ATO not laughing at LAFHA

The government is pushing for major changes to the Living Away From Home Allowance (LAFHA) which will wipe out many of the tax benefits for temporary residents from 1 July 2012.

Tip: if you want skip the background information and go straight to the new rules, scroll down to the fourth heading.

What is Living Away From Home Allowance?

The Living Away From Home Allowance (LAFHA) is a payment made to an employee who is living away from their usual residence due to work commitments. The advantage of the allowance is that, unlike other allowances, it is effectively tax free.

How does it work?

LAFHA does not count as a assessable income, which means you don’t include it in your personal tax return. This effectively reduces the your personal tax. It is classified as a fringe benefit, and fringe benefits tax is paid by employers, not employees.

Furthermore, unlike other fringe benefits, LAFHA is exempt from FBT. This means the employer does not pay tax either. Employers use LAFHA as an enticement to attract overseas workers who will work on a 457 temporary residents visa.

Here is an example of why there is an advantage:

[framed_box bgColor=”#cdc8ff”] From the government’s Constulation Paper November 2011
Example of the current rules

Case Study #2: International Relocation (457 Visa Holder)

Patrick is a 33 year old Systems Engineer from Dublin who decides to immigrate to Australia with his family. He finds a job with a large retail head office in Sydney, and his employer sponsors him on a schedule A 457 Visa for four years. He has brought with him to Sydney his wife and two children, aged four and eight.

Patrick’s salary of $95,000, exclusive of super, gives him $69,575 take home pay after tax… When LAFHA is applied, without his employer increasing his salary, Patrick’s take home (after tax) pay increases by $13,247 in the first year, and $10,412 for the subsequent three years.

Source: http://www.treasury.gov.au/documents/2235/PDF/CP_FBT_LAFH_Benefits.pdf
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Note that the employer still only pays $95,000 in total under both scenarios.

Why the ATO is unhappy with the current use of LAFHA

The Living Away From Home Allowance was designed to assist employees who have a permanent home which they are living away from for work purposes. The rules mean that an employer can pay the costs of living away from home without causing the employee to incur extra tax.

LAFHA was never intended to be a tax bonus for temporary residents. It was also probably intended to cover situations where the employer paid an allowance on top of the existing salary package to cover costs. In reality, temporary residents use LAFHA to transform taxable income into tax free income, with no incremental cost to the employer.

The rules have also tried to distinguish between an employee who is living away from their usual home, and an employee who has simply re-located internationally. It is not unheard of for a temporary resident to put off applying for permanent residency for the sake of the tax advantages of temporary residency*, which include LAFHA.

* For a fact sheet on the tax advantages for temporary residents email us on info@beyondaccountancy.com.au

The government is now acting to restrict the use of LAFHA to a more narrow set of circumstances, which will adversely affect many temporary residents current receiving the allowance.

New rules for Living Away From Home Allowance (LAFHA)

The following is from the government’s Constulation Paper:

[framed_box bgColor=”#cdc8ff”] Temporary residents who maintain a home in Australia for their own use and who are required to live away from that home to perform the duties of their employment will be able to claim an income tax deduction for their actual expenses.
Source: http://www.treasury.gov.au/documents/2235/PDF/CP_FBT_LAFH_Benefits.pdf
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Essentially, the home you are living away from must be one you maintain in Australia. You could not have a family home in London, for example, and claim a LAFHA for a property you rent in Melbourne. In that case, you will only be eligible for tax concessions if you live away from your Melbourne home.

The new rules close the current loophole that allows ex-pat workers to be paid a tax free allowance for the sole place of residence in Australia. Read the following example:

[framed_box bgColor=”#cdc8ff”] From the government’s Constulation Paper November 2011
Example of the proposed rules

Fiona comes to Australia as a temporary resident working for an international firm. She is paid LAFHA for the duration of her three year contract. She lives and works in Melbourne.

She will have the LAFHA included in her assessable income. She will not be able to claim a deduction for any expenses incurred from living away from home.

Source: http://www.treasury.gov.au/documents/2235/PDF/CP_FBT_LAFH_Benefits.pdf
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So while temporary residents can still receive LAFHA, but unless they are working away from their Australian home, the allowance is taxed in exactly the same way as the rest of their wage, so the tax benefit is no longer there.

What can I do about this?

The proposals are not law yet, but it appears likely that they will be passed through parliament. You cannot do much about it from a tax point of view. The main point of action should be to re-negotiate your salary package from 1 July 2012 when the new rules are scheduled to come into effect.

If you are no longer entitled to LAFHA, your gross salary package will not change, but from 1 July 2012 your tax home (after tax) pay will drop. And it is your tax home pay that really matters in evaluating what your current salary is worth to you.

Once the changes become law, you need to start talking to your employer about whether they can increase your gross salary to offset part or all of the drop in your take home pay. Ideally, you should aim to have the same take home pay before and after any changes. Whether such a large increase in gross pay is commercially viable is a matter for you and your employer.

Need to know more?

Contact us on info@beyondaccountancy.com.au or 1300 883 122 to discuss how this could affect you, or to arrange a consultation or request a copy of our flyer on tax issues for temporary residents.

Existing clients can contact their usual accountant via direct phone or email contacts.

To keep up to date with other relevant tax tips and changes sign up now on the right hand side of this page.

Disclaimer: this information is current to the best of our knowledge at the date of publishing. This is general information for the purposes of education clients and potential clients of Beyond Accountancy. Legislation can change at any time and this may invalidate the information in this article. Personal tax advice will require an official client engagement with Beyond Accountancy.