***Please read Breaking news: LAFHA and the 2012 – 2013 Budget Update for the latest information on the LAFHA reform.***
If you live in Australia as a temporary resident, for example if you’re holding a 457 visa, you are probably aware of the LAFHA changes recently announced by the Australian Treasury.
A few months ago we wrote about this Australian “tax break”. In What is LAFHA? Mum explained that LAFHA is a tax exemption that Australians and overseas temporary residents claim if they have relocated in order to fulfil employment. We mentioned that LAFHA isn’t a sum of money paid directly to employees who relocate for work. It is a sum of money that individuals use to reduce their taxable income.
If an employer covers the cost of accommodation and food costs whilst an employee is working away from home, LAFHA permits them to include these costs in their salary package as tax free income; this reduces their overall tax liability. They pay less tax and have a higher monthly income. According to LAFHA.com.au individuals can be around $9,400 better off a year, many families receive more.
Breaking news – changes to LAFHA
On 29th November, the Australian Government announced a Fringe Benefits Tax Reform that includes changes to LAFHA. In the Treasurer’s media release they state that; “access to the tax exemption for temporary residents will be limited to those who maintain a residence for their own use in Australia, which they are living away from for work purposes, such as ‘fly-in fly-out’ workers.”
Currently, overseas workers living in Australia as temporary residents claim LAFHA. The press release doesn’t explicitly say that these people will no longer receive the tax exemption but in describing who WILL be eligible to receive LAFHA it’s clear that overseas temporary residents no longer fit the criteria.
More about the LAFHA reforms
A consultation document released to LAFHA agents by The Australian Government the Treasury has the same tone. There are some important paragraphs that make the intentions of the reform clearer than the press release.
Firstly, the intended use of LAFHA is clearly outlined: “The LAFHA benefits are intended to compensate employees for additional costs they incur when they are temporarily relocated by their employer for work.” The document says; “These tax concessions have been subject to growing exploitation…temporary resident employees who are not genuinely living away from an Australian home receive the benefits.” The consultation document talks about creating a level playing field between local and overseas workers.
One of the most important paragraphs we read, under the heading “How LAFHA benefits will be taxed in the future” states;
“Temporary resident employees will be required to maintain a home for their own use in Australia (which they are living away from for work) to access the concession, and in those cases the expenses will need to be substantiated.”
The same idea is confirmed here;
“Temporary residents who maintain a home in Australia for their own use and who are required to live away from that home to perform the duties of their employment will be able to claim an income tax deduction for their actual expenses. Allowances for other temporary residents will be taxed like other forms of income under the income tax system.”
Overseas temporary residents, who don’t have an Australian home that they are living away from, can still receive an accommodation and food payment from their employer but they will be taxed on it as if it’s additional income (i.e. they pay Fringe Benefit Tax (FBT)). For most individuals and families who claim LAFHA this means a significant decrease in their monthly income.
LAFHA Reform Examples
In the Treasury’s consultation paper two examples are provided that we feel represent the most likely scenarios for our readers.
“Steve comes to Australia as a temporary resident to work in the information technology sector for two years. He lives and works in Sydney. His employer reimburses his living expenses while in Australia. Steve’s employer is subject to FBT on the accommodation and food benefits provided to Steve.”
“Fiona comes to Australia as a temporary resident working for an international firm. She is paid LAFHA for the duration of her three year contract. She lives and works in Melbourne. She will have the LAFHA included in her assessable income. She will not be able to claim a deduction for any expenses incurred from living away from home.”
LAFHA changes timeline
As we have mentioned, a consultation paper has been circulated to LAFHA agents and other interested parties. The closing date for responses is 3rd February 2012. The reform will need to be approved by parliament before being implemented – the proposed implementation date is 1st July 2012. LAFHA.com.au includes a detailed response to the changes here.
Are the changes fair?
At the risk of sounding like we’re having a toddler tantrum we started to question how fair the proposed changes are for overseas temporary residents.
On the one hand it is obvious that the way LAFHA has evolved is not as it was intended. Clearly Australian workers living away from home and maintaining an empty home whilst they are working elsewhere should be compensated. The position of an overseas worker, who may own property elsewhere in the world but is probably covering the costs with rent, isn’t the same as a local living away from home.
However, we can also understand why temporary residents may be feeling hard done by. Typically, Australian temporary residents are not eligible for Medicare and they don’t get Family Assistance to help with the cost of childcare. Depending where they live in Australia, Temporary Residents pay annual school fees for their children to attend Government Public Schools e.g. $4,500 per year per child in a NSW Primary School, we have written about government school fees throughout Australia here.
LAFHA seems to have evolved into a form of financial compensation for temporary residents, particularly those with children, who have far more out of pocket expenses than Permanent Residents or Australian Citizens. Unless employers routinely pay them more, how will they survive?
If Temporary Residents earn the same and are taxed the same as Permanent Residents and Australian citizens for the duration of their time here, shouldn’t they have access to the same services i.e. healthcare and schooling? Or is there more to it than this?
Are you affected by the proposed LAFHA reform? We’d love to hear your views. We’ll also send a link to this article and your comments to the Treasurer’s media centre so they can hear what you have to say. Thank you.
P.S. If any financial or migration experts would like to add their comments and views on LAFHA and the proposed changes we’d love to hear from you. Thank you too.
***Breaking news re LAFHA changes: read our response to the Treasury here***
- Monthly family expenses – the cost of living in Australia
- Australian family relocation budget
- UK Child Trust Fund – what happens when you move abroad?
- The outs and ins of your Australian family budget
- Family Assistance payments in Australia – the series
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