The tax changes for living away from home benefits are not equitable

I have been expecting for a while now that the Federal Government would tighten up the living-away-from-home (LAFH) concessions in the FBT law but the extent of the proposed amendments announced last November goes too far.

LAFH concessions allow employers to provide tax free or concessional taxed accommodation benefits and /or food and accommodation allowances to their employees who are required to live away from their usual place of residence in order to perform their employment duties. The current rules provide the concessions where the employee intends moving back to the location of their usual place of residence after they cease work in the temporary place of work. There is no requirement in the current rules for the employee to maintain a home in the usual place of residence i.e. they can sell, rent out or cancel the rental of their existing home, provided they intend returning to live in the same location.

The Government proposes from 1 July 2012 to stop all LAFH concessions for temporary residents unless thy are maintaining a home in Australia and then required to live away from that home to perform their employment duties i.e. fly in fly out arrangements. For residents, the rules will remain similar to the current rules, which do not require the employee to maintain an existing home at their usual place of residence.

The Government said one of the main reasons why they wanted to change the LAFH concessions was because temporary residents are getting an unfair advantage over local Australian workers. However the proposed change turns this on its head and now gives permanent residents an advantage over temporary residents. If the law is to be changed it should be done on an equitable basis, not replacing a perceived inequity with a real inequity.

The existing law does not specifically provide an advantage to temporary residents over permanent residents, the rules are the same for both i.e. employees have to be required to live away from their usual palace of residence to perform their employment duties. However, the very nature of being a temporary resident means that they are more likely to be living away from home to perform their employment duties in Australia and therefore more likely to qualify for the LAFH concessions.

I agree the LAFH concessions need to be tightened up and updated but not at the expense of equity. The qualifying requirements for LAFH concessions are ambiguous and out of date. There is plenty of room to fix these concessions without introducing further inequities.

It is common for industrialised countries to provide some sort of LAFH tax concessions on the basis that the employee is incurring additional private costs on top of their normal private costs in order to perform their employment duties while living away from their usual place of residence. I am not aware of other countries that discriminate in this concessions based on the employee’s residency status. The compensation for additional costs should be the basis of providing the LAFH concession not the employee’s status as resident or temporary resident.

The inequity of the proposed changes is compounded by the effect on existing employment arrangements. Many employers and employees have medium term arrangements that will go for a number of years after 1 July 2012 (the proposed introduction date of these changes). In many cases commercial and personal decisions have been made based on the LAFH concessions being available over the term of the arrangement. The proposal to cease the LAFH concessions for most temporary residents could have dramatic commercial or personal consequences. In some cases the employer may be compelled to compensate the relevant employees for the changes to the tax benefits of their arrangements, Many commercial projects may be in jeopardy as a result of budgeted costs being exceeded. In other cases where the employer does not compensate the employee, the employee will be in the position of having to fund private accommodation commitments that were entered into on the basis of cash flow that may be reduced after 1 July 2012.

There should at least be a transitional period for arrangements in existence as at 29 November 2011 (the date of the Government announcement) so that the new rules will not apply to those arrangements for a set period to allow commercial and personal arrangements to be renegotiated on a reasonable basis. A four year transitional period from the date of announcement would be appropriate in these circumstances.

These changes to LAFH concessions are likely to cause or exacerbate skills shortages in certain industry sectors and regional areas. Many affected employers can’t find people to fill the positions in Australia and are forced to look overseas. This is a particular problem for employers in the community sector, where it is difficult to find suitably trained employees at the best of time.

The practical effect of the proposed changes is to make it more expensive for employers to fill a position with a temporary resident than with a permanent resident where both would be required to live away from their usual place of residence. It is inappropriate to force employers who can’t fill a temporary position with an Australian resident worker to have a higher cost to fill the temporary position with a temporary resident.

Tax Complexity Part II

The costs of complying with the Australian tax system are undoubtedly a major issue for business. 

It has been suggested that these problems are much worse than in other Western countries such as the UK and NZ. 

Two points about compliance costs that have been made by the Productivity Commission are not surprising. First, they tend to be much larger than the direct costs of administering the tax by the ATO and second, compliance costs are usually regressive affecting small taxpayers and businesses to a much greater extent than large firms. 

The recent decision in the Mount Pritchard case (on the limitations of the private ruling system, the very design of which was to provide certainty to taxpayers and reduce compliance costs) just exemplifies the issue. 

There is no chance of the tax advisory profession dying out…….!

GST

Sydney University has apparently done some research which shows that Australian business suffers the second highest tax compliance costs in the western world. I’ve not seen the report but it was raised in a recent meeting of the tax compliance working group assembled by Inspector General of Taxation. While the main focus of this group is income tax compliance costs similar claims could be made for GST. If ever one wanted to study how to maximise compliance costs when writing tax law, Australia’s GST provides some great examples. We did get some things right but we also got a number of things very wrong from a compliance cost perspective. Let me give you three examples of things which help to maximise compliance costs.

First, we introduced law that conflicts with section 114 of our own constitution. The Federal politicians thought they had solved the problem through agreement with the States but they forgot about local government and this has come back to bite us.

Second we defined the term consideration (and some other terms) more broadly than its ordinary meaning. The result is that for many transactions the information collected by computerised accounting systems for accounts and income tax purposes is insufficient for GST purposes.

My third example is financial supplies. That which we and every other VAT/GST jurisdiction seek to put into this difficult to tax category might be described commercially as financial intermediation services. The absurdity of the definition of financial supplies in the GST Act is exemplified in the decision in the Travellex case. Overall five judges held for the ATO and four judges held for the taxpayer but the end result is that the financial intermediation service of changing currency is treated as a dealing in rights in Australia but simple financial intermediation everywhere else in the VAT world.

When Michael Palin (as the assistant zoo keeper) was asked by John Cleese (the head zoo keeper) why he (Palin) had put all the birds in one cage he answered: …well the vultures look happy. Complexity is “manna from heaven” for tax advisers.

Carbon Tax

It’s hard to understand the anti carbon tax lobby: that is unless one accepts they don’t understand tax, economics, the cost of the Coalition’s alternative proposal and/or they are really closet deniers. A number of economic think tanks (eg Gratten Institute) have already calculated that the Coalition plan would cost more than the proposed tax. The reason is simple: subsidies are just a tax that someone else pays: but because someone pays they are very inefficient at changing behaviour. More importantly, good economic theory suggests that because CO2 is a pollutant (eg ocean acidification) the cost of cleaning up the mess created by the pollution should be factored into the goods and services, the production of which gives rise to the pollution. If you don’t agree then I suppose we could always make our coal even more price competitive by not requiring that mining companies repair spent mine sites; and why should James Hardie pay for asbestosis?

As for the deniers: one is reminded of the stories recounted by a number of Einstein’s biographers. The great man was apparently regularly approached by non scientists who insisted that he was wrong on special relativity. Despite the fact that we can’t prove special relativity it is still used to run our GPS systems and to launch hellfire rockets from pilotless drones in Pakistan and Yemen. The analogy with CO2 pollution (the term climate change must be some spin doctors invention) is that the mechanism by which CO2 warms the atmosphere has been known since 1896; and over 120 years of detailed scientific testing has largely confirmed what the Swedish scientist and nobel laureate Svante Arrhenius calculated back in 1896.

PKF Tax Blog – Streaming trust capital gains and franked dividends

The ability to stream capital gains and franked dividends has been one of the big advantages of investing through discretionary trusts. However, the Tax Office has never liked the flexibility that streaming provides because it allows trustees to stream the taxable income or capital gains to members of the family group with the lowest tax rates or eligibility to tax concessions.
Until recently it looked like the Tax Office had won the battle as a result of the High Court decision in the Bamford case, but earlier this year the Federal Government decided to allow a limited form of trust streaming of capital gains and franked dividends.
While the changes will restore some of the flexibility for family discretionary trusts, the new rules are very complex and trustees and their advisers will have to be very careful to ensure all the new rules are followed because if the capital gains and/or franked dividends are not successfully streamed, the tax payable and/or associated tax benefits may not apply to the intended beneficiary. This can potentially result in the tax rates being higher and/or the tax benefits, such as CGT discounts or franking offsets, being reduced or not available.
One of the new rules which should be considered is the requirement to record the beneficiaries’ specific entitlement to the capital gains and/or franked dividends in the trusts accounts or records. For the 2010/2011 income year the recording of specific entitlement in the trust records must be done by 31 August 2011. However, this date for recording should not be confused with the date the trust deed requires the entitlement to the income of the trust be determined by the trustee, which for most trusts is on or before 30 June each year.
While I assume most trustees will have determined the entitlement to the income of the trust for the 2010/2011 income year already, they may not as yet have recorded their determination in the trust records. You should ensure the beneficiaries who have specific entitlement to the capital gains and/or franked dividends of the trust for the 2010/2011 income year are recorded in the trust records before 31 August 2011.
To maintain as much flexibility of your family discretionary trusts as possible, for future years it will be important to speak to your accountant and let them know of received or expected capital gains and/or franked dividends for the financial year and who you wish to distribute them to before the date your trust deed requires (usually by 30 June) and to determine when the resolutions for these distributions must be recorded.
Your trust deed should be reviewed to identify the date it required you to determine the beneficiaries who are entitled to the income of the trust. Such reviews have another positive result as often trustees of family discretionary trusts and some of their advisers assume all trust deeds are similar but this is far from the truth; each trust deed is unique and the same treatment cannot be applied across all trusts.
While discretionary trusts have lost some of their flexibility they are still valuable investment structures and, if used carefully, can give important tax and asset protection benefits to their beneficiaries. However, costs of maintaining discretionary trust structures due to the additional work required by trustees and their accountants will have to be weighed up against these benefits.
To see more details on this topic click on this link to the PKF Tax Flash on the PKF website: PKF Tax Flash – Trust Streaming