2012-13 Federal Budget: A Salary Packaging Overview

Hi Readers – Simon Ellis here  posting about the 2012-13 Federal Budget.

NOW UPDATED: Please note the new information relating to the LAFHA budget changes impacting foreign nationals included below.

We’ve been doing budget updates here at Smartsalary for a while now and each year we seem to end up reviewing the announcement on another big salary packaging policy change.  Over the last five years we’ve seen changes to laptops, in-house meals and car benefits.

Thankfully the 2012-13 budget is a departure from this trend: it doesn’t contain anything unexpected or likely to have a significant impact on  those who are salary packaging.

In short, the budget includes the following salary packaging related policy announcements:

  • The living-away-from-home allowance benefit will be severely curtailed: it will no longer be available to employees coming into Australia from overseas and eligibility will be capped to a maximum of 12 months for domestic assignees.

The good news is that anyone currently salary packaging LAFHA will be able to maintain their packaging arrangements until the end of their LAFHA period OR until 1 July 2014 -whichever comes first. This means that LAFHA documentation will need to be reviewed to ensure end dates are clearly identified.

UPDATE: Despite indications within the budget speech that customers with current LAFHA arrangements will be able to preserve those arrangements through to 30 June 2014, it has subsequently been made clear that Foreign Nationals will not be able to access this transition concession.  That is, as per the announcements in last year’s mid-year budget, after 30 June 2012 you will only be able to claim LAFHA if you can identify an Australian address as your ‘usual’ residence. 

  • The car fringe benefit changes announced and implemented in last year’s budget are still on track and will continue as before.
  • The tax rate applied to salary packaged superannuation will increase to 30% for those with an income in excess of $300,000 p.a. This will reduce the benefit of salary packaging superannuation for these individuals but won’t eliminate it (given their 46.5% income tax rate).
  • The plan to allow employees aged 50 and over to retain the 15% tax concession on pre-tax contributions up to $50,000 (if their superannuation balance is below $500,000) has been postponed until 1 July 2014.  This means everyone’s cap will be $25,000 from 1 July this year, which will remain the case for at least the next two years.

The only other  point to consider from a salary packaging perspective is the Budget’s specific mention of the ‘Not-for-profit Sector Tax Concession Working Group’, a policy body convened to examine the question asked by both the Henry Review and the Tax Forum: whether existing tax-based support for the not-for-profit industry can be provided in a fairer, simpler or more effective way.

This means a review of the Threshold, Meal Entertainment and Holiday Accommodation benefits offered to Public Hospital and Not-for-profit employees is still on the cards in the not too distant future, but certainly no changes this year.  Smartsalary will, of course, work hard to ensure the perspective of  salary packaging employees is fully represented to this committee and we will report back if/when we hear more.

There’s not much more to report this year!  It may not make for a particularly compelling blog post,  but we’re happy that it will make it an easier year for our customers and their employers.

So package on people!

Leave a comment here.

16 Responses to “2012-13 Federal Budget: A Salary Packaging Overview”

  1. 1 ali May 9, 2012 at 11:01 am

    Will this impact on students who are receiving the living away from home allowance (LAHFA)? Or does it only affect working recipients of LAFHA?

    • 2 Simon Ellis May 9, 2012 at 2:42 pm

      Hi Ali

      As far as we know the changes to employer-provided living away from home allowances are across the board – but I think you may be talking about a different type of allowance, i.e. the Student Living Allowance payed direct to students by the Federal Government (through Centrelink).

      That allowance is not affected by the budget.

  2. 3 Ben May 9, 2012 at 11:08 am

    If I’m reading this correctly, foreigners who currently have LAFHA won’t have it cut for two years. Is there a link where I can see this confirmed?

    • 4 Simon Ellis May 9, 2012 at 2:47 pm

      Hi Ben

      You’re reading correctly – from what the budget papers contain it seems that those who had a current LAFHA arrangement in place before the budget will be able to continue with that arrangement until the end of their LAFHA period or 1 July 2014, whichever comes first.

      This isn’t 100% certain – the budget wording is a little vague but does say the following: “The reforms will apply from 1 July 2012 for arrangements entered into after 7.30pm (AEST) on 8 May 2012, and from 1 July 2014 for arrangements entered into prior to that time.”

      Note the updates to the post and below Ben – it looks like the budget text was misleading and in fact the changes for foreign residents announced last year are going ahead with no transitional period. Sincere apologies for my initial error!

      If you want to review the actual budget statement go to: http://www.budget.gov.au/2012-13/content/bp2/html/bp2_revenue-09.htm and search down the page for the living away from home announcement.

  3. 5 Ronan May 9, 2012 at 12:59 pm

    When does the “LAFHA period end”? Is this at the end of the next FBT year or is it tied to your 2 year VISA?

    • 6 Simon Ellis May 9, 2012 at 2:53 pm

      Good question Ronan. Your “LAFHA Period” is the period during which you are required to live away from your usual place of residence in order to perform employment duties at your temporary work location.

      Without knowing the full details of your case I would say that your LAFHA period will end on the day your employment at the temporary work location is scheduled to end – i.e. the date on which you are expected to return home to your usual location.

      You should check your employment contract to determine when this is.

  4. 7 Larissa May 9, 2012 at 1:08 pm

    Is it true that domestic recipients of LAFHA will also receive the same benefit until 1 July 2014 or end of LAFHA period before any changes come into effect? With no additional requirements to prove maintenance of a second residence? I would also like to see a link that confirms this if anyone knows of one?

    • 8 Simon Ellis May 9, 2012 at 2:59 pm

      Hi Larissa

      See the link I provided to Ben above. Yours is another good question – and I wish I could be more definitive in confirmation of how the transition rules will work – but I can only work from the Treasurer’s stated commitment, i.e. that “the reforms will apply from 1 July 2012 for arrangements entered into after 7.30pm (AEST) on 8 May 2012”.
      I interpret that to mean that arrangements entered into before the budget will not be subject to the reforms, but until the final legislation is released I guess we can’t be 100% sure.

      Larissa – see the comments below. It looks like the changes for foreign residents announced last year are going ahead with no transitional period. That is, foreign residents will lose their LAFHA benefits from 1 July this year regardless of prior arrangements.

  5. 9 Gina May 10, 2012 at 12:05 pm

    My question is the same as Ben’s. I’ve read some conflicting stories.

    • 10 Simon Ellis May 10, 2012 at 3:13 pm

      Hi Gina

      Yours is a timely question – my discussions with tax advisors and treasury today indicates that the promise made in the budget (excerpted above) is very misleading. Apparently the commitment made, i.e. that the LAFHA reforms will not apply to those with arrangements entered into before budget night, does not apply to foreign visitors.

      That is, all current LAFHA recipients whose “usual place of residence” is an address outside Australia will lose their LAFHA entitlement from 30 June this year, despite the comments made in the budget papers.

      Sincere apologies for my error Gina (and Ben) – I will be updating this blog and the video ASAP to reflect this new information.

  6. 11 Kaye Kabin May 10, 2012 at 9:40 pm

    Any idea where boomers can salary sacrifice to save if have to drop from $50000 to $25000 to try and build up super now kids have just finished uni?

    • 12 Simon Ellis May 11, 2012 at 5:57 pm

      Hi Kaye

      Unfortunately no – the government has not proposed any additional measures to help anyone contribute to super above the reduced concessional cap.

      I suppose you could always make post-tax contributions, which are not taxable on their way into the fund and are not subject to a contributions cap – although you will obviously have already paid tax on these funds at your marginal rate, and thus they’re hardly ‘concessional’ from a tax point of view.

  7. 13 Simon Ellis May 11, 2012 at 5:59 pm

    Hi Readers – I’m re-posting below a comment left on another thread by RaoulDuke66 because it contains some good analysis of the LAFHA changes and some inside information from Wayne Swann’s Research Assistant.

    Take it away Raoul:

    All, I’m posting this message on a number of forums as it will provide 100% clarity on what is happening with regard to LAFHA for overseas workers.

    I spoke with Rebecca Fanning, Wayne Swann’s research advisor on the LAFHA reforms. I can only recount the conversation I had with her. You may want to do your own due diligence on the matter. And, up front, I want to praise her for her honesty and taking the time to come back to me after office hours, regardless of the dirty work she’s being made to do.

    Anyway, she conceded that Budget paper 2 does in fact say that all LAFHA reforms will be subject to a transitional period. However, she apologised for that, and said that it meant to say that only Australians will be allowed 2 years to re-arrange their financial affairs to an affordable position. Foreigners are left up a creek from 1 July 2012.

    However, the reason there has been confusion on this is because Wayne Swann and his Treasury haven’t been 100% honest about the nature of the reforms in respect of overseas workers. What we’ve all missed (i.e. what they’ve tried to hide) is that they basically view the overseas worker LAFHA budgetary savings as a direct pass-through cost to business. Of course, I can understand why Swann wouldn’t say that, given how much he pretended to be helping Australian business in the budget. He’ll no doubt view it as a tax on nasty foreign companies – but I, like thousands of others who now can’t afford to live here/leave, work for an Australian company.

    The reason I say this regarding the nature of the reforms is because the Treasury told me that they expected all employees’ losses to be met by employers through renegotiated employment contracts. I asked what happens if the employer refuses to renegotiate to a liveable wage for that individual/family, leaving the employee unable to afford to stay in Australia but unable to afford to go. She said that shouldn’t happen – it is up to the employer to meet all losses incurred due to the reforms.

    I also pointed out that whilst the changes were intended to level the playing field between Australian employees and overseas employees, it costs an overseas employee thousands more per year to live and work here (health care, schooling etc), and therefore overseas workers (especially families) will be significantly worse off than Australians in the same job with the same company. She said that the Treasury expected companies to pay additional amounts to overseas workers to meet those additional costs.

    Further, I asked when had notice been given that the proposed changes outlined in November were confirmed. She said that items set out in the mid-year outlook and consultation paper in November had the same effect as if set out in the budget. In other words, employers should have known exactly what was happening back in November, and should have been renegotiating overseas employees’ contracts back then to ensure that they didn’t lose anything. I took from her the Treasury view that, if an employer hasn’t renegotiated their contracts for overseas workers, they’ve been deliberately pulling the wool over the eyes of those employees, and they need to re-package salaries now.

    All of this will be confirmed when the draft legislation and a press release is issued on Monday, although of course they’ll omit the bit about this being intended as a pass-through cost to nasty horrible foreign companies (although I understand that HM’s foreign office sees it as exactly that).

    In summary, the Treasury view:
    – a 2 year transitional period for Australian workers;
    – nothing for overseas workers;
    – businesses to provide repackaged contracts to all affected overseas workers to meet all additional costs.

    My view would be that everyone affected should, as a first step, gather all information available to them before deciding how to proceed in their own particular circumstances:
    – approach their employer and at least give them the benefit of this information, that the Treasury intends the company to pick up the employee’s losses;
    – confirm the position regarding flights home (which the employer is supposed to pay for), so that the position on that is clear with them;
    – confirm the position regarding employment contract termination costs (you may have to pay penalties within a certain period of having entered into the contract); and
    – find out whether your employer has transfer opportunities to countries looking to have skilled/professional overseas labour (of course, you’ll want to stay clear of countries which have a history of these types of tax grabs from foreigners).

    On a positive note, this is a great opportunity for businesses outside of Australia to recruit skilled and professional employees, and I have no doubt that anyone on a 457 will walk into a job abroad on a liveable wage for them and their family.

  8. 14 RuCo May 11, 2012 at 8:43 pm

    The LAFHA ‘clarification’ people are talking about makes no sense. Firstly, logically, the Budget announcement is clear and sure it builds on the previous announcement but it supersedes it too. Secondly, at mid year the tsy press released talked about 750m cost, and the budget measures table shows only 47m of savings in year one. All appears conjecture, and terribly handled by avert shaky administration

  9. 15 Simon Ellis May 14, 2012 at 3:31 pm

    Well obviously I agree with you RuCo since I initally interpreted it the same way that you did!!

  10. 16 RaoulDuke66 May 18, 2012 at 2:40 pm

    Please see last post on this link by RaoulDuke66…

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Deven Billimoria
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