Living-away-from-home concessions: new laws

The Tax Laws Amendment (2012 Measures No. 4) Bill 2012 received Royal Assent on 28 September 2012. This implements amendments concerning the tax treatment of living-away-from-home allowances (LAFHAs) and related benefits. The purpose of the changes is to address perceived rorting issues where the LAFHA concessions have been applied by employers and employees, yet do not meet the intended purpose of the benefits.

Schedule 1 to the Bill (containing the relevant amendments) had been significantly altered by the House of Representatives since its introduction in June 2012. This article discusses the LAFHA changes following the subsequent amendments made by the House. (Note the Bill also contains other amendments concerning GST and representatives of incapacitated entities, and specific changes concerning the consolidation regime.)

Previously proposed changes

It was first proposed that from 1 July 2012, the Government would tax LAFHAs under the income tax system, as opposed to the fringe benefits tax (FBT) system. Therefore, any allowance paid by an employer to an employee as compensation for being required to live away from their usual place of residence would have been included in the assessable income of the employee.

Employees who are permanent residents would have been able to claim income tax deductions for the expenses incurred for accommodation and food while living away from home, provided they could have substantiated those expenses.

Temporary resident employees who maintain a home in Australia for their own use and who are required to live away from that usual place of residence in Australia to perform their work would also have been able to claim a deduction for substantiated expenses. Allowances for temporary residents and non-residents who do not have a home in Australia that they are required to live away from would have been assessable, with no offsetting deductions available.

New treatment

From 1 October 2012, the Government continues to tax LAFHAs and related benefits under the FBT system only, as opposed to taxing allowances under the income tax system. As a result, any allowance paid by an employer to an employee as compensation for being required to live away from their usual place of residence is not included in the assessable income of the employee as previously proposed.

This means that employers continue to be taxed on LAFHAs that do not meet the requirements for the FBT concessions. The FBT concessions available are similar to those in place before, which are exemptions for a reasonable amount for accommodation and for the difference between a reasonable amount for food (set by the ATO) and the usual amount spent on food (statutory amounts).

Employees other than fly-in fly-out or drive-in drive-out workers are required to maintain a home in Australia from which they “live away” in order to qualify for concessions. In addition, the LAFHA concessions are only available for 12 months for a particular employee in a particular location, except for fly-in-fly-out or drive-in-drive-out workers. The 12-month period started on 1 October 2012 for employees who were already living away from home but not eligible for the transitional rules.

Transitional rules

Transitional rules apply to those employees who had arrangements in place prior to 8 May 2012 for as long as those arrangements are not materially varied or renewed, but for no longer than the period ending 30 June 2014.

Employees who are permanent residents and who meet the requirement for the transitional rules do not need to maintain a home in Australia and the 12-month limit does not apply, provided there are no material variations to or renewal of their employment arrangements. However, temporary and foreign residents must maintain a home in Australia during this period in order to apply the transitional rules.

Clarification has been provided in the Explanatory Memorandum to the Bill to confirm that a minor change to an employment arrangement, such as a salary increase or annual adjustment to the food component, will not trigger a material variation.

Substantiation

As with the previously proposed changes, substantiation is required for the accommodation component of a LAFHA, and in certain instances for the food component.

Employers are required to obtain documentary evidence from employees to substantiate the expenses incurred on accommodation, such as lease agreements. Substantiation will not be required for food expenses for an amount the Commissioner considers to be reasonable. The ATO will publish the reasonable food component each year. If employers choose to reimburse amounts in excess of the reasonable amount, the full amount must be substantiated in order to apply the exemption.

Some further, more subtle changes

The following are more subtle, but still important, changes:

• There is a shift from simply being required to live away from home, to the “duties of employment” requiring the employee to live away from home.

• The employee’s spouse can own/rent the home being “lived away from”.

• The home in Australia being “lived away from” need not be the employee’s usual place of residence if that is overseas, but must still be owned or rented by the employee and/or their spouse.

• Declarations regarding “living away from home” status continue to be required.

• Declarations for food expenses are to be accepted if the employee maintains substantiation for food expenses in excess of the ATO’s reasonable limit.

What arrangements will not be affected?

As with the previous proposal, the following taxpayers and arrangements should not be affected by the new reforms:

• employees operating under fly-in-fly-out or drive-in-drive-out arrangements within Australia;

• those receiving travel allowances who must travel from their usual place of work for short periods; and

• employees receiving FBT remote area concessions.

Key messages

Non-residents and temporary residents working in Australia continue to be the most impacted as they are no longer able to receive FBT-free LAFHA benefits unless they maintain a home in Australia that they are required to live away from.

The new laws also impact employers who send employees on domestic secondments for a couple of years, given that access to the LAFHA concessions is only available for the first 12 months of the secondment period.