The ATO is stepping up efforts to target rorting of tax-free living-away-from-home allowances, amid fears employers and employees are using contrived arrangements to get a tax-free salary boost. Fringe benefits tax rules allow employers to pay tax-free LAFM allowances to employees whose work requires them to temporarily relocate from their home. The allowances, which are generally tax free, cover food and accommodation.
However, in the last few months the ATO has been writing to employers who provide large LAFM allowances to staff to review their arrangements. In some cases it has been found that LAFH allowances can account for 90% of a worker's total remuneration. Yasser El-Ansary, senior tax counsel at the Institute of Chartered Accountants, says the targeted initiative is not surprising. If you are an employer of an employee, Please read further how it may affect you:
What is the Living Away From Home Allowance? Living Away From Home Allowance (LAFHA), as defined by the ATO, is "- an allowance that must be in the nature of compensation to the employee for additional expenses incurred as a consequence of an employee being required to live away from their principle place of residence in order to perform the duties of that employment."
Note the use of the words "ADDITIONAL EXPENSE" and "PRINCIPLE PLACE OF RESIDENCE". These are clear indications of the nature and intention of LAFHA being an allowance for inconveniencing an employee.
Who is eligible? Any employee deemed to be required to live away from their principle place of residence, whether interstate, international or on a residency visa. A very common misconception is that a contractor holding a Working Holiday Visa is able to claim LAFHA.
This is NOT the case and is clearly stated in the ATO draft legislation for this allowance. Interestingly, this legislation was initially drafted up back in May 2000 but has only really become a talking point over the past 6 months or so. So, who is eligible and who is not; • YES - employees performing duties away from their residence, • NO - working holiday visa holders. It is also worth noting at this stage that once the employee/contractor starts to make their own decisions regarding lifestyle and employment changes, LAFHA ceases to be payable. For example, if an ITG employee moves interstate with ITG then transfers employers, LAFHA will cease.
Actually, even someone living away from home with work isn't necessarily able to claim it unless they can prove there is a difference between what they were paying in rental costs and what they will be required to pay in rental costs during the period of inconvenience. What I mean is this; if an ITG contractor in the UK moves to Australia with ITG to work and has a current mortgage in the UK, the additional amount of cost for rent is claimable.
Here Are 9 Points To Consider
1. A living-away-from-home allowance exists where it is reasonable to conclude from all the surrounding circumstances that some or all of the allowance is in the nature of compensation to the employee for additional expenses incurred, or additional expenses incurred and other disadvantages suffered, because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment. Additional expenses do not include expenses for which the employee would be entitled to an income tax deduction.
2. The whole or such part of the allowance as satisfies these tests is a living-away-from-home allowance fringe benefit, the taxable value of which is calculated in accordance with the rules contained in section 31. The taxable value is so much of the allowance as qualifies as a living-away-from-home allowance fringe benefit reduced by either or both of two components being the "exempt accommodation component" and the "exempt food component". Both of these terms are defined in section 136 of the Act.
3. The exempt accommodation component is so much of the allowance as it is reasonable to conclude is in the nature of compensation for additional expenses on accommodation that the employee could reasonably be expected to incur.
4. The exempt food component is so much of the allowance as is reasonable compensation for additional expenses on food. It is arrived at by first ascertaining the "food component" of the allowance, as defined in section 136. The food component is so much of the allowance as is in the nature of compensation for expenses the employee could reasonably be expected to incur on food and drink.
5. If the amount of the food component is set with the intention that it cover all food costs of the employee and (where applicable) his or her family, the exempt food component is the excess of that component over what the employee would normally expend on food if he or she were not living away from home. Those normal home food costs, referred to as the "statutory food amounts", are set in the Act at $42 per week for each adult and $21 per week for each child who is under 12 at the beginning of the relevant year of tax. Thus, if an employee with a wife and one child under 12 is receiving $130 a week to cover all food costs, the exempt food component is $130 reduced by $105, i.e., $25 of the allowance is exempt from fringe benefits tax.
6. If the food component of the allowance has been set to reflect only additional costs by reducing the allowance for home food costs, and the amount of the reduction on this account equals or exceeds the statutory food amounts, the amount of the net food component is the exempt food component.
7. If, however, the estimated home food costs taken into account in setting the allowance are less than the statutory food amounts, the food component reduced by the amount by which the statutory food amounts exceed the estimated home food costs is the exempt food component. For example, if the food component for a single person has been set at $100 after allowing for estimated home food costs of $30, the exempt food component would be $100 - ($42 - 30), i.e., $88.
8. The taxable value of a living-away-from-home allowance benefit may not be reduced on account of an exempt accommodation component or exempt food component unless the employee gives the employer a declaration, in a form approved by the Commissioner of Taxation, that sets out particulars of the employee's usual place of residence and actual place of residence for the period during which the living-away-from-home allowance was paid in the year of tax. The declaration is generally required by the date of lodgment of the employer's relevant fringe benefits tax return. However, for the purpose of quarterly instalment statements of fringe benefits tax for the quarters ending on 30 September and 31 December 1986 of the transitional year, the declaration is required by the date of lodgment of those statements due on 28 October 1986 and 29 January 1987 respectively.
9. This ruling contains guidelines for determining the circumstances in which an allowance paid to an employee is to be treated as a living-away-from-home allowance. It also indicates the conditions to be satisfied in order that an employee may give an employer a declaration of the kind required to establish that the employee was living away from his or her usual place of residence during the period when the allowance was paid. Finally, the ruling explains the principles that distinguish between a travelling allowance and a living-away-from-home allowance.
If another ITG UK contractor moves to Australia with ITG and ends a current rental lease to move, they are NOT able to claim a full allowance, only the amount of difference in the rental costs if the rental costs in Australia happen to be greater than the UK. This is clearly defined by the ATO and that is how it is assessed during an ATO audit.
Overpayment will have to be paid back to the ATO by the contractor/employee in all cases, without exception. Most contractors/employees are not told of this when they sign up for LAFHA with a management company. It's a big shock when you get a $25,000 tax bill with payment required within 30 days to the ATO.
How should someone go about determining whether they are eligible? Simply either talk to ITG and we can provide you with a copy of the legislation via email or contact the ATO.
What are the financial benefits of claiming it? Provided you are eligible, the financial benefits can be excellent. As the term 'allowance' suggests, it can provide significant cost savings and tax effectiveness for the average employee/contractor. All additional costs incurred by residing outside of a principle place of residence for business purposes can be provided to an employee tax free, although certain allowances incur FBT.
Haven't there been some changes in the law recently regarding this allowance? As mentioned above, there have been no specific changes to the legislation of late but the ATO have been making a concerted effort to audit and track down employers and employees that are continuing to abuse the system.
It is commonplace to hear of a typical overseas contractor who has been getting LAFHA for many years but has had many different employers during that time - maybe 2-3 end clients and 1 management company. This person is NOT eligible for LAFHA and will be caught should the ATO audit their personal returns or any of the company's they have worked for.
One thing worth noting is that the ATO openly speaks of its intention to roll out this legislation by the end of the next financial quarter - meaning the end of September 2003 - which will spell the end of contractors and management companies abusing LAFHA plus provide both with significant headaches, if only financial ones in the first instance.
As an example, if a contractor has been claiming LAFHA incorrectly on advice from their management company for 2 years, at a typical weekly rental cost of $400 in Sydney, the contractor will be liable to pay back the tax component of that allowance to the ATO usually within a 30 day payment period or severe interest and penalties may apply. In this example, that equates to annual rental costs of $20,800 per year over two years meaning that the contractor may be required to pay back up to 47% of $20,800 x 2 equally around $19,500 in tax owed to the ATO.
Whilst you may argue to the ATO that the management company provided you with the initial 'advice', the legislation clearly states that "- these allowances should be treated as income and are subject to PAYG taxation." - essentially meaning that incorrect assessment and payment of LAFHA by a management company just to entice you to work through them is likely to financially cripple you for many years to come.
One final comment to note - I mentioned that the ATO have stated their intention to roll out this legislation later this year (2003) but what I also should mention is that they intend to audit each and every management company shortly after. So if you are claiming LAFHA allowance through a direct employer or a management company, my advice would be to read a copy of the ATO legislation and talk to someone about your personal situation before continuing to claim it.
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