The government’s changes to the tax concessions for living away from home (LAFH) allowances and benefits have now been legislated. The Tax Laws Amendment (2012 Measures No. 4) Bill received the Royal Assent on 28 September 2012 (to become Act No. 142 of 2012). The final legislation incorporates the recommendations made by the House of Representatives Standing Committee on Economics, which clarified and simplified the changes initially proposed by the government in the first reading of the Bill.
The reforms to the tax treatment of LAFH allowances and benefits were originally announced on 29 November 2011, by the Treasurer the Hon Wayne Swan MP, who commented that the “tax exemption is being increasingly misused by a narrow group of people, particularly highly paid executives and foreign workers, at the expense of Australian taxpayers”. According to the Treasurer, rorting of this tax exemption has seen the total amount of tax-free LAFH allowance reported by employers to the Australian Taxation Office increase from $162 million in 2004-05 to $740 million in 2010-11.
The government’s concerns with the exploitation and misuse of the provisions included:
· People have been able to access the concession even if they are not maintaining another home in Australia (including people who have sold their old home or are renting it out)
· The tax concession has been applied in relation to cash payments in excess of the actual amount spent on accommodation and food
· What was meant to be a temporary tax concession has been claimed for long periods, often 3 or 4 years or more.
We have previously pointed out problems with the government’s proposed changes to the taxation treatment of living away from home allowances and benefits in the first reading of the Bill (see HERE, which includes links to earlier news items). While positioned by the Australian government as a clamp down on executive perquisites, the net effect will be to significantly constrain the flexibility of companies to respond to major investment opportunities, especially those involving the temporary import of skilled foreigners. Moreover, it was belatedly recognised that the draft legislative Bill had failed to address significant transitional issues.
The two problems with the initial draft that had elicited the most attention were the vagueness of the material changes to employment contracts and transitional rules for non-permanent residents. The final legislation has addressed both of these issues, as well as others that were raised by the House of Representatives Standing Committee on Economics.
The final legislation:
· Provides a clear and inclusive definition of what constitutes a ‘material variation’ to a contract that would disqualify an employee from eligibility for the transitional provisions, which defer the start date for employees who entered into employment arrangements prior to 8 May 2012 (“Budget time”). For the purposes of the transitional rules, an annual salary review is not a material variation to an employment arrangement. Changes to an employment arrangement to reflect other annual adjustments, such as the food component of a LAFHA, do not constitute a material variation.
· Extends transitional rules for temporary residents with employment arrangements in place prior to the Budget time. Under the final version, for temporary residents who maintain a home in Australia for their immediate use and enjoyment at all times, the requirement that the fringe benefits must relate to the first 12 months the employee is living away from home does not apply until 1 July 2014.
· Leaves the taxation treatment of LAFH allowances and benefits in the fringe benefits tax (FBT) system, instead of being split between FBT and income tax, as originally proposed.
· Tightens the eligibility criteria re the 12 month limit per location and the maintenance of a ‘usual place of residence’ within Australia, to limit exploitation of the tax concession, on the basis that the tax concessions for LAFH allowances are intended to be temporary and are not designed to support workers who have essentially moved residence to gain or retain employment
· Recognizes the unique nature of remote construction sites and exempts of fly-in-fly-out (FIFO) and drive-in-drive-out (DIDO) workers from the 12 month limit
· Expands the definition of FIFO and DIDO workers to include workers who do not meet the test of maintaining a usual place of residence within Australia, and clarifies the circumstances in which the 12 month time limit will be paused
· Retains the requirement that an employee must be maintaining a primary residence, but clearly articulates the definition of an employee’s ‘usual place of residence’ and ‘ownership interest’
· Classifies all LAFH allowances and benefits under fringe benefits tax (FBT) regime, rather than having different elements subject to different tax regimes as was suggested in the first reading of the Bill
· Allows partners or spouses to incur deductible expenses on behalf of an employee where all other eligibility requirements are met (all accommodation expenses will need to be substantiated; food and drink expenses will only need to be substantiated if they exceed the amount prescribed by the Commissioner of Taxation)
The text of the Tax Laws Amendment (2012 Measures No. 4) Bill 2012 and explanatory memoranda are available HERE.
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