Draft LAFHA Legislation Released
Jun 6, 2012
The Australian Government has just released draft legislation regarding the proposed reform to the Living-Away-From-Home-Allowance (LAFHA) rules. The final submissions to the Australian government regarding the draft legislation closed on May 29, 2012 with the final bill scheduled for Parliamentary debate during this month. The final legislation will be effective from July 1, 2012.
The recently drafted bill confirms our prior guidance released in January of this year that temporary residents & foreigners working in Australia will effectively no longer be able to receive a tax-free LAFHA for their assignments to Australia. This will apply from July 1, 2012 and there is no transitional arrangement to allow current recipients of the LAFHA to receive it beyond June 30, 2012.
The only instance where a temporary resident can effectively receive a tax-free LAFHA (by claiming tax deductions for accommodation and food expenses) is if they establish a usual place of residence in Australia and are then required to live away from that residence to perform their employment duties. For example, an employee is assigned to Sydney and relocates there with his family. He rents a house in Sydney for his family. He is then required to work in Melbourne for 3 months and is paid a LAFHA for the costs of accommodation and food in Melbourne. In this instance, he will be taxed on the LAFHA but will be able to claim a tax deduction for his actual accommodation and food expenses in Melbourne – the house in Sydney would have to be maintained by him (rest of the family would typically remain in the Sydney house).
Recent inaccurate press releases stated that there would be an extension or grandfathering of the prior LAFHA concessions to June 30, 2014 for ALL current LAFHA recipients. However, it is now clear that this extension was ONLY meant to apply to LAFHA recipients who are required to live away from a home that they are maintaining in Australia and who had a LAFHA arrangement in place by 7:30pm on May 8, 2012. That is, the above transitional rules were only meant to apply to Domestic LAFHA arrangements in place by May 8th, 2012 (as in the above example), not expatriate LAFHA arrangements.
In addition to the above transitional rules, Domestic LAFHA arrangements NOT in place by May 8th, 2012 will only apply for a maximum 12 month period in a single work location (similar to US tax law).There are further requirements necessary to be met for these Domestic LAFHA arrangements, which should be discussed with your GMT Advisor.
From July 1, 2012, employers and employees will now need to substantiate these claims to maintain tax-free LAFHA treatment for Domestic LAFHA arrangements. If unsubstantiated, these Domestic LAFHA payments will be treated as employment income to the employee and subject to income tax. Also, direct payments to landlords by the employer or reimbursement by the employer of employee’s accommodation costs will be subject to fringe benefits tax (to the employer) with corresponding deductions for those expenses that meet the LAFHA requirements. Permanent Residents currently receiving substantiated LAFHA payments can continue receiving them with the tax concessions they currently enjoy.
As noted above, the transitional exceptions are very limited and unlikely to apply to most global companies assigning employees to work in Australia. As this legislation is now in its final stages prior to enactment, companies now need to assess the new legislation’s impact on its assignee costs and strategic business objectives.
GMT recommends the following actions on the part of companies with temporary assignees in/going to Australia regarding this new legislation:
- Companies should assess the financial impact of temporary assignees in Australia who are receiving LAFHA payments for both Aussie income tax and Fringe Benefit Tax under this proposal. Accruing for increased tax costs of current assignments or determining viability of pending assignments should be undertaken soon before the proposed law’s July 1st enactment. GMT can assist with these cost projections.
- Permanent residents will need to begin substantiating their LAFHA expenses for tax-free treatment. This change should be communicated to these employees so that a new cooperative approach to tax compliance can be agreed and implemented in a timely manner.
- GMT recommends companies review their foreign assignment policies to adjust for this change.We can assist with re-drafting these policies.