Changes to Living Away from Home Allowances

It is currently possible for an employer to compensate an employee who is living away from home (LAFH) for work purposes with either an allowance or benefits for the additional expenses the employee will incur as a result of being away from their usual place of residence.

Regardless of whether an employer provides this compensation as an allowance, reimburses expenses or pays for benefits directly, it will be treated as a fringe benefit.  The benefit provided by the employer can then be exempt from Fringe Benefits Tax (FBT) where it represents reasonable accommodation and food costs. 

The Government has recently announced a number of significant changes to the way LAFH allowances and benefits will be taxed.  The changes are proposed to apply from 1 July 2012 to both new and existing arrangements. 

Temporary residents

From 1 July 2012, access to the FBT exemption by temporary residents will be limited to those who maintain a home for their own use in Australia, and which they are living away from for work purposes.  LAFH benefits provided to temporary residents who do not maintain a usual place of residence in Australia that they live away from will be subject to FBT.

Maintaining a residence

A temporary resident will be considered to maintain a home for their own use in Australia when this is available at all times for their personal use and enjoyment.  A home can be either rented or owned by the temporary resident, but must be available for their use at any time.  This means that the home cannot be rented out or sub-let while the temporary resident is living away from it.

Allowances

A LAFH allowance will no longer be deemed to be a fringe benefit and will instead be treated as assessable income to the employee, regardless of whether they are a permanent or temporary resident.  This change will ensure that an LAFH allowance is treated for income tax purposes on a basis consistent with other allowances.

A deduction will be able to be claimed by the employee against the allowance for accommodation and food costs incurred.  However, this will not be possible if the employee is a temporary resident who does not maintain a home for their use in Australia, which they are required to live away from for work.

Substantiation requirements

LAFH benefits reimbursed to an employee will be exempt from FBT only where these expenses are actually incurred.  Proof will need to be provided by employees, but not for reasonable food expenses.

The ATO will provide guidance each year on what is considered to be reasonable.  This will most likely be similar to information currently provided on the reasonable food component of an LAFH allowance for expatriate employees.  If an employer chooses to reimburse amounts in excess of the reasonable limit determined by the ATO, the full amount must be substantiated.

No evidence will be required where an employer provides accommodation and food directly to an employee.  However, the employee must provide the employer with an annual declaration stating that they are living away from their usual place of residence. This declaration is also required when LAFH benefits are reimbursed to an employee.

When an employee receives an LAFH allowance they will need to substantiate expenses when determining what deductions can be claimed.  However, evidence will not be required for food expenses considered reasonable by the ATO.

PAYG Withholding Tax

As taxable allowances are ordinarily subject to PAYG withholding tax, the ATO will allow a variation of this tax where an employee intends to claim deductible expenses.

What now?

Remuneration for employee travel is a complex matter. Employers must have a clear understanding of how these changes impact their existing and future arrangements.   There are also significant benefits associated with utilising the concessions when eligible.  Please contact us should you require assistance in the structuring of remuneration for employees. 

Published : 10 February 2012