Chapter 2 Analysis of the Bill
This chapter focuses on Schedule 1 of the Tax Laws Amendment (2012
Measures No. 4) Bill 2012 (the Schedule and the Bill) which relates to changes
to the taxation treatment of living-away-from-home (LAFH) allowances and
benefits. The Bill contains three schedules which address separate matters. However,
the committee only received evidence pertaining to Schedule 1 of the
Bill. Schedule 1 brings LAFH allowances in line with other allowances by
primarily treating it under the income tax system.
The ‘ordinary weekly food and drink expenses’ component will continue to be
treated as a fringe benefit.
The amendments to the taxation treatment of LAFH allowances and benefits
seek to address concerns that the current concessions are being misused,
resulting in a significant and growing cost to revenue. As the Explanatory
Memorandum (EM) states:
The current law is being interpreted broadly and the
concession is being used in a manner that is outside the original policy
intent. Employees are using the concession to access tax-free amounts even
though they are not incurring additional expenses, that is, the cost of
maintaining two homes.
Submitters were supportive of the broad intention of the Schedule to
eradicate the exploitation and misuse of the tax concession for LAFH allowances
This chapter reviews the issues raised during the inquiry by submitters
and, where appropriate, provides guidance about possible measures to improve
the Schedule. The concerns of submitters to the inquiry were broadly focused
on: the complications which would arise from the dual tax treatment of the
allowance; the additional expenses and obligations which would result from the
changes; and concerns about the effect on the transitional arrangements
particularly for 457 visa holders.
The committee has made a range of recommendations which aim to simplify
the application of the legislation and limit the exploitation of the tax
concession for LAFH allowances and benefits. The committee strongly supports
the single taxation treatment of LAFH allowances and believes that it may be
prudent for it to continue to be treated under the fringe benefits regime. To inhibit
the exploitation of the tax concession for LAFH allowances and benefits, the
committee supports the introduction of tightened eligibility criteria. A small
amendment has been recommended to exempt drive-in drive-out (DIDO) workers
using their own transport from the 12 month time limit.
To further improve the Schedule the committee has recommended that where
definitional ambiguity exists clarity must be provided to ensure individuals
and industry know how any changes will impact on them.
Principals and definitions
LAFH allowances were first introduced into the income tax system in
1945. The EM described the application of a LAFH allowance, in its original
incarnation, as being paid:
...to compensate the employee for the additional expenditure
he is obliged to incur in providing board and accommodation for himself at his
place of employment while, at the same time, maintaining his home elsewhere.
In 1986 the treatment of LAFH allowances changed and it became a fringe
benefit. Under these arrangements:
An employee is regarded as living away from their usual place
of residence if they would have continued to live at the former place if they
did not have to work temporarily in a different locality. The residence does
not have to be the employee’s permanent place of residence...The
general presumption is that a person's usual place of residence will be close
to where they are permanently employed. 
Currently no time restrictions are placed on how long an employer can
claim tax relief on LAFH allowances and benefits provided to an eligible
employee. The committee accepts the EM’s rationale that LAFH allowances and
benefits should not be claimed for ‘extended periods of time’.
The committee supports the move to limit, to 12 months, the amount of
time LAFH allowances and benefits can be claimed per location.
The committee recognises the unique nature of remote construction sites
which require large workforces for a discrete operational phase. Therefore, the
committee supports the decision to exempt fly-in fly-out (FIFO) and DIDO
workers from the 12 month limit. This measure recognises that FIFO and DIDO
workers are a unique category of temporary workers. As outlined below, the
committee recommends that the exemption be extended to include DIDO workers who
use their own vehicles to access their place of work.
The committee is also supportive of the proposed stipulation that an
employee must be maintaining a primary residence. However, it should be noted
that the committee believes that the definition of an employee’s ‘usual place
of residence’ and ‘ownership interest’ must be broadly interpreted and clearly
As a general principle if employees are not incurring extra costs as a
result of a temporary relocation, LAFH allowances and benefits essentially
become a wage subsidy.
Employees who are required to live away from their usual place of
residence in Australia by their employer and continue to maintain that home for
their personal use will be entitled to access the tax concession for LAFH
allowances and benefits. The EM stipulates that:
The employee’s usual place of residence must be a residence
in which the employee or the employee’s spouse has an ownership interest, that
is it is either owned or leased by the employee or the employee’s spouse.
The residence must continue ‘to be available for their immediate use and
enjoyment at all times while they are living away from it’.
There are provisions for a tenant or boarder to reside in the house so long as
they do not ‘impinge of the availability of the residence’.
The house can also be occupied by a house-sitter, so long as they vacate the
residence when the employee returns.
Secondly, the tax concession for LAFH allowances and benefits will be
limited to the first 12 months that an employee is required to live away from
home. FIFO workers and DIDO workers are exempt from the 12 month limit.
The Schedule uses the criteria in the FBTA Act
of eligible employees who are provided with exempt transport benefits under
Subsection 47(7) to define FIFO and DIDO workers. Under these criteria, only
employees whose transport is provided by their employer are exempt.
Submitters argued that the new eligibility requirements represent a
departure from the previous policy intent and would significantly reduce the
number of workers who would be able to fulfil the eligibility requirements. In
particular, they argued that the tightened eligibility requirements would
significantly impact on 457 visa holders and the proponents of large regional
projects reliant on temporary workforces.
Interpretation of ‘residence’
Submitters felt that the Schedule redefined what constitutes a person’s
usual place of residence. As PricewaterhouseCoopers told the committee:
...do you need bricks and mortar to 'live away from'.
Historically, you have not needed to have a house or a lease; it just had to be
an intention to return to a region. But that is history.
Similarly, the Institute of Chartered Accountants stated:
In all that I can remember it is: are you living somewhere
that is not where you would normally live? If you are on a
relatively-short-term temporary assignment and you intend to go back then that
has always been accepted as living away from home.
According to the EM:
The term ‘usual place of residence’ is not a defined term and
is therefore understood according to its ordinary meaning. The customary
meaning of the word ‘reside’ is to dwell permanently or for a considerable
time. ‘Residence’ means the place, especially the house, in which one lives.
The EM explicitly stated that the intent of LAFH allowances and benefits
was to compensate for additional expenses associated with maintaining two
Consequently, a residence ‘cannot be rented out or sub-let while [the
employee] is living away from home’. However, there was the
If an individual has a boarder or tenant staying with them in
their usual place of residence when they are required to live away from home
for their employment, they can continue to have that boarder or tenant, but the
boarder’s stay must not impinge on the availability for the individual’s
immediate and reasonable use and enjoyment.
House-sitters are permitted but they must vacate a residence when the
employee returns home. The varied treatment of
boarders and tenants (who do not impinge on an employee’s use of a property)
with house-sitters does appear to be anomalous. The stipulation that a
house-sitter must vacate a premise once the employee returns home is a
criterion that would be difficult to verify and unnecessary if the house-sitter
does not impinge on the owner’s use of the residence.
Impact on non-resident workers
The majority of submissions received by the committee from both industry
and affected employees related to the eligibility requirement for employees to
maintain a home within Australia at all times. In particular, it was argued
that this requirement has a disproportionate impact on the eligibility of
temporary and non-resident workers, particularly those on 457 visas.
Mr Gary Matthews, Tax Manager of Pitcher Partners, stated that temporary
residents would commonly not maintain a second home in Australia:
The requirement to maintain a home in Australia and live away
from that somewhere else in Australia isn’t what overseas employees will do.
A number of foreign workers and temporary residents made submissions to
They posited that without the tax concession, employment opportunities in
Australia would become less attractive, existing workers would leave earlier
than intended, and employers would be forced to offer significant wage
increases in the future to attract skilled migrants.
The committee was told that industries relying on foreign workers to
fill areas of skill shortage would be negatively impacted. The Australian
Constructors Association warned:
This will also impact the relative attractiveness of
Australia for resource sector investments and may result in projects being delayed
or shelved because of the inability to attract appropriately qualified
employees, or through the potentially significant increase in costs involved.
Conversely, the Australian Manufacturing Workers’ Union indicated that
if access to LAFH allowances and benefits was restricted there could be an
increase in 457 visa holders on remote worksites. According to the Australian
Manufacturing Workers’ Union:
If you are down $200 or $300 a week at the 12-month mark in
what you are bringing into the household budget, you may look at not finishing
that project. You may end up with a decline in labour midway through the
project or you may struggle to attract labour. All sorts of issues may arise
from that. Normally the living away from home allowance covers what it actually
costs to live away from home and then you get your income on top of that, but
if you have to eat into your wage to pay your expenses, some of those projects
are not worth the effort. You will see people return to the capital cities or
the larger towns around the area and choose not to do that work any longer than
12 months, which would probably have an effect on the economy eventually with
the attraction of labour. It would probably open up the door for more
opportunities for 457 workers to come in and do that type of work if there is a
problem attracting labour.
The University of Sydney, PricewaterhouseCoopers and the Australian
Constructors Association stated that some foreign workers were already
returning home or choosing not to come to Australia as a result of the proposed
12 month limit
A further point of contention was the 12 month limit which industry
argued was arbitrary and inadequate for business requirements. In their
submission to Treasury on the exposure draft, the Institute of Chartered
Accountants argued that if enacted, this proposal ‘may encourage skilled
workers to leave the projects after 12 months or it may discourage them from
living away from home in the first place’.
As covered above, the committee was told by the Australian Manufacturing
Workers’ Union that the 12 month limit could lead to problems recruiting and
retaining workers for projects in remote locations.
The Institute of Chartered Accountants proposed a minimum three year
threshold while PricewaterhouseCoopers suggested a two year period as being
more appropriate for business requirements.
Industry specific timeframes were also discussed. The Australian
Manufacturing Workers’ Union indicated that the construction of a new mine
generally took two and half years while the University of Sydney indicated that
research contracts usually ran for three to five years.
The Schedule states that the 12 month time limit will pause if an
employee temporarily resumes living in their usual place of residence. A number
of questions were raised about the circumstances in which the pause will apply.
For example, Ernst & Young argued that:
… it is not necessary or reasonable to create a distinction
between temporary absences taken at the employees’ usual place of residence and
an alternative destination. Furthermore, it would be difficult for the ATO to
audit such absences in the event the employee makes a claim that the 12 month
period was paused and therefore he/she is entitled to claim deductions for a period
beyond 12 months.
Eligibility of fly-in fly-out and drive-in drive-out workers
In its submission to the inquiry, the Minerals Council of Australia
stated that while they welcomed the exemption of FIFO and DIDO workers from the
12 month limit, they were concerned about the ineligibility of DIDO workers who
drove their own vehicles.
Treasury confirmed that ‘[i]f it is their own vehicle, then they do not
get that exemption’.
The committee received evidence that employees, particularly in remote
locations, could arrive at site in a variety of ways:
In practice, there are lots of different examples of how
people arrive at sites. Some people would have work vehicles; some people would
take their own transport.
Ernst & Young told the committee that the Bill as currently drafted
would not achieve the Government’s clear policy intent that FIFO arrangements
will not be affected. They explained:
It is not uncommon for Australian based FIFO employees to
live in shared accommodation or live with family members during the off cycles.
For these reasons, many FIFO employees will be unable to benefit from the
concessional tax treatment outlined in the Bill as they do not have an
ownership interest in a residence that is maintained for their use and
In addition, FIFO arrangements often extend to overseas
employees. In many circumstances, it is more cost effective to fly an
individual directly in and out of their overseas home location, as opposed to
accommodating them in an Australian city during “off” cycles. 
The Tax Institute also argued that:
Temporary residents flying in and out of remote localities
with their home bases outside of Australia should continue to be able to access
LAFH concessions…This would appear consistent with the policy intent surrounding
assistance for “fly-in fly-out” arrangements.
The committee supports the Schedule’s intent to compensate employees for
the additional expenses associated with living-away-from-home at the request of
their employer. However, it is noted that LAFH allowances and benefits were not
designed to provide a wage subsidy for workers in certain industries.
The committee views the treatment of house-sitters as overly
prescriptive and anticipates it will be difficult to enforce. If an employer
accessing a LAFH allowance or benefit is not receiving any financial benefit
from a house-sitter and the house-sitter does not impinge on their use of the
house, then vacating during short visits should be a personal decision for the
individuals involved. The committee recommends simplifying the requirements so
that as long as the primary residence remains available to the employee for
their personal use and enjoyment at all times, then the eligibility criterion
has been met.
The committee noted industry’s concern that the 12 month limit will not
provide coverage for the duration of all projects. However, LAFH allowances and
benefits are intended to be temporary and are not designed to support workers
who have essentially moved residence to gain or retain employment.
The committee recognises that special conditions apply during the
short-term construction phase of many large infrastructure projects, as found
in mining regions where large numbers of workers move into sparsely inhabited
regions for short periods, before a much smaller permanent workforce take their
place. The committee is aware that the Standing Committee on Regional Australia
is undertaking an inquiry into FIFO/DIDO work practices and has received
extensive evidence regarding the tax treatment of FIFO versus residential
workers. The committee acknowledges that large temporary workforces represent a
tremendous challenge for both regional areas and the social wellbeing of the
workers themselves. Balancing the needs of employers and the local community is
difficult to achieve and outside the scope of this inquiry. Therefore, the
committee commends the Standing Committee on Regional Australia for its current
inquiry and keenly awaits the outcome.
The Schedule makes provisions for regional areas by exempting FIFO and
DIDO workers from the 12 month limit (where the employer provides the employee’s
transport to work). The committee believes that the exemption should be
extended to DIDO workers who use their own vehicles (to drive in and drive out
of their place of work while operating on the same rosters as other DIDO and
FIFO workers). It is the committee’s view that while in Western Australia the
number of workers driving their own vehicles to mines is probably minimal, the
circumstances in Queensland are different where the drive in for a several day
roster may be quite achievable. Where possible, maximum flexibility should be
allowed for employers and employees so that work arrangements suit the needs of
workers. If an employee fulfils all the other eligibility requirements, the
distinction between DIDO workers who use their own vehicles and are reimbursed,
and those who use an employer provided vehicle to drive in and out, is
The Committee supports an expansion of the definition of FIFO workers,
as proposed by Ernst & Young in their submission as follows:
… the exception for temporary residents who maintain a
residence should not be limited to those who maintain a home in Australia, but
should include those who maintain a residence anywhere in the world.
Furthermore, we propose a relaxation of the requirement for Australian based
FIFO workers to maintain a home in which they have an ownership interest. In
our view, a more practical position may be to stipulate that provided the FIFO
worker is able to substantiate ongoing home accommodation costs (for example by
way of bank statements), he/she would be entitled to claim a deduction for the
additional accommodation costs incurred.
recommends that the Department of the Treasury provide a clear definition as
to what constitutes an ‘ownership interest’ and the satisfactory retention of
an employee’s usual place of residence. The committee believes that the
definition of ‘ownership interest’ should take into account the varied living
arrangements that effectively constitute a person’s ‘primary residence’.
||The committee supports the introduction of the tightened eligibility
criteria for the tax concession for living-away-from-home allowances and
benefits as proposed in Schedule 1 of the Tax Laws Amendment (2012 Measures
No. 4) Bill 2012 which ensures that a 12 month limit applies per location and
the maintenance of a ‘usual place of residence’.
||The committee recommends that the treatment of drive-in drive-out
workers who use their own vehicles be brought into line with drive-in drive-out
workers who use employer provided transport. In effect all drive-in drive-out
workers should be exempt from the 12 month time limit proposed in Schedule 1
of the Tax Laws Amendment (2012 Measures No. 4) Bill 2012.
||The committee recommends that
the definition of fly-in fly-out (FIFO) workers and drive-in-drive-out (DIDO)
workers should include FIFO and DIDO workers who do not meet the test of
maintaining a ‘usual place of residence’ within Australia, such as those who
live with family members during off cycles or whose usual place of residence
is in a country other than Australia.
||The committee recommends that the Department of the Treasury
clarifies the circumstances in which the 12 month time limit will be paused,
with a view to providing the greatest level of simplicity and certainty while
also achieving the policy intent of the time limit.
To access the tax concession for LAFH allowances and benefits, the
claimant will be required to provide evidence of the costs they have incurred:
The written evidence for accommodation expenses could include
a lease agreement, credit card statements, bank statements or other receipts
for accommodation. The written evidence for food and drink expenses is provided
by the receipts for expenses actually incurred.
All accommodation expenses will need to be substantiated with the Australian
Taxation Office (ATO), while food and drink expenses will only need to be
substantiated if they exceed the amount prescribed by the Commissioner.
The Commissioner is yet to issue this determination.
Any portion of the allowance which cannot be substantiated will be
treated as income and will be subject to income tax. Employees are required to
retain written evidence for five years for the purposes of substantiation if
requested by the ATO.
The proposed arrangements stipulate that substantiation of food and
drink expenditure under the amount ‘specified’ by the Commissioner does not
need to be lodged with the ATO. The Police Federation of Australia noted that
the cost of living varies across Australia, making a single determination about
what constitutes ‘reasonable expenses’ problematic.
It was argued that the Commissioner would need to consider the extraordinary
circumstances of workers in different locations when determining the
‘reasonable expenses’ threshold.
The Australian Manufacturing Workers’ Union explained the difficulties
that the system could pose for its members:
One of the other concerns for our members is that blue-collar
workers are obviously just that; they are not exactly book keepers and
accountants. Keeping meals and expenses receipts is going to be a very
difficult task. One of the problems incurred is that you have breakfast and
lunch and do not think you are going to have an expensive dinner so you do not
keep your breakfast and lunch receipts. All of a sudden you have an expensive
dinner and you need to keep that receipt but you have thrown out your breakfast
and lunch receipts and have gone over the amount. So we have boilermakers and
fitters running back to lunchbox shops in industrial estates wanting the
receipts from their morning bacon and egg roll or can of Coke. It is going to
be a real issue on some of our projects for construction workers. They are not
really good book keepers.
The Institute of Chartered Accountants noted that Section 25-115 of the
Schedule identified the employee as the only person able to incur a deductible
expense. It was recommended that this be amended so that the spouse or partner
of an eligible employee could pay for food, drink or accommodation as a
The committee can see how the implementation of the proposed changes
will need to be accompanied by clear and accessible advice for both employers
and employees. The committee would see value in the Government providing
on-line, and where requested hard-copy, advice about how best to keep the
documentation necessary for substantiating accommodation expenses, and food and
drink expenses that exceed the ‘specified’ amount.
In addition, the committee believes that Treasury should investigate
whether there are any substantive impediments to allowing partners or spouses
to incur deductible expenses on behalf of an employee where all other
eligibility requirements are met.
||The Department of the Treasury should investigate whether
there are any substantive impediments to allowing partners or spouses to
incur deductible expenses on behalf of an employee where all other
eligibility requirements are met.
treatment of LAFH allowances and benefits and compliance
The Bill amends the Income Tax Assessment Act 1997 (ITA Act) so
that the majority of a LAFH allowance will be treated as the assessable income
of the employee. At present LAFH allowances and benefits are treated in the Fringe
Benefits Tax Assessment Act 1986 (FBTA Act). The EM states that the
proposed change ‘is consistent with the income tax treatment of most allowances’.
Employers will be required to withhold tax under the Pay As You Go (PAYG)
system [Withholding variation form].
Under the amendments employees will be able to deduct reasonable
expenses for food, drink and accommodation incurred while required by their
employer to live away from their usual Australian residence. All accommodation
expenses will need to be substantiated, while food and drink expenses will only
need to be substantiated, and lodged, once they exceed the amount prescribed by
While the intention of the Schedule was to bring the majority of a LAFH
allowance under the income tax arrangements, ‘ordinary weekly food and drink expenses’
are still treated as a fringe benefit to the employer. The ‘LAFHA food and
drink fringe benefit’ was set at $42 for the employee per seven-day period.
This amount is increased further if the employee’s spouse or children are living
The ordinary food and drink expenses amount is intended to represent the
employee’s stay-at-home food costs and ensure that an income tax deduction is
available only for the expenses exceeding this amount. For example, an employee
receives a $250 weekly food and drink allowance from their employer. The
employer is responsible for reporting the first $42 of this amount under the
FBT regime. The employee may then deduct the remaining $208 under income tax
provisions if the food and drink amount prescribed by the Commissioner is equal
to or more than $250, or the employee can substantiate they actually spent $250
per week on food and drink.
The requirement effectively splits the responsibility for determining
the tax treatment of a food allowance between the employer and the employee,
where the food allowance exceeds the $42 per week limit. That is, the liability
for the tax on, and the responsibility of reporting, the $42 component lies
with the employer. The liability for the tax on, and the responsibility of reporting,
the remainder of the food allowance lies with the employee in receipt of the
When an employer directly covers the additional costs incurred by an
employee, the employer can claim a deduction under the normal fringe benefit
tax (FBT) arrangements. This is known as the ‘otherwise deductible rule’.
To claim the concession, the employer must receive a signed declaration (in a
form approved by the Commissioner) from their employee.
This is then lodged with the ATO.
Industry was concerned that the reforms could have significant on-costs
for employers in areas such as superannuation, workcover and payroll tax, and
flow-on effects for employees in areas such as Family Tax Benefits and child
support payments. The Australian Industry
Group submitted that the changes would have a number of unintended consequences
for both employers and employees:
These include flow-on costs to employers associated with
payroll tax, superannuation contributions and workers’ compensation premiums
and the impacts on the entitlements of employees’ families to payments such as
the Family Tax Benefits.
Treasury told the committee that it had:
...not undertaken any explicit modelling of such flow-on
costs [i.e. payroll tax and workers compensation]. We are aware that there would
be potential flow-ons for things like family tax benefit, for example, as
people's reportable fringe benefits are incorporated into the income
definition, but we have not been able to quantify those.
The committee heard evidence about the additional costs that might be
incurred by employees. Treasury told the committee:
If there are means-tested impacts, then they will flow
through. So if you have PAYG allowance it will increase their taxable income.
If they are entitled to a deduction for those expenses, under the new system
there will be no impact. To the extent that they are not entitled to these
deductions because they do not maintain a residence or it is outside the
12-month period, then there is an increase in their taxable income and that may
have flow-on impacts for other government benefits that are calculated on the
basis of taxable income.
In relation to the ‘otherwise deductible rule’, submitters were
concerned that the proposed process made employers responsible and liable for
the compliance of their employees. The Australian Industry Group queried the
extent to which employers would have to check the veracity of an employee’s
So for our 1,600 people, monitoring when they moved into
accommodation, when they moved out for the 12 months, asking them if they are
maintaining their own home, whether they are renting it out to someone—don’t
you think that is a slight invasion of privacy? And how are we going to prove
Treasury stated that there were penalties for employees who provide a
false declaration and that the employer does not need to verify the veracity of
All the employer needs to get from the employee is a
declaration that it is otherwise deductible to the employee, in line with the
otherwise deductible rule as it applies throughout the entire FBT system. So
long as the employer has that declaration in their hands, the employer has done
all they have to do and it is exempt from FBT.
The Australian Constructors Association also provided an example whereby
employees of the John Holland Group had failed to sign declarations. The
committee was told:
Last year we paid half a million dollars to walk-out
employees who did not give us a declaration. So we just bear the cost.
When questioned, both Treasury and the ATO indicated that they had not
received a large volume of complaints about employees failing to sign
Overwhelmingly, submitters were concerned that the bifurcation in the
Schedule between the FBT and income tax treatment for the food and drink
provisions was unnecessarily complicated. Ashurst submitted that
operating within two tax systems increased the flow-on compliance costs for
employers and employees.
To minimise the compliance burden on employees and employers, it was
proposed that the food and drink component of LAFH allowances be treated wholly
within one tax regime.
Submitters noted that Treasury’s exposure draft legislation did not
contain the bifurcation of the tax treatment for food and drink allowances.
During the public hearing Treasury indicated that there were no practical
impediments, or apparent revenue implications, to treating the entitlement
wholly within the FBT system or the income tax system.
The Institute of Chartered Accountants told the committee:
Allowances are ordinarily treated in the income tax system.
Therefore it makes sense for the LAFHA allowance to be treated in the income
tax system. The bifurcation just adds unnecessary complexity. 
The Institute of Chartered Accountants described how the single tax
treatment could work:
This could be achieved by removing the ordinary food amount
from the reasonable food amounts published by the ATO on an annual basis. That
is, the ATO publishes only the amount which it considers are reasonable costs over
and above the stay-at-home costs. Where the employer pays only the
reasonable amount, there would be no need to consider the tax treatment of the
first $42. Where the employer pays an allowance greater than the reasonable
amount published by the ATO, the excess over the reasonable amount should be
taxable, subject to the employee’s eligibility to claim a tax deduction for
PricewaterhouseCoopers supported removing the requirement for an
employer to pay ‘ordinary food and drink expenses’ which would negate the need
for the FBT provisions. The Australian
Constructors Association stated that currently:
Most companies do not pay the first $42 home component to any
employees anywhere so they are only giving them the top-up additional amount.
Generally speaking, it is not subject to fringe benefits tax because it is not
paid to the employee.
The Institute of Chartered Accountants noted that:
…when it comes to a decision as to which system that
component should fall under, whether it should be wholly within the income tax
system or wholly within the FBT system, that is a decision where reasonable
minds might differ.
Ernst & Young provided a comprehensive explanation of the issues
which arise from moving LAFH allowances into the income tax system:
It is prevalent in many industries including resources,
engineering and construction, for a significant portion of the workforce to be
engaged under industrial agreements or awards. These instruments typically
contain provisions for LAFH allowances which cannot readily be changed or
renegotiated. The Bill as currently drafted would have a significant and
potentially highly adverse impact on individuals who are subject to such
Under the current law, the tax consequences of a LAFH
allowance are borne entirely by the employer. Therefore a recipient of a LAFH
allowance receives the allowance without any tax being deducted. The individual
can then apply the entire allowance to meet the relevant expenses. The Bill
proposes a fundamental change in this approach by shifting the taxation of LAFH
allowances to the income tax regime.
Several circumstances may arise where an individual would no
longer be entitled to receive the allowance free of PAYG withholding, including
n Where the individual does not meet any element of the
new requirements e.g. if they do not own or lease a home in Australia that
continues to be available to them or do not meet the 12 month or fly-in fly-out
n If no declaration is provided to their employer before
the allowance is paid confirming that they meet the relevant requirements;
n If the predetermined food allowance to which they are
entitled exceeds the reasonable food allowance to be stipulated by the ATO and
the employee does not demonstrate to the employer that substantiation has or
will be maintained in relation to the excess;
n Where the employer requires a PAYG variation to be
undertaken by the employee but the individual does not undertake this process;
n Where the employee’s expenditure on accommodation is
less than the predetermined accommodation allowance amount, or if they do not
In our view there is little awareness among the
affected parts of the workforce of the significance or practical impact of
these changes. For those individuals who are not accustomed to maintaining
significant tax documentation, it is highly likely that one or more of the
above scenarios will arise. This will place the individuals at a significant
cash flow disadvantage, in circumstances where their employer withholds tax as
they are required by law to do, and the individual must wait until the year-end
tax return process to claim deductions and recoup the tax withheld, should they
be so entitled. In some cases, the tax cost will be fully borne by the
individual. This will cause significant disruption as employers deal with the
complaints and concerns of these individuals.
Affected individuals will also likely incur costs in
obtaining tax advice and the assistance of a tax agent to lodge their tax
returns as the complexity of the provisions is likely to be difficult for most
individuals to handle directly. This is contrary to the objective of
simplifying the individual income tax return process as previously announced by
the Government. There also remains scope for individuals who are not entitled
to claim deductions to do so in error, creating a significant risk management
issue for the ATO. 
PricewaterhouseCoopers noted in its submission that:
Moving the LAFH provisions from the FBTA Act will increase
the compliance burden on individual employees in relation to complex
provisions. Under the current provisions, this compliance burden sits with the
employer who commonly has guidelines and policies on which advice has been
sought to ensure compliance with the relevant provisions.
Similarly, the Tax Institute said in its submission that moving LAFH
allowances into the income tax system would result in:
a greater compliance burden for employees who will now be
required to determine themselves if they are “living away from home” with, in
many situations, inadequate knowledge of the complex LAFH criteria (which has
troubled tax advisers, the ATO and employers alike). 
The Australian Constructors Association told the committee:
I think we all have to remember that employees have to determine
in their own tax return when their deduction ceases...How can individual
employees like the AMWU guys work out when their transitional arrangements
ceased and their deductions ceased? 
The Institute of Chartered Accountants noted in their submission:
Under the proposed reforms, the tax treatment of LAFHAs will
be governed by the income tax system rather than the FBT system. This will
introduce new complexities as employers will be required to withhold tax to the
extent the employee is not expected to incur deductible expenses.
The Australian Mines & Metals Association noted in their submission
Employees have built their acceptance to work away from home
on resource projects based on certain salary arrangements that will no longer
exist if the Bill in its current form becomes law. As is to be expected, this
will upset many employees.
There will almost certainly be pressure on employers to make
up the difference in pay. As to how employers deal with that pressure, it will
be up to them to decide while taking into account their own unique and complex
set of commercial considerations before making a decision.
The taxation treatment of LAFH allowances and benefits
The committee does not support the current proposal to bifurcate the
treatment of LAFH allowances. The committee believes that the bifurcation
unnecessarily complicates the tax treatment of LAFH allowances and that the
potential on-flow costs represent an undue and unquantified financial burden
for employees and employers. It is the committee’s view that LAFH allowances
should be dealt with under a single tax regime.
The Tax Institute and the Institute of Chartered Accountants both
cautioned against bifurcating the tax treatment of LAFH allowances. According
to the Institute of Chartered Accountants ‘[t]he bifurcation just adds
unnecessary complexity’.  The Tax Institute
The tax treatment of LAFH allowances is determined either in
the context of the income tax laws, or the FBT laws, but not both. 
While the Bill is designed to bring LAFH allowances into the income tax
regime, in reality employers are left straddling both the income tax and FBT
regimes. As the Bill stands employers will still be claiming LAFH benefits
(reimbursement or the direct provision of accommodation and food and drink) and
the ‘ordinary food and drink component’ of LAFH allowances under the FBT
system. By treating LAFH allowances within the FBT system the issue of
accounting for an employee’s ordinary food and drink expenses (i.e. $42 per employee
and spouse, and $21 per child) is simplified and in practise usually deducted
before the employee receives their LAFH allowance.
There are significant advantages in keeping LAFH allowances within the
FBT system. The committee received compelling evidence that treating LAFH
allowances within the income tax system could cause a variety of anomalies and
unintended consequences for employees. For employers, if the income of their
employees increases there may be increased costs for them associated with superannuation,
and potentially also workcover and payroll tax. Continuing to treat LAFH
allowances as a fringe benefit will mitigate against some of the associated
on-costs for employers and the flow-on effects for employees.
The committee recommends that living-away-from-home allowances
be treated within one taxation system.
The committee supports retaining the taxation treatment of living-away-from-home
allowances wholly within the fringe benefits tax system.
Under the existing provisions in the FBTA Act, declarations are
currently provided by an employee so that an employer can receive the tax
concession for LAFH allowances and benefits. This process does not rely on the
employer verifying the veracity of the employee’s eligibility. It is however
the responsibility of the employer to provide the declaration to the ATO if
they wish to seek tax relief. The committee does not see any compelling reason
to amend these arrangements.
||The committee recommends that prior to the implementation of
any changes to living-away-from-home allowances and benefits the Government
must provide clear and concise documentation outlining the new compliance
obligations for employers and employees.
The reforms will generally apply from 1 October 2012.
However, there are some transitional provisions for employees who entered into
employment arrangements, which afforded them LAFH allowances or benefits, prior
to 8 May 2012.
Permanent residents who are currently receiving LAFH allowances or
benefits but are not maintaining a primary home in Australia will be subject to
transitional arrangements. They will not be subject to the requirement to
maintain a home in Australia for their own use at all times and the 12 month
time limit will not apply until 1 July 2014 or the date a new or altered
employment contract is entered into.
Temporary residents who are maintaining a primary residence in Australia
from which they are required by their employer to live away from will be
entitled to the same transitional arrangements as permanent residents.
However, temporary residents who are not maintaining a primary residence
in Australia will not be eligible for the transitional provisions. From 1
October 2012 any LAFH allowance or benefit they receive will not be eligible
for the tax concession.
The committee received evidence from both industry and individuals
(predominately foreign workers on 457 visas) about inadequacies in the
Length of proposed transitional provisions
Industry was particularly concerned about the potential cost increases
associated with renegotiating contracts with employees and completing existing
contracts to supply goods and services. The Australian Industry Group argued
Transitional provisions should extend for the duration of
existing employment arrangements so that bargains struck on the basis of the
existing tax treatment (both between employers and employees and between
businesses) can run their course without disputation and/or renegotiation.
‘Material variation’ to employment contracts
The committee heard that the definition of a ‘material variation’ to an
employment contract which could end transitional arrangements was inadequate
and may stifle normal workforce processes. PricewaterhouseCooper
stated that it ‘may lead to dilemmas for employers that may face difficulties
in being able to award or agree to a promotion’.
PricewaterhouseCoopers further submitted that:
...a ‘material variation’ to an employment contract should
only occur where there is a variation that changes the requirement for the
employee to live away from home for the purposes of their employment.
The Institute of Chartered Accountants told the committee that there
needed to be clarification about what constitutes a material variation.
As the Institute of Chartered Accounts explained:
...the legislation does not actually use those words
[material variation]. The legislation uses the words 'termination of a
contract'. 'Material' is something that has been imported into it through the
explanatory memorandum and even then the interpretation of what 'material'
might be will mean that most people will not get the transition for very long.
It is still a concern that, if you look strictly at the words in the
legislation: any time and any variation, that is it; it is all over.
During the public hearing, Treasury acknowledged that the terminology
had created some confusion and confirmed that it would undertake additional
work to provide further clarification as to what constitutes a material
Transitional provisions for temporary workers, particularly those on 457
Throughout the consultation period workers on 457 visas have been vocal
about how they believe the proposed changes will adversely affect them. Indeed,
the committee received over 20 submissions from 457 visa holders. It was argued
consistently that the proposed changes will result in many skilled workers
leaving Australia and that foreign workers are not being afforded the same
rights as Australian workers.
The Department of Immigration and Citizenship has provided some advice
in response to the issue of 457 visa holders. The department submitted that:
Based on visa application and grant trends since the
announcement of the changes to the tax treatment of living-away-from-home
allowances and benefits, the Department does not anticipate a significant
impact on the volume of 457 visa applications and grants. The 457 visa program
is a demand driven program used by employers to fill vacancies that cannot be
filled from Australia’s labour market, and as such skill shortages and labour
market conditions are the primary determinant of growth with the 457 program.
Many submitters requested that transitional arrangements be expanded to
include temporary and foreign workers. Consult Australia argued
...doing this will provide employers with sufficient time to
manage employee expectations, amend workforce development and recruitment plans,
and enable existing employees who receive LAFHA to properly prepare for the
A group of professionals from the Australian Nuclear Science and
Technology Organisation (ANSTO) on temporary visas submitted that the change to
the eligibility of temporary residents was unfair as:
Many temporary residents accepted jobs in Australia based on
budgeted levels of income and expenses. They committed to lease arrangements
and bank loans based on the same calculations. Hence, they are tied in to
financial agreements that they will no longer be able to afford.
Furthermore, some submitters argued that the differing transitional
arrangements provided to permanent residents but not to temporary residents was
discriminatory and could breach non-discrimination provisions within
Australia’s double taxation agreements.
The EM addressed the human rights implications. It explained that the
different treatment the transitional rules provide to taxpayers, according to
their residency status, is consistent with international law and practice in
allowing the taxation laws of a state to differentiate between residents and
non-residents. The EM concluded that:
...there is no basis to conclude that this different
treatment amounts to discrimination on the basis of ‘other status’ under the
international instruments listed in section 3 of the Human Rights (Parliamentary
Scrutiny) Act 2011.
During the public hearing Treasury confirmed that it considered both the
Schedule and the ensuing transitional provisions as being compatible with
Australia’s human rights obligations and not in breach of any double-tax
The committee urges the Government to clarify what constitutes a
‘material variation’ of a contract as a matter of urgency. It is the view of
the committee that definitional clarity is necessary for both employers and
employees adjusting to the new arrangements.
The committee notes the concerns of foreign workers who will not meet
the new eligibility criteria. The committee has had to rely on the guidance of
Treasury and its advice that the Schedule and the ensuing transitional
provisions are compatible with Australia’s human rights obligations and do not
breach any double taxation agreements.
||The committee recommends that the Government provide as a
matter of urgency a clear and inclusive definition of what constitutes a
‘material variation’ to a contract, as it relates to Schedule 1 of the Tax
Laws Amendment (2012 Measure No. 4) Bill 2012.
Julie Owens MP
13 August 2012