Living Away From Home Allowance (LAFHA) - commencement of 12 month period if a material variation occurs during the transitional period
Clarification is sought of the application of the 12 month period for transitional arrangements. Specifically, the date on which the 12 month period commences if an eligible employment arrangement is varied or renewed during the transitional period.
The living-away-from-home reforms generally apply from 1 October 2012. However, transitional rules apply to employees who had an employment arrangement in place prior to 7.30 pm on 8 May 2012 if the employment arrangement was not materially varied or renewed between 8 May 2012 and 1 October 2012.
If the transitional arrangements apply, paragraph 1.63 of the Revised Explanatory Memorandum states:
1.63 In these circumstances, the requirements that the employee must maintain a home in Australia and the fringe benefits must relate to the first 12 months the employee is living away from home do not apply until 1 July 2014. However, if there is a material change to or renewal of the employment arrangement between 1 October 2012 and 1 July 2014, the new rules apply from the date of the change or renewal. [Schedule 1, Part 3, sub items 27(1) and (3)] [emphasis added]
This indicates the new rules apply from the point of a material change or 1 July 2014. That is, the 12 month period commences either when the material change occurs or from 1 July 2014. This means the concession would be extended to 30 June 2015.
However paragraph 1.66 of the Revised Explanatory Memorandum states:
1.66 For employees who are living away from their normal residence on 1 October 2012, the first 12 months the employee is living away from home is treated as commencing on or after 1 October 2012. [Schedule 1, Part 3, item 28]
This indicates the 12 month period starts at 1 October 2012.
Consider the following examples:
1. An employee enters into a LAFH arrangement on 1 May 2012. The employee has a material variation to the agreement on 1 December 2012. When does the 12 month period commence for the employee? 1 May, 1 October 2012 or 1 December 2012?
2. An employee enters into a LAFH arrangement on 30 May 2012. The employee lives away from home until 31 December 2013. When does the 12 month period commence for the employee? 30 May 2012, 1 October 2012 or 1 December 2012?
Industry view/suggested treatment
My understanding of the intent of the transitional provisions in the Explanatory Memorandum is that in the two examples:
1. 1 December 2012 would be the commencement of the 12 month period.
2. 1 October 2012 would be the commencement of the 12 month period.
The requirement for a living-away-from-home allowance to relate to the first 12 months that the employee is required to live away from the place in Australia at which he or she usually resides is contained in section 31D of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).
Under the transitional arrangements this requirement can be disregarded during the transitional period. The transitional period is defined in subitem 27(3) of Tax Laws Amendment (2012 Measures No. 4) Act 2012 to mean the period commencing on 1 October 2012 and ending at the earliest of 30 June 2014 or the date on which the eligible employment arrangement is varied or renewed.
That is, the transitional arrangements set out the date on which the test in section 31D has to be considered in determining whether subsection 31(2) of the FBTAA can be used to calculate the taxable value of a living-away-from-home fringe benefit. They do not set out the date on which the 12 month period commences.
Under item 28, if the employee had an existing arrangement in place on 1 October 2012, the 12 month period notionally commences on that date. However, this date will only need to be considered if a material variation or renewal of the employment arrangement occurs between 1 October 2012 and 30 June 2014.
If a change does not occur during the transitional period (1 October 2012 and 30 June 2014), sub items 27(1) and 27(2) provide that the transitional rules will continue to apply until 30 June 2014.
However, if a change does occur, the date on which the concessional treatment will cease will depend upon whether the treatment has already applied for at least 12 months from 1 October 2012. If concessional treatment has not applied for at least 12 months, then it will continue to apply only to the balance of the 12 month period.
For example, if a material change to an employment arrangement that was in place on 1 October 2012 occurred on 1 December 2012:
- the transitional period ended on 1 December 2012; but
- the concessional treatment will still apply until 30 September 2013 as the 12 month period is taken to commence on 1 October 2012.