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Tax Law - LAFHA Fringe benefits(Part 2)

Date: February 22, 2012

Authors: Jonathan Lim B.A., LL.B. (Hons)

Exempt components

The chief reason for the special LAFHA section of the FBT regime, is to ensure that part of the LAFHA benefit is exempt from FBT. The exempt components of the LAFHA benefit are:

  • the exempt accommodation component; and

  • the exempt food component.

These components are excluded from the taxable value of the LAFHA benefit.

Note the implication that the policy position of the Government is that LAFHA amounts that are neither to pay for food costs nor for accommodation, are a form of remuneration to the employee and therefore a fringe benefit.

Exempt accommodation component

The exempt accommodation component is the amount of LAFHA paid to the employee in respect of accommodation expenses that the employee could “reasonably expect” to incur at the temporary location.

Unlike the food component, the ATO has so far declined to provide actual values of what it would regard as reasonable. Instead, the ATO provides the following factors which should be taken into account:

  • whether the employee is intended to be accompanied by family;

  • the rank of the employee;

  • the nature of the temporary location;

  • whether furnishings are included; and

  • the standard of living of the employee at home.

The ATO suggests using other employees’ expenditure in similar circumstances in the guide, or using the Australian Bureau of Statistics or commercial organisations’ guidelines.

The vagueness of the ATO’s definition of reasonable accommodation expenses is not a comfort to employers trying to bring their accommodation allowances within the exempt component.

Exempt food amount

The food component of the LAFHA is relatively clearly defined. The exempt food component is defined as the part of the allowance that can be ascribed to expenses the employee can reasonably incur on food and drink.

The food component, unlike the accommodation component, is required to be calculated before the LAFHA is paid.

Total food costs

The compensatory amount for food can be in respect of total food costs, which means that the exempt food component will have to be the LAFHA food component minus the statutory food amount.

The statutory food amounts are changed from time to time. At the present they are:

  • $42 per week for any person 12 years or over; and

  • $21 per week for any person less than 12 years old.

These amounts purport to represent the expenditure on food that would have been required at the employee’s old location. Thus, the exempt component can only include the LAFHA food payments that exceed this amount.

It has been noted by commentators that $42/$21 per week would appear to be not entirely true to the actual cost of nourishment for a week. Nevertheless, that is what the amounts purport to represent.

Note that different rates apply to expatriates “living away from home” inside Australia. We will not deal with those rates here.

Other ways of calculating the food component

Alternatively, the employer may:

  • carry out its own valuation of the employee’s home food costs, and specify that the allowance is only for the food costs that exceed the home food costs. In this case the food component is entirely exempt from FBT; or

  • carry out its own valuation of the employee’s home food costs, and end up with a figure that is actually lower than the statutory food amount. In this case, the amount of excess of the statutory amount over the estimated home food costs is exempt.

The ATO is again somewhat vague about how employees should value home food costs, so many employers will prefer to rely on the statutory food amounts.

Example: Exempt food component

P Co has an employee, Q, whom P Co requires to relocate temporarily to Melbourne VIC. The relocation will be for a period of 19 months.

P Co pays an allowance to Q in respect of the costs of living away from home. Of this allowance, P Co specifies that $160 per week is for the Q’s food costs. The amount is for Q’s total food costs, not merely for the excess of the food costs in Melbourne over Q’s home food costs.

In this case, $42 is Q’s statutory food component for every week. Over the 19 months Q receives 19 food allowance payments, for a total of $3,040. Of this, the exempt food component is the total food allowance minus the statutory food amount, ie $3040 - $798 = $2,242.

Conclusion

If you have concerns about LAFHA fringe benefits call LAC Lawyers and we can provide advice and assistance.

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