The Australian Taxation Office (“ATO”) is increasing their audit activities in relation to Living Away From Home allowance (“LAFHA”) benefits provided to employees. This article sets out the requirements of a LAFHA and the documentation that should be maintained to support LAFHA benefits.
What is a LAFHA?
A LAFHA benefit arises where an employer pays an allowance to an employee (including working directors) as compensation for additional non-deductible expenses and other disadvantages caused by the fact that the employee (with or without family members) is required to live away from his or her usual place of residence in order to perform the duties of employment.
When is an employee considered to be living away from home?
Generally, an employee is considered to be living away from home where the employee moves away from their usual place of residence to a temporary residence so that they can carry out their work duties. This is usually for greater than 21 days, but can be up to four years. An employee’s transfer should be for a fixed period and the employee should expect to return to their usual place of residence upon completion of their temporary work assignment.
Taxation of LAFHA
Concessional taxation treatment of a LAFHA for accommodation and/or food expenses incurred by an employee living away from home is available when an employer pays an allowance to a relocating employee.
Under the Fringe Benefit Tax (“FBT”) rules, a LAFHA is exempt from FBT as long as the accommodation and food components of the allowance do not exceed certain limits. The LAFHA does not attract PAYG Withholding and is not taxed in the hands of the employee.
The ATO releases each year a determination of the maximum amount that will normally be accepted as the reasonable food costs. Set out below is the table extracted from the latest determination (TD 2011/4), covering the period 1 April 2011 to 31 March 2012
|One adult and one child||$301|
|Two adults and one or two children||$419|
|Two adults and three children||$488|
|Three adults and one child||$488|
|Three adults and two children||$558|
The maximum tax exempt LAFHA food component or the “additional food” component is then calculated by deducting from these amounts the relevant statutory food amounts, referred to in MT 2030, of $42 per adult and $21 per child under 12.
For accommodation, the entire amount will be exempt as long as the rental payments are considered reasonable in the circumstances, i.e. they are not excessive. On many occasions, the market rate of rent is acceptable subject to consideration of the factors addressed below by the ATO:
- Whether the employee will be accompanied by family members;
- The position held by the employee in the workplace;
- The location where the employee will be living;
- Whether or not the accommodation will be furnished; and
- The employee’s current living standards
The ATO is focusing their compliance activities on LAFHA benefits as it believes some employers may be claiming excessive amounts for exempt accommodation and food components. The ATO is contacting employers from April 2011 onwards requesting information for each employee receiving such an allowance.
Records must be kept for five years to support any LAFHA benefits provided. The following records should be maintained:
- LAFHA declaration: This signed document must detail the employee’s usual place of residence and actual place of residence during the period of the allowance;
- Employment contract: This document must include details of the period the employee will be required to live away from their usual place of residence; and
- Documentation to verify the date the LAFHA was provided, the amount of LAFHA paid, the amount of exempt accommodation and food allowances paid and the basis for calculating any exempt accommodation and food components.