents and temporary residents still will be required to have 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. We recommend that you seeking accounting and/or financial advise as to how the above changes may affect your financial circumstances.