The very lucrative tax break ‘Living Away from Home Allowance’, or LAFHA, is set to be almost abolished from July 1, 2012, with the retail sector hit hard due to the high number of expats taking advantages of the tax concessions.
As a result of the proposed changes to the tax law:
- Overseas employees on LAFHA will see a dramatic drop in wages.
- Employers will see an increase in staff costs and find it harder to compete for overseas talent.
What is LAFHA?
LAFHA is a way of packaging part of your remuneration, for reasonable expenses, when you are living away from your usual place of residence. The amount of money that is classified as an allowance is paid as a reimbursed expense, and hence not taxed in the hands of the employee.
For example, an employee earning $100, 000 plus superannuation who received $2,300 per month as an accommodation and food allowance, took home $7,060 under the LAFHA arrangements. This will fall by $806 per month to $6,254 once the entitlement ceases.
The tax break has been extremely popular in the fashion industry, particularly for overseas candidates or for people who move within Australia for work. In the retail sector we see this mostly for expats on 457 visas, but also for inter-state transfers, such as Melbourne to Sydney.
What does it mean for employees and employers?
Unfortunately for most overseas employees on LAFHA, their net wages will fall considerable from July 1, 2012 this year – unless they can negotiate a higher salary with their employer!
Unfortunately for the employer, the employee will also become more expensive as superannuation contributions, payroll tax and workers’ compensation needs to be paid on the amount previously included as an allowance element of their package. This can increase the wage cost by about five per cent, thus making salary increases harder for an employee to negotiate.
LAFHA has been a key tool in recruiting talent from overseas. Tracy Appleton from Jivaro Recruitment, a specialist fashion and retail agency said, “LAFHA has allowed Australian businesses to compete on a global basis for exceptional talent. The fashion and retail sector in Australia is very strong and dynamic, but small on a global scale. The tax benefits of LAFHA have been an important catalyst in securing globally recognised senior management, designers and buyers for many years.”
Australian businesses will find attracting overseas talent significantly more expensive going forwards without LAFHA.
Who will still qualify for LAFHA?
To qualify for LAFHA under the proposed arrangements, you must be a permanent resident or temporary resident maintaining a home in Australia, which they are living away from as a result of their work. A temporary resident is considered to be maintaining a home in Australia for their own use when that home is available for their personal use and enjoyment at all times, i.e. is not being rented out.
Is it all bad news?
You may still be able to obtain LAFHA if you move from your usual place of residence in Australia, if you are a citizen or a permanent resident (PR). For example, if you are from Melbourne and consider a job opportunity in Sydney, your net wages could increase with carful negotiation of contracts and tax advice.
One of the disadvantages of expats getting LAFHA is that you cannot apply for permanent residency without losing the allowance. We predict a flood of applications for PR visas will follow the end of the allowance for overseas employees.
Once you have a PR you may become eligible for family tax benefits, childcare rebates and other social security rebates you were previously ineligible for.
The tax consultation process on the changes is still in process, however the general feeling in the financial community is that it will be reformed, as planned, from July 1, 2012.
Simon James is an audit and corporate advisory partner at Sydney-based accounting, business and financial consulting firm HLB Mann Judd. www.hlb.com.au