Recruitment agencies and employers reliant on overseas talent are facing tough times ahead after the announcement yesterday that the Living Away From Home Allowance (LAFHA) will be phased out for overseas workers on a 457 business visa.

The Government said yesterday that the tax perk had been abused over the last five years, particularly highly-paid executives and foreign workers, and a severe crackdown was needed to return an estimated $613m to the treasury over the next four years.

So-called rorting of this tax exemption was discussed at the October Tax Forum - indeed the total amount of tax-free LAFHA reported by employers to the ATO increased from $162m in 2004-05 to $740m in 2010-11.

However, employer groups are outraged over the blanket cut of the tax incentive which they say has been instrumental in luring foreign talent to Australia.

The LAFHA currently allows overseas workers on a 457 business visa to claim their accommodation and living costs as a tax deduction.

Additionally, employers will need to pay between 5% and 15% more for foreign worker visas, and full superannuation contributions on affected staff members' entire pay, rather than only on the part not claimed back against the LAFHA.

In a statement released by Treasurer Wayne Swan, he said the key aspects of the new reforms, which will be formally introduced on 1 July 2012 are:

  • Access to the tax exemption for temporary residents will be limited to those who maintain a residence for their own use in Australia, which they are living away from for work purposes, such as 'fly-in fly-out' workers; and
  • Individuals will be required to substantiate their actual expenditure on accommodation and food beyond a statutory amount.
  • No permanent resident legitimately using this tax exemption for accommodation and food expenses will lose any entitlements.

Notably, these reforms will not affect other tax concessions, such as those that apply to travel and meal allowances, and remote area fringe benefits.

In his statement, Swan said, "These changes will ensure that a level playing field exists between temporary residents and permanent residents, and that Australian taxpayers are not funding the unfair exploitation of concessions."

KPMG's tax partner Andy Hutt said that the majority of employers were not rorting the system, and were providing the benefits in a manner consistent with the legislation and with the tax office's public rulings.

Hutt said the changes may see companies come under pressure to give staff pay rises to make up for the shortfall, or risk losing them.

"This is a move which will significantly increase the cost for Australian businesses of attracting highly skilled foreign workers," he added.