Elements to a Living Away from Home Allowance - Term Paper Example

Taxation Your name: Institution name: 1.0 Introduction ‘Fringe benefit’ can be defined as including any privilege, rights, facility or service. As a result, fringe benefit will include the use of something (e.g. such as a house, equipment), the njoyment of a privilege or facility or the ownership of something (Treasury, 2011). In Australia, fringe benefits include all those benefits that will arise from in-kind benefits such as the living-away-from-home-allowance, a use of a car, a debt waiver, loans, payment of housing, an expense payment, airline transport, board, use of equipment, property, car parking and entertainment, including that provided by a tax-exempt organization (Walsh, 2012). In general terms living-away-from-home-allowance (LAFHA) is paid to employee to compensate for the inconvenience or additional costs of living away from home so that an employee is able to perform responsibility that are related to the contract (Treasury, 2011). There are typically three elements to a living-away-from-home-allowance (LAFHA): food, accommodation and hardship (Walsh, 2012). From the perspective of the employee none of these elements are assessable as income. However, an employer should regard this to the Fringe Benefits Tax legislation. 2.0 Current rules Where the allowance is a fringe benefit and is accessible to the employer under the FBTAA, the employee will not be taxed (Andrew, 2007). However, if the allowance does not fall within Div 7, it will form part f the employee’s taxable income against which appropriate income tax deductions may be claimed (Dockery, et. al, 2006). Living-away-from-home-allowance (LAFHA) is exempted from FBT and an employee will not be taxed (Walsh, 2012). The rule allow for the value of LAFHA to be reduced by the value of the ‘the exempt accommodation component’ and the ‘exempt food component’ 2.1 Food component The exempt food component Living-away-from-home-allowance (LAFHA) is calculated by the reference to the amount of the food component that exceeds the amount reasonably necessary to compensate the staff for the cost of food (Walsh, 2012). Currently, a statutory food stipend has been set at 42 dollars per week for an individual aged 12 years or over and 21 dollars per week for an individual who is less that 12 years of age. Only the amount of the food component portion of the LAFHA that exceeds the statutory amount is treated as an exempt food component (Dockery, et. al, 2006). 2.2 Accommodation The component of accommodation allowance must be reasonable for the employee (Walsh, 2012). What is ‘reasonable compensation’ will depend upon the situations (Treasury, 2011). For instance, if the employee was previously living in a two bedroom house and a two bedroom house is leased for the duration of contract , that would be regarded as reasonable (Andrew, 2007). 3.0 Who is affected by LAFHA reforms 3.1 Temporary Resident Under s 995–1 of the Income Tax Assessment Act 1997, temporary resident is a person who holds a temporary visa that has been granted under the Migration Act 1958, secondly, a person who is not an Australian resident within the meaning of the Social Security Act 1991 (Walsh, 2012). Under LAFHA reform temporary resident employees are required to maintain a home for their stay in Australia, and if the employee live away from that home he will be able to access the concession (Treasury, 2011). The rationale for this policy states that, any changes will ensure the employing having a level playing field between a temporary resident employee and Australian employee or a temporary resident employee living at his or her home in Australia, in the same location, doing the same kind of work (Andrew, 2007). However, temporary resident employees often pay higher school fees and bigger medical bills, and are not able to access social security benefits. It has been argued that these factors, when combined with the cost of relocating to Australia, already put the temporary resident employee at a disadvantage. Therefore, a temporary resident employee is considered to maintain a home in Australia for their own use when that home is available for their personal enjoyment and use at all times, even though they are considered to be living away from it for their employment (Treasury, 2011). In order for a temporary resident employee to qualify as maintain a house for their own use or enjoyment in Australia, the employee may either rent or own accommodation which must be there for their own use and cannot be sublet or rented out while they are still in Australia (Walsh, 2012). This implies that a temporary resident employee is exposed to double accommodation costs and some have argued that this reform has ensure that it is impossible for foreign workers to claim tax free food and accommodation when relocating to Australia. Position following changes to LAFHA Salary 150,000 Food allowance 500 Accommodation Allowance 2,500 Total salary package 153,000 Exempt Income 0 Allowable deduction 0 Taxable Income 153,000 Total tax payable (including Medicare) 43,450 Take-home amount 109,550 Table 1: Tax calculation for Mr. Robert Smith 3.2 Permanent Resident For a permanent resident, Living-away-from-home-allowance (LAFHA) will be included in the employee’s accessible income (Andrew, 2007). However, the employee will be entitled to claim deductions for expensed incurred (Treasury, 2011). But an employer will not be under any obligation to withhold employee’s tax from a permanent resident as long as the employee is reasonably expected to incur deductible expenses. Position following changes to LAFHA Salary 130,000 Food allowance 500 Accommodation Allowance 2,500 Total salary package 133,000 Exempt Income 0 Allowable deduction 3000 Taxable Income 130,000 Total tax payable (including Medicare) 58,249 Take-home amount 74751 Table 2: Tax calculation for Mr. Samuel Lyton Position following changes to LAFHA Salary 100,000 Food allowance 500 Accommodation Allowance 2,000 Total salary package 102,500 Exempt Income 0 Allowable deduction 0 Taxable Income 102,500 Total tax payable 45,461 Take-home amount 57,039 Table 3: Tax calculation for Mr. Leslie Ross 4.0 Employment Costs The employment cost for the three potential employees for the next two years will be as follows: Mr. Robert Smith will earn a salary of $3,600,000 as seen in table 1; Mr. Samul Lyton will earn a salary of $3,120,000 as seen in table 2; while Mr. Leslie Ross will earn a salary of $2,400,000 as seen in table 3. Both Mr. Robert Smith and Mr. Samuel Lyton are entitled to LAFHA reimbursement of $72,000 each. Mr. Leslie Ross will not be entitled to LAFHA because his parent will be staying at his house. For an employee to qualify as maintaining a home for their own use, an employ may either rent or own the accommodation which must be available for their use at any time and that accommodation should not be rented out or sublet when the employee is living away from home. 5.0 Take home amount The employment cost for the three potential employees for the next two years will be as follows: Mr. Robert Smith will earn a salary of $2,069,200 as seen in table 1; Mr. Samul Lyton will earn a salary of $1,890,024 as seen in table 2; while Mr. Leslie Ross will earn a salary of $1,368,936 as seen in table 3. Both Mr. Robert Smith and Mr. Samuel Lyton are entitled to LAFHA reimbursement of $72,000 each. While, Mr. Leslie Ross will not be entitled to LAFHA because his parent will be staying at his house while he is away 6.0 Recommendation Mr. Robert Smith (a U.S resident) is entitled to the LAFHA tax concessions as he is living away from a residence in Australia. He will have LAFHA included in his assessable income (Andrew, 2007). He will be in a position to claim accommodation and food deduction incurred from living away from home. There will be FBT obligation for ADVANCE IT Group to refund him the money he spend on food and accommodation. Mr. Leslie Ross home in Brisbane is available for his use even when he will be working away from Brisbane. Mr. Leslie Ross has declared that to his future employer that this is his home and he will be maintain it for his own use (Dockery, et. al, 2006). The LAFHA will not be assessable income in the hands of Mr. Leslie Ross. He will not be able to claim a deduction for food and accommodation expenses incurred for the period only while he is living away from home because the his house in Brisbane still host Leslie’s mother. Mr. Samuel Lyton will be entitled to LAFHA tax concessions. ADVANCE IT Group will be required to pay FBT on food and accommodation benefits provided to Mr. Samuel Lyton during the time he is living away from home. Therefore, ADVANCE IT Group should hire Mr. Leslie Ross because his salary is the lowest as compare to the other two. Secondly, the firm will not be required to pay LAFHA tax concessions. 7.0 Effects of Living-away-from-home benefits Any firm in Australia that give remuneration to its employees which includes a LAFHA will be affected, along with the employees in receipt of the food and accommodation allowances (Walsh, 2012). The employees that will be affected the most are non-residents who do not have a permanent home in Australia (Dockery, et. al, 2006). At moment foreign expertise working in Australia are not considered to be living away from home. Also, younger workers in receipt of a LAFHA who may not maintain an "ownership interest" in the home in which they live when not at work will not be able to deduct expenses (Dockery, et. al, 2006). Lastly, many employers have started foreseeing difficulties in retaining or attracting foreign employees because of many issues with LAFHA. Reference Andrew, B. (2007). The contribution of effective marginal tax rates to work disincentives. London: Penguin Publisher. Dockery, et. al. (2006). Welfare reform, housing assistance and effective marginal tax rates. London: Penguin Publisher Treasury.( 2011). Fringe Benefit Tax (FBT) Reform Living Away From Home Benefits, Consultation Paper November Walsh K. (2012). ‘Cut to tax perks sparks backlash’,The Australian Financial Review, 5 March, p 47 Read More