Changes to LAFHA and what they mean for expats in Australia

Many expats living in Australia have in recent years been able to make use of the Living Away From Home Allowance (LAFHA) fringe benefit. This benefit was basically a tax-free allowance for any employee in Australia who relocated in order to work. This included Australians who moved from one part of Australia to another, but the large majority of people who claimed this allowance were expats who immigrated to Australia to work a job they couldn't fulfil from their home country. To qualify, whether Australian or a foreign national, you had to prove that you intended to move back to your original place of residence once your contract expired. 
LAFHA isn't an extra allowance paid on top of an employee's salary; rather a portion of that salary is not considered accessible income, which means it isn't included in a personal tax return. Although LAFHA does not actually increase a salary package, it significantly increases the proportion of it that an employee is able to take home after tax. Because Australian employers pay a reduced tax on this portion of their employee's salary, they have often used this allowance to entice skilled expats to Australia, especially on the popular 457 temporary visa.
For example, let's say Patrick is an Irish engineer from Dublin who relocates to Sydney with his wife and two young kids on a four-year contract. A yearly salary of 95,000 AUD would allow him to take home just over 69,575 AUD after tax. However, when LAFHA is applied, this increases by over 13,247 AUD a year, and 10,421 AUD for each subsequent year.

Changes to LAFHA

LAFHA was intended to help employees who had to temporarily live away from their permanent residence in order to fulfil a work contract, rather than as a tax perk for employees permanently immigrating from overseas. For example, expats who first organised a permanent visa, then found work in Australia, were not eligible for LAFHA. However, loopholes in the regulation allowed it to be exploited, as expats were often able to renew their contracts and 457 temporary visa, and continue claiming LAFHA after the initial four-year period was up. In addition, there was no limit to the length of time that Australian nationals could claim the benefit.
The Australian government has proposed significant changes to the allowance, and most expats moving to Australia will find they no longer qualify for it. To qualify for LAFHA, you must now be living away from your usual place of residence in Australia for work purposes, while maintaining (and not renting out) the original property – in other words, maintaining two homes for work purposes. In addition, you can only qualify for the tax break if you are an Australian citizen or permanent resident of Australia, and the allowance can only be claimed for a maximum of 12 months.
For example, let's say Patrick was in Australia on a permanent visa, owned a house in Sydney, where his wife and kids lived, but worked in Adelaide during the week while renting an apartment there. Since he returns each weekend to his family, and therefore maintains two homes in Australia because of his work, he qualifies for LAFHA. But if he and his wife divorced, or his family moved with him to Adelaide and the house in Sydney was rented to another family, he would not qualify for the benefit. Also, if Patrick lives in Australia on a 457 visa, he still won't qualify for LAFHA even if he does maintain two homes.

So what's the difference?

Australian dollarsIn a nutshell, anyone who got a job offer in Australia and moved there on the 457 visa used to be able to claim a significant tax break on their salary. You could also claim it if you were an Australian citizen moving within Australia because of a job offer, and either way, you could claim it until your contract expired. Whether Australian or foreign national, if you renewed your contract, you could continue claiming LAFHA if you could prove that you still intended to move back once your contract was up for good.
Now, under the proposed changes, you can only claim LAFHA if you a) are a permanent resident, b) maintain two homes because you intend to move back eventually and don't rent out your original home, and c) these two homes are both in Australia.

When do the new regulations for LAFHA come into effect?

The changes to the LAFHA will come into effect on 1 July 2012.
Although these changes are not technically written into law yet, as they still need to be formally approved in the Australian parliament, you should assume that the new changes apply to any work contract agreement entered into after 8 May 2012, when the changes were announced in the 2012/2013 federal budget speech.
There is a transitional period for expats living and working in Australia who entered into a work agreement before 8 May 2012 and who do not own a second home in Australia. These expats will still be eligible for LAFHA until 30 June 2014 provided that they are permanent residents of Australia.
Under the proposed law, expats working in Australia on the 457 temporary visa will not qualify for LAFHA during the transitional period, and from 1 July 2012 will need to start paying tax on the portion of their salary that was previously tax-free.

I'm on a 457 temporary visa, help!

Unfortunately, although your annual salary technically won't decrease, it's likely that a significant amount of it will be taxed from 1 July 2012. If you're worried about making ends meet, you might want to negotiate a raise to offset the amount that you'll lose to your taxes every month.
Because the changes have not been formally written into law, it is possible that there will be some extension of the transition period to cover temporary visa holders – but as the proposal stands now, no such transition period exists.

Further reading

Work permits for Australia
Working in Australia
Expat Arrivals Australia guide

Search Expat Arrivals

Our Article Expert

GabyS's picture
South Africa

Got a question about your new country?

Login with your Facebook account (Recommended)