Living Away From Home Allowance (LAFHA) is a specific type of allowance that some Australian employers pay to employees to compensate for additional costs incurred when they are temporarily required to live away from their usual place of residence for work purposes. This allowance plays an important role in supporting employees but also brings specific tax implications that both employers and employees must understand.

In this article, we will break down the basics of LAFHA, how it is treated for tax purposes, eligibility requirements, examples of how it applies in practice, and important compliance points. Our aim is to make the complex rules around LAFHA clear and manageable for Australian workers and employers alike.

What is LAFHA?

A Living Away From Home Allowance is paid to an employee to cover additional living costs, such as accommodation and food, that arise because the employee has to live away from their normal home for work-related reasons. LAFHA is not simply a travel allowance or a relocation payment; it specifically addresses the situation where an employee temporarily lives in a location other than their regular home.

The key features of LAFHA include:

• It compensates for additional living expenses and disadvantages suffered because of living away from home.
• It is usually paid regularly (e.g., weekly or fortnightly) with an employee’s salary.
• It has a distinct tax treatment, separate from normal income or travel reimbursements.

Understanding these features is crucial because incorrect classification can lead to compliance issues and unexpected tax liabilities.

Tax Treatment of LAFHA

LAFHA is considered a “fringe benefit” under Australia’s Fringe Benefits Tax (FBT) system. This means that, generally, the employer, not the employee, is responsible for paying tax on the benefit unless specific exemptions or concessions apply.

Fringe Benefits Tax and Exemptions

When an employer provides a LAFHA, it is usually subject to FBT. However, if the allowance meets certain conditions, an FBT exemption or reduction can apply, significantly decreasing the amount of tax payable.

Employers can reduce the taxable value of the LAFHA by excluding amounts that represent:

• Reasonable accommodation expenses
• Reasonable food and drink expenses

The Australian Taxation Office (ATO) releases annual guidelines specifying what constitutes “reasonable” amounts for food and accommodation. If the LAFHA paid is within these limits, the employer may not have to pay FBT on these amounts, or the amount will be greatly reduced.

Employee Perspective: Is LAFHA Taxable?

From the employee’s perspective, a properly structured LAFHA is not treated as assessable income and does not need to be included in their personal income tax return. However, if the allowance does not meet the ATO criteria, it might be considered taxable income.

In cases where an employee is simply given an allowance without sufficient documentation or without truly living away from home, the ATO may treat the payments as normal salary and wages, making them fully taxable.

Conditions for LAFHA Eligibility

For a LAFHA to qualify for concessional tax treatment under the FBT regime, certain strict conditions must be met:

1. Employee Must Maintain a Home in Australia

The employee must be genuinely living away from their regular home, and they must have a home that they are living away from. Temporary accommodation arrangements or mere relocations do not qualify. Importantly, the home must continue to be available for the employee’s use while they are away.

2. Temporary Nature of Living Away

The period the employee is away from home must be temporary. The ATO expects that there is a clear intention that the employee will return to their original home after the work assignment ends. Long-term or indefinite assignments do not generally qualify.

3. Substantiation Requirements

Employers must maintain appropriate records to substantiate the expense claims, including evidence of:

• Actual costs incurred
• Duration of the stay
• Purpose and nature of the work assignment

Without proper documentation, the employer risks losing the FBT concessions.

4. Reasonableness of Allowance Amounts

The amounts paid for food, accommodation, and related expenses must be reasonable as per ATO guidelines. Payments that significantly exceed these guidelines may not be eligible for FBT concessions.

Practical Example of LAFHA

Consider an example: Sarah works for an engineering company in Brisbane. She is assigned to a six-month project in Perth. Sarah’s company pays her a LAFHA to cover the cost of renting a furnished apartment in Perth and her higher food costs.

Sarah’s main residence remains in Brisbane, where her husband and children continue to live. She intends to return there after the project. Sarah’s employer calculates the allowance according to ATO reasonable amounts and retains records of her Perth rental and food expenses.

In this case, the LAFHA is likely to qualify for concessional FBT treatment, and Sarah does not need to declare it as income in her tax return.

Common Mistakes and Pitfalls

LAFHA arrangements can be complex, and several common errors can cause tax problems for employers and employees alike:

• Misclassifying Relocations as LAFHA: Permanent relocations for work do not qualify for LAFHA concessions.
• Lack of Documentation: Failure to maintain evidence of expenses and assignments can result in loss of FBT benefits.
• Incorrect Allowance Calculations: Paying allowances above ATO reasonable limits without appropriate justification can cause FBT liability.
• Employee Status: LAFHA is generally not available to independent contractors or self-employed individuals.

Employers should carefully structure LAFHA arrangements and seek professional advice if needed to ensure compliance.

Important Updates and Changes

The ATO regularly updates the guidelines regarding reasonable food and accommodation amounts. Employers must stay informed of these updates to ensure continued compliance.

Additionally, certain reforms over the past decade have tightened the eligibility for LAFHA, especially for temporary residents and expatriate workers, limiting some of the previously broader concessions.

For example, from 1 October 2012, new rules limited LAFHA tax concessions for temporary residents unless they maintained a home in Australia.

Conclusion

Living Away From Home Allowance (LAFHA) provides valuable financial support to employees who are required to live away from their usual home for work. However, it comes with strict eligibility requirements and specific tax treatment under the Fringe Benefits Tax regime.

Understanding the rules and ensuring proper documentation are key to benefiting from the available concessions while avoiding costly mistakes. Employers must design and administer LAFHA arrangements carefully, while employees should be aware of their obligations and rights.

Given the complexity, consulting with a qualified tax professional or human resources advisor is strongly recommended for both employers and employees involved in LAFHA arrangements.

By managing LAFHA properly, both parties can benefit from a fair, compliant, and efficient system that supports Australia’s dynamic and mobile workforce.