Proposed changes to the tax treatment of living away from home allowances

by 19 Jan 2012

Are you prepared for the additional costs of employing temporary overseas workers?

Chris Barton, Partner and Bhavisha Mahalingam, Employment Lawyer

The Government has announced proposed changes to the tax treatment of living away from home allowances (LAFHA) that will have a significant impact on employers and temporary overseas workers.  The changes are expected to take effect from 1 July 2012.

In the lead up to the implementation of these reforms, employers should urgently consider how these changes will impact: 

  • current employment arrangements for temporary overseas workers,
  • the employment costs of temporary overseas workers,
  • 457 visa holders immigration requirements, and
  • workforce recruitment and retention strategies.

Under the current arrangements, certain living away from home allowances paid to eligible temporary overseas workers are exempt from both income tax and fringe benefits tax. These significant LAFHA tax concessions have helped Australian employers to attract and retain temporary overseas workers and to compete for talent with employers in lower tax jurisdictions.

Under the Government’s proposed changes, the LAFHA tax concessions will only apply where temporary overseas workers are living away for work from a home that they maintain for their own use in Australia.  Overseas workers will be able to claim a tax deduction for certain accommodation and food expenses provided they can be substantiated. Certain exemptions from fringe benefits tax will apply but these will be subject to substantiation requirements.

In all other cases, living away from home allowances paid to temporary overseas workers will be subject to income tax and payments made to temporary overseas workers to reimburse them for their accommodation expenses will be subject to fringe benefits tax, which will be payable by the employer.

It is unlikely that many temporary overseas workers will be living away for work from a home that they maintain for themselves in Australia. Accordingly, most of them will cease to be eligible to receive the LAFHA tax concessions from 1 July 2012 if the proposed changes go ahead. 

The effect of the proposed changes therefore is that like their Australian counterparts, most temporary overseas workers will have to meet their accommodation expenses out of their aftertax income. Their gross remuneration will have to increase in order to maintain their after tax income at current levels.

For employers, the effect of the proposed changes is likely to be an increase in the costs of employing temporary overseas workers. In addition to employee demands to increase gross remuneration to offset the additional income tax liability and the employer liability for fringe benefits tax where accommodation expenses are reimbursed, employment on-costs such as compulsory superannuation contributions and State payroll tax obligations will also increase. 

In view of the impact that the proposed changes will have, employers should urgently review their employment contracts for temporary overseas workers as well as their policies and procedures with regard to LAFHA to identify the available options. Employers will also need to consider a communication strategy to inform their temporary overseas workers of the proposed changes and to discuss the arrangements that will apply if the proposed changes go ahead.

Subject to the employment arrangements in each case, the options available to employers of temporary overseas workers include:

  • continuing to pay the living away from home allowance – the overseas worker will bear the tax liability under the income tax regime,
  • increasing the overseas worker’s gross remuneration to ensure that there is no reduction in their take home(after tax) pay, or
  • renegotiating the employment arrangements so that the living away from home allowance is paid as a reimbursement of accommodation expenses actually incurred – in this case the employer will bear a fringe benefits tax liability.

Employers will also need to consider visa conditions and requirements arising under the Migration Act and Regulations in relation to their temporary overseas workers, in particular 457 visa holders.

 

 

Chris Barton

 
Partner
 
+61 2 8224 8520  
cbarton@fragomen.com  
www.fragomen.com  

Other topics:

  • Centre for International Employment and Migration (CENTIEM) – a Fragomen initiative and business unit within Fragomen Australia www.centiem.com