• 11.10 Transitional rules

    Transitional rules may apply to some employees where certain conditions are met.

    If your employee is… Then this employee…

    A temporary or foreign resident who:

    • had an eligible employment arrangement:
      • in place before 7.30pm (AEST) on 8 May 2012, and
      • that was not materially varied or renewed from 7.30pm on 8 May 2012 up to and including 30 September 2012, and
       
    • maintained a home in Australia for their immediate use and enjoyment at all times during the period their duties of employment required them to live away from it
     

    is not limited to the LAFHA concessions for 12 months before the earlier of:

    • 1 July 2014
    • the date of a material variation in the employment arrangement
    • the date of renewal of the eligible employment arrangement, or
    • the date the eligible employment arrangement ends.
     

    Neither a temporary or a foreign resident and had an eligible employment arrangement:

    • in place before 7.30pm (AEST) on 8 May 2012 and
    • that was not materially varied or renewed from 7.30pm on 8 May 2012 up to and including 30 September 2012
     
    • is not required to maintain a home in Australia
    • is not limited to the LAFHA concessions for 12 months.
    • This is until the earlier of:
      • 1 July 2014
      • the date of a material variation in the eligible employment arrangement
      • the date of renewal of the eligible employment arrangement, or
      • the date the eligible employment arrangement ends.
       

    Note: the 12-month period starts from 1 October 2012 for the purposes of the transitional rules, regardless of the date of any renewal or material variation.

    Further information

    The terms temporary resident and foreign resident have their meaning given by section 995-1 of the Income Tax Assessment Act 1997. The meaning of temporary resident can also be found by referring to Foreign income exemption for temporary residents – introduction

    End of further information

    Eligible employment arrangement

    An eligible employment arrangement is the arrangement under which the employer or an associate of the employer commits to provide a particular employee with an allowance or benefit for the employee's accommodation, food or drink. This is as a result of the employee's duties of employment requiring the employee to live away from his or her normal residence.

    Depending on the circumstances, an eligible employment arrangement could be the contract of employment, award, enterprise agreement, or any additional arrangements involving the employer and employee.

    A general agreement covering all employees, such as an award or enterprise agreement, which provides for the payment of an allowance or benefit if an employee's employment duties require the employee to live away from his or her normal residence, is not an eligible employment arrangement.

    Example

    Peter is an Australian resident who commenced employment in his employer's Melbourne branch prior to 8 May 2012.

    Peter's employment arrangement is governed by an enterprise agreement entered into before 8 May 2012. The enterprise agreement provides for the payment of a LAFHA to employees who are required to live away from their normal residence to perform their duties of employment.

    Peter's normal residence is in Melbourne.

    In January 2013, Peter and his employer agreed for him to commence an 18-month secondment in the Sydney branch from 1 February 2013. As part of the agreement, the employer advised Peter that he will be paid a LAFHA during the secondment period, in accordance with the terms of the enterprise agreement.

    The eligible employment arrangement in this example is the subsequent agreement under which the employer committed to pay Peter a LAFHA during the 18-month secondment period – it is not the enterprise agreement. As the eligible employment arrangement was not in place before 7.30pm (AEST) on 8 May 2012, the transitional rules will not apply to the LAFHA paid to Peter.

    End of example

    Maintaining a home in Australia and the transitional rules for permanent residents

    Where the transitional rules apply, a resident who is not a temporary or foreign resident is not required to maintain a home in Australia until the earlier of either:

    • 1 July 2014, or
    • the date that the employment arrangement was materially varied or renewed.

    If the transitional rules apply, employees who are permanent residents only need to have an intention to return to the same city or district at the end of their appointment. It is acceptable that the employee’s residence has been rented out or sold, as long as the employee intends to return to their old locality.

    12-month period and transitional rules

    Where the transitional rules apply, the concessional treatment does not apply for another 12 months starting from the earlier of 1 July 2014 or the date of a material variation in the employment arrangement. The 12-month period is taken to notionally commence on 1 October 2012.

    If there is no material variation to the employment arrangement, then the transitional rules will continue to apply until 30 June 2014. Once there is a material variation to the employment arrangement, then the concessional treatment will stop immediately if such 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.

    Example

    Meg is an Australian resident who has been receiving a LAFHA and has had an employment arrangement in place since 1 January 2010. Meg’s employment arrangement has not been materially varied or renewed.

    If Meg’s employment situation does not change, Meg’s LAFHA will continue to be taxed concessionally until 30 June 2014. Meg’s employer will not be able to apply the concessional taxation treatment of Meg’s LAFHA for another 12 months from 1 July 2014.

    If Meg’s employment contract was materially varied on 1 February 2013, Meg's employer would have received concessional tax treatment of the LAFHA for a period of four months – from 1 October 2012 to 31 January 2013. Meg’s LAFHA would continue to be taxed concessionally for another eight months – that is, until 30 September 2013 – provided that from 1 February 2013, Meg was maintaining a home in Australia that she was living away from. This means that the 12-month period for Meg started on 1 October 2012 under the transitional rules, regardless of the fact that the material variation to her contract occurred on 1 February 2013. The 12-month period does not commence on 1 February 2013.

    If Meg's employment contract was materially varied on 1 February 2014, then the concessional treatment of the LAFHA would cease immediately because there has already been concessional treatment of the LAFHA for at least 12 months – that is, from 1 October 2012 to 31 January 2014, a period of 16 months.

    End of example

    Material variation or renewal of employment arrangement

    A material variation occurs when fundamental changes are made to the employment arrangement.

    For the purposes of the transitional rules, an annual salary review is not a material variation to an employment arrangement. Changes to an employment arrangement to reflect other annual adjustments, such as the food component of a LAFHA, do not constitute a material variation.

    In the case of promotions, it will be a matter of fact, depending on the circumstances of each case – for example, if an employee is promoted and the underlying terms of their employment arrangement do not change, there has not been a material variation in the employment arrangement. However, if there are fundamental differences to the employment arrangement arising from the promotion, the employment arrangement has been the subject of a material variation.

    Where an employer formally extends the employee's secondment period, through issuing a new contract or by letter confirming an extension to a current arrangement, that would constitute a material variation or renewal of an eligible employment arrangement.

      Last modified: 23 Aug 2013QC 17825