LAFHA Changes Spell Trouble: Non-residents Hit Hardest

1. LAFHA Changes Spell Trouble: Non-residents Hit Hardest 30 August 2012

2. Overview • What is a LAFHA? • What are the changes? • How will the changes affect staff? • How will the changes impact visitors? • Visitor Working Group Update • Alternatives for attracting non-residents

3. What is a LAFHA? LAFHA is Living Away From Home Allowance Background • LAFHA is an allowance that is taxed under the Fringe Benefits Tax Assessment Act 1986 • An employee needs to temporarily relocate for work • The amount paid is to compensate for the additional expenses of living away from home for work

4. What is a LAFHA? • Food (ATO) components of a LAFHA are exempt from tax • Reasonable accommodation costs are also exempt from tax • Home could be anywhere in the world • Do not have to maintain a home at original place but must intend on returning at the end of the temporary period

5. What is a LAFHA? • For residents of Australia you could be living away from home for up to 2 years and be entitled to the tax free components of a LAFHA • For non-residents you could be living away from home for up to 4 years and be entitled to the tax free components of a LAFHA • Usually only the tax free components were paid to an employee

6. Where are we at? • Tax Laws Amendment (2012 Measures No. 4) 2012 bill has been passed by the House of Representatives • The bill was sent to House Standing Committee on Economics who have reported back to the House of Representatives. The bill was amended following the report • We are waiting for the bill to be passed by the Senate and therefore are working with anticipated changes

7. What are the changes? • Limiting LAFHA exemptions. • The Government announced initially in The Mid-Year Economic and Fiscal Outlook (MYEFO). • A consultation paper was released for discussion. • More details in the 2012/2013 Commonwealth Budget. • Draft Legislation was released on 15 May 2012.

8. What are the changes? • Legislation was introduced to parliament on 28 June 2012. • Legislation passed the House of Representatives on 21 August 2012 • Effect of changes is to limit tax exemption from 1 July 2012 1 October 2012. • Why? $1.8bil in revenue over forward estimates

9. What are the changes? New LAFHA rules from 8 May 2012 • Applies to both residents and non-residents • Must maintain a home for personal use in Australia (can’t rent/sub-let) • Need to live away from that home for work • Maximum LAFHA exemption period of 12 months at one site

10. What are the changes? Legislative Changes • Move the LAFHA to the income tax system (like every other allowance). • Allow deductions for actual accommodation and food expenses against the allowance • Actual expenses must be substantiated • No deduction for the first $110 $42 of food expenses • Food amounts below a limit (yet to be set) won’t need to be substantiated.

11. How will the changes affect staff? Staff from overseas that are receiving a LAFHA will not be entitled from 1 October • Salary packaged LAFHA’s with SmartSalary will cease. SmartSalary has/will contact the employees directly • LAFHA’s arranged as part of the contract with the employee and paid through HR will be taxed from 1 October

12. How will the changes affect staff? Staff from Australia that are receiving a LAFHA will not be affected • Transitional arrangements are in place to ensure they continue to be entitled until the end of their LAFHA period or 1 July 2014 • A change to their employment conditions or LAFHA arrangements could reset their entitlement

13. How will the changes affect staff? Staff that are setting up a LAFHA will be subject to news rules • They must maintain a home in Australia • Must have full and free access to their home • Will be limited to 12 months of allowable deductions (exemption) • Need to live away from home for work • Allowance provided to recognise additional costs of living away from home

14. How will the changes affect staff? • Employer to determine if employee is entitled to Food and Accommodation deductions • Employer to self assess PAYGW variation • Employer needs to be able to capture information to ensure eligibility for deductions exemptions • First $110 $42 of Food component will always be subject to PAYG FBT

15. How will the changes impact visitors? [This is for visitors from overseas, typically on 419 Visas] Are visiting academics employees? • For EBA purposes – No • For tax purposes – Yes. FBT Act expands the definition of employee • Need to ask: “If the benefit had been provided as cash, would PAYG apply?” • If PAYG would apply then the payment fits the definition of salary and person is an employee

16. How will the changes impact visitors? • Visiting academic allowances are normally to compensate for the additional living costs • As they are considered to be living away from home, the payments are a LAFHA • This has meant visiting academic allowances were generally tax free if limited to food and accommodation

17. How will the changes impact visitors? Tax Implications • From 1 October 2012 tax will apply to these payments • Visiting academics will be not living away from a home they maintain in Australia • Tax will be either FBT which adds 90% to the cost of a visiting academic; or • PAYGW which adds up to 70%

18. How will the changes impact visitors? Current Situation There are 3 ways to pay a LAFHA to visiting academics: • Through AP as a payment of the exempt amounts to the employee (an allowance) • Through AP as a reimbursement on the production of receipts (reimbursement) • Through AP as a direct payment to the supplier (direct payment)

19. How will the changes impact visitors? Situation post 1 October There are 3 ways to pay a visiting academic: • Through HR as an allowance – PAYGW & on-costs • Through AP as a reimbursement on the production of receipts (reimbursement) – Full FBT • Through AP as a direct payment to the supplier (direct payment) – Full FBT • These changes will impact current visitors

20. How will the changes impact visitors? Are there any tax free options remaining? • Double Taxation Agreements • Professor and Teachers clause • Less than 2 years, public benefit research • Travel Allowance • Duration, maintaining a home, short term accommodation, is family accompanying?

21. How will the changes impact visitors? Are there other tax free options? • Contract for Service • Enter into a contract for service in accordance with the Sole Trader contract • Arrangements with home institution to invoice ANU for secondment • Careful not to invoice for living costs as this will continue to be a Fringe Benefit

22. How will the changes impact visitors? Students • Some students are invited to ANU to continue studies • Some students come on 442 Visa – Occupational Training • Some Students get a stipend for living costs • Tax will not apply to students as they are considered volunteers and the payments are not connected to employment

23. Visitor Working Group Update • Visitor payment decision tool • Relocated vs traveller determination tool • Payments from HRMS – banking requirements • Reviewing person of interest to identify visitors • Updated visitor invitation letter • Emailed ANU Academics, GM’s, Deans re changes • Paying visiting academics policy • Bona fide travel allowance payment rules

24. Alternatives for attracting non-residents • Relocation Allowances • Temporary accommodation (rent) for 6 months (up to 12 months for owners selling) • Moving & storage of furniture • Transport costs • Moving consultant • Where they sell in previous location within 2 years: Stamp duty and fees associated with sale and purchase

25. Alternatives for attracting non-residents • Education of Children • Overseas Employees only • Payment of full time education costs (school, college, university or tutor) • Overseas employees working in Australia >28 days (or Australian employees overseas) • Student does not need to accompany employee • Industry standard or award requirement

26. Questions • Contact: Luke Beckett • X58739 • taxunit@anu.edu.au