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There are basically two steps when dealing with LAFHA at the time of FBT return.
1. Determine whether the payment qualifies for LAFHA exemption. With the dramatic reform effective from 1 October 2012, the LAFHA exemption is now very limited. Generally, the employee must living away from usual place of residence due to employment duty. So permanent relocation does not qualify, such as an overseas employee applies PR in Australia. The employee must have an “owned” home elsewhere in Australia for immediately use. That means the accommodation cannot be under parents’ name, cannot be rent out when living away from home. Literally, no overseas employees such as 457 visa holders will have this type of arrangement.
The employment contract should be specific regarding the payment that is to compensate the employee for the inconvenience. It is also recommended to state that the employee will be offer a position in the office near the usual place of residence once the assignment is conducted. Keeping silent in the contract about the nature of the payment may lead to the LAFHA exemption being invalid.
The new LAFHA exemption only applies for 12 months per location. 12 months is the total period and can be paused when the employee is on holiday. The law does not define “location” but the ATO expressed that suburbs like Sydney CBD and North Sydney will be treated as one location, so simply moving office within the same municipal will not qualify.
2. Once you determine the LAFHA exemption may apply, the second step is to find out the THREE components of the payment: accommodation, food and beverage, and all others. No exemption for all others so if the employment contract does not state the components, the exemption is hanging on the edge.
The accommodation is entirely exemption, if the total figure is substantiated. No limit about the figure. If no rental agreement, there will be no exemption and the payment is fully taxable.
The food component is complicate. Refer to this TD http://law.ato.gov.au/atolaw/vie ... AT%2FATO%2F00001%22
If the employer is paying a total amount of $236 per week for one single employee, the exemption will be $236-$42, where the $42 is statutory amount for an adult. If the employer is paying only the amount on top of $42 up to the reasonable cap (must be specific in the contract), i.e. $236-$42=$194, the entire amount is exempt.
If the employer is paying a total amount more than $236 per week, the excessive amount will be subject to FBT as well. Say the employer pays $250 per week, the taxable amount is ($250-$236) + $42 = $56 per week. If the employee can provide substantiation for all $250, the taxable amount will be reduced to $42 per week. The reasonable cap is the amount that no substantiation is required. You can still go over and get higher exemption.
To sum up, regardless how much your employer has paid to an employee, after determining the exemption can apply, you need to split the payment into these three categories. If no description, too bad as it may not enjoy the exemption. They apply the exemption based on substantiation and contract.
It is too late for 2013/14 return, but let me know if you need to submit an amendment. And you may suggest your boss to review LAFHA due to 12 months restriction.
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