Living-away-from-home tax law changes on the way

The commencement date of the Government’s major tax changes to living-away-from-home (LAFH) allowances and benefits has been deferred for three months. These will take effect on 1 October 2012, instead of 1 July 2012 as previously announced. The Government said it has made the change in response to submissions it received and that this will give employers and employees more time to prepare for the new arrangements. The Assistant Treasurer also noted that some technical changes have been made to the new LAFH regime in response to feedback on the previously released draft legislation.

The changes are contained in the Tax Laws Amendment (2012 Measures No. 4) Bill 2012, which has been introduced into Parliament. The Bill will not be debated until after Parliament resumes on 14 August 2012 and has been referred to the House of Representatives Standing Committee on Economics for report. It contains the following amendments:

LAFH amendments

The Bill proposes to implement reforms to the tax concession for LAFH allowances and benefits that were announced in the November 2011 Mid-Year Economic and Fiscal Outlook and in the 2012–2013 Federal Budget. The changes were announced because the Government considered that the concession was being used in a manner that was outside the original policy intent.

If passed, the Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and the Income Tax Assessment Act 1997 (ITAA 1997) to reform the taxation treatment of LAFH allowances and benefits. In particular, the new laws will:

• generally treat a LAFH allowance as part of an employee’s assessable income, rather than as a fringe benefit;
• allow an income tax deduction for reasonable expenses incurred and substantiated for food and drink (beyond “ordinary weekly food and drink expenses”) and accommodation:
  
  • to employees who maintain a home in Australia for their own personal and immediate use and enjoyment at all times while required to live away from home for their work; and
  • for a maximum period of 12 months in respect of an individual employee for a particular work location; and
• tax employers on: (i) LAFH allowances to the extent that they relate to “ordinary weekly food and drink expenses” of employees who satisfy the requirements to claim an income tax deduction and who have provided their employer with a declaration; and (ii) LAFH benefits (ie the direct provision of accommodation, food and expense payments) provided to employees who would not be eligible to claim an income tax deduction had they incurred the expenses directly.

The Assistant Treasurer said the proposed changes will not affect:

• the tax concession for “fly-in fly-out” arrangements, as these employees will not be subject to the 12-month time limit;
• the tax treatment of travel and meal allowances that are provided to employees who must travel from their usual place of work for short periods (generally up to 21 days);  or
• the tax concessions provided for remote area fringe benefits.
• The proposed amendments, if enacted, will generally return the taxation treatment of LAFH allowances to the income tax system in a way that it is similar to the treatment that was in place prior to the introduction of the FBT law in 1986. Generally, allowances paid by an employer to an employee as compensation for being required to live away from home will be included in the assessable income of the employee.
• Employees who maintain a home in Australia for their own use, and who are required by their employer to live away from that home for the purposes of their employment, will be able to claim a tax deduction for reasonable, substantiated expenses incurred on accommodation (eg rent, lease or hotel costs, but not mortgage payments) and food and drink (beyond “ordinary weekly food and drink expenses”). The deduction will be limited to a period of 12 months, ie for the first 12 months that their employer requires them to live away from their usual place of residence in Australia for their employment. (As discussed above, the 12-month limit does not apply to “fly-in fly-out” workers.)
• The component of a LAFH allowance representing “ordinary weekly food and drink expenses” will not be included in the assessable income of employees who satisfy the requirements to claim a tax deduction and who have provided their employer with a declaration. Similarly to the current law, this component will be treated as a fringe benefit of the employer.
• The LAFH fringe benefit provisions in the FBT law (ss 30 and 31 of the FBTAA), which provide an FBT exemption or concession, will be repealed. Employers who provide direct LAFH benefits will be able to apply the “otherwise deductible” rule to reduce the taxable value of LAFH fringe benefits they provide to their employees.

Key features

Date of effect

Subject to transitional rules, the amendments will generally apply from 1 October 2012, not 1 July 2012 as originally announced.

An employer will have to withhold (under the PAYG system) from an allowance that is assessable income of the employee, except as varied by the Commissioner (either by way of an individual or a class variation).

Transitional rules will apply to:

• permanent residents; and
• temporary residents or foreign residents who maintain a residence in Australia for their own personal and immediate use and enjoyment at all times, that they are required to live away from for work;

who had employment arrangements for LAFH allowances and benefits in place prior to 7:30pm (AEST) on 8 May 2012.

The requirements that were announced in the 2012–2013 Budget that:

• permanent residents will be required to maintain a residence in Australia for their own personal and immediate use and enjoyment at all times, that they are required to live away from for work; and
• an employee will only be able to claim deductions for accommodation and food and drink 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;

will not apply to permanent residents until the earlier of 1 July 2014 or the date a new employment arrangement is entered into (or an existing arrangement is varied) but not so as to give anyone an additional 12 months after the transitional arrangements end.

The requirement that was announced in the 2012–2013 Budget that an employee will only be able to claim deductions for accommodation and food and drink 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, will not apply to temporary residents or foreign residents who maintain a residence in Australia for their own personal and immediate use and enjoyment at all times, that they are required to live away from for work, until the earlier of 1 July 2014 or the date a new employment arrangement is entered into (or an existing arrangement is varied) but not so as to give anyone an additional 12 months after the transitional arrangements end.

Note that any material variation to an existing employment arrangement will trigger the commencement of the new arrangements.

Other amendments

Other amendments contained in No. 4 Bill include the following:

• GST amendments – The Bill proposes to amend the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that, in circumstances where a representative of an incapacitated entity is a creditor of that entity, the correct provision of the GST Act is applied. Proposed date of application: from the first quarterly tax period on or after Royal Assent is received.
• Consolidation amendments – The Bill also proposes various technical amendments to Sch 3 to the Tax Laws Amendment (2012 Measures No. 2) Act 2012. Proposed date of effect: the day the Measures No. 2 Act 2012 received Royal Assent (ie 29 June 2012).

Source: Tax Laws Amendment (2012 Measures No. 4) Bill 2012 www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r4865