Live Away From Home Allowance (LAFHA): A Practical Guide to Tax Benefits, Eligibility and ATO Compliance

Understanding LAFHA and why the distinction matters

When an employee needs to work away from their usual home, an employer may consider paying a living-away-from-home allowance, commonly called LAFHA. It can assist with the extra cost of accommodation and food, but it is not simply another payroll allowance with a different label.

A genuine LAFHA is generally treated as a fringe benefit rather than ordinary salary or wages. That means the employer needs to consider fringe benefits tax, or FBT, obligations, employee declarations, substantiation and reporting. Getting the classification wrong can lead to unexpected FBT exposure, PAYG withholding corrections and record-keeping issues.

The central question is whether the employee is genuinely living away from their normal residence to perform their employment duties, or whether they are travelling for work. The tax outcomes can be very different.

For small business owners, payroll teams and employees considering a temporary relocation, it is important to assess the arrangement before payments begin, rather than trying to correct the treatment at EOFY.

What is a living-away-from-home allowance?

Under the Fringe Benefits Tax Assessment Act 1986, a LAFHA arises where an employer pays an allowance that is, in substance, compensation for additional non-deductible expenses, or additional expenses and disadvantages, because the employee is required to live away from their usual place of residence to perform their employment duties.

In practical terms, the allowance is commonly intended to help with costs such as:

• temporary accommodation near the work location;
• additional food costs that arise from living away from home; and
• the inconvenience of maintaining two places of living.

The name used in an employment contract, award, enterprise agreement or payroll system does not determine the tax treatment. A payment described as a “living away from home allowance” may still be ordinary income, a travel allowance or another form of employment-related payment if the facts do not support LAFHA treatment.

A genuine LAFHA is different from an employee simply receiving higher wages to meet their normal living costs. It must be directed to the additional cost and disadvantage of being required to live away from the employee’s normal residence for work.

For the employee, a LAFHA fringe benefit is generally not assessable income in the same way as salary or wages. However, that does not mean it is tax-free in every sense. The employer may have an FBT liability, and a reportable fringe benefits amount can affect certain employee entitlements and obligations even though it is not taxed as ordinary income.

LAFHA versus a travel allowance

The most important issue is whether the employee is travelling on work or living at a work location away from home. This is a factual question, not a matter of choosing the more favourable tax treatment.

A travel allowance is generally paid where an employee is travelling in the course of performing their duties. The allowance is ordinarily assessable to the employee, and the employee may be able to claim eligible work-related deductions, subject to the usual deduction and substantiation rules.

A LAFHA, on the other hand, may apply where the employee has effectively relocated to another location for work on a temporary basis, while retaining a connection with their usual home.

The ATO’s guidance makes clear that employers should look at all relevant circumstances. Factors that can point towards an employee living at a location, rather than travelling on work, include:

• a change in the employee’s regular work location;
• a lengthy or indefinite period at the new location;
• accommodation that is more consistent with longer-term living, such as a leased apartment or house;
• the employee establishing a settled routine at the work location; and
• family members joining the employee at the work location.

Conversely, a short-term assignment involving hotel or motel accommodation may be more consistent with work travel. However, there is no automatic result based solely on the type of accommodation or the number of days away.

The ATO provides an administrative compliance approach for some short-term travel arrangements. It is useful, but it is not a universal rule that converts every longer assignment into a LAFHA arrangement. Where the arrangement falls outside that approach, the employer still needs to examine the employee’s actual circumstances.

Returning home on weekends does not automatically mean the employee is travelling rather than living away from home. Similarly, an employee can be living away from home even if their family remains at the usual residence.

Eligibility for concessional LAFHA treatment

A payment may meet the definition of a LAFHA fringe benefit, but the employer can only reduce its taxable value for eligible accommodation and food components if the legislative requirements are met.

For most employees, the key conditions include maintaining a home in Australia, being within the relevant time limit and providing the required declaration.

Maintaining an Australian home

For the standard LAFHA concession, the employee must maintain a home in Australia at which they usually reside when in Australia. The home must generally:

• be accommodation in which the employee or their spouse has an ownership interest;
• remain available for the employee’s immediate use and enjoyment while they are living away for work; and
• be a home the employee is reasonably expected to resume living in when the relevant work period ends.

This requirement creates a common problem for employees who rent their usual home and sublet it, terminate their lease or otherwise make it unavailable during the assignment. Even if the employee still considers the location to be “home”, the statutory requirements may not be met.

It is also important to remember that an employee who has no fixed usual residence may not be living away from a usual home at all. For example, a person with a highly mobile lifestyle who regularly changes residences and employment locations may not satisfy the factual foundation for LAFHA treatment.

The 12-month rule

For employees relying on the standard Australian-home rules, concessional LAFHA treatment is generally limited to the first 12 months that the employment duties require the employee to live away from that home.

The law does allow the employer to pause the 12-month period. It may also allow a separate 12-month period where the employee is later required to live at another work location and it would be unreasonable to expect them to commute there from the earlier location. A change in the employee’s duties alone does not necessarily create a fresh period.

This is an area where employers should document the original assignment, anticipated duration, changes in work location and the reasons for any pause. Extending an employee’s stay at the same location without reviewing the LAFHA position can be costly.

FIFO and DIDO employees

Specific rules apply to eligible fly-in fly-out and drive-in drive-out employees. The standard requirement to maintain a home in Australia and the standard 12-month limit do not apply in the same way.

However, the employee must meet strict conditions. Their work pattern must be regular and rotational, customary for similar employees in that industry, and daily travel between their normal residence and usual work location must be unreasonable. It must also be reasonable to expect the employee will resume living at their normal residence when the work arrangement ends.

FIFO and DIDO arrangements should not be assumed to qualify merely because the employee works a roster or travels a long distance. The employment pattern and industry practice matter.

Labour-hire arrangements

Labour-hire arrangements need particular care. The ATO has stated that labour-hire workers cannot access the LAFHA FBT concessions in the usual way because of the operation of the FBT rules in these arrangements.

Businesses using labour-hire workers should not assume they can replicate a direct-employment LAFHA arrangement. The contract structure, entity making the payment and the worker’s employment relationship should be reviewed before implementing any accommodation or allowance arrangement.

How the accommodation and food components work

Where the relevant conditions are met, the taxable value of a LAFHA fringe benefit may be reduced by an exempt accommodation component and an exempt food component.

The accommodation component is broadly linked to accommodation expenses incurred by the employee or eligible family members while living away from home. These expenses need to be substantiated.

The food component is more limited. It is not a concession for all grocery, restaurant or meal costs while the employee is away. It is designed to recognise the additional food and drink costs associated with living away from home.

The exempt food component is calculated by comparing the food component of the allowance with the employee’s normal food costs, using the statutory food amount framework. In simple terms, ordinary food costs that the employee would have incurred at home are excluded. The potential concession is directed to the additional amount.

The Commissioner publishes reasonable food and drink expense amounts for LAFHA purposes. These amounts can be relevant to substantiation, but they are not a licence to pay an allowance without considering the actual nature of the arrangement.

If food and drink expenses exceed the amount the Commissioner considers reasonable, the employee must substantiate the relevant food and drink expenditure. Importantly, where substantiation is required, incomplete records can reduce the amount that can be treated as exempt.

Accommodation expenses must also be substantiated. This can include evidence such as lease agreements, rent receipts, tax invoices, bank statements or other documents that reliably demonstrate the expense.

Declarations, evidence and employer record keeping

A LAFHA arrangement should be supported by more than a payroll code and a signed employment contract. Employers need evidence that the relevant conditions are satisfied for the period the benefit is provided.

The employee must provide an approved living-away-from-home declaration to the employer before the applicable declaration deadline for the FBT year. For an employee maintaining an Australian home, the declaration includes information about:

• the address of the employee’s usual Australian residence;
• confirmation that the home-maintenance requirements are met; and
• the address or addresses where the employee actually lived during the relevant period.

For eligible FIFO or DIDO employees, the declaration addresses their normal residence, the expectation that they will return to it and the places where they resided while working away.

Employees may also need to provide documentary evidence of accommodation expenses and, where required, food and drink expenses. If the employee provides an approved expense declaration rather than the underlying documents, they must keep the relevant evidence for the required retention period.

For employers, a practical LAFHA file should ordinarily include:

• the employment contract or assignment letter;
• a description of why the employee must work away from home;
• details of the employee’s usual home and work location;
• the approved employee declaration;
• evidence of accommodation expenses;
• evidence of food expenses where substantiation is required;
• calculations separating accommodation, food and any residual allowance amount;
• records of the period the employee has been living away; and
• a review note if the assignment is extended, paused or moved to a new location.

These records are especially important where the arrangement involves related parties, a business owner who is also an employee, or a salary packaging arrangement.

A practical example

Consider an employee whose regular role is based in a regional town. Their employer requires them to take a temporary project role in another city, so they lease a small apartment near the new workplace while keeping their Australian home available for their own return.

The employer pays a separately identified allowance intended to compensate for the employee’s additional accommodation and food costs. The employee expects to return to their original home once the project ends, provides the required declaration and gives the employer evidence of the temporary accommodation expenses.

On these facts, the arrangement may be capable of LAFHA treatment, subject to the detailed requirements being met and the assignment remaining within the applicable concession period.

If the project continues for longer than expected, the employer should not simply continue processing the allowance in the same way. The 12-month position, any pause, the employee’s ongoing connection with their usual home and the FBT calculation should all be reviewed.

Common mistakes to avoid

LAFHA arrangements are often challenged because the underlying facts and documents do not match the tax treatment. Common errors include:

• calling a payment LAFHA without establishing that the employee is living away from home;
• treating a travel allowance as a LAFHA, or vice versa;
• paying an allowance that is really ordinary remuneration for services;
• failing to separate the accommodation and food components;
• assuming all food costs are concessionally treated;
• overlooking the requirement for an employee to maintain an eligible Australian home;
• continuing concessional treatment after the relevant period has ended;
• accepting incomplete declarations or missing accommodation records;
• treating a labour-hire worker as though they were a direct employee for LAFHA purposes; and
• forgetting to consider FBT reporting and payroll consequences.

The cost of an error can extend beyond the LAFHA payment itself. It may affect the employer’s FBT position, income tax records, employee reporting and the reliability of payroll processes more broadly.

The key takeaway

A LAFHA can be a useful way to address genuine additional living costs when an employee must temporarily live away from home for work. But it is a tightly regulated FBT arrangement, not a general allowance for employees who travel, relocate or choose to work away from where they live.

The right treatment depends on the facts, including the employee’s usual home, work location, assignment length, accommodation, employment arrangement and supporting records. Before starting or extending a LAFHA arrangement, it is sensible to obtain advice tailored to the business and employee circumstances.

This article is general information only and is not personal financial or tax advice. Speak with a registered tax agent or accountant, such as, about your specific circumstances and obligations.