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Q&As For Proposed LAFHA Changes
December 14, 2011
These questions and answers have been put together to help you learn more about the proposed changes to LAFHA legislation and to better understand how they could affect you.
1. What are the proposed changes recently announced by the Australian Government?
Two proposed changes were announced in the Government’s mid-year budget review whilst a third change outlined below is included in the respective discussion paper. - Requiring individuals to substantiate their actual expenditure on accommodation, and food beyond a statutory amount.
- Limiting access to LAFHA for temporary residents to those who maintain a home for their own use in Australia that they are living away from for work.
- The taxation treatment of LAFHA to be administered under the income tax system rather than the current fringe benefit legislation.
Okay, but what does this actually mean?
Substantiating actual expenditure...
With regards to the first change, current legislation allows the allowance to be calculated based on a ‘reasonable’ amount. This is regardless of whether the amount is actually being incurred and expensed by the employee. This change will ensure that whilst the amount remains reasonable, it also represents the actual expense incurred by the employee in living away from home.
Maintaining a home for use in Australia...
The second change effectively restricts LAFHA entitlement to only domestic relocations. If enacted, this change will deny LAFHA to any temporary resident who cannot establish that they are living away from a home located within Australia.
Here’s an example, assuming all other criteria is met. Take an employee on a temporary visa, living away from their overseas address who has relocated to Sydney for work purposes. Under the current legislation the employee would be able to access the concession. However, under the proposed change, Sydney is seen as the employee’s usual residence within Australia and therefore unless they are living away from this residence, they will not be entitled to LAFHA.
Administering LAFHA under income tax rather than fringe benefit tax...
The third change relates to the legislation which will administer the taxation of the allowance. Currently the allowance is seen as an employer allowance and governed under the Fringe Benefit Tax (FBT) Act. The proposed reform would change the governing legislation to the Income Tax Act. This will result in the tax treatment of the allowance being similar to other employee allowances such as a car allowance. The LAFHA paid will be reported on the year end payment summary and will be assessable income to the employee. The employee will be entitled to an income tax deduction for accommodation expenses incurred as well as food expenses beyond a statutory limit (beyond the limit that the employee would have incurred had they remained at home).
2. How will this impact the services offered by LAFHA.com.au?
The first change will have no impact on our service. Our method of calculation ensures that the current accommodation component is based on actual and reasonable expenditure whilst the food component is within the amounts advised by the ATO. We are already compliant with this proposed change and welcome the clarity we hope it will bring with regards to determining what can be considered to be a reasonable amount. The second change will have a significant impact on the advice we provide to clients with regards to the eligibility of an employee who is classified as a temporary resident. The proposed change suggests that LAFHA entitlement will only genuinely benefit domestic relocations where the employee can show that they are living away from a home maintained within Australia. Therefore, any current arrangements where the employee has shown to be living away from an overseas location will need to be reviewed and possibly ended, should the change become effective.
The third change will not alter our routine service delivery, however additional guidance will need to be provided to ensure the allowance is appropriately set up and accounted for, both from the employers and employees perspective.
3. What is the likelihood of these changes being actioned?
The Government is now undertaking an extensive consultation process on the reforms with interested parties invited to make comments. Submissions close on 3rd February 2012 and after this time we will be in a better position to assess the likelihood and nature of the changes occurring.
4. When will these changes be actioned?
It is the Government’s intention to make any confirmed changes effective from 1st July 2012 on both new and existing arrangements. 5. How is a temporary resident defined? A temporary resident is an individual who has entered Australia on a temporary visa. Temporary visas are distinguished from permanent visas as they don’t allow a person to remain in Australia indefinitely. An example of a temporary visa is the Employer Sponsored 457 Visa. Holders of temporary visas who are entitled to LAFHA under current legislation are likely to find they don’t meet the criteria should the changes become effective. 6. Will permanent residents be affected by these reforms?
From a financial perspective, permanent residents will not be affected by these reforms, unless they are receiving an amount in excess of their actual expenses. This is unlikely to be the case if the LAFHA has been applied as per our guidelines. From an administration perspective there will be a greater need to retain documentation to ensure the employee can substantiate their expenses and thus allow them to be offset against their assessable income. 7. What about New Zealand citizens - will they too be affected by the proposed changes? Currently there is little information with regards to the impact the changes will have on employees relocating from New Zealand. On arrival in Australia, most New Zealanders are automatically granted a Special Category Visa which allows them to remain and work in Australia indefinitely. This suggests that individuals on this visa won’t be classified as temporary residents and therefore the change around eligibility won’t apply. It is too early however to confirm what impact the changes will have on New Zealand citizens. Further information will follow upon the completion of the consultation process in February 2012. 8. Are there any arrangements involving temporary resident employees that aren’t impacted by the changes? The reforms will not prevent temporary residents who are ‘fly-in fly-out’ workers in Australia from accessing the tax concession and will not affect employees who receive allowances for having to travel from their usual place of work for short periods. 9. What about related expenses - such as flights and storage - has there been any change with regards to these? There is no specific mention of related expenses in the proposed changes. However the proposed change does look to only provide LAFHA support to domestic relocations and therefore costs relating strictly to overseas employees such as school fees and return flights to the home country may be impacted as a result. 10. Where can I found out more? You can review the consultation paper here. Another way you can stay in touch and voice your opinions is through a LinkedIn Group we have set up: Understanding Proposed LAFHA legislation changes.