The federal government’s proposed changes to the living-away-from-home allowance (LAFHA) are expected to take effect from 1 July 2012, and new data reveals employers are deeply concerned about the impact on recruiting, and paying for, overseas talent.
When the changes come into effect, the government will:
require LAFHA recipients to substantiate their actual expenditure on taxable items
limit access to LAFHA for relocations within Australia
transfer administration of the taxation of LAHFA to the income tax system instead of the current fringe benefit legislation
A study of 64 Australian organisations by consulting firm Aon Hewitt has revealed that employers from a range of industries fear the changes will increase their remuneration costs. Although nearly all organisations surveyed were not contractually obliged to compensate for the loss of the allowance, many will consider doing so in order to remain attractive to overseas talent. Planned methods of compensation include increasing fixed pay or offering a special allowance to at least partially offset the loss.
According to migration law specialists at Fragomen, the key change will be that LAFHA tax concessions will only apply where temporary overseas workers are, for work, living away from a home they maintain for their own use in Australia – not from an overseas home. Overseas workers will only be able to claim a tax deduction for certain accommodation and food expenses provided they can be substantiated. Formerly, overseas workers could have their rent paid out of before-tax income – their rent expenses were tax-free. The effect is that as most temporary overseas workers will have to meet their accommodation expenses out of their after-tax income, their gross remuneration will have to increase in order to maintain their after-tax income at current levels.
Fragomen lawyers said 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 regards to LAFHA to identify the available options.
Employers must also consider their communication strategy on how temporary overseas workers will be informed of the proposed changes and 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 are:
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
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
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