Most New Zealanders working in Australia and receiving living away from home allowances (“LAFHA’s”) will not be eligible to benefit from the LAFHA tax concessions after 1 October 2012.
In May 2012, the Australian Treasurer announced major changes to the tax treatment of LAFHA’s removing most of the tax concessions available. As we predicted, there was significant resistance from large businesses and, after a period of consultation, the Government amended a number of the original proposals.
The principal change to the existing law is to the home which is used as the reference point for entitlement to the benefit. Currently, if your home is New Zealand (regardless of whether you maintain a home there or not) and you are required to live (away from home) in Australia for work purposes, you are entitled to a non-taxable LAFH Allowance. After the changes, you will need to maintain a home in Australia and your work must require you to live away from that Australian home before you can benefit from a LAFHA with no tax consequences.
The main features of the proposals which have now been passed by the House of Representatives are:
- The new rules will apply from 1 October 2012.
- There are major carve outs for fly-in fly-out and drive-in drive-out workers.
- LAFH allowances and benefits will continue to be subject to the FBT system. (The original proposal was to tax the allowances in the hands of the employee.)
- Employees will need to maintain a home in Australia from which they “live away” in order to qualify for concessions.
- The ATO will publish LAFHA amounts that it considers to be “reasonable”. Where LAFHA’s are paid to employees in excess of those ATO amounts, documentation substantiating the amount will be required.
- The concessions are only available for 12 months for a particular employee in a particular location with a particular employer.
- Transitional rules will be available until 30 June 2014 for employees with arrangements in place prior to 8 May 2012. Temporary residents and foreign residents must maintain a home in Australia during this period to qualify. Minor change such as a salary reviews or annual adjustment to food component should not affect continuity of the arrangements.
The politicians say that the changes are required to address rorting of the current system. In our opinion, they go much further than is necessary. Along with the removal of the 50% CGT (capital gains) discount for foreign residents, they seem to signal a shift in Australia’s attitude to encouraging foreign investment.
We expect the rules to continue through the Senate and receive Royal Assent. This means that employers with existing LAFHA arrangements need to talk to affected employees and determine their post-1 October 2012 policies.
Update provided by Sydney based Henderson Edelstein & Co partner – Weston Ryan.