Living Away From Home Allowance (LAFHA) Tax changes on the horizon for Temporary Residents (Visa 457) working in Australia
Temporary Residents (Visa 457) employed in Australia need to be aware of proposed changes to Australia's tax laws. The changes, if legislated, would have a significant impact on the costs associated with expatriate appointments involving contracts of less than four years.
For many years, the Australian government has sought to mitigate skill shortages, particularly in remote areas, by encouraging the temporary placement of non-Australians into local positions. They have done this in two ways: by streamlining the granting of temporary residence, and through the provision of tax concessions. Principal amongst the latter is the ‘living away from home allowance’ (LAFHA).
In its current form, LAFHA effectively allows expatriate employees to receive extra remuneration – free of tax – to cover their additional costs whilst living in Australia. These costs would typically include higher living costs (particularly in remote areas), health care costs (as expats have only limited access to Australia’s national health insurance scheme, Medicare) and children’s education. State-funded education is not available to temporary residents in some states.
The tax benefits of LAFHA are also available to Australians who are living away from their normal place of residence, e.g. a Sydney resident living temporarily in Perth.
The proposed changes would limit the availability of LAFHA tax concessions to those who maintain a permanent home in Australia. In other words, expatriates working temporarily in Australia would no longer qualify for the tax concessions unless they establish a permanent home in one city, then relocate to the place of employment. This is obviously highly impractical. Instead, any extra living away from home payments made to employees would be subject to the federal fringe benefits tax (FBT).
These changes could significantly reduce the after-tax wages of Temporary Residents (Visa 457) working in Australia.
The reasoning behind the proposed changes is what the government perceives as overuse of the LAFHA concessions. Government figures suggest that there has been a significant increase in the claiming of these benefits in recent years, with claims made in circumstances beyond what was originally intended. In some cases, it is believed that employees are receiving as much as 90% of their salary in the form of the tax-free living-away-from-home allowance.
At the moment the Australian government is likely to make these changes effective from 1 July 2012. There are not expected to be any transitional rules put in place to protect existing contractual arrangements.
As in all matters relating to taxation, the likely effects of the proposed changes won’t be known in any detail until the draft legislation becomes available. Nevertheless, we suggest that any company likely to be affected by the changes should stay abreast of the situation and plan accordingly. Where tax is concerned, it’s always better to be a step ahead where you can.
Gordon Hatch
Taurus Accounting Services Pty Ltd
Registered Tax Agent Number 73646000
Level 6, 2 Help Street Chatswood NSW 2067
Tel: + 61 2 9411-4161
Fax: + 61 2 9412-1518
Email: gordon@taurusfinancial.com.au
Web: www.taurusfinancial.com.au
Securitor Financial Group Limited is not responsible for advice provided by your Adviser through Taurus Accounting Services Pty Ltd.