In Short
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A Living Away from Home Allowance (LAFHA) applies when an employee must temporarily live away from their usual home for work, and it compensates for extra living costs such as accommodation and food.
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LAFHA is treated as a fringe benefit, not ordinary wages — so tax treatment depends on whether the allowance qualifies and whether components (like accommodation and food) are exempt.
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To benefit from exemptions, employers must meet strict conditions and keep detailed records. Otherwise, the allowance may be treated as taxable and could attract payroll tax liabilities as well.
Tips for Businesses
Make sure you carefully assess whether the allowance truly involves living away from the employee’s usual home, and keep complete documentation. If you pay for accommodation or food, use the exemption rules correctly. Review your payroll tax and FBT obligations, and consider seeking professional advice if you’re unsure.
As an employer, understanding Fringe Benefits Tax (FBT) is crucial if you are providing, or intend to provide, non-cash benefits to your employees. One such benefit is the Living Away from Home Allowance (LAFHA), which applies when an employer pays an employee to live away from home for work. This can cause confusion for employers, as the line between “living away from home” and “travelling for work” can be challenging to draw. However, it significantly impacts the tax treatment of that allowance. This article explains how LAFHA works, how it is taxed, and what you need to do as an employer to stay compliant with Australian tax laws.
Is the Allowance a LAFHA?
Not every allowance will be considered a LAFHA. Allowances paid to employees who travel for work are generally treated as assessable income rather than as a fringe benefit. This will depend on the employee’s circumstances, such as whether they are travelling for work or living away from home.
The LAFHA is a financial benefit provided to employees who need to temporarily relocate for work. Essentially, it compensates employees for the additional living costs incurred when they are required to live away from their usual place of residence for work. The allowance can cover accommodation costs, food, and incidentals, making it a valuable benefit for workers on temporary assignments away from home.
For a payment to qualify as an LAFHA, three conditions must be met:
- Employment-related allowance: the payment must be an allowance provided to the employee in relation to their employment.
- Relocation for work: the employee’s job duties must require them to live away from their usual residence. This is typically the case when an employee is temporarily assigned to a work location away from their home.
- Compensation for additional expenses: the allowance must cover non-deductible relocation-related expenses incurred by the employee. This can include higher living costs, such as accommodation and food, as well as other disadvantages arising from living away from home for work. The reason these expenses are generally considered “non-deductible” is that an employee is usually unable to claim living expenses as income tax deductions, as they are private and domestic in nature.
Exempt Accommodation Component
Accommodation expenses provided to employees who qualify for LAFHA may be exempt from FBT, provided specific conditions are met. They generally apply to:
- employees who are relocated from their usual place of residence with the LAFHA relating to the first 12-month period at that particular work location; and
- to arrangements where employees work on a fly-in-fly-out or drive-in-drive-out basis.
Additionally, you must maintain comprehensive records of employees to substantiate the exemption, including:
- an employee’s living-away-from-home declaration and documentary evidence of the payment of the expense; or
- a declaration about the expense in the approved form.
Exempt Food Component
The food component of LAFHA can also be exempt from FBT under certain conditions.
Each FBT year, the ATO publishes “reasonable” food and drink amounts for LAFHA. The ATO allows employers to reduce the LAFHA taxable value by this amount. However, this reduction usually means no FBT applies to that part of the LAFHA.
Employer Obligations for Providing LAFHA
When providing LAFHA to employees, you must comply with several reporting and documentation requirements. These include:
- Maintaining records: Keep detailed records of all LAFHA payments, including receipts, invoices, and any other supporting documentation.
- FBT Return: Report the LAFHA benefit in your FBT return, ensuring all necessary information is accurately disclosed.
- Payment of FBT: If the LAFHA doesn’t qualify for an exemption, you will be required to pay the appropriate FBT based on the taxable value of the benefit provided.
LAFHA and Payroll Tax Considerations
In addition to FBT, some Australian jurisdictions impose payroll tax on fringe benefits such as LAFHA. This means that payroll tax can apply to the taxable value of the fringe benefits, such as the LAFHA. However, exempt benefits are excluded from taxable wages for payroll tax purposes, such as the exempt portion of the LAFHA.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Key Takeaways
As an employer, understanding the rules around LAFHA is crucial to ensure compliance with FBT and payroll tax obligations. If your employee’s relocation is work-related and they maintain a home at their usual residence, or if their work is a fly-in-fly-out nature or a drive-in drive-out nature, and you are paying that employee an allowance, you should seek advice on LAFHA.
However, some LAFHA components may be exempt from FBT depending on the circumstances. Proper record-keeping and accurate reporting are essential to avoid penalties. It is important to always seek professional advice when necessary to ensure your business remains compliant with federal and state tax laws.
If you are uncertain about your legal obligations surrounding LAFHA or fringe benefits in general, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
LAFHA applies when an employee temporarily relocates for work and keeps a home elsewhere. A travel allowance is for employees who are simply travelling for work. This affects how the payment is taxed.
Accommodation and food may be exempt if conditions are met. Accommodation is usually limited to 12 months, and food is exempt up to ATO limits, with records required.
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