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

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 2

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

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

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 5

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 6

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.

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

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

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. 10

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 11

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 12

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 13

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 14

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 15

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 16

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% 17

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)

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

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? 20

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 21

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 22

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 ed ANU Academics, GM’s, Deans re changes Paying visiting academics policy Bona fide travel allowance payment rules 23

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 24

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 25

26 Questions Contact: Luke Beckett X58739