The Australian Taxation Office (ATO) has launched new guidance to help employers determine whether a fringe benefit arises when they pay an allowance to an employee to compensate for expenses incurred when temporarily living away from home to perform their employment duties.
In this article, we will look at the tax implications of living away from home allowance (LAFHA).
LAFHA is a fringe benefit that an employer provides to an employee to cover any disadvantages suffered or additional expenses incurred as a result of them being required to temporarily live away from their usual residence to perform their work duties.
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LAFHA covers expenses such as accommodation and food and compensates for disadvantages such as isolation when an employee must live away from home to perform their work duties temporarily.
To qualify for a LAFHA benefit, an employee must pass the living away from home allowance eligibility criteria, namely:
When calculating the taxable value of a LAFHA, the following conditions have to be met:
It is important to note that employees who work on a fly-in, fly-out basis, or drive-in drive-out basis do not have to maintain a home in Australia, and the benefit is not limited to the first 12 months. If these are, however, not met, the taxable value of the fringe benefit is the amount of the allowance paid to the employee.
There is also the expectation that employees who’ve received a LAFHA will be returning to their usual place of residence after the work is complete. Also, an employee must substantiate when applying for a LAFHA less than 21 days.
There are two types of allowances that small business owners can offer their employees.
LAFHA is paid to employees to compensate for additional living expenses due to living away from home for an extended period for work. A LAFHA fringe benefit may arise when certain conditions are met and therefore need to be reported in your annual fringe benefits tax (FBT) return. In some circumstances, LAFHA payment may be exempt from FBT.
Tax-exempt components of a LAFHA include:
With LAFHA, the employee intends to return home after work at the temporary location is completed. When the employee is temporarily relocating for work, their family may also relocate with them or visit them. To qualify for LAFHA, the employee will also be working at the temporary workplace for longer than 21 days.
If their family relocates with them, LAFHA can also compensate for secondary schooling. Find out more here.
Unlike LAFHA, travel allowance is generally included in your employee’s assessable income, and tax may be withheld from it. A travel allowance can include food, drink, and accommodation, and the employee may incur incidental expenses.
It is important to note that a travel allowance provided by an employer is not taxed under the FBT regime but may be taxed under the PAYG withholding regime instead.
A travel allowance is usually offered to employees who travel to perform their work duties and return home intermittently during their time away.
Unlike LAFHA, an employee does not have to relocate temporarily when provided with a travel allowance. The current work will continue to be their usual place of work.
When travelling for work, the employee will typically only need to bring travel supplies. These can include toiletries and extra clothing. They will also use temporary styles of accommodation the employer provides, such as a hotel.
To reimburse an expense to your employee, they should generally keep a record, such as:
An employee must have provided you with a LAFHA declaration before your FBT return is due to be lodged with the ATO. Your employee should keep their documentation to prove the expenses incurred five years from the declaration date.
However, if they provide you with documentary evidence of the expense, they do not need to keep the documents.
The Tax Commissioner will decide whether your employee has spent a reasonable amount of money on food and drink expenses while living away from home. For example, the statutory food and drink amount per adult is $42 per week, while it is $21 per week per child under 12 years of age. If the amount exceeds what is considered reasonable, the employee must be prepared to pay the excess amount and the entirety of the food and drink expense.
The employee must be able to provide proof of the total amount of the accommodation expenses incurred. For example, an employee working at a petroleum installation at sea or an oil rig would be provided accommodation near the worksite. In this instance, the employee must lease temporary housing similar to their usual residence – and provide proof of this – to receive LAFHA as compensation.
Providing LAFHA and travel allowances to your employees can help cover the costs of work-related expenses when temporarily working away from their usual place of work.
If you are unsure about their taxation treatment, visit the ATO website or contact an accountant or bookkeeper for a more detailed overview using our ProAdvisor tool.
If this article has helped you better understand LAFHA, have a look at the QuickBooks Blog for tips on growing and running your business. We also offer a range of accounting software tools and features to ensure your business’s financial well-being.
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