A business structure or entity is allowed to pay a living away from home allowance (LAFHA) to an employee who is living away from home as part of their work duties. This allowance is not treated as income under the PAYG scheme but will be subject to the Fringe Benefit Tax (FBT) on its taxable value.
LAFHA is an amount paid to an employee to compensate for the additional expenses and inconvenience or disadvantage suffered by the employee who is required to live away from home in order to perform employment duties. The employee must not have changed their usual place of residence or relocated elsewhere otherwise, the allowance will be taxed as income and withheld at source under the PAYG scheme.
Taxable Value of the Living Away From Home Allowance
Existing tax provisions allow you to deduct amounts corresponding to reasonable food and accommodation components also known as exempt food and exempt accommodation components.
The exempt food component is the amount of the allowance paid to compensate an employee for additional food costs in the alternate location. The ATO does not lay down strict guidelines for the calculation of this amount but only reasonable and defensible amounts are generally allowed.
As a guide, an amount obtained through the following are considered reasonable and defensible:
- Indexes and guidelines of the Australian Bureau of Statistics setting estimated amounts of additional food costs in specific locations;
- comparison of food expenses at the home location and alternate location by computing the difference between both average expenses;
- ATO issues guidelines on an annual basis.
The exempt food component should also consider factors such as:
- The composition of the employee’s family at the start of the FBT year, the number and ages of each member;
- the costs of food in the alternate location;
- the usual food costs in the home location.
In addition, you are allowed to deduct a reasonable expense for your accommodations in the alternate location also known as the exempt accommodation component. This amount is arrived at after considering your position in the company or entity and the size of your family, if they are accompanying you in the alternate location.
The recognition of the amount as living away from home allowance is not automatic and you are required to submit a LAFHA declaration each FBT year to avail of the tax concessions. Failure to submit this declaration will result in the entire allowance being taxed as fringe benefits.