Every so often, a person’s career will take them places — but not necessarily in an ‘upwardly mobile’ way. If earning a living means an employee needs to be away from their usual place of residence for an extended period, the government has made available tax concessions generally known as the Living Away From Home Allowance (LAFHA).
LAFHA is intended to compensate for the additional expenses incurred when an employee is required to live somewhere other than their usual home in order to carry out their employment duties (although the term ‘additional expenses’ does not include expenses that they would be able to claim as tax deductions anyway).
The Tax Office considers that an employee is living ‘away from home’ when they have a usual place of residence at which they would otherwise continue to live but for the fact that work commitments require them to temporarily live in a different locality.
What is a ‘usual place of residence’?
While it may seem straightforward to determine if a worker is living at their usual place of residence or not, the current interpretations have been developed over years of case law decisions, and ultimately depend on the facts of each case.
Factors such as the lifestyle of the employee, residency status, type of profession, location of family members and the type of industry can often be part of Tax Office considerations, should they investigate claims. Other relevant details may include, for example, whether electoral enrolment has changed, or driver’s licence details, or whether the former residence is under a ‘house-sitting’ arrangement or is being rented out while the employee is working at the other locality.
LAFHA concessions may not be available, for example, where it can be shown that an employee has a more transitory lifestyle, such as following shearing work from wool shed to wool shed, and so strictly does not have a ‘usual’ place of residence. Also certain kinds of occupations bring with them locational transfers as part and parcel of the job, such as members of the defence forces, certain law enforcement officers or project managers.
Although ‘usual place of residence’ is not defined, and so takes on its ordinary meaning, it is stipulated that the residence must be one that the taxpayer (or their spouse) has an ‘ownership interest’ in and that continues to be available for their use while living away from it.
The interpretation of ‘ownership interest’ means that, for example, adult children living in the family home who move away from that home for work are not entitled to LAFHA. And the stipulation that the residence must be ‘available for use’ means a taxpayer cannot rent out the premises, for example, while they are away from it and still claim the allowance.
But there are straightforward LAFHA situations, such as where an employee is appointed for a specified time to a branch office in another state, and in some situations employees who are construction workers living in camps, barracks or huts, and oil industry employees living on offshore oil rigs.
Reforms and the new regime
In November 2011, the government’s Mid-year Economic and Fiscal Update contained announcements regarding LAFHA. Under the reforms announced at the time:
• access to the tax exemption for temporary residents will be limited to those who maintain a ‘usual place of residence’ for their own use in Australia, which they are living away from for work purposes, such as under ‘fly-in/fly-out’ arrangements (a separate reform extends the fly-in/fly-out exemption to ‘resident’ employees working overseas)
• individuals will be required to substantiate their actual expenditure on accommodation and food beyond a statutory amount.
A new 12-month limit
A further set of reforms was announced following the release of the Federal Budget in May 2012, which included clarification about how employment arrangements will be affected by the previously announced LAFHA changes. Another limitation was added in that the government will provide the tax concession for a maximum period of 12 months in respect of an individual employee for any particular work location.
This 12 month period:
- commences the first day the employee begins living away from home
- pauses if the employee temporarily relocates to their usual place of residence
- restarts if the work location changes, and it would be unreasonable for the employer to expect the employee to commute to the new location from the earlier location
- does not apply to fly-in/fly-out workers
- does not recommence if the employee takes up employment with a connected entity.
Reforms that affect everyone
LAHFA is primarily designed to cover food and accommodation expenses. In its previous incarnation food costs up to a ‘statutory’ amount, which was for example $250 per week for one adult or $400 for two adults, and accommodation costs which were ‘reasonable’, incurred no fringe benefits tax.
This has now been changed, and allowances for food and accommodation are part of further reforms relating to the concession which will affect anyone already receiving the allowance.
• the requirement to substantiate expenditure against the allowance came into effect on October 1, 2012 for all employees
• LAFH allowances will transfer from the fringe benefits tax regime to the income tax system.
The last point will bring with it further consequences:
1. the allowance will be assessable income to the employee and reported on their year-end payment summary
2. provided the eligibility criteria is met, the employee will be able to deduct expenditure for accommodation and food on their income tax return
3. food expenses that exceed $110 per adult and $55 per child under 12 (per seven day period) will be deductible up to a reasonable amount
4. substantiation of food expenses which exceed an amount specified by the Commissioner of Taxation will be required (the threshold amount is yet to be announced)
5. accommodation expenses can be substantiated by lease agreements, mortgage documents or other accommodation receipts.
The new regime: What the reforms involve
LAFHA arrangements entered into after 7.30pm AEST, May 8, 2012, come under the new regime from October 1, 2012 (initially slotted to start on July 1, 2012, the regime has been delayed by three months to allow both employers and employees to prepare for the changes).
There are limited transitional rules for employees with LAFH employment arrangements in place before 7.30pm on May 8, 2012:
permanent residents — will not be required to maintain a home in Australia and the 12 month maximum period will not apply until the earlier of July 1, 2014, or a new employment agreement is entered into
temporary residents — the 12 month maximum period will not apply until the earlier of July 1, 2014 or a new employment agreement is entered into, however the employee must be maintaining a home in Australia that they are living away from.