Tax update | Nov 2011

Plans to change rules concerning LAFHA

On 29 November 2011 the Federal Government unveiled plans to change the rules concerning tax exemptions that are currently being allowed under living-away-from-home-allowances (LAFHAs) for foreign nationals working in Australia.

Tax free living-away-from-home allowances and benefits have been an important element of the remuneration package for international and domestic assignees/employees for many years, helping compensate for additional costs when living-away-from-home for employment purposes and Australia's relatively high personal tax rates. 
 
However, the Australian Taxation Office (ATO) has become concerned with the widespread use of tax free allowance and benefits.

A consultation paper was released at the time the proposed reforms were announced. The consultation paper states the perceived widespread exploitation of providing tax free LAFHAs to temporary residents has breached the original policy intent of the living-away-from-home (LAFH) provisions. It states this has provided an unfair advantage for temporary residents over local Australian workers.

Under the proposed reforms, LAFH benefits provided to temporary residents working in Australia will be fully taxable to the employee (if paid as an allowance) or fully taxable under fringe benefits tax (FBT) (if paid or provided by the company). The intention is for temporary residents to be subject to the same Australian tax burden on their employment income as are local employees.

If implemented as drafted, the reforms will have a significant impact on Australian businesses ability to attract foreign skilled labour in a time of increasing skill shortages. Australia’s high tax rates, increasing rent costs and the overall cost of living do not compare favourably with regional competitors such as Hong Kong, Singapore and mainland China. Abolishing LAFHAs for foreign nationals will inevitably put upward pressure on wages in order to attract and/or retain foreign skilled workers in Australia.

For any of our business clients or colleagues who may have a concern about the impact that this may have on their existing 457 visa holders enjoying the benefit of LAFH, please contact us to discuss as we can ensure that you are introduced to our panel of experts in this matter.

Content of the press release is listed below for review:

Media Release, The Hon Wayne Swan MP CANBERRA
29 November 2011

Tax Measures In Mid-Year economic and fiscal outlook

The Gillard Government today announced a number of measures as part of the Mid-Year Economic and Fiscal Outlook that build on ideas discussed at last month's Tax Forum.

Fringe benefits tax (FBT) reform – Living-away-from-home allowance and benefits

The Government will introduce reforms to stop individuals from being able to exploit the tax exemption for living-away-from-home allowance and benefits.

This tax exemption is being increasingly misused by a narrow group of people, particularly highly-paid executives and foreign workers, at the expense of Australian taxpayers.

Rorting of this tax exemption was one of the issues raised at the Tax Forum, and has seen the total amount of tax-free living-away-from-home allowance reported by employers to the Australian Taxation Office increase from $162 million in 2004-05 to $740 million in 2010-11.

Under reforms announced today:

• 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; and
• individuals will be required to substantiate their actual expenditure on accommodation and food beyond a statutory amount.

No permanent resident legitimately using this tax exemption for accommodation and food expenses will lose any entitlements.
These reforms will not affect other tax concessions, such as those that apply to travel and meal allowances, and remote area fringe benefits.
The reforms will apply from 1 July 2012. This start date will enable the Government to undertake an extensive consultation process on these reforms, so appropriate transitional arrangements can be put in place, including in regional Australia.
These changes will ensure that a level playing field exists between temporary residents and permanent residents, and that Australian taxpayers are not funding the unfair exploitation of concessions.

This reform progresses recommendation 9(c) of the Australia's Future Tax System Review, and will provide savings of $683.3 million over the forward estimates.

Personal income tax reform – Dependent Spouse Tax Offset

The Government will further reduce outdated workforce participation disincentives for spouses without dependent children to take up paid employment by restricting the Dependent Spouse Tax Offset to those with spouses born before 1 July 1952. This reform will not affect people whose spouse is an invalid or a carer, or who receive the zone, overseas forces or overseas civilian tax offsets.

A taxpayer's entitlement to the Dependent Spouse Tax Offset is reduced by $1 for every $4 of income which their dependent spouse earns above $282 per year. This means that the effective tax rate on the first $10,000 earned by a dependent spouse without children is around 25 per cent.

This measure builds on the reform announced in the 2011-12 Budget, which progressed recommendation 6(a) of the Australia's Future Tax System Review, and will provide savings of $370.0 million over the forward estimates.

Responsible economic management

As part of its commitment to responsible economic management and returning the budget to surplus in 2012-13, the Government will defer four previously announced tax reforms by one year.

• The start date of the standard deduction for work related expenses will be deferred until 1 July 2013.
• The start date of the 50 per cent tax discount for interest income will be deferred until 1 July 2013, allowing more time for consultation with stakeholders on issues previously raised by industry.
• The start date of the phase down in interest withholding tax for financial institutions will be deferred until 2014-15.
• The start date of the new tax system for managed investment trusts will be deferred until 1 July 2013, allowing more time for consultation with stakeholders about how to best implement the elements of the package.

Together the deferral of these four measures will provide savings of $2.1 billion over the forward estimates.

The Government emphasised its commitment to fiscal discipline in the lead up to the Tax Forum, and remains committed to these important tax reforms.