Living Away From Home Allowance Proposed Changes
Dec
20
Written by:
Tuesday, December 20, 2011
LAFH concessions provide tax-free benefits for housing and food costs of employees who are required to live away from home temporarily in order to perform their employment duties. From 1 July 2012, the Government is seeking to reform the rules by moving the current rules in the Fringe Benefits Tax (FBT) regime to the Income Tax regime. LAFH allowances will only be accessible where the amounts are substantiated and where the temporary resident is living away from a maintained Australian home that is for their own use. This is similar to the rules applying to Australian employees. From 1 July 2012, temporary residents will be subject to personal taxation on these LAFH payments where they do not maintain an Australian home, effectively reducing their take home pay.
Under the subclass 457 visa program, sponsors are required to demonstrate that the earnings for the nominated occupation are above the Temporary Skilled Migration Income Threshold (TSMIT) and are at ‘market rate’ for the position and location of the role. Earnings include wages (including LAFH payments), amounts that the employee has directed the employer to pay, and the value of agreed non-monetary benefits. It does not include payments of amounts that cannot be determined in advance, reimbursements (in the usual business sense) or compulsory contributions to superannuation.
These tax reforms will require employers to reconsider and potentially adjust the earnings packages of their temporary resident employees. Immigration rules under the subclass 457 visa program will remain unchanged and it is an ongoing sponsorship obligation for employers and sponsors of subclass 457 visa holders to continue to pay at least the earnings as specified in the approved nomination of the position and at the relevant market rate.
As one of the outcomes from the recent Tax Forum, the Federal Government has, on 29 November 2011, released a consultation paper on its plans to change the rules concerning tax exemptions that are currently being allowed under LAFHAs for foreign nationals working in Australia as well as tightening the rules for permanent residents. These changes are proposed to come into effect from 1 July 2012.
Tax concessions available under LAFHAs and other related benefits have been an important element of the remuneration package for international and domestic employees for many years. These have helped employees compensate for additional costs when living in away from home for employment purposes and Australia's relatively high personal tax rates. However, the Australian Taxation Office (ATO) has become concerned with the widespread use of these tax free allowances and benefits.
A consultation paper was released at the time the proposed reforms were announced. The consultation paper states the perceived widespread exploitation of providing tax free LAFHAs to temporary residents has breached the original policy intent of the LAFHA concessions. It states further that this has provided an unfair advantage for temporary residents over local Australian workers.
Under the proposed reforms, LAFH benefits provided to temporary residents working in Australia will be fully taxable to the employee (if paid as an allowance) or fully taxable under fringe benefits tax (FBT) (if paid or provided by the employer). The stated intention is for temporary residents to be subject to the same Australian tax burden on their employment income as are local employees. Permanent residents working away from home will be subject to certain compliance obligations and will be required to substantiate their actual accommodation costs and food costs beyond a statutory amount.
If implemented as announced, the reforms will have a significant impact on Australian businesses’ ability to attract foreign skilled labour in a time of increasing skill shortages. Australia’s high tax rates, increasing rent costs and the overall cost of living do not compare favourably with regional competitors in nearby Asian countries. Abolishing LAFHAs for foreign nationals will inevitably put upward pressure on wages in order to attract and/or retain foreign skilled workers in Australia.
These reforms will not affect other tax concessions, such as those that apply to travel and meal allowances, and remote area fringe benefits.
As mentioned these reforms will apply from 1 July 2012. This start date will enable the Government to undertake an extensive consultation process on these reforms, so that appropriate transitional arrangements can be put in place, including in regional Australia.
If you are currently providing LAFHA benefits to any of your employees (whether foreign nationals working in Australia on temporary visas or Australian residents), you should be reviewing the impact on your business of these proposed changes and to ensure that the new stricter eligibility criteria is met. Remember, as an employer you are primarily responsible for getting it right.