Under the Fringe Benefits Tax Assessment Act 1986 (‘FBTAA’), an employer can provide employees with benefits for living away from home, either in the form of an allowance (Division 7 of Part III), or as the provisions of accommodation (sub-section 47(5)), food (s 63) or expense payments (s 21).

This article will focus specifically on the recent amendments to the living-away-from-home allowance (‘LAFHA’) as provided for under the FBTAA. The reforms apply from 1 October 2012.

What is the LAFHA?

Under Division 7 of Part III of the FBTAA, a LAFHA is an allowance paid by an employer to an employee who is required to live away from their usual place of residence in order to perform their employment duties (s 30 FBTAA).

The allowance is intended to cover reasonable and additional accommodation and food expenses (as specified in the legislation). This does not include expenses the employee would be entitled to claim as an income tax deduction.

No income tax is payable by the employee on a LAFHA.

The part of the LAFHA fringe benefit that is taxed to the employer is usually minimal as the taxable part of the fringe benefit is reduced by any reasonable amounts paid in compensation for accommodation and increased expenditure on food.

What is the purpose of the LAFHA?

The Explanatory Memorandum of the FBTAA explains that the purpose of the LAFHA is to compensate an employee for additional expenditure incurred on food and accommodation where an employee is required by their current employer to live away from their usual place of residence in order to perform their employment duties.

What was the rationale behind the proposed amendments?

Essentially employees have been taking advantage of the tax exemptions offered to them under the LAFHA, which has resulted in significant and growing costs to revenue.

Under the current laws, employees are using the concessions to access tax-free amounts even though they are not incurring the specified additional expenses. Moreover, the amount of the allowance may be in excess of actual expenditure incurred on accommodation and food, and employees may also be claiming the concessions for extended periods of time.

Furthermore, the term ‘normal residence’ has been inserted into Section 30 (discussed below at paragraph [15]), in order to allow the LAFHA fringe benefit to arise regardless of the location of the employee’s usual residence.

The amendments in a nutshell

While under the current law, concessional taxation treatment is broadly applied to LAFH allowances and benefits, the proposed amendments seek to limit the situations in which these concessions may be applied.

Accordingly, the concessional tax treatment of LAFH allowances and benefits to employees (other than those working on a fly-in-fly-out or drive-in-drive out basis) will be limited as follows:-

1. The concessional tax treatment of LAFH allowances and benefits is now limited to a maximum period of 12 months (s 31D);
2. Employees must maintain a home in Australia (at which they usually reside) for their immediate use and enjoyment at all times while required to live away from that home for their work (s 31C); and
3. Employees must provide their employer with a declaration about living away from home in accordance with s 31F.

Under s 31A, LAFHA benefits received by employees who are working on a fly-in-fly-out or drive-in-drive-out basis will be limited as follows:-

1. Employees must have residential accommodation at or near their usual place of employment
2. Employees must be considered to be working on a fly-in-fly-out or drive-in-drive-out basis in accordance with s 31E; and
3. Employees must provide their employer with a declaration about living away from home in accordance with s 31F.

Consequently employees working on a fly-in-fly-out or drive-in-drive-out basis do not have to maintain a home in Australia for their own use for the concessional tax treatment to apply. Moreover, their concessional tax treatment is not subject to the 12 month limitation.

Section 30 of the FBTAA has been amended by removing ‘usual place of residence’ and replacing it with ‘normal residence’ (as defined under s 136(1)). Consequently, the location where the employee usually resides in Australia is relevant to the calculation of the taxable value of the fringe benefit.

Employees are now also required to substantiate the expenses they incur on accommodation, and food or drink beyond the Commissioner of Taxation’s (‘Commissioner’) reasonable amount (as per s 31G).

In addition to the above, there have been amendments to s 21, sub-section 47(5) and s 63 in order to further limit the concessional treatment of LAFH allowances and benefits.
What does it meant by ‘maintain a home’ under s 31C?

To maintain a home in Australia, the employee or their spouse, must have an ownership interest in a ‘unit of accommodation’ (as defined in s 136(1)) where the employee is reasonably expected to resume living at when they are no longer living away from home for the purposes of their employment.

Ownership interest is taken to be as defined under ss 118-130 of the Income Tax Assessment Act 1997, to include both legal and equitable interest and a licence or right to occupy a dwelling. Consequently, adult children living in the family home are taken to not ‘maintain a home’ as required by s 31C, as they generally do not have such an ownership interest in the home.

The home cannot be rented out or sub-let while the employee is living away from it.

The fact that boarder or tenant, or house-sitter, is staying in the employee’s normal residence does not prevent that employee from being considered to be ‘maintaining a home’ for the purposes of s 31C, so long as the employee’s use and enjoyment of the home is not impugned by the presence of the boarder, tenant or house-sitter.

What are the ‘substantiating’ requirements under s 31G?

For the purposes of any exempt accommodation component and any exempt food component, substantiation requirements must be met by the employee.

Accommodation expenses must be substantiated in full.

Food or drink expenses must be substantiated in full only where the expenses incurred while living away from home exceed an amount considered reasonable by the Commissioner. That is, the full amount of the expenses, not just the excess amount, needs to be substantiated.

In order to satisfy the substantiation requirements, the employee must give the employer either;

• Documentary evidence of the expense (e.g. actual receipt or other appropriate evidence such as a credit card or bank statement) or a copy of these documents; or
• A declaration in a form approved by the Commissioner setting out information about the expense.

If an employee opts to provide a declaration, then he or she must retain the relevant documents to substantiate the expenses incurred for a period of five years from the declaration date.

How will the taxable value be determined after the amendments take effect?

The amendments to Division 7 mean that the taxable value of the LAFHA fringe benefit is dependent on the circumstances of the employee to whom the fringe benefit is provided. As such, there are three tax treatments which need to be considered; an employee who maintains a home in Australia, fly-in-fly-out or drive-in-drive-out employees, and all other cases.

1. Taxable value for an employee who maintains a home in Australia (s 31 FBTAA)

Subject to the conditions set out in paragraph [12], sub-section 31(2) provides that the taxable value of the fringe benefit in relation to the year of tax is the amount of the fringe benefit reduced by any exempt accommodation component and any exempt food component. The exempt food component does not apply to the extent that the fringe benefit relates to a period during which the employee resumes living at his or her normal residence.

The exempt accommodation component

The accommodation component is the amount of the LAFHA benefit that is considered reasonable compensation for expenses to be incurred by the employee for accommodation while the employee is living away from home. These expenses also extend to the employees eligible family members (as defined under s 136(1)). These expenses must be substantiated (as per s 31G).

The exempt accommodation component is so much of the accommodation component that equals the accommodation expenses actually incurrent by the employee. This includes expenses incurred by family members (as per s 136(1)).

If an employee does not fully expend the LAFHA provided in respect of the accommodation component, the excess is not an exempt accommodation component.

The exempt food component

The food component is determined in the same way as the accommodation component (see above at paragraph [31]) for expenses incurred for food or drink by the employee, and his or her family members (as per s 136(1)).

Under s 31H, the exempt food component is the amount by which the food component exceeds the applicable statutory food total. The applicable statutory food total is calculated by the reducing the statutory food amount (as per s 136(1)) by; (a) the total normal food and drink expenses which the employee and his or her family would have incurred had they remained in their normal residence, and (b) any amount that was taken into account when working out the food component.

2. Taxable value for fly-in-fly-out & drive-in-drive-out employees (s 31A FBTAA)

Subject to the conditions set out in paragraph [13], sub-section 31A(2) provides that the taxable value of a LAFHA fringe benefit for fly-in-fly-out or drive-in-drive-out employees is calculated as the amount of the fringe benefit reduced by any exempt accommodation component and any exempt food component (calculated as per paragraphs [30]-[36]).

3. Taxable value in any other case (s 31B FBTAA)

Where an employer provides a LAFHA fringe benefit to an employee who is neither maintaining a home in Australia nor working on a fly-in-fly-out or drive-in-drive-out basis, the taxable value of the fringe benefit is the full amount of the fringe benefit.

What are the transitional rules in place?

The amendments do not apply to permanent residents and temporary residents who maintain a home in Australia for their immediate use and enjoyment at all times, who have employment arrangements for LAFH allowances and benefits in place prior to 7.30pm (AEST) on 8 May 2012. For such individuals, the 12-month limitation for concessional tax treatment does not apply until the earlier of 1 July 2014 or the date a new employment contract is entered into, or the existing contract is varied in a material way.