What’s left in LAFHA?
Not a lot. The reform to the LAFHA rules is having an immediate and significant impact on businesses and their employees. Back in November the Government made their intentions clear to reduce access to the LAFHA concessions. With the release of the 2012-13 Federal Budget on 8 May 2012, these intentions have now been even more broadly imposed.
Many businesses did not take heed of the warning signals back in November and are now scrambling to implement the changes. This is required even though we have no actual law change in place, Treasury has received a large number of submissions and there remains uncertainty over the exact detail or the final form of the proposed changes.
This article will outline the proposed changes, including what’s left in LAFHA, and what approaches or solutions can be taken in the future.
What do we know?
From 1 July 2012 all LAFH allowances will be treated as assessable income unless the transitional provisions apply. The transitional rules will apply as follows:
- to permanent residents who have employment arrangements for LAFH allowances and benefits in place prior to 7:30 pm (AEST) on 8 May 2012. These employees will not be required to maintain a home in Australia and the concession will not be limited to a maximum of 12 months until the earlier of 1 July 2014 and the date the employment arrangement ends or is first varied or renewed.
- to temporary and foreign residents who maintain a home in Australia and have employment arrangements for LAFH allowances and benefits in place prior to 7:30 pm (AEST) on 8 May 2012. The condition to limit the concessional treatment to a maximum of 12 months will not apply to such temporary and foreign residents until the earlier of 1 July 2014 and the date the employment arrangement ends or is first varied or renewed (but not to give anyone an additional 12 months after the transitional arrangements end).
Impact by dollars – Winners v Losers
The following example shows the significant cost impact on the employee and employer where the exempt LAFHA becomes taxable and the employee is not able to claim a deduction. The example is based on a family grouping of 2 adults and 2 children.
|Total salary package||
|Less LAFHA accommodation||
|Less LAFHA food||
|Less Income tax||
|Net after tax||
|Add back tax free LAFHA||
|Net to employee including LAFHA||
Cost impact to the employee is a reduction in take home pay of $34,034
Cost impact to the employer is an increase in payroll tax of nearly $4,200
Increased revenue to the Federal Government of $34,034 in PAYG withholding
Increased revenue to the Office of State Revenue of nearly $4,200 in Payroll Tax
- Transitional rules do not apply
- Deduction not available to employee
- Employer has not compensated employee for law change
- We have ignored super, medicare & flood levy
- Notional Payroll Tax rate applied (will differ in each State & Territory)
What if I reimburse or provide LAFH benefits to my employees?
LAFH benefits provided or reimbursed to an employee will remain within the FBT rules and be taxed as an expense payment benefit, property fringe benefit or a residual fringe benefit. The taxable value of the benefits will be determined under the normal valuation rules. The otherwise deductible rule will apply to reduce the taxable value if an employee meets the conditions in the income tax law for claiming a deduction for LAFH benefits.
An employee will be able to claim a deduction for reasonable accommodation and food and drink expenses incurred in living away from home if the following apply:
- the employee is required by their employer to live away from their usual place of residence in Australia on a temporary basis to perform the duties of their employment;
- their usual place of residence in Australia in which they have an ownership interest (own or lease) continues to be available for their use and enjoyment all times while they are living away from it (ie they cannot lease out the residence)
- the expense on accommodation or food or drink is for the employee and their spouse or child living at the temporary residence; and
- it is reasonable to expect that the employee will return to their usual place of residence upon completion of the temporary job arrangement.
In determining what are reasonable accommodation expenses, the following may be considered:
- an allowance is determined based on a survey of accommodation and living costs at the employee’s temporary work location;
- the allowance may also contain a component to compensate for general disadvantages of the temporary location such as isolation;
- looking at the employee’s income and usual standard of accommodation;
- an employee’s actual expenditure is their share of the accommodation costs only – not the full amount;
Food and drink
An employee will be able to deduct food and drink expenses for themself and for a spouse and/or children that live with them. An employee will be able to deduct food and drink expenses to the extent the expenses are reasonable and (for 2012-13) exceed the new statutory food amounts of:
- $110 in relation to a 7-day period for each individual aged 12 or more
- $55 in relation to a 7-day period for each individual under 12
After 2012-13 the statutory food and drink amounts of $110 and $55 are to be indexed annually.
To claim accommodation and food and drink expenses, the expenditure will have to be substantiated by the employee providing written evidence. In the case of accommodation, written evidence would include a lease agreement or mortgage document.
To minimise the cost of compliance for employees, substantiation will not be required for food and drink expenses unless the expenses exceed an amount specified in a determination by the Commissioner. But if an employee claims an amount in excess of the reasonable amount, then the full amount must be substantiated.
Time Limit for LAFH Deduction
An employee will only be able claim a deduction for accommodation or food expenses for the first 12 months that their employer requires them to live away from their usual place of residence in Australia for their employment. (Note that the 12-month limitation does not apply to fly-in fly-out worker arrangements)
The 12-month period commences the first day the employee begins living away from home and pauses if the employee temporarily relocates to their usual place of residence. The 12-month period restarts if the employee’s work location changes, that is, if the employee is required by their employer to move to another location to perform the duties of employment.
If an employee takes up employment with a related entity of their employer, the 12-month period will not recommence. That is, the employer will be treated as continuing to work for the same employer.
Relocation Exemptions and Concessions
LAFHA is paid in relation to temporary relocations, however, post 1 July 2012 it is worth carefully considering the FBT exemptions and concessions as they relate to permanent relocations. These should be considered from a policy (including salary packaging) and procedure perspective and importantly it must be identified if the prospective employee or transferring employee is moving temporarily or permanently.
Three key areas of FBT exemptions and concessions to consider:
ONE – Relocation costs including storage and removal of goods, relocation transport including familiarisation (or going for a look see) trips, connection of utilities and engaging the services of a relocation consultant
TWO – Temporary accommodation – up to 12 months can be claimed free of FBT, subject to certain conditions and employee declarations being completed
THREE – Sale of former residence / purchase new residence – an exemption applies for stamp duty costs and incidental selling & acquisition costs. A key condition is that the former residence must be sold within 2 years of relocating and the new residence purchased within 4 years of relocating.
Travelling Expenses & Allowances
Travelling v Living Away From Home has been a long standing and often frustrating debate. The rule of thumb has been, up to 21 days then you must be travelling. Over 21 days, then you must be living away from home. With the demise of LAFHA, employers would be wise to closely review (or create) a travel policy.
For travel scenarios, employers can usually pay tax free travel allowances or reimburse actual travel expenses free of FBT.
Finally, if you haven’t started already…
With the changes imminent, it is important that employers understand their obligations from 1 July 2012 and manage employee concerns. Employee contracts will require reviewing, negotiation may be required, contracts revised and payroll will need to be informed of the changes. Employees who decide that the change in net pay is too much to sustain may be forced to break their leases, incurring significant penalty costs – will the employer reimburse these? (and it goes without saying, FBT may apply)
Policies will need to be rewritten (or created!), procedures revised and related offshore companies informed of the changes. This is especially true in relation to relocation, travel and salary packaging policies.
A further consequence of these changes is a likely spike in salary and wages, especially in the areas already suffering from a shortage of skilled workers. Therefore, we may start to see some movement in the job market.
FBT, Payroll & Salary Packaging Solutions – Founder Paul Mather
Australia’s only 100% dedicated FBT, Payroll & Salary Packaging Consulting and Compliance practice, providing solutions to businesses across Australia and offshore.
They provide a complete solution for Employers by working closely with HR, Payroll, Tax, Legal & Finance groups and operational business units to manage change, minimise liabilities and reduce risk. Importantly, they have the skills across accounting & finance, expense claim processes, payroll, salary packaging, tax audits & investigations, FBT software, indirect taxes, project management and training & seminars.