Under the proposed changes, set to begin on 1 October 2012, LAFH allowances will generally be treated as assessable income of employees, rather than as fringe benefits and subject to fringe benefits tax (FBT). Tax concessions will instead be in the form of income tax deductions, and their availability will be much more restricted. Transitional rules will apply for certain employees until 1 July 2014, provided specific requirements are met.
In this update, we summarise the employment issues that may arise in the context of the proposed changes. We analyse the potential effect on employers, and provide some tips to ensure your business takes the right steps to deal with the changes if they become law.
Existing tax treatment of LAFH allowances
Under existing laws, a LAFH allowance is a fringe benefit on which employers have to pay FBT. However, the taxable amount of a LAFH allowance is reduced by exempt food and accommodation components, on which no FBT is payable. This has meant, in the past, that a large portion of a LAFH allowance could effectively be provided tax free to eligible employees.
The explanatory memorandum to the Bill states that employees are using these concessions to access tax-free amounts even though they are not incurring additional expenses (that is, the cost of maintaining two homes), and that the amount of the allowance may exceed actual employee expenditure. The negative impact of these practices on government revenue has driven the federal government’s proposed reforms.
Proposed tax treatment of LAFH allowances and benefits
The proposed reforms will generally treat a LAFH allowance as part of an employee’s assessable income and subject to income tax, rather than as a fringe benefit subject to FBT in the hands of the employer. However, an income tax deduction will be available for:
- employees who maintain, and have an ownership interest in, a home in Australia for their own personal and immediate use and enjoyment at all times, and from which they are required to live away from in order to work. This requirement will apply irrespective of whether an employee is a permanent Australian resident or a temporary or foreign resident;
- actual substantiated expenses on accommodation, and food and drink beyond “ordinary weekly food and drink expenses”, currently $42 per person ($21 for children under 12); and
- a maximum of 12 months for each particular work location.
In other words, the scope of tax concessions available for LAFH allowances and benefits will be much more limited than has previously been the case. Significantly, to access those concessions, employees will need to maintain a residence in Australia for their own use and enjoyment at all times which they live away from. That residence cannot be rented out or sub-let while the employee is living away from home.
Employers will still pay FBT on the “ordinary weekly food and drink expenses” component of the LAFH allowance paid to employees who are eligible to claim an income tax deduction and who provide their employer with a specific declaration.
Where an employer makes direct accommodation, food and expense LAFH payments for an employee who would not be eligible to claim an income tax deduction had they incurred the expenses themselves, then those payments will also be treated as a fringe benefit and be subject to FBT payable by the employer.
The Bill was referred to a parliamentary economics committee for its consideration. After receiving submissions on the Bill, the committee released its advisory report on 15 August 2012 (Report). The Report expressed the committee’s broad support for the reforms, but made several recommendations about, amongst other things, the treatment of fly-in fly-out workers, about the need for greater clarification on certain matters, and about the desirability of having LAFH allowances and benefits remain within one tax regime... Read more...Download full PDF