Australia: Living Away from Home to Become More Expensive for Expatriate Employees
On 8 May 2012, as part of the 2012/2013 Federal Budget1 announcements, the government provided further details about the reform of Australia’s living-away-from-home (LAFH) regime. The changes will significantly limit the availability of LAFH benefit tax concessions for foreign nationals who are working on temporary assignments in Australia. The changes to the LAFH regime are being introduced to address the government’s concerns that LAFH benefits are being provided in a way that is contrary to policy intent.
To address the above concerns, the government proposes to limit the availability of LAFH benefits by introducing the following changes:
• Only employees who maintain a residence for their own use in Australia, and who are living away from that home for work purposes, will be entitled to LAFH food and accommodation benefits;
• Individuals will be required to substantiate their actual expenditures on accommodation and food beyond a statutory amount;
• The tax concession will only be available for a maximum period of 12 months for an employee in respect of a particular work location.
The 12-month limitation will not apply to “fly-in-fly-out” workers.
The Treasury has indicated that draft legislation will be released in May 2012 and the changes, if enacted, will apply to new arrangements entered into after 7:30pm (local time) on 8 May 2012, starting on 1 July 2012. Transitional rules mean that existing arrangements will be grandfathered until 1 July 2014.
Impact of Changes
As stated above, the changes will significantly limit the availability of LAFH benefit tax concessions for foreign nationals who are working on temporary assignments in Australia. Access to the LAFH benefits for foreign nationals will be limited to those employees who maintain a home for their own use in Australia (the home must be available at all times and not be rented out) and are required to live away from that home for employment, i.e., fly-in-fly-out arrangements within Australia. This means that, effectively, very few foreign nationals will be eligible to receive LAFH benefits tax concessions from 1 July 2012, subject to being eligible under the transitional rules.
Those temporary residents who continue to receive LAFH benefits but are not living away from a home in Australia will be taxed on the LAFH allowances. Alternatively, their employers will be liable for Fringe Benefit Tax (“FBT”) on the LAFH benefits provided.
Extension of LAFH Policies to Australian Citizens and Permanent Residents
The budget announcement now extends the limitation on LAFH arrangements to Australian citizens and permanent residents, which is a significant departure from the initial announcement in late 2011.
Tax Treatment of LAFH Benefits
Where a cash LAFH allowance is provided to employees, the allowance will now be taxable income to the individual. However, the individual will be entitled to a deduction in his or her Australian income tax return for accommodation and food costs that can be substantiated.
Where employers reimburse accommodation and food expenses, the expenditure will continue to be taxed as an employer fringe benefit. An FBT exemption for the employer will be available for eligible employees provided the accommodation and food costs can be substantiated.
Impact for Employers
The LAFH changes will increase the cost of employment in Australia. The following measures should be considered by employers:
• How they will approach the provision of LAFH benefits from today.
• A review of new assignments to help ensure the additional costs are being captured.
• An update of any internal check-lists to determine whether employees will be eligible for the concession.
• What the additional payroll tax and Superannuation Guarantee implications and costs are that will arise on LAFH benefits that do not qualify for the tax concessions.
It is welcome that the government acknowledged the content of various submissions by concerned parties including transitional measures previously not included. However, it was surprising that the measures were extended to domestic assignments and a shorter time limit imposed than currently in practice.