Information provided by Geoff Taylor of Majenda, Tax & Super specialists. (www.majenda.com) 

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What is LAFHA?

LAFHA stands for "Living Away From Home Allowance" and includes allowances that are paid by an Australian employer to an employee to help them cover the additional costs of living away from their usual place of residence.

LAFHA is typically paid in respect of accommodation costs and food costs. 

Accommodation LAFHA

An employer can pay the accommodation costs of an employee providing the costs are reasonable and the amount paid will not form part of an employees Taxable Income.  Also, providing the accommodation costs are "reasonable", the employer will not be required to pay Fringe Benefits Tax (FBT) in respect of the benefit provided.

Factors that should be taken into account when determining the accommodation costs include:

• whether the employee will be accompanied by family members
• the position held by the employee in the workplace
• the location where the employee will be living
• whether or not the accommodation will be furnished
• the employee's current living standards.

For example, if a single person who had been living in a one bedroom apartment in New York moved to Australia at the request of his employer, it would be reasonable for his employer to pay the cost of an equivalent sized one bedroom apartment.  However, if the employer paid the cost of a 4 bedroom house with beach views, it is unlikely this payment would be considered "reasonable" by the Tax Office.

Food LAFHA

The food LAFHA is based on what is a 'reasonable' calculation of the costs of food, but as additional food expenses in the alternate location will never be a known amount there are no strict guidelines.

The Tax Office set out a maximum 'reasonable food component' for expatriate employees working in Australia each year.  The rates for the FBT tax year commencing 1 April 2011 are shown in TD 2011 / 4.

For the current FBT year the maximum reasonable food component for one adult is $233 per week.  However, the rules are a bit quirky in that it is assumed that an adult employee spends $42 per week on food ($6 per day) if they live in their usual residence.  The calculation of the amount of food allowance that is not subject to FBT is therefore $233 - $42 = $191.

The statutory food amount of $42 per week is subject to FBT, which is payable by the employer.  However, the big benefit for the employee is that the $233 payment of the reasonable food component is not subject to tax in the hands of the employee.

Where the taxpayer has a spouse and family, the calculation of the reasonable food component can be determined with reference to TD 2011 / 4 for the current year and there will be a new ruling with amended rates in respect of the FBT year commencing 1 April 2012.

Key benefits

In summary, a single employee could have their reasonable accommodation costs paid by their employer and receive a food allowance of $233 per week and not pay tax on either of those allowances.  Providing the eligibility criteria had been met, the employer would obtain a tax deduction for expenses incurred and would pay FBT on the statutory food component of the food allowance.

A word of caution

Statistics recently released by the Australian Taxation Office (ATO) indicate an alarming and disproportionate lack of compliance in relation to FBT. The ATO states that a review of "lapsed" employers (i.e. those who had ceased lodging FBT returns) indicated that 69% of those employers were still providing benefits to their employees and should have been lodging FBT returns. Further, the ATO's pilot project found that the rate of non-compliance in lodged returns was as high as 70%. Not surprisingly, the ATO have announced that FBT will be a much larger target for compliance activities over the next 12 months with a view to improving these compliance statistics.

In short, the Tax Office will be closely examining LAFHA arrangements in future and therefore it is essential that employers and employees ensure that the rules are followed.

(information correct as at Oct 2011)