# Living Away from Home Allowance (LAFHA) and United States (U.S.) Income tax



## nfg05 (Apr 11, 2011)

Hi-

I've read around a dozen threads on this topic so far but none has ended up answering the question .

*Situation:*
I am a U.S. citizen planning to work in Australia on a 457 visa from early July to mid December 2011. I will then return to my permanent residence in the United States.

I will receive approx $45K AUD compensation (incl. super) for the ~5 months spent in Australia. The employer has agreed to designate part of this income as LAFHA so I can deduct it from my Australian taxable income. 

Details haven't been ironed out, but let's say employer agrees with ~$225/week food and ~$500/week rent LAFHA. Over 5 month (assumed 20 week period), this is $4500 for food and $10,000 for rent. My taxable Australian income is now $30,500 (awesome!).


*Questions*
1. Given that there is a bilateral agreement to prevent double taxation btw. the U.S. and Australia, how much income will I be required to report to the IRS for the Jul. to Dec. period when I am earning in Australia? $45K or $30.5K?

2. Assuming the worst, that I have to report the full $45K, is there really no benefit to Australian tax breaks up to the level of U.S. income tax I would normally owe?

My understanding is that I am taxed on worldwide income as a U.S. citizen, with the ability to take a U.S. tax credit for tax paid to foreign governments.

In this situation, any tax break I get from Australia is just eaten back up by the IRS, until said tax breaks exceed the amt. of U.S. income tax I owe on my 2011 calendar year income. Is this right?


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## Bevdeforges (Nov 16, 2007)

Let's take your questions one at a time...


nfg05 said:


> *Questions*
> 1. Given that there is a bilateral agreement to prevent double taxation btw. the U.S. and Australia, how much income will I be required to report to the IRS for the Jul. to Dec. period when I am earning in Australia? $45K or $30.5K?


You always have to report your worldwide income to the IRS. One of the "joys" of US citizenship.



> 2. Assuming the worst, that I have to report the full $45K, is there really no benefit to Australian tax breaks up to the level of U.S. income tax I would normally owe?


Since you won't be out of the country long enough to qualify for the earned income exclusion, basically you're right. The main protection from double taxation is the foreign tax credit. But if you aren't paying taxes to Australia, then you will wind up paying them to the US.



> My understanding is that I am taxed on worldwide income as a U.S. citizen, with the ability to take a U.S. tax credit for tax paid to foreign governments.


Right - until and unless you are overseas for a full 12 consecutive months, in which case the earned income exclusion kicks in.



> In this situation, any tax break I get from Australia is just eaten back up by the IRS, until said tax breaks exceed the amt. of U.S. income tax I owe on my 2011 calendar year income. Is this right?


Yup. Ask any American living in the Gulf States, especially when Congress goes through one of their periodic rounds of threatening to eliminate Section 911 of the Tax Code (this is the one that grants the overseas earned income exclusion in the first place). 
Cheers,
Bev


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## nfg05 (Apr 11, 2011)

Thanks for the reply, unfortunate that the tax benefits offered by Australia will be taken back by the U.S. Helpful info though!


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## LACali2Melbourne457 (Apr 30, 2011)

*Earned income exclusion*



nfg05 said:


> Thanks for the reply, unfortunate that the tax benefits offered by Australia will be taken back by the U.S. Helpful info though!


Earned income exclusion? Can you expound? 
Please respond I need to post to gain credibility to start a thread


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## nfg05 (Apr 11, 2011)

LACali2Melbourne457 said:


> Earned income exclusion? Can you expound?
> Please respond I need to post to gain credibility to start a thread


Essentially, if you live nearly the entire year outside the US (at least 330 days), ~$90K of your worldwide income is not subject to US income tax.


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## BettinaCC (Jun 24, 2010)

nfg05 said:


> Essentially, if you live nearly the entire year outside the US (at least 330 days), ~$90K of your worldwide income is not subject to US income tax.


In the research we have done to date. It seems the Australian income is taxed more heavily than the US IRS taxation. So reducing the taxable income in Australia may be a benefit. Go to ato.gov.au and look at the tax tables. Assume medical levy and no HECS HELP debt. As a non resident you may not be entitled to the tax free threshold. There are some useful calculators to work out your net income on the ATO website. This may provide you with an accurate taxed and net income figure.

Bettina!


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## JNAtlantafornow (Jul 11, 2011)

*Possible Job Opportunity in Sydney with LAFHA*

I may have an opportunity to work for my company (457 Visa) in Sydney, Australia, which is paying $65,000 base plus an additional amount for commission and bonuses.

My current situation that affects LAFHA - 
I am married and have a 7yr old son 
I will have a management position, and own a home in the US that I am not selling.

My understanding on this is the food component will be about $314/wk after statutory component is taken out.

I then get a rental accommodation that must be "reasonable" for my position - let's say $500/wk

My question is this - Do I take only my base salary into consideration, or do I take the whole package into consideration for LAFHA? 

If it is only the base salary, is there a minimum taxable salary that LAFHA dictates? Or is it a gross amount? This is where I have been confused. 

Any help or clarification would be much appreciated.

Thanks,

Jon


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## nfg05 (Apr 11, 2011)

JNAtlantafornow said:


> I may have an opportunity to work for my company (457 Visa) in Sydney, Australia, which is paying $65,000 base plus an additional amount for commission and bonuses.
> 
> My current situation that affects LAFHA -
> I am married and have a 7yr old son
> ...


The food allowances as you noted are pretty standardized. As for the rent proportion being "reasonable", I think there's quite a bit of latitude on your employer's part in determining what's reasonable, and it's not necessarily linked to your salary. There is not a table from the Australian Tax Office that says for $X of income (however you calculate it) $Y of rent is reasonable.

To give you one data point, my employer just asked for a copy of my lease ($650/week) and submitted that as it was reflective of actuals incurred. There wasn't much conversation about what the test for "reasonable" is. I don't think there really is one, it's just whether the company would be comfortable justifying it to the ATO if needed. My fixed annual remuneration (incl. super) is 95,000 AUD.


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## JNAtlantafornow (Jul 11, 2011)

nfg05 said:


> The food allowances as you noted are pretty standardized. As for the rent proportion being "reasonable", I think there's quite a bit of latitude on your employer's part in determining what's reasonable, and it's not necessarily linked to your salary. There is not a table from the Australian Tax Office that says for $X of income (however you calculate it) $Y of rent is reasonable.
> 
> To give you one data point, my employer just asked for a copy of my lease ($650/week) and submitted that as it was reflective of actuals incurred. There wasn't much conversation about what the test for "reasonable" is. I don't think there really is one, it's just whether the company would be comfortable justifying it to the ATO if needed. My fixed annual remuneration (incl. super) is 95,000 AUD.


Thanks for your help regarding the reasonable factor, and my employer's role in this. Do you know if there is a minimum taxable wage for LAFHA that would affect how much LAFHA I can get?

Thanks again for all of your help!


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## bilkar (Sep 12, 2011)

*LAFHA breakdown*



nfg05 said:


> The food allowances as you noted are pretty standardized. As for the rent proportion being "reasonable", I think there's quite a bit of latitude on your employer's part in determining what's reasonable, and it's not necessarily linked to your salary. There is not a table from the Australian Tax Office that says for $X of income (however you calculate it) $Y of rent is reasonable.
> 
> To give you one data point, my employer just asked for a copy of my lease ($650/week) and submitted that as it was reflective of actuals incurred. There wasn't much conversation about what the test for "reasonable" is. I don't think there really is one, it's just whether the company would be comfortable justifying it to the ATO if needed. My fixed annual remuneration (incl. super) is 95,000 AUD.


Hello,
I have searched numerous websites and forums and this is my understanding of LAFHA allowance.

Food allowance for two adults and two children $412/week (2011-2012)
Looks like my employer has to pay partial FBT on this amount.

Housing allowance is capped at $350.00/ week.
Looks like my employer is exempt from paying FBT on this amount.

I am not finding anything that caps the relocation allowance.
Nor am I finding anything that tells me how much my employer pays in FBT.

MINOR RANT>>>
I just think it is very strange that the ATO doesn't have one central location for this stuff - I had to go to several locations to gather it.

OK took a breath...


I guess my bottom line question is it appears that the LAFHA allowance puts a bit more money in my net paycheck - but is this actually in the form of a refund at the end of the year when I file a tax return (using the USA analogy so if Aus is different forgive me).

Are my findings on the housing cap and overall cap correct ?


Thanks in advance !!!

bilkar


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## 133689 (Jul 14, 2011)

*LAFHA Facts*

Hi Guys,

I just wanted to assist you with some points of clarification about LAFHA. As someone said, there is no one point of information on LAFHA so it is hard to find the facts. This is true, not just the case for you, but also for Australian employers, accountants etc. So it would be very wrong to assume that and employer or every Australian accountant knows all there is to know about LAFHA.

*The two main Components – Food Component and Accommodation Component*

Someone said above that the food allowance for two adults and two children is $412/week. Yes this is correct for 2011 at first glance from http://law.ato.gov.au/pdf/pbr/td2011-004.pdf, but you also have to read Appendix 1 paragraph 5 to see that you also have to read MT 2040 that states you must deduct $42 for each adult (and child over 12) and $21 for each child under 12. 

This reduces the food component from $412 to $286. If your employer pays you more than $286 per week, your employer has to pay Fringe Benefits Tax at 46.5 cents in the dollar for each dollar paid over $286. So that is unlikely.

So, the food component for 2 adults and two children is actually $286.

Accommodation, now that’s not as regulated and as someone above said it is governed by the employer’s concept of “reasonableness”. This again defined in MT 2030.

Someone said the maximum is $350 per week. This is wrong, very wrong. 

This may have been interpreted from the LAFHA Calculator Australia off our web site which uses $350 as an example, for calculation purposes only. 

Each case must be considered on its own. If you are in Sydney with a spouse and two children, reasonable can be between $550 to $850 or so a week. If you are living in Brisbane, it would be more like $450 - $650 a week as a maximum. There are so many variables.

Bottom line….there is no definitive cap on LAFHA Accommodation allowance, other than it must be reasonable. 

So not a hovel, or a penthouse (unless you are a senior executive on lots of money). Just what other people in Australia are paying from rent with the same family make up, on similar salaries and in the same area. Simple. An employer should always require you to give a copy of your lease to them, so they have proof of you renting.

Go over what the Australian Taxation Office considers reasonable, and your employer will pay Fringe Benefits Tax at 46.5 cents in the dollar for each dollar paid over that amount.

*Base Salary for LAFHA*

This is known as the TSMIT (Temporary Skilled Migration Income Threshold) and is $49,330 in general. LAFHA can contribute to this, but you need a skilled migration agent to assist. The old regulations say that LAFHA cannot contribute this this and they are still on the immigration web site and are wrong.

If you are on $100,000 a year and are single or with a partner…you will be able to claim all the LAFHA you are eligible for, so long as your employer understands what they are doing.

I won’t say any more on it because I am not an immigration agent, but I can recommend Alan Collett at GoMatilda http://www.gomatilda.com/contact.cfm. Everyone I speak to has had a great experience with him and his team.

*Tax*

US citizens pay much less tax that Australian citizens by almost a factor of two. Yes the tax treaty exists, so you are not double taxed, you just need to ensure that you do not fall below your US tax bracket. This is easy for example if you are on $100,000 taxable salary, and can claim $30,000 in LAFHA, your new base salary is $70,000.

Regards,

Ian


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