GMT Client Alert Series - 2013/07
Jul 5, 2013
The taxation of fringe benefits in Australia was revamped last year and the implementation date deferred with new LAFHA rules applying to employees who are living away from home commencing October 1, 2012. Further legislative supplements to this law will take effect starting April 1, 2013.
Prior to the legislative changes to LAFHA beginning July 1, 2012, foreign workers in Australia qualified for a special tax treatment on their fringe benefits.
Australian employees are now only able to take advantage of the concessional tax treatment of LAFHA allowances and benefits for a maximum of 12 months, if not under a transitional LAFHA arrangement, provided they:
1- Maintain a home in Australia (no longer counts if the home is overseas) where they usually reside available for their immediate use and enjoyment during the period that their duties of employment require them to live away from home; and
2- Provide a declaration of living away from home to the employer; and
3- Can substantiate all expenses incurred on accommodation, food and drink (if the amounts for the food or drink expenses incurred exceed the reasonable amounts determined by the Commissioner of Taxation).
In the case of employees who are working on a fly-in fly-out and drive-in drive-out basis, there is no need to maintain a home in Australia and there is no 12 month limitation. Nevertheless, the employees will need to be able to substantiate the accommodation and food and drink expenses as well as provide the employer with a declaration about living away from home and in some situations, a declaration on substantiation.
The taxable value of the allowances can be reduced by the amounts of the actual verified accommodation expense and the amounts incurred for food or drink costs reduced by a statutory amount, if applicable.
The Commissioner prepared a Determination that regulates the reasonable amounts for food and drink expenses within Australia and overseas. The amount of the exempt allowance is the difference between the total of an employee’s expenses for food and drink substantiated by the employee minus the amount considered reasonable. For years commencing from April 1, 2013, revised amounts for food and drink for both in-Australia and overseas have now been recently released by the government.
For those employees who have Domestic (within Australia) LAFHA arrangements before May 8, 2012, the previous law may still apply. Unlike new arrangements, the concession will not be limited to a maximum of 12 months. Modifying the existing agreement with a “material variation” may nullify the favorable concessions.
If the employment arrangement is subject to a “material variation”, the 12-month maximum will apply from the earlier of the date of change or June 30, 2014.
We encourage readers to revisit our earlier alerts on this topic found on our website for those affected by these changes.
As a result of the aforementioned changes, Australia will not be that appealing to foreign workers and companies because the additional costs coupled with the high tax rates (45% maximum tax rate) will make the assignments more onerous. Employers will need to determine whether they will cover those additional costs or let the assignees absorb this burden.
Furthermore, Australians who live away from home within the country and do not maintain a residence in their home location will be affected by these rules. If they rent their homes, they will fail to maintain the home for personal use.
GMT recommends the following actions on the part of companies with international assignees in/to Australia in light of the above legislation:
1. Companies need to review and/or revise their contracts for assignment in Australia. Consider the additional costs with projections that incorporate both assignee income taxes and Australia’s Fringe Benefits Tax (FBT) that may also be affected. Revised compensation packages may need to be crafted.
2. Australian assignees will need to keep detailed records of accommodation and/or food & drink expenses and provide the company with a declaration of their away-from-home situation. This requirement should be communicated to the employees before they go on assignment and to those already in Australia.
3. GMT also recommends companies review their foreign assignment policies to capture the potential tax risks of not accounting for the above changes. Please consult your GMT advisors for assistance in mitigating these effects in Australia.