Changes To the LAFHA Scheme
From the 1st July 2012, there is a major change to the LAFHA Scheme, resulting on the majority of employees whom have been previously entitled to LAFHA no longer being entitled in the new financial year. These changes will have a major impact on both the employee and employer. As a general rule employees on a 457 Visa (considered temporary residents of Australia for taxation purposes) will not be entitled to a LAFHA from 1 July 2012. The only ‘temporary residents’ that may be entitled to a LAFHA are those that have current residential leases in place and are living away from these premises.
There will be limited concessions for Australians and temporary residents provided:
• The employee is maintaining (strict rules will apply, the home must not be rented out) a home in Australia which they are required to live away from in order to perform their employment duties;
• The employer requires the employee to live away from that home (rather than an employee’s choice); and
• The period of time in which the concessions will apply is for 12 months (however this may be freshened up if the employee returns to the home).
The draft legislation incorporates both of the Government’s earlier announcements regarding LAFH changes in the Federal Budget on 8 May 2012, and also the Mid-year Economic and Fiscal Outlook in November 2011.
From 1 July 2012, the provision of a LAFH Allowance (LAHFA) to an employee will be treated as income to an employee. Where the employee meets the criteria of LAFH, provided they can substantiate the expenditure incurred in respect of food and accommodation, there will be no tax exposure to the employee.
The ‘Living Away From Home’ changes have arrived!
It is expected that the ATO will put in place a PAYG-Withholding variation for employers, so as not to have to withhold tax on the allowance to the extent the employee would be expected to claim a deduction against the allowance. Where an employer pays the LAFH costs directly on behalf of an employee, then there will be an exemption from FBT where the ‘otherwise deductible’ rule would apply to the employee.
Transitional rules
For those employees lucky enough to have an arrangement in place with their employer before the Federal Budget (7.30pm 8 May 2012), which provided them with LAFH benefits or allowance, then the LAFH exemption (in a similar form to the current rules) will continue to apply until 1 July 2014 or the date of a new employment contract, whichever date occurs first. Where the employee is a temporary resident of Australia, the transitional rules will not apply unless the employee is maintaining a home in Australia which they are living away from. ‘Home’ means the employee’s usual place of residence in Australia, which can be owned or occupied under a lease. For Australians who qualify for the transitional rules, they are not required to maintain a home in Australia.
Substantiation requirements
Under the new rules from 1 July 2012, an employee will be required to report the LAFHA as income in their personal tax return. A deduction would be able to be claimed in their return to the extent the expenditure incurred on food and accommodation is reasonable. Written evidence will be required to support any deduction claimed for the cost of food and accommodation. In respect of substantiating food costs, an employee may opt for a simpler approach by relying on the ATO publication setting out what is considered ‘reasonable food component’. The statutory food component will increase from 1 July 2012. Liability limited by a scheme approved under Professional Standards Legislation.price@rsmi.com.au
Action
If you have not already done so, all employment conditions for employees receiving LAFH benefits or LAFHA will need to be revisited urgently, with the start date 1 July 2012 fast approaching. You will need to assess their entitlements under the new rules and also consider the renegotiation of employment terms and conditions with employees:
• Payroll systems will need to be updated for the changes from 1 July 2012, to include all LAFHA as a taxable allowance;
• LAFHA will need to be shown on the employee’s PAYG Payment Summary, commencing with the year ending 30 June 2013; and
• Determine if PAYG-Withholding will be required to be withheld from LAFHA payments or part thereof.
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