From 1 July this year, temporary residents who are not maintaining a home for their own use in Australia, which they must live away from for work, will no longer be eligible to receive the living-away-from-home allowance (LAFHA).
From an employment law perspective, employers will have to carefully review existing employment contracts and other arrangements in assessing the options open to them. Retention strategies, remuneration options and policies with regard to permanent residency will have to be considered in managing employee concerns.
Communicate the key changes
According to an employment law expert at Fragomen, many employers were left confused after the final changes to LAFHA were announced on budget night – some firms even briefed their employees with incorrect information as a result of Treasury’s ambiguity in communicating the reforms.
However, the latest document from the department of Treasury now sets out the changes in no uncertain terms. From July 1 2012 the following changes will apply:
access to the tax concession for temporary residents will be limited to those who maintain a residence for their own use in Australia, that they are required to live away from for work (such as 'fly-in fly-out' workers); and
all individuals will be required to substantiate their actual expenditure on accommodation, and food beyond a statutory amount.
From 1 July 2012, the following changes will apply for arrangements entered into after 7.30pm (AEST) on 8 May 2012, and from 1 July 2014 for arrangements entered into prior to that time:
access to the tax concession for permanent residents will be limited to those who maintain a residence for their own use in Australia, that they are required to live away from for work; and
a 12 month time limit will be imposed on how long an employee can receive the tax concession at a particular work location.
will not affect the tax concession for 'fly-in fly-out' arrangements, as these employees will not be subject to the 12 month time limit;
will not affect the tax treatment of travel and meal allowances, which are provided to employees who have to travel from their usual place of work for short periods (generally up to 21 days).
To read the complete document click here.
LAFHA changes may mean employers cough up
Some employers may have made a commitment in worker’s contracts which promises to deliver a particular after-tax outcome. As a result some employers may have no choice but to make up the shortfall, and increase the worker’s gross income to match what they had previously pocketed when they received LAFHA. Likewise, bumping up an employee’s remuneration may be necessary for employers who offered schemes of tax-equalisation – essentially to put their employers in the same position they would have been in had they stayed in their home country. “Depending on those contractual arrangements, there’s going to be some employers who are forced to compensate people for the adverse effects of these tax changes,” employment lawyer Chris Barton from Fragomen said.
Barton added that as the changes are just 5 weeks away, now is the time to re-look at employee contracts and determine where the organisation stands.
Turn the changes into clever retention strategies
The view of many employers is that employees are just going to have to wear the cost, as any changes to the tax outlook which adversely affect employees are out of the organisation’s control.
Yet, it stands to reason that when employees are faced with losing a tax benefit, the first thing many would their employer would be: “Are you going to increase my remuneration to put me in the same after-tax position?” Barton commented that employers that are not contractually bound to offer a particular after-tax outcome may wish to consider the risks of doing nothing – for example, losing the employee to another organisation.
Employees who had put off applying for residency because of the LAFHA tax concession may now be asking their employer to support them for permanent residency. From the 1st of July, the government is also changing the scheme for employer-supported transitions from temporary to permanent residents. 457 visa holders applying for residency must now have been with their employer for 2 years, whereas previously it was 12 months.
While the employee may not be happy about losing these tax concessions, for an employee who has been here for one year, an enticing retention strategy may be to put support for residency on the table, if they agree to stay for another year.
The cost of gaining permanent residency generally incurs $3,625 in government lodgment fees, and legal costs are typically $3,800 to $4,500, according to Fragomen.
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