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Standing Committee on Economics

BAILEY, Mr Christopher, Project Manager, Australian Taxation Office

BHATT, Mr Piyush, Director, Remuneration and Human Resources Services Centre, University of Sydney

BREWER, Professor Ann, Deputy Vice-Chancellor, Strategic Management University of Sydney

BURN, Dr Peter, Director, Public Policy, Australian Industry Group

CLEAVER, Ms Carolyn, Group Manager, Tax, John Holland Group

DYSON, Mrs Teresa Mary, Partner, Ashurst Australia

ELLIS, Mr Paul, Partner, Human Capital and Employment Taxes, Ernst and Young; and Institute of Chartered Accountants

GOWER, Ms Nicole, Senior Human Resources Manager, University of New South Wales

JACOBS, Mr Martin, Acting Principal Adviser, Indirect, Philanthropy and Resource Tax Division, Treasury

JAMES, Mr Adam Lloyd, John Holland Group, Group Manager, Remunerations and Benefits, John Holland Group

JEREMENKO, Mr Robert, Senior Tax Counsel, Tax Institute

LEGGETT, Mr Chris, Manager, Philanthropy and Exemptions Unit, Treasury

LE COMPTE, Mr Lindsay Graham, Executive Director, Australian Constructors Association

LUCAS, Ms Elizabeth, Chair, Fringe Benefits Tax Subcommittee, Tax Institute

MELVILLE, Mr Anthony Peter, Director, Public Affairs and Government Relations, Australian Industry Group

O'NEILL, Ms Raylee, Senior Adviser, Philanthropy and Exemptions Unit, Treasury

PATON, Ms Deepti, Tax Counsel, Tax Institute

PAYNE, Mr Timothy, Director, Policy Analysis and Communication, University of Sydney

ROBINSON, Mr Marty, Manager, Household Modelling Analysis Unit, Treasury

SEDDON, Ms Norah, Partner, PricewaterhouseCoopers

STACEY, Mr Paul, Tax Counsel, Institute of Chartered Accountants

TRAVERS, Mr Kane, Senior Adviser, Treasury

WALLACE, Mr Daniel Mark, State Organiser, Australian Manufacturing Workers Union

WATTS, Mr Ron, Chair, HR Directors Committee, Group of Eight; and Director, Human Resources, Australian National University

WRIGHT, Mr Cory Mathew, State Organiser, Australian Manufacturing Workers Union

Committee met at 09:19

CHAIR ( Ms Owens ): I declare open this public hearing of the House of Representatives Standing Committee on Economics inquiry into the Tax Laws Amendment (2012 Measures No. 4) Bill 2012. This hearing will focus on schedule 1 of the bill. Schedule 1 amends the Fringe Benefits Tax Assessment Act 1986 and the Income Tax Assessment Act 1997 to reform the taxation treatment of living away from home allowances. Schedule 1 will bring living away from home allowances in line with other similar tax concessions by treating them as part of an employee's assessable income rather than a fringe benefit. The government has been working hard to improve Australia's tax laws to ensure that they are both efficient and effective. In 2010 the Australia's future tax system review recommended that all fringe benefit tax exemptions should be reviewed to determine their continuing appropriateness. It has come to light that the concessions provided by the living away from home allowances are being used in a manner outside the original policy intent, and the changes proposed in schedule 1 are intended to stop the concession being exploited.

I now welcome all of you to today's roundtable discussion. Do you have any comment to make on the capacity in which you appear?

Ms Gower : I am here on behalf of the Group of Eight universities.

Ms Lucas : I am also a partner with Grant Thornton.

CHAIR: Thank you. I advise witnesses that these hearings are legal proceedings of the parliament and therefore have the same standing as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Thank you for appearing today to assist the committee further with its inquiry. If you wish to make a brief opening statement, I ask that you keep it to about two minutes. Professor Brewer, we will start at your end.

Prof. Brewer : Our position is that the bill is likely to have a significant and unintended negative impact on the quality and international competitiveness of the Australian university sector. For example, some of the high-profile Australian researchers who have made their careers overseas that we wish to attract are funded through government competitive grants from the ARC and so on. The aspiration of these government funding agencies is to attract our best and brightest research talent home to Australia by offering competitive research fellowships to support this. However, these researchers often receive counter offers from the countries where they are based or other countries. The LAFHA scheme has been critical in ensuring that our offers are competitive and that these high-profile researchers return to Australia rather than go somewhere else. One unintended consequence is that some key government research programs will actually be compromised by the removal of LAFHA. Australia will miss out on getting some of our best internationally based researchers to return home, initially for a short period but with the hope that that, once back in Australia, they will stay here permanently.

Besides helping us to reverse the brain drain, the LAFHA arrangements have helped us to attract and recruit international applicants to fill short-term positions in areas of skills shortage, under 457 visas. These staff are not taking jobs that could be filled by Australians or permanent residents, as we must demonstrate that we cannot fill each position locally. These employees are critical to sustaining our research and teaching effort in highly technical disciplines, where local and international competition for staff is intense and we struggle to compete with the salary packages on offer in the private sector.

We also share in the concerns raised by the Group of Eight and other universities about the impact the reforms will have on our capacity to assist foreign researchers on 419 visas to visit the university to participate in research projects and other significant collaborations. These visits benefit Australia through joint publications and the exchange of ideas between researchers, giving our students access to thought leaders in their disciplines and facilitating the lasting collaborations that are essential to keeping our research world-class. The following are key points. We have offered the LAFHA arrangements in accordance with the law to attract outstanding researchers back to Australia, filling only short-term academic and professional staff vacancies in areas of acute skill shortage using the 457 visa and facilitating vital international research collaborations using 419 visas. LAFHA has enabled us to attract high-quality candidates in areas of skill shortage to come and live temporarily in Sydney, a city, along with Melbourne and Perth, recognised as amongst the most expensive in the world.

Universities are not in a position to compensate affected current staff who will lose the benefit, nor to replace this from our own budgets to attract internationally based talent to Australia in the future. The funding challenges universities currently face have been well documented recently by the government's base funding review. Unlike most private sector organisations that will be affected by this legislation, government regulation of higher education course fees for core undergraduate teaching activities means that we cannot increase the prices we charge domestic students. Moreover, in the areas of research it is widely acknowledged that funding falls well short of the full cost and that universities are already cross-subsidising this activity heavily from other income sources.

We are very concerned that removal of LAFHA will see the private sector move to offer even higher salaries to the limited pool of researchers and professionals that we seek to attract in areas of critical shortage, making it even harder for the university sector to compete. It is important for universities to attract high-quality international talent to augment and further develop our Australian research and teaching capability, as many researchers we attract teach for some of the time here. However, if our capacity to recruit high-quality staff with advanced skills where there continues to be a shortage is reduced, this will inevitably impact the quality of Australian university research.

The reforms to LAFHA will prove to be a false economy in the decade ahead, outweighing the value of the immediate savings to the current budget. At the very least we ask you to consider amending the bill's transitional arrangements for temporary residents, to exempt current employees of Australian universities on 457 visas from the reforms for the duration of their existing contracts, so long as the contracts were entered into prior to the government's announcement of its proposed changes. We also ask you to consider extending to Australia's 39 universities the concessional fringe benefit tax treatment currently available to some charities and community not-for-profit organisations.

Finally, if the bill is to be passed without amendment, it is critical that temporary residents are given the same access to health, education, child care and other taxpayer funded services that are available to Australian citizens and permanent residents. Otherwise, we will have the unfair and untenable situation of 457 visa holders paying full taxes and still having to pay extra to access our hospitals, schools and the other benefits.

Mrs Dyson : From our perspective, for the purposes of these hearings, our concerns with the current bill relate only to the treatment of food and drink and the way that the taxation of benefits or payments in relation to food and drink have been bifurcated in the current bill between FBT treatment and income tax treatment. The exposure draft that preceded this bill had those measures being treated in the income tax regime and that is consistent with the way in which the rest of the regime is moving in relation to LAFHA in general. In moving to this bill, the carving out of a particular part of the amount paid in relation to food and drink and having that treated under FBT rules and the rest treated under income tax rules, with the associated notifications and information that has to flow between employees and employers, is administratively really quite impossible to manage. That is our main concern.

CHAIR: That issue came up in a number of submissions, so we will deal with that. Just indicate an interest in your opening statements in order to keep the time short.

Mr Watts : The Group of Eight is a coalition of Australia's most research intensive and prominent universities. It comprises the ANU, the University of New South Wales, the University of Adelaide, the University of Queensland, the University of Melbourne, the University of Western Australia, Monash University and the University of Sydney. I concur with the earlier comments of my colleagues, so I will not repeat those. Perhaps I will make a couple of example points to illustrate our concern and the concern of the sector around some of the proposed changes.

The issue around short-term 457 visas is a significant one. By way of example, at the University of New South Wales there are some 123 staff who are receiving LAFHA benefits at the moment. Of those nearly 80 per cent are academics at level A and level B. In other words, they are entry-level academic positions who earn a salary of between $60,000 and $80,000. The impact of the reforms based on some work that UNSW had by PNC is that there will be a reduction in their disposable income of some 25 per cent because of the consequence of the removal of these benefits. A person on a level B salary will pay accommodation of $500 a week with a small family. Their disposable income will go from around $2,000 a week to $1,500. I illustrate these because these are not corporate fat cats living in harbourside mansions that may have driven some of these policy initiatives; these are hard-working juniors staff who are at the core of our desire to improve our research quality in Australia.

The other point I would make is in relation to 419 visas. It is common practice across the world, and Australia is no different, that we regularly encourage visitors to Australia—visiting academics who are engaged in contributing to research. They are not employees of any university in Australia. They are employed by overseas universities. They currently come here and typically have a contribution to their living expenses paid by the host institution. At the moment they are capped under their visa conditions to $25,000 but they are exempt from FBT. Under the current proposals those exemptions will be repealed and they will be subject to tax. We think that that is an unintended consequence of creating a penalty on a critical entry of intellectual property into the university sector.

They are a couple of points I wanted to raise. So we think there are indeed unintended consequences for a sector that contributes some $10 billion to the Australian economy. We have had government reforms that have loosened and made more flexible visa arrangements and then we have these consequences around the taxing arrangements, which seem to be counterproductive to the goal of government. As with my colleagues, we would suggest that there are intended consequences. We would suggest that 491 and 442 visas should be exempt from the reforms and the FBT exemptions they currently have should be retained. We also think that 457 visas ought to have an exemption.

Finally, the transitional arrangements that are in place should extend to temporary residents who are engaged before the reforms who have got fixed term contracts that commit them to beyond the current transitional arrangements. We would ask that those things be considered. Thank you for the opportunity.

CHAIR: Thank you.

Mr Le Compte : The Australian Constructors Association have lodged a submission to the inquiry. I will not go back through all of that. I suspect that a number of issues that we would speak about have already been raised and will be raised by others. The association represents the peak construction organisations in this country. Collectively they employ over 100,000 people directly and are of course involved in projects where there are many more people involved. Their annual turnover exceeds $50 billion.

What we are saying in relation to the legislation is that we accept that there may well be some areas which have taken advantage of what was available in relation to living away from home allowances, but the way the legislation is crafted we believe impacts significantly on a large number of people who are operating within a normal employee-employer relationship and who are working in circumstances where they are required to move around and they work on projects which invariably are involved in time frames well over 12 months. Major construction projects often run from two to five years. So the issue about a transitional period of 12 months for existing contracts et cetera is going to be very problematic.

We also think that in the context of the outcome there will be many hundreds of millions of dollars involved in the issues that we are talking about. These moneys are going to have to be met by somebody. They will have to be met by employees, who are going to lose entitlements and have great difficulty in relation to their operational situations or they will be expected to be met by the organisation who pay them, who are more likely than not going to pass those costs on to clients.

If we look at the construction sector, which in many respects is under significant stress on the one hand in certain areas and on the other hand is at the cutting edge of driving the economy forward, this legislation is going to operate in many ways in a situation which is unintended, in our view. It will impact on productivity, it will put prices up and governments, state and federal, will end up paying, as well other clients, because a lot of the work that the large constructors are involved with are public infrastructure arrangements. In tendering terms, the prices will go up. We believe that there is an opportunity through the committee and through sensible discussion for a re-examination of these proposals. There is time to do it, and we believe that would address the core issues that have been raised but also address the difficulties that are going to be highlighted in a practical sense.

My two colleagues from the John Holland Group are representative of one of the member companies of the association. They are experts in the practical application of these types of things. They are going to be able to provide the committee with the practical, on-the-ground results that will come from the legislation if it goes through.

Mr Wallace : The AMWU's position on the living away from home allowance cap at 12 months is that it is a major concern for our local infrastructure within New South Wales and Queensland. Regional New South Wales has experienced some pretty high growth around the mining industry. The Port of Newcastle sits at a capacity of around 120 million tonnes per annum. Over the next 10 to 15 years, it is expected to grow to around 350 million per annum. To give the committee an idea of the size of the exports from Newcastle, the amount of coal that is extracted and exported from the port is equivalent to building a one-lane highway from Newcastle to Darwin three metres wide and one metre deep. There are 1,500 ocean liners that come into the port every year to pick up coal and over 7,500 train movements into the Port of Newcastle.

Over the last few years, we have experienced some major projects. The biggest one was the NCIG project, which was to build a third coal loader in Newcastle. It was worth $2.9 billion. The construction was over five years. Our major concern is that a cap on living away from home allowances after 12 months will actually be an impediment to attracting labour into the region. If you look to the coal industry where we have turnover of around $12 billion to $15 billion worth of sales at present and that over the next 10 to 15 years is expected to grow to around $65 billion it is a really important issue to be able to be assured that we can attract labour.

What we find is that the pool of construction work at present is around $5 billion worth. Future work planned around the Newcastle and Gunnedah basins and the coal basins throughout New South Wales is around $7 billion. Our major concern is that when we try to get labour into those regional areas normally there is a cost in the local community. They would like to be able to get the local benefits. As you would imagine, rents seems to increase in those local communities. Our members normally pay over and above the standard rates in those communities in rent. If there were any reduction in or the equivalent tax was to be paid on those living away from home allowances on projects after 12 months it would not be feasible for our members to go and work in those areas. There are real concerns that they would not last on those project jobs and would come back to more civilised work within the main areas of Newcastle, Sydney or Wollongong.

So our major concern is focused around being able to attract labour into regional areas and being able to make sure that their expenses are fully covered. The last thing we want is to put impediments in place in the job after 12 months. If people lose part of their living away from home allowance they will leave the project and we will not be able to get the labour to complete these projects at a time when regional New South Wales is going through some pretty big booms.

Dr Burn : We support the objective of addressing the misuse of the tax provisions relating to the living away from home allowance. However, we have three criticisms of the proposals. First of all, they go well beyond the abuse by, to quote the Treasurer, 'a narrow group of people' and will impact on many for whom the existing tax treatment recognises legitimate expenses relating to their earning and income. Secondly, we think that there is unfair treatment of temporary residents who maintain a home in their country of origin. They would be excluded from appropriate tax treatment of living away from home allowances unless they maintain another home in Australia. Thirdly, we think that there are inadequate transitional provisions, particularly relating to the changes announced in November last year. I am happy to elaborate on those as we go on.

Mr Jacobs : Thank you for the opportunity to appear before the committee. Schedule 1 of the bill before this committee amends the tax laws to better target the tax concessions for living away from home allowances and concessions. The reforms are designed to better target the tax concession at people who are legitimately maintaining a home away from their actual home in Australia for an initial period. These reforms provide savings of $1.9 billion over the forward estimates.

The government has undertaken two consultation processes in relation to the measure to reform living away from home allowances and benefits. The first consultation process followed the government's announcement in the 2011-12 Mid-Year Economic and Fiscal Outlook and it requires individuals to substantiate their actual expenditure on accommodation and food beyond the statutory amount and to limit the tax concession for temporary and foreign residents to those who maintain a home in Australia for their own use, from which they are living away for their work.

The government issued a consultation paper called Fringe benefits tax reform living-away-from-home benefits in November 2011 to undertake consultation with stakeholders before the commencement of the changes. Treasury received 113 submissions in relation to this consultation process. In the 2012-13 budget, the government announced further reforms to the treatment of living away from home allowances and benefits. The budget measure made further reforms to better target the concessions to people who are legitimately maintaining a second home in addition to their actual home for an initial period. This is achieved by limiting access to the concession to employees who maintain a home for their own use in Australia that they are living away from for work and providing the tax concession for a maximum period of 12 months in respect of an individual employee for any particular work location.

Subsequent to the budget, a second consultation process was undertaken. The government released draft legislation for consultation on 15 May 2012 and the government received 150 submissions in response to this process. The bill introduced by the government into parliament on 28 June 2012 reflects feedback from the consultation on the draft legislation and, as a result, the government deferred the start date of the reforms from 1 July 2012 to 1 October 2012. We are pleased to contribute to today's discussion.

Mr Ellis : As Martin has pointed out, there have been a number of consultations already. I think the number of submissions received in both those consultations and probably by your committee is reflective of the broad concern in the community and in Australian business. Most of the submissions in the previous consultations have largely been ignored. I think it is agreed the reforms go too far. There are two particular areas of concern, including the impact on domestic organisations where living away from home allowances are prescribed under industrial awards in various shapes and forms. That makes it very difficult for those companies to be flexible, because renegotiating awards is very difficult. Secondly, there is the impact on the fly-in fly-out worker sector. Although it has been stated a number of times that these reforms are not intended to impact on fly-in fly-out workers, they definitely will. How that will happen is detailed in our submission.

Some other particular shortcomings include that the requirement to keep a home is just not practical. One of the things that we are discovering is that many people who would do that are having trouble getting insurance, so they basically have to leave vacant uninsured homes, and that is plainly not practical. Twelve months is not long enough. We have heard that already, particularly from the Constructors Association. That goes right across construction, across mining and across the service industries that service those sectors.

One of the other big gaps in the legislation at the moment is that there are fringe benefits tax exemptions for temporary accommodation in relation to permanent relocation, so when people first come to the country they need to stay in a serviced apartment or something similar. At the moment there is no exemption for that for people who are living away from home. Even that first few weeks of accommodation will become subject to FBT.

Some alternatives that I think would much better serve the intentions are that you could, for example, allow foreign workers to come here and benefit from LAFHA provided they are genuinely coming to Australia temporarily at their employer request. You could legislate time limits over the top of the existing framework but certainly more than 12 months. You could even legislate dollar limits. That would all enable the LAFHA provisions to be better targeted without having the impact that obviously concerns all of these people here today across a very broad range of sectors in the Australian economy. Finally, and this is something we have already heard, the transition rules are nowhere near adequate. The way in which the requirement around contracts not being varied is phrased, it means that practically speaking very few people will be able to access that concession for the intended length of time that might apply for anyone.

Mr Stacey : The institute shares many of the concerns which have been expressed around the table which broadly revolve around a sense that the rules have been tightened too much whilst accepting they may have been somewhat lax in the past. Our focus is on three points. The first is the aspect of the reform which straddles both the income tax and the FBT system, which has already been referred to by Ashurst Australia. I will not dwell on this point, for the reason referred to earlier. But I would note that when it comes to a decision as to which system that component should fall under, whether it should be wholly within the income tax system or wholly within the FBT system, that is a decision where reasonable minds might differ. The institute's view is that were there to be amendment in this area it makes conceptually more sense for the disallowance to fall within the income tax system rather than the FBT system.

The second point, which my colleague Paul Ellis was already referred to, is that we see a need for further clarification around what is meant by material variation, because that can effectively means that the measures are limited. Thirdly, we see some anomalies around temporary accommodation benefits provided to individuals who have access to a LAFHA and those who do not. We see that should be improved.

Mr Jeremenko : A number of issues that the Tax Institute has raised in its submission have already been flagged and, conscious of time, I will briefly mention our four main points and then elaborate through the discussion. The bill clearly changes the policy intention behind the provision of the living away from home concessions and we are conscious that the statements that the government made in the successive announcements in November and May, as well as the explanatory memorandum, have not gone beyond description of exploitation as one of the reasons. That may well be one of the reasons and we support cracking down on exploitation of rules. However, we should call a spade a spade and this law clearly changes and tightens the concession. So we want to make sure that that is made clear in the explanatory memorandum. Again, the tax treatment of the LAFHA allowance should certainly be determined in either the income tax or the fringe benefits sphere, not both, as is currently the case under the bill. We will have a discussion, I am sure, about which one may be preferable. Let us be honest, the tax system does not need any help in being complex and this is a case in point; we do not need to cover both systems for this one.

Also, with regad to the transitional rules ceasing to apply, there are instances where we are concerned that some variations to employment arrangements may inadvertently throw people out of being able to rely on those transitional rules. Again, we can go to some further detail during the discussion. We think that it is important for Treasury to do some extra work on the flow-on impacts of these reforms on various means tested levies and benefits, and let the wider community know about the potential effects of these reforms. I will leave it there and go into further detail later.

Ms Seddon : I am here because I have significant concerns in relation to the consequences of the bill, some of which have already been mentioned. I would like to point out that the need for employee mobility is actually a business need with a social impact and often that makes it a very emotional discussion. What I would like to do today is remove some of that emotion. The three main impacts we see on our client base and on our business are an increased cost to business, a decreased ability to deliver on projects, and a decreased ability to attract and retain talent within Australia and to Australia.

In June 2002 we performed a survey of our client base and those three points came through very clearly from the respondents to the survey. Firstly, 77 per cent of the respondents to the survey expect additional business costs as a result of the proposed changes and expect that these costs will either have to be borne by the business or passed on ultimately to consumers. The additional costs include additional salary and benefits to give employees incentives to move; potentially provide transitional support for those that do not qualify for the transitional rules—and I agree with the comment that, as drafted, very few people are going to end up qualifying for the transitional rules—and an increase in on-costs such as workers compensation, payroll tax and, potentially, superannuation.

Secondly, 14 per cent of the respondents to our survey indicated that current projects may not be viable either because of increased costs or because of a skills gap that the proposed changes are expected to create. In the short term, the absence of transitional rules for temporary residents and the significant restrictions applying to everybody else may result in many people going home or being sent home by their employers. Of the respondents to the survey, 14 per cent—I would like to point out this was before we even had the law—had people go home or be sent home as a result of the changes proposed. In the longer term, the removal of living away from home benefits for temporary residents and the significant and, in my view, unwarranted limitations for everyone else are a disincentive for employees to be mobile. This will make the skill shortage in Australia worse. As a result of the impact on ability to deliver on projects, we are aware that many businesses are considering moving projects or services offshore or terminating unprofitable contracts, both of which will have a significant impact on Australian business and the economy.

Lastly, we have heard this morning a skills shortage or a need for employee mobility were significant concerns for all the respondents to our survey. The living away from home benefits provide an incentive for people to be mobile. Being mobile is a very big decision for employees with significant family and social impacts especially where they need to move to remote areas or they need to be away from their families for a short term, which is anything up to two years. When making a decision with those social and family impacts people need an incentive to actually move. The war for talent globally and within Australia means that Australian businesses need to be competitive in attracting and retaining talent. The changes to the living away from home concessions will not help employers attract talent to Australia because those benefits are seen as offsetting the high cost of living in Australia, including our high marginal tax rates relative to other countries in the world, as well as the distance from the rest of the world. Australia is a long way away from family and friends when you need to move. The changes will also not assist employers in moving people within Australia, as there will be little incentive given the significant restrictions, especially in relation to the 12-month cap on the benefits and having to leave your house vacant for a period of time. Fifty-five of the respondents to our survey expect to have difficulty attracting new talent to Australia and 44 per cent expect to have difficulty retaining it here. Within the domestic market, 40 per cent expect to have difficulty attracting new talent and 29 per cent expect to have difficulty retaining existing talent.

I would also like to point out that many moves at an employer's request are actually for the training of a domestic resident employee, and taxing the employer for moving someone on a short-term basis to further develop them and their career seems to be an unintended consequence of the proposed changes.

In conclusion, the effect of these reforms on not only the cost of business but also the ability to deliver on projects, and the decreased ability to attract and retain talent are significant negative impacts for Australian business and for the Australian economy. The original intention of the announced reforms was to address growing exploitation of the concessions. This could have been achieved through the implementation of the recommendations from the Inspector-General of Taxation in 2007 or the tightening of requirements for the benefits, rather than their complete removal for temporary residents and the significant restrictions for permanent residents.

The other intention was to level the playing field between a temporary resident and a permanent resident. The playing field is not level. A temporary resident will now be significantly disadvantaged under the proposed reforms, where they maintain a home offshore and have to maintain a home in Australia, and they cannot access any of the benefits that an Australian would but still have to pay the same taxes and the same tax rates. If the reform to the living away from home concessions was to be considered, alternative approaches could have achieved the desired policy outcomes of addressing misuse and levelling the playing field without the significant flow-on effects of the proposed changes to both Australian business and the economy.

CHAIR: Thank you very much. We have a lot to get through and about two hours to do it. So, if it is okay, we will spend 15 minutes just on the FBT-income tax issue, because, no matter what else happens, that one still sits there. Having read the submissions, I ask Treasury why it is that there cannot be a simpler way, where you just say, 'Okay, this is the acceptable, reasonable expense and as long as you stay within that you don't have to account for it and, if you go over it, you do,' and it is all income. Why do we have the separation between FBT and income tax?

Mr Jacobs : Going back, have had a system since 1986 which has taxed fringe benefits in the form of living away from home allowances in the fringe benefits tax system. In terms of cash allowances, the payment of allowances in relation to accommodation and food are the only cash allowances that are taxed in the fringe benefits tax system. Other cash allowances are just treated as salary and wages, and taxed through withholding. So initially, when the FBT system was set up, it brought these allowances into the fringe benefits tax system, and that is where they have sat.

In terms of the government's reforms, in the MYEFO announcement it looked to move all of the living away from home allowances into the income tax system, make them subject to tax through withholding and give a deduction to the individual. That system has carried through up until the legislation that has been introduced into parliament where a subset of the allowance, the 'ordinary food' amount, will be taxed through the FBT system. That is the $42 a week. There are obviously options about where this is placed. The system that would be introduced by this legislation is to move most of the accommodation and food allowances into the income tax system, but the first $42, the ordinary amount, would be retained in the FBT system.

Mr STEPHEN JONES: The question is not whether there is a rational reason why it has been dealt with in the way it has; the question is: is there a practical and rational way that it could be treated differently—that is, wholly within the income tax system or wholly within the FBT system?

Mr Jacobs : I guess my answer is that we have had different approaches; prior to the changes, it was all in the FBT system—

Mr STEPHEN JONES: I understand that. I get the rationality behind it, and I think the chair does as well.

CHAIR: I got it before 1986. I remember that. But, if you were starting now, I am not sure you would separate it into two. You might not have it at all, because you are effectively being paid twice and you are getting a tax concession for the food that you would normally eat anyway, so it is a very strange thing anyway—and then you are treating them differently. If you started now, I think you would have it in one or the other. I am just wondering why we cannot do that.

Mr Jacobs : The legislation that is introduced has the approach that the initial food amount would be retained in the FBT system. I think the explanation for that is that it is to not change that treatment in relation to those amounts but for amounts beyond that that exceed the reasonable allowances—that they would be put into the income tax system.

Mr STEPHEN JONES: Are you aware of any technical reason, for tax administration or other purposes, why we could not do what Mrs Dyson from Ashurst has suggested, and that is wholly treat it within the FBT or wholly treat it within the income tax regime?

Mr Jacobs : Prior to these changes, it has all been in the FBT system and that has worked. We think that it could all be in the income tax system similarly, like there are other allowances.

Mr STEPHEN JONES: So, as far as you are aware, there is no technical impediment—I understand the rational basis, but there is no technical impediment—

Mr Jacobs : To going one way or the other.

Mr STEPHEN JONES: Thank you.

CHAIR: What is the revenue implication?

Mr Jacobs : I might have to take that on notice. I am not sure if there is a revenue implication from whether it is in the FBT system or in the income tax system, if you are not changing the fundamental entitlements.

Mrs Dyson : I would expect that any revenue implications would only be based around marginal tax rates. It would be an incremental impact if at all.

Mr Bhatt : The FBT is taxed at the top marginal rate of tax, which is applicable to people at $180,000 a year, whilst income tax would be at your marginal rate of tax. I think most of the people would be worse off under the FBT regime. So there is a revenue loss perhaps.

CHAIR: You could take that one on notice.

Ms Lucas : It might be difficult to measure because, if you know that something is to be taxed as an FBT item or, alternatively, you know it would be taxed as an income taxable item, it might alter the amount that you pay, from a cost to business point of view and knowing what the net outcome is for the individual. When you think about the first $42, that has got FBT on top of it, but, if you know it is going to be subject to income tax in someone's hands, you might pay them $60 because some of it is going to go in tax to have the $42 left.

Mr STEPHEN JONES: It depends where the burden falls, on the employer or the employee.

Ms Lucas : That is right.

CHAIR: There is always a burden.

Mr Ellis : But the clear difficulty with this dual-system proposal is that it places emphasis on the employers to understand facts that are within the knowledge of the employee, and if they get it wrong they are the ones that might well end up getting penalised, because of facts that are outside of their control.

Mrs Dyson : There seems to be no policy basis for this bifurcation. In the exposure draft that preceded this bill, all of these benefits were essentially treated as being taxable within the income tax system, and it is only through a change, without any explanation within the explanatory memorandum for that change, between the exposure draft and this bill that it has been now bifurcated back out, with only that minor or part component of the payment that has to be extracted from the income tax treatment, which is where the rest of the regime in relation to living away from home allowances is going.

Mr Stacey : I wonder if I could make a point from a coherence-of-the-tax-system perspective. As Mr Jacobs stated in his summary of how we got to where we are today, the treatment of the LAFHA allowances is anomalous. Allowances are ordinarily treated in the income tax system. Therefore it makes sense for the LAFHA allowance to be treated in the income tax system. The bifurcation just adds unnecessary complexity. From the perspective of a coherent tax design whose beneficial attributes should be as much simplicity is possible, it makes more sense to treat this in income tax system.

CHAIR: Can we talk now about the employee's responsibility? It is something that will exist no matter what else happens. The employee is going to have to account in one way or another. Is the intention that the employee has to account from the first dollar or is there going to be a level which is reasonable and you only need to account above that, as it used to be prior to 1996?

Mr Leggett : It depends on the particular component. We treat accommodation and food differently in the bill. Accommodation needs to be substantiated from the first dollar, though substantiating accommodation is much easier in respect of ongoing food expenses. In respect of food you only need to substantiate amounts in excess—if you spend on your food expenses an amount below a reasonable man sent by the Commissioner of Taxation, that amount does not need to be substantiated. But if you exceed the reasonable threshold set by the Commissioner of Taxation, you will need to substantiate from the first dollar.

CHAIR: And it is taxed upfront, it is actually taxed on the way in to my pay packet.

Mr Leggett : The Commissioner of Taxation has announced that he is intending to issue a class variation to PAYGo withholdings, so where the employee is expected to expend all of their allowance on deductible amounts there will not be withholding on those amounts but where the employee is not expected to expend those amounts of deductible expenses then there will be withholding by the employer.

CHAIR: The paperwork between the employee and the employer on that?

Mr Leggett : There would usually be a withholding declaration upfront when the allowances begin to be paid, so the employer knows whether the employee is expected to deduct or not deduct the expenses.

CHAIR: Okay. Any comment on that?

Mrs Dyson : There is in relation to the food and drink an overlay in that there is a different treatment depending on whether the employee has given a particular declaration or not and then a subsequent flow-on consequence if the employee then gives a further declaration that the original declaration will cease to apply for a particular period. So there is an increased burden in relation to the interaction between employees and employers just for simply working out how much is payable. Our written submission goes through some worked examples on that to show the different way in which that ultimately plays out in the way that both the employee will be taxed and the employer's obligations as well. Trying to manage those sorts of interactions on large-scale operations or even for small businesses is an additional compliance burden that is really unnecessary in the context of the amounts that are at stake there.

Mr Ellis : The outcome will depend on whether the employee comes from somewhere in Australia or somewhere overseas, whether it is 12 months or longer, whether they have maintained their home or not. You could have employees working on an identical project in an identical place getting exactly the same amount of allowance but the employer will have to set up systems to treat that allowance differently based on the personal individual circumstances of each employee in that group and then set up a process to track whether that changes. That is going to lead to errors.

Ms Cleaver : We also have in the construction industry where people may move from a travelling situation less than 21 days to living away from home for three months and crews will move along down the line. When they are in travelling they will not need to substantiate but when they are in living away from home then they will need to give the pay-as-you-go declaration. That may change every few months for an individual employee.

CHAIR: Any response from Treasury or the ATO on that? Is there a reason why it has to be done this way? Is there an example elsewhere where it is done differently?

Mr Jacobs : One of the considerations is whether or not, for individuals with the ordinary food amount, that is better taxed at the employer level or at the individual level. The government, based on the feedback and in developing changes from the initial exposure draft, took the view that it would be better to put that amount into the fringe benefits tax system.

Ms Cleaver : Another point to raise is the practical aspect. Most companies do not pay the first $42 home component to any employees anywhere so they are only giving them the top-up additional amount. Generally speaking, it is not subject to fringe benefits tax because it is not paid to the employee.

CHAIR: Even if the living away from home allowance is not paid, if that employee expects that they are going to use it all then they submit a form to their employer so that it is not taxed on the way out. There is a complexity whether or not the $42 is there. That is a bit I am trying to find out about. Even if you remove the $42 completely, the taxable bit is either taxed at the employer end or it is accounted for by the employee. I am trying to see whether there is a way to do that which has less paperwork.

Ms Lucas : I think there is some confusion in the way the bill is written now about whether that first $42 would be taxable anyway. So in a scenario where you are not paying the first $42, does the first $42 of what you are paying still get taxed? It is not very clear and there are differing opinions on what the outcome of the drafting is.

Mr STEPHEN JONES: How many taxpayers do we think there are who are going to be caught by this?

CHAIR: The number we have now, only quite a few less.

Mr Robinson : We will need to take that on notice.

Mr Wallace : For some projects it is especially difficult. In one project alone in Newcastle, the third coal loader that was built, there were over 7,000 inductions on that project over a five-year period so there were 7,000 different workers who went on to that site. Around 50 per cent of those would have been from outside the area. Those that came into the area would have received some form of living away from home allowance whether it was meals or accommodation or those types of things. One of the other concerns for our members is that blue-collar workers are obviously just that; they are not exactly book keepers and accountants. Keeping meals and expenses receipts is going to be a very difficult task. One of the problems incurred is that you have breakfast and lunch and do not think you are going to have an expensive dinner so you do not keep your breakfast and lunch receipts. All of a sudden you have an expensive dinner and you need to keep that receipt but you have thrown out your breakfast and lunch receipts and have gone over the amount. So we have boilermakers and fitters running back to lunchbox shops in industrial estates wanting the receipts from their morning bacon and egg roll or can of Coke. It is going to be a real issue on some of our projects for construction workers. They are not really good book keepers. Anyone who has ever done a tax return for a fitter or boilermaker would understand that they just turn up with all their paperwork and say, 'That is your job.'

Mr CIOBO: I am interested in Treasury's clarification on how FIFO will be treated with respect to who falls in and who falls outside of FIFO?

Mr Jacobs : The 12-month limit in how long you can access the concessions for living away from home allowances under the changes does not apply to fly-in fly-out workers.

Mr CIOBO: I am asking you what constitutes a fly-in fly-out worker. How are they defined?

Ms O'Neill : We use the definition that is currently in the FBT law that provides an exemption for residual benefits for certain transport provided. There are certain criteria that currently exist in subsection 47(7) of the Fringe Benefits Assessment Tax Act that defines fly-in fly-out workers with reference to them working on a roster basis, it is impractical for them to travel on a daily basis between home and work, and they get accommodation near the worksite provided by the employer. We have used that as the basis for the carve-out.

Mr CIOBO: Does industry have any comments about that?

Ms Lucas : There has been one issue raised in relation to that about the length of time that you might be spending there before you go home again. What if it is a whole couple of months and then you go home for a weekend and go for another couple of months? That is obviously not the intention of fly-in fly-out but it is possible that it extends that far.

Mr Wallace : One of the major concerns for the developed states along the east coast is that you have actually got roads to our coalmines and infrastructure whereas Western Australia has not. So whilst the exemptions take place in Western Australia, most of our mining projects are in regional areas but they travel via road—the infrastructure is already there. There could be some confusion about whether those projects are actually fly-in fly-out jobs but they are just as important to the economy as any project that are fly-in fly-out, whether they be in regional Queensland or Western Australia. So we really need to make that point on what is a fly-in fly-out project and what is the difference between states like New South Wales and Queensland, where there are major construction jobs where there is a network of roads and a different type of environment but the projects similar to the work to be conducted in North Queensland or Western Australia.

Mr Ellis : There are some aspects of the submission that Raylee read out that are fine in terms of the rostering arrangements and it not being compatible for them to go home at night. But there are other aspects like the drive-in drive-out that the AMWU is talking about. There are other aspects. Increasingly, particularly in some mining areas, employers are paying allowances rather than providing housing because it is just too difficult for them to get housing where housing is very tight. And there are a number of other minor issues with that definition that we have identified in our Ernst & Young submission where that does not really work purely and simply based on what seems to be the current policy decisions.

There are also much bigger issues. Okay, they have relaxed the 12 months, but they have not relaxed the requirement to maintain a home. There are a lot of people that work in the industry that might still live with family where they do not own the home or they might be living with a group of people where the lease is not in their name. So they will fall outside the other part of that definition and will not qualify. There is also, particularly in Queensland as I understand, a number of fly-in fly-out workers who come directly from overseas. They will be ruled out because they are temporary visa holders.

The other big issue with the whole fly-in fly-out debate is that no-one really clearly understands how you properly treat these people. As little as two years ago the then Assistant Treasurer—I think it was Senator Sherry—put out a press release that said that fly-in fly-out workers could qualify under the otherwise deductible rule in the FBT act and therefore all of their expenses on the way there, on the way back and while they are there would qualify for FBT exemption. For some reason the tax office could not get comfortable with that and they retracted on that. But there are questions: are they living away from home, are they effectively equated to travelling for business or is it just a bloody long commute? No-one has ever really clarified that basic issue of how this category of worker should actually be treated. So there are all these other open issues around that that have not really been satisfactorily clarified.

CHAIR: And if suddenly there is an advantage to being a fly-in fly-out rather than a living away from home allowance then the definitions will start to blur as people find the edges of it.

Mr Ellis : The other interesting issue that will come out of all this is that, certainly from my insights in remote areas, there are other FBT remote area concessions applied that allow an exemption where accommodation is provided. So you get the slightly ridiculous outcome where some individuals who are working permanently at those mine sites will qualify for an exemption for their accommodation, but fly-in fly-out workers who do not maintain a home in their normal location, to the satisfaction of the legislation, will not qualify. You get some really silly anomalies coming out of all of this.

CHAIR: I want to come to the issue of how you define your primary residence—what the definition is. But I want to stay just for a little bit on the drive-in drive-out element, because my understanding of the legislation is that there is a distinction, even in drive-in drive-out, between a person who uses their own car and a person who uses a vehicle provided by the employer. I would imagine, for a lot of the AMWU workers, that sometimes—

Mr Ellis : It is more a distinction between flying in and flying out, versus driving in and driving out, because—

CHAIR: I think that drive-in drive-out is excluded too, isn't it?

Mr Ellis : Yes.

Ms O'Neill : It depends on whether the employer is providing the transport. That is the key to the way we have described it.

CHAIR: Yes, and that is because you have gone from a definition that already existed, if you like, in the fringe benefits system—

Ms O'Neill : That is right.

CHAIR: and you have applied that across.

Mr James : At John Holland Group, we have projects where we have both drive-in drive-out and fly-in fly-out just because there are no airports where the employees are coming from. We provide them with vehicles to do that.

Ms O'Neill : Yes. So, from our understanding, where the employer might fund a bus service to transport the workers from a pick-up point to the mine site, that is employer-provided transport and therefore it falls within the existing definition under section 47(7) of the FBT Assessment Act.

Mr Ellis : But I think, in many of the cases that the AMWU is talking about, employees will drive in in their own vehicles and will then be put up in accommodation provided by their employer.

CHAIR: Yes, and that is was I was really trying to get at—the difference between the situation where the employer provides a vehicle or other transport and where the employer does not. Do you have any comments to make on that?

Ms Cleaver : If it is their own vehicle, then they do not get that exemption. That is quite common in the regional areas.

Mr Wallace : In practice, there are lots of different examples of how people arrive at sites. Some people would have work vehicles; some people would take their own transport. As for accommodation, there is everything from camps provided inside construction sites—but those costs are distributed to the contractors—or a living away from home allowance, to accommodation that is outside the work site or where someone pays a fee for just a room. It could also be a room where there is a changeover: because in most rosters they normally work for two weeks on, one week off, three weeks on and one week off, in some cases they have to maintain that room for the additional week in which they may go home. So there are costs involved in that side of that. At other times, that room might become available for rent when they are not there for the week.

The point is that there are all sorts of different situations. The gentleman raised the issue that, with potentially 300 to 400 workers on-site, it is a task for each individual worker to work out what category they actually fit into, which is another potential burden. 'I'm on business.' That may add to the cost.

CHAIR: Why is it treated differently if an employer provides the transport rather than reimbursing the employee for transport?

Ms O'Neill : That is simply due to the existing provisions that we have used as our starting point. The FBT law provides an exemption for this employer-provided transport to this category of employees. We have used that as the basis for defining who these employees are.

Mr STEPHEN JONES: Is that because it is an indicium that you may be living away from home?

Ms O'Neill : Yes.

Mr STEPHEN JONES: Presumably, if you have your own car on-site, you are not living away from home. Maybe that breaks down in some of these instances. I can think of lots of examples where that assumption breaks down. It is useful to understand the basis of—

Mr Ellis : It is actually driven more off why that exemption is there in the first place. You do not need an exemption to cover people who drive their own car, because there is no benefit being provided. That particular provision is focused on providing an exemption for that transport. That is what it is there for.

Mr STEPHEN JONES: I want to return to that issue.

CHAIR: Do you want to stay on that issue now then?

Mr STEPHEN JONES: I am interested in whether anybody around this very big table is arguing that this provision should be paid to people who are not living away from home. It is not a trick question. I think I have heard that.

Mr Ellis : I do not think that is the issue. All these people are living away from home.

Mr STEPHEN JONES: Not in one of your submissions, they are not. I understand one of your submissions says that the requirement to keep a personal residence is impractical. What is the definition of 'living away from home?' if it is not that you have a home somewhere that you are not living in?

Mr Ellis : Traditionally it has been that you are living somewhere temporarily away from where you would normally live.

Mr STEPHEN JONES: Yes, but I thought your submission—and this is your opportunity to clarify it—was that it was impractical to use the keeping of a permanent residence, whether it is in Australia or not, as a test for whether you should have access to this allowance.

Mr Ellis : Yes. That is correct. The submission was saying that it is impractical to keep a permanent residence vacant in that period. The way the rules are formulated now, you have to keep a residence and it has to be vacant. You cannot rent it out. If you are leasing, you have to keep leasing it, even though it is going to be vacant when you are not there.

Mr STEPHEN JONES: If we were to do otherwise, wouldn't the Australian taxpayer be providing a windfall for that person? Wouldn't the government be paying a windfall if the person is renting a house and collecting an allowance as well?

Mr Ellis : I do not believe it is a windfall. In many cases, rents are substantially higher. The trouble is, if you look at someone who is living at a family home then they are incurring extra cost.

Mr STEPHEN JONES: I get it, but there are other ways of dealing with that. But I do understand that point. Without wanting to interrupt, the other question I have for you, or any of the other people around the table, is: at what point are you no longer living away from home; at what point have you moved?

Mr Ellis : That is a fair question, and one of the points in my submission is that we could deal with this by leaving the existing legislation as it is and then legislating appropriate limits as to what that point is. This is a difficulty that we have always had with this legislation, certainly for as long as I can remember. I can remember as a junior, when I first started out, a very nasty person gave me the task of finding out where this supposed time limit existed, and it does not actually exist. An alternative and much simpler mechanism could be just to legislate appropriate time limits.

Mr STEPHEN JONES: I would be interested in hearing from either the AMWU or the construction association on this, because you represent people who work on project based work. What is the length of the job and is there any synergy between the current 12-month rule or anything else that you might submit which is an appropriate test for how long you might be working—

Mr James : As part of this review, we looked at the number of projects that we have and the length of those projects. We currently have 156 projects on our books, from $4.8 billion to $5 million or $6 million. We have two projects that are less than one year in length. The rest of the projects are over one year in length, and the average project length is 2½ years, or 2.6 years. So to give people living away from home allowance for 12 months—

Mr STEPHEN JONES: For the other 1.6 years—

Mr James : For the other 1.6 years, they are either losing money or they come back to us for an increase in their pay so they are back to their same net base.

Mr STEPHEN JONES: Does the AMWU have something?

Mr Wallace : Just on that point, I do not have the numbers on it, but generally 2½ years is the time it takes to construct a new mine. If you look at an allowance that is paid around the Gunnedah and Mudgee area, you are looking at around $700 a week being paid in living away from home expenses. Most rent in the region is up around that level of dollars. If the tax effect on that were anywhere near a couple of hundred dollars out of that allowance a week, added up over that year and a half you would be looking at $15,000 to $20,000 worth of additional expenses.

The other concern that we would raise would be about the requirement to maintain a house. It is an issue for younger people that have lived at home with their parents and then have gone away to work on a project. They are still living away from home and they still have rent to pay in the community in which they are working, but they would not have a residence of their own that they maintain. So they may have to be taxed on their allowance. That raises another question for younger people.

Mr Stacey : The institute in a previous submission to Treasury suggested a three-year time limit would be more appropriate, and that time span seems to be consistent with the comments that we are hearing today from that side of the table.

Mr Payne : Can I just add the University of Sydney's perspective. Many of our research contracts go for three to five years. Currently under our guidelines we offer the LAFHA up to a maximum of four years, but we also require the employees to sign a declaration every year to say that their intention is to return to their home country.

CHAIR: Putting aside the 457 issue, which we will need to deal with, let's deal with the question that Stephen asked, about at what point you have moved. I put this to you as a person who has moved from one capital city to another for work. If you are moving from Sydney to Melbourne for three or four years, that is probably a move. In fact, if you are going from Sydney to Melbourne for one year that might be a move, because there is work there when you finish. They are major employment centres. The AMWU issue, where you are going to Gladstone or somewhere for a year and a half, where there is a major construction bump and there is not actually a town where you would live permanently because the work comes and goes, seems to me to be different.

Ms Lucas : There has been a lot of history about this and some difficulty in getting clarity under the old rules about when someone is living away from home versus having moved permanently. As a tax adviser with a chartered accounting firm, I am often providing advice to clients about individual scenarios and whether somebody is living away from home or whether they have moved permanently. We have a great big checklist of issues to consider in determining which side of the line you fall on—things like: did you sell your previous home, have your family gone with you, did you close bank accounts, if it is an overseas thing are you off the electoral roll, do you still have your boat mooring or have you given it up?

CHAIR: It does not help.

Ms Lucas : That is a real life case. We have to come up with a balanced view for each individual. We have had scenarios where it has been difficult to determine, so we go to the tax office for a private ruling. You may be aware that some years ago there was a move to introduce time limits on how long people could be living away from home. It was going to be two years for domestic transfers and four years for international transfers. That did not go anywhere, but it still exists as a kind of rule of thumb in the marketplace for determining whether people are living away from home or not. But it is a case-by-case consideration at the moment.

CHAIR: The other reason why I am raising that is that for highly skilled people who move from Sydney to Melbourne, who might only get the living away from home allowance for one year, it may not have the same impact on people only working that year as it might, for example, on people working in the mines. For them, when the year runs out and you have a year and a half contract, the contracts might start to become very fluid at the end of a 12-month period.

Ms Lucas :    Particularly with the high costs for food and accommodation in those areas as well.

Mr Wallace : If you are down $200 or $300 a week at the 12-month mark in what you are bringing into the household budget, you may look at not finishing that project. You may end up with a decline in labour midway through the project or you may struggle to attract labour. All sorts of issues may arise from that. Normally the living away from home allowance covers what it actually costs to live away from home and then you get your income on top of that, but if you have to eat into your wage to pay your expenses, some of those projects are not worth the effort. You will see people return to the capital cities or the larger towns around the area and choose not to do that work any longer than 12 months, which would probably have an effect on the economy eventually with the attraction of labour. It would probably open up the door for more opportunities for 457 workers to come in and do that type of work if there is a problem attracting labour.

Ms Seddon : I entirely agree with the point about remote labour and the like. But where people move between capital cities—and I will use Sydney to Perth as an example—many employers send their employees to a capital city for a specific and defined need and want them to come back when they have met that need. There may be opportunities for that individual in the Perth market and that is something that they always have an option to explore, but their arrangement with their employer is to come back after a defined period of time once they have done what they need to do. I used the example of Perth because there are a lot of people going into Perth at the moment. Even though they are going to a capital city, they are still going for a business need for a defined period. Especially given rents in Perth, I think when trying to make a distinction between remote and capital cities there are circumstances I can see in a capital city sense that are still there to meet a business need and that are for the short to medium term.

Mr STEPHEN JONES: In a former life, I employed people who moved from all around the country in exactly those circumstances. But the question is: at what point does it become, 'Come on. This is not living away from home. You have actually moved'?

CHAIR: That is what I was going to say too. I can understand—

Mr James : We have a checklist. We go through the checklist to make sure. We look at the length of the project. We have people going to Perth. If their circumstances change, we can revisit that contract and say, 'No, you have now moved permanently. You have changed jobs. You are not intending to come back.' The original contract will say, 'At the end of the project you will come back to the Sydney office.' That is when we will change it. We will say, 'No, you are now permanently over there.' We look at individuals.

CHAIR: I understand that. If the contract is for a year and a half and then they are going to return I can understand why the person going would like the security of having a home—

Mr STEPHEN JONES: A right of return.

CHAIR: and that they did not have to rent it out. I can understand all the security and sense of space issues of why you might want that. My question is: why should the taxpayer pay for that to the extent that they do? Is there a reason why the taxpayer has to pay so that the person does not have to rent out their first home in order to spend a year and a half somewhere else?

Ms Paton : I will respond to that quickly. I think there is a valid discussion as to where the line ought to be drawn. Broadly, there is a perception in the industry that where that line has historically been drawn by the administration and the ATO in the existing rules has now moved as a result of the proposed changes. That goes back to Mr Jeremenko's earlier comment, which is that, if the line has changed, let's call a spade a spade and say that the concessions are now going to be offered to a different set of people in different circumstances and government will not be extending the benefit past that line and that the line is now different to where it used to be.

Ms Seddon : I think there are a lot of personal factors to do with the employee that need to be taken into consideration, but from a business perspective I think a fair line in the sand is if your employer is sending you it is a genuine, legitimate business expense and should actually be treated as a business expense. If someone volunteers and says, 'I would really like to go to Perth,' or 'I would love to go and work for the University of Sydney,' on a voluntary basis rather than the employer requiring someone to move I think we need to treat those slightly differently. For someone who volunteers it is a personal choice that they make and you can argue that that is not a genuine business expense. In all the examples we have talked about remote sites. It is because that is where the work is that people are driving in and driving out or flying in and flying out. That is where the work is and therefore employers are requiring people to go there. Where that is the case, I believe that is a genuine and legitimate business expense that that should be treated concessionally. Where it is an employee's personal choice, I do not believe the Australian taxpayer should subsidise it. But where it is driven by a business need it should be treated as a business expense.

Mr STEPHEN JONES: Could there ever be a situation where it was not treated as a business need? Presumably businesses do not transfer people from one part of the country to the other if it does not make sense for the business.

Ms Seddon : People move for private reasons—

Mr STEPHEN JONES: I fully understand that. We used to call for volunteers but, at the end of the day, it was the employer who made the decision on which of the volunteers went.

Ms Lucas : You might still find a space in one of your other offices if they particularly want to go there, for instance. That would be a voluntary thing and not a requirement to live away from home as such.

Mr STEPHEN JONES: I can understand, for running a business, why that is an absolutely sound way to go about it. I am not sure it is a useful discrimination from a tax administration point of view—voluntary and non-voluntary.

Ms Lucas : With the voluntary scenario, that is not a business expense. As Norah was saying, that is a personal choice thing, so you would not—

Ms Seddon : I am not making a distinction between voluntary and non-voluntary. Someone may say, 'There's a business need there, and I'm going to volunteer for it.' The underlying answer is that there is still a business need that someone is moving for. As long as it is for a fixed term and it is to meet a business need, that should be treated as a genuine business expense.

CHAIR: Indefinitely? For five years? For three years?

Ms Seddon : The rule of thumb historically has been two years domestically or four years internationally, or, if you are on a fixed term that is less than those times, then for the fixed term of your assignment.

Proceedings suspended from 10:40 to 10:57

CHAIR: Mr Ciobo is off getting a real coffee! He wants to talk about 457s so, when he comes back, we will go to the 457 issue. Can we perhaps go back to the definition of 'keeping a home for personal use'. Issues about that are now coming to light concerning the inability of getting insurance if a house is vacant. There are definitions in the legislation that say that if you have a three-bedroom unit and you rent out one of the rooms while you are away, you are no longer entitled to LAFHA. Are there any comments on those definitions and any practicalities of making those work?

Mr Wallace : I think this issue is around the generation age 18 to 25 who may leave the family home, work in a project in regional Australia but be taxed on their living away from home allowance. I think earlier it was possible because they did not actually own a home whereas at the moment they are treated just like everyone else: if they are living away from their family residence they pick up the LAFHA tax free. So that may be an issue that the committee may need to give some thought to.

CHAIR: Can we stop there on that. This goes back to something Steven asked, which was: at what point are you actually living away from home and at what point do you just live in one place? Steven asked the question: is there anyone in the room who thinks you should be paid a living away from home allowance if you do not have a primary residence that you are living away from?

Ms Lucas : When the rules were originally introduced they were about compensating for additional expenditure. That has kind of been lost here a little bit. If you are in that scenario where you live at home and you move somewhere, those costs are additional because you did not have any costs at home. I can see the point that, if you do own a home and you rent it and you are getting that income, the law could have been adjusted to reflect any additional cost of living away from home, taking into account the fact that you got some income from renting your property. But the way it has currently been drafted under the bill, it eliminates that concept of 'additional' for a lot of people who actually never had the cost in the first place but now will have in the place where they are living away from home.

Mr STEPHEN JONES: I get the point; the reason is absolutely sensational. From a practical administration point of view it would advantage home renters with live parents over every other renter who happens to take up a job away from the place where they normally live. I can imagine where you might be renting a house, you get a job and a week before you move you take your belongings, stick them in your parents' garage, and you have met the test.

CHAIR: But that would only apply if the employer was prepared to pay the additional LAFHA. I guess this is where the LAFHA is actually a way to top up the employee's salary through a tax advantage and this circumstance was covered in some submissions in various ways. In other words, the employer is paying the money, anyway, but the employee is getting to take more of it home than they would if it were a wage.

Mr Ellis : I think you will find that mobility programs that are offered by most organisations have nothing to do with any tax advantage but have to do with the whole process of ensuring that people are prepared to move from one location to another to meet the business needs of the organisation. So they will provide for additional compensation for housing and cost of living.

CHAIR: But over and above the actual costs?

Mr Ellis : The trouble is you have to balance the objectives of a generic policy versus getting down to the tintacks of every individual scenario. There will always be cases where some people will have ongoing expenses at their usual place of residence, whether that be mortgage costs or whatever, and there will be some cases where they do not. But it is not always that easy to establish what those additional costs are. An administratively easier way of dealing with it is that they will cover the accommodation costs of the place where they are living away from home. Again, that rarely has reference to tax advantages.

Ms Lucas : I think, though, there has been some use of the tax advantages aside from just what the employer is willing to pay for to the extent that an employer might be willing to meet some of the cost but the employee might be permitted, for instance, to salary package a portion of the cost. That is a way of using the tax advantage where the employer is not willing to bear the whole cost.

Mr Jacobs : The 'Context of amendments' section in the explanatory memorandum does go through some of this history of the origination of the FBT concessions and the fact it is about additional costs. Another point concerns the practices that are out there. We would see that there are a range of practices out there in that salary-packaging firms encourage people to review their circumstances to see whether or not they are living away from home and then to access the concessions. We just make the point that there are a range of ways in which people get into these concessions.

Mr Ellis : I do think that, to some extent, there is an element of rewriting history. I have been involved in this area for over 20 years and, to my understanding, the concept of living away from home has always been defined by reference to someone who is temporarily living somewhere where they do not normally live, not by reference to whether they are physically maintaining a residence in that place, but rather that they intended to return to that location after the completion of their temporary assignment.

CHAIR: So you think that, even though a person does not have a residence in Sydney, for example, if they are transferred to Melbourne they should still get living away from home allowance?

Mr Ellis : There are two steps. One is: are they living away from home? The answer to that is probably yes. The next step is: should they get some sort of tax preference allowance?

Mr STEPHEN JONES: Wouldn't the test be: missing your favourite coffee shop?

Mr Ellis : You would be living away from a home or—

Mr STEPHEN JONES: There has to be a test from an administration point of view.

Mr Ellis : You need to separate it out into two steps. Let's take some of the emotion out of this. The first test is: are they living away from home? In all that I can remember it is: are you living somewhere that is not where you would normally live? If you are on a relatively-short-term temporary assignment and you intend to go back then that has always been accepted as living away from home. The next question is: should there be a tax concession and how does it apply? Does it only apply where you are actually incurring additional expenses? In my history and knowledge it has never been applied that way. It just looked at what your actual accommodation costs are in the place where you are living away from home and what the comparative food costs are based on the way the FPT legislation works where you are living.

Mr Bhatt : In our case at the university, we ensure that we reimburse expenses as opposed to reasonable housing allowance. We really tightened it up to say: 'Show me your rent and we'll reimburse you. Show me the school fees and we'll reimburse you. Show me your travel expenses and we'll reimburse you'—as opposed to 'Here's an allowance for where you live.' In terms of the other side of the equation, which is what you do with the previous house which you might or might not have rented out—that is a personal call—that should be taxable income in most normal circumstances, but we cannot go look over the shoulder of the employee and say: 'Is that your main residence? Perhaps you will want to get a tax break for it.' That is not our concern.

I know you will come back to the 457 visa later on, but it makes it even worse for somebody from overseas where we are not giving them the concession of saying, 'I'm still keeping a house in Sweden, England or wherever and am denied that benefit compared to an Australian resident.' In fact it is reverse discrimination against the 457 employee.

Ms Seddon : I will add to that comment because I agree that one of the suggestions from the consultations that was not taken up was that allowances be scrapped and the whole system go to reimbursement on the basis that that is how you would treat any other business expense. It does prevent people salary sacrificing additional amounts over and above what the employer would be willing to pay as a business expense. I raise that because one of the concerns that I understood from the original consultation paper was that people were receiving allowances that they were not fully expending and so, effectively, were getting additional money in their hand that had not been subject to tax. A full reimbursement system would address that. The second was that people were living in mansions on Sydney Harbour or big houses in Toorak. I think that got completely overblown in the press. In my experience many people who are living away from home are living in regular suburban accommodation that is very similar to what they would have had in their home location. I know many employers who actually say, 'We will only pay you for the standard of accommodation that you would have got in your home location.' Again, that could be monitored by a reimbursement system.

Mr James : That is exactly what we do with 457 employees. We let them salary sacrifice, but we look at what their income is and determine that, if a person is on $80,000 a year and salary sacrifices $60,000, they cannot do that, because they are not going to live on $20,000 a year. We just disallow it.

Ms Seddon : I would also point out that I also think that business needs a short, medium and long term. Living away from home is only for short-and medium-term needs. I think that is up to three or four years. Beyond that you are permanent, you are meeting a long-term business need and you should not be living away from home. If we solely focus on people with short and medium term, most employers will pay them their home location salary. If you are going from Tasmania to Perth, your home location salary will not be in line with what people in Perth are receiving and, therefore, you will not actually be able to afford to live in Perth on what you might have been paid in Tasmania. The fact that the company is giving them accommodation or otherwise is also an acknowledgement that on short- and medium-term business transfers you are on a different salary base from people in that local market.

Mr Wallace : On the issue of reimbursement, that would have some major effects because of the way industrial agreements are set upon the industry as far as awards and agreements. We have flat rates of, say, $600 a week. There may be an employee who chooses to pay $300 a week on accommodation but then travels 15 kilometres further each day to the site, and someone may pay $400 a week but live closer to the site. So some of those costs in the actual allowance may be travel or other types of things. The difference for the industry we look after is that you can rest assured that, if the employee is not living away from home, the employer will not pay LAFHA. I think the line that needs to be drawn is where the negotiations between the employer and the employee get to the point where they could use living away from home allowances as an avoidance. In our industry it is not the case; if you are not living away from home, they definitely will not pay it.

The other point I think the committee should consideration to is about the question Steven asked whether we think LAFHA should be paid to someone who does not own their own residence. There may need to be some consideration for the 18-25 age group that may take on some of these projects away from the family home but still have the cost expenses of providing accommodation for themselves in those locations. If they have to pay tax on some of those amounts, it may be a burden on those types of projects and they may choose not to take those projects and set themselves up for a future.

CHAIR: Can I be devil's advocate on that one? Anybody who works and provides their own accommodation pays for their first residence out of their wage. We all do that. So why is it different for a person who used to live at home? It is actually a normal part of life to pay for your first accommodation out of your wage. Your second one, because you are living away from your first one, is different, but your first one you pay for.

Mr Wallace : Yes. Firstly, if they are not living away from home, they would not get the allowance, so it would not be an issue. The issue is that, if they are living away from home it is acknowledged in that they have a place of residence. If you take an employee at the moment who is presently picking up living away from home allowance and has moved away from their parents to work on a remote location, say, four hours drive west of the coast, at the moment they are not paying tax on their LAFHA. With the introduction of this they would be paying tax on their LAFHA, so it would be a significant change for that employee pretty much immediately. I do not see how it would be right that potentially they could have an extra burden of $200 to $300 a week with the introduction of this legislation.

CHAIR: But they would only have the tax burden on a part of the allowance that they did not actually spend.

Mr Ellis : No, they would have the tax burden on the whole amount.

Mr Wallace : Yes, because they do not have a residence. That is the way I understand it.

Mr Ellis : Yes, correct.

Ms Lucas : But to qualify for any of the concessions you have to have a home that you have an interest in—own or rent—that you are living away from. So even food.

Mr STEPHEN JONES: I think the chair's point is that they would be eligible expenses to claim through the income tax system.

Mr Ellis : No, they would not. That is the whole point.

Ms Seddon : Because in that situation someone does not own a home.

Mr Jacobs : Madam chair, I think it is the point that, as you said, it is those costs which others who do not move to a mining site bear when they move out of their parents' home and go to take a job. Then they start to pay rental accommodation and have to take a job that enables them to get sufficient income to be able to pay those costs.

Mr Ellis : I think the difference is that in many of those locations the rental costs are significantly higher than if, for example, they were in a share rental in a major city,

Mr STEPHEN JONES: I see two pretty clear examples here where tax expenditure which was introduced to offset additional costs has morphed on the one hand to a source of income to help offset the exceptional costs for workers living in regional areas with low housing availability and, in the university sector, the Commonwealth government is effectively providing wage subsidies to attract people into the country. They may both be very worthy causes—I want to make that quite clear—but is a tax expenditure which was established for the purpose of offsetting additional costs for people who are genuinely living away from home the best way of doing that? I have to say that, from where I am sitting, the answer is no.

Mr Ellis : It is certainly a model that is used in many overseas countries.

Mr STEPHEN JONES: Sure, but there might be a more effective way of doing it; that is the question. That has me returning to my point: should we be paying this to people who do not live away from home—who have effectively moved?

Mr Ellis : My point is that they are living away from home.

Ms Seddon : Could I say that the institute's representative talks about two steps here. The first question is: is someone living away from home? If they are not, under the current law they will pay tax on their allowances—end of discussion. That is the right answer, because they have decided to go somewhere permanently. If someone is genuinely living away from home, to meet a business need for the short to medium term, then I think the second question is: in what circumstances should they get an allowance, and in what circumstances should they get a concession on that allowance? Your point is that the original intention of the allowance was to compensate for additional costs. That was the original intention of the allowance. Where the additional costs will change depends on whether you are an 18- to 25-year-old who has been living at home with mum and probably earning a salary that means you do have to live at home with your mum and dad, or whether you are someone who is perhaps spending rent at a level that they would not do in their home jurisdiction. They are two different situations. It is trying to make a one-size-fits-all for those two situations and everything in between. Historically what has happened is that the employer says, 'I'll pay your host country accommodation for you.' Otherwise, to compensate every individual employee for their additional costs becomes a huge nightmare, and you may have 50 different people at the port of Newcastle in the same situation, on the same wage, with 50 different outcomes from a tax perspective.

Ms Gower : I think it also highlights that really the issue comes back to a change in definition about what living away from home is under the old regime and under the new regime. Under the old regime, we talked about living away from your primary place of residence and the additional costs that that might bring. In our case we might have an employee who resides in Sweden. They can get a two-bedroom apartment for the equivalent of A$300 per week, and that provides a certain level of accommodation. They move to Sydney, and the cost of that same quality of accommodation is now $600 per week, and there are clearly additional expenses that they bear from making that move and living away from where they have previously lived and where they have an intention to move back. What we are talking about under this new regime is that, unless you actually own and maintain that property and live away from your house and maintain a second house, that becomes the new definition of 'living away from home'. That is a changed definition. It has a changed meaning, and it means that there are a lot of the issues that we have talked about in terms of people who might pay a notional amount of bond to their parents but now have to pay full-blown rent. Again, under the old system they bore additional expenses and there was some tax concession for that. Now, because they do not own their own home and leave it behind, they fall outside the definition.

Mr Stacey : I just appeared with Nicole here. In answer to your question, I do not think anyone here at the table would answer that in the negative—that is, you should not be paid for additional costs for living away from home. The issue is: what is living away from home and how do we define that? The point that I think has been made in different ways around the table is that, as we have sought to tighten that definition, we have probably tightened it too far.

Mr STEPHEN JONES: But it has to be something more than missing your favourite coffee shop.

Ms Seddon : Indeed.

CHAIR: Yes, but again I will be devil's advocate, because I have spent most of my life in shared accommodation at various times. At various times I have been on my own because I could afford it at that time, and at various times I have not. That changes, as a lot of people's lives do and probably most of your young workers' lives do. Your home situation changes because things are tight. So to be in a position when I was that age where, if I rented out my second bedroom while I was away, I would then not qualify for living away from home allowance when I was getting an extra $150 a week from the second room would have been very harsh. Again, I just want—

Mr Wallace : In real terms, if you said to a 22-year-old, 'Listen, you need to go to Port Hedland to work on a construction project; the rent's $1,000 a week and you need to come up with a six-grand bond before you move there,' and then you turn around and say, 'But you're not entitled to living away from home allowance because you don't have your own residence,' that job would be filled by a 457 without a doubt. That is the issue that you have.

CHAIR: But that is because the rents are high there. That is not about living away from home; it is about moving to a place where the expenses are very high.

Mr Wallace : The issue is that there is no exclusion in the legislation to say that those people will be the exception. That is the point. There is nothing defined to say certain people are not going to be affected by this. One of the issues would be that our model construction agreement for the Hunter region and the Gunnedah Basin has it at around $600 a week; the likely immediate effect of the legislation on someone that is not a homeowner could be as much as $200 a week, which is $10,000 a year taken out of their income to pay for expenses that they currently incur.

CHAIR: Is there a reason why a person who owns a home should be treated so differently to a person who rents? One could argue that people who own have an additional benefit here because they are at a stage in their lives when they can afford to own compared to people who are at a stage in their life when they cannot. I want you to talk about it, but I am just being devil's advocate as much as I can.

Ms O'Neill : The way we have described maintaining a home does not differentiate between someone who owns a home and someone who is renting. We have used the definition of ownership interest, so as long as they maintain that home for their own use on an ongoing basis while they are living away from it, they will qualify for the concessional tax treatment.

Mr Ellis : But that means you would have to pay rent for a vacant house for that period of time, which clearly—

CHAIR: Otherwise you are not living away from home, surely.

Mr Ellis : That is why I say that you are living away from home, but it is a question of additional expense. By definition, as I have always understood it, home is the city where you live, not the bricks and mortar. That is a house but it is not necessarily home.

Dr LEIGH: Away from the city in which we were born—

Mr Ellis : No, not necessarily where you were born.

Dr LEIGH: No, but many of us might have our hearts in another city. It seems as though you need the bricks and mortar, because that nails down living away from home. It is not a living away from the city allowance.

Mr Ellis : No, but there are plenty of people who are asked to go and work in a place like Port Hedland or in Gunnedah or overseas, or who come to Australia for a short-term, fixed period of time with the intention that they will always go back to where they started from, because that is their home. That is how this has always been interpreted.

Ms Seddon : I think we are mixing up two things here. One is: what is the additional cost of having to move for business reasons. The other is: do you need bricks and mortar to 'live away from'. Historically, you have not needed to have a house or a lease; it just had to be an intention to return to a region. But that is history. So, if I may use Ms Gower's example, if someone is living in a city in which the standard of living they would normally have costs $300 and they move to meet a short- or medium-term business need and their rent becomes $600, merely because of the change in cities—and invariably there is no change in salary as a result for a short to medium term, so it is not like they are matching the salaries in the host city or host country—then why shouldn't they be compensated for the extra $300? That is, not for the first $300, because they would have incurred that in their home location. But why shouldn't they be compensated for the extra $300, regardless of whether they have maintained something in their home city? The additional cost to them of moving to meet a business need is the extra $300. Should they get an allowance of the full $600? Perhaps not. But should they get an allowance that covers the additional costs that they are having as a result of having to move and live away from home for business purposes? I think they should. That additional cost is not necessarily whether you have a rental or an owned property in the home location.

Mr CIOBO: Given that the living away from home allowance is for additional expenses associated with living away from home, why is there a requirement on a policy basis for it to be tied back to not allowing your primary asset to be used for income purposes?

Mr Jacobs : I would just refer back to what the government has put in its explanatory memorandum which goes through some of the history: that this was about having additional costs whilst at the same time maintaining a home elsewhere. The government has been clear about saying that, in effect, we have had the current law being interpreted broadly and the concession being used in a manner that is outside the original policy intent:

Employees are using the concessions to access tax-free amounts even though they are not incurring additional expenses, that is, the cost of maintaining two homes.

In terms of that perspective, it is this question of what is 'additional costs'? And 'additional costs' can be clearly referenced. If you are maintaining a home in one place and are then required by your work to live in another place and maintain those costs as well, in that case you clearly have additional costs.

Mr CIOBO: Can someone rent out their primary place of residence and still be eligible?

Mr Jacobs : No. Under the changes—

Mr CIOBO: They are still maintaining the home, right?

Mr Jacobs : The test in the legislation would be that you are maintaining your home for your personal use and enjoyment which, if you have rented it out, is not available for you to go back to.

Mr CIOBO: Again, on the policy question: why can someone not rent out their PPR and be eligible for this when they are still maintaining a home but they are just not doing it in a stupid way; they are actually generating an income off the back of it? How is that inconsistent with anything that you have outlined?

Mr Jacobs : The issue becomes the additional costs. If you have rented out your home and are getting income from that asset, then in effect the question becomes: what are the additional costs that you have got by living in one place—

Mr CIOBO: The additional costs are from living away from home. That has got nothing to do with extra income that you incur as a result of your PPR, does it?

Mr Jacobs : No. I guess what we are saying is that the government has made its intent clear here, which is that it is additional costs to those; that it is actually about the additional costs from having to maintain two homes.

Mr CIOBO: Right. And that exists. If you are living elsewhere and ordinarily eligible for living away from home allowance, you are incurring additional costs. That is what your employer is compensating you for. It is not net additional costs—or is Treasury trying to argue that it should be net additional costs?

Mr Jacobs : I am just explaining the legislation as it has been introduced.

Mr CIOBO: Yes, and I am asking on a policy rationale. So the policy rationale—is it net additional costs or just additional costs?

Mr Jacobs : It is, in effect, net additional costs when we get to the point that, to have a home that you have rented out, then the question is: do you still have those costs in association with that home?

Mr CIOBO: So someone could rent out their PPR and, provided there were net additional costs, they would still be eligible—is that what you are saying?

Mr Jacobs : No.

Mr CIOBO: So it is not net additional costs?

Mr Jacobs : No. It is a strict test, that you have to have that home available for your use and if you have rented it out that is not available.

Mr CIOBO: So what is the policy rationale for not allowing someone to rent out their PPR?

Mr Jacobs : I think you can look at—

Mr CIOBO: You can say it is a decision of the government if you want to, if you do not have a policy rationale for it. I am just asking you—

CHAIR: I think the rationale is that you live in one place and if you live in two places then you get the living away from home allowance but if you live in one you do not. Because if you live in one—

Mr CIOBO: Madam Chair, I appreciate your view but I am asking Treasury why there would be a policy rationale for prohibiting someone from generating income from their PPR.

CHAIR: The policy rationale is: it goes as an indicator of whether or not you have additional costs.

Mr CIOBO: I come from the Gold Coast and we have 20,000 or 30,000 holiday apartments there. For many people, it is pretty standard practice to have an apartment that they would live in and lock up valuables and all those types of things and move away. Many people, in fact, treat it as a second home. Why should they not be eligible to derive income from those premises, and still maintain it as a property that they could move into whenever they chose and saw fit but also have it available on the rental pool? How does that sit ajar to the policy rationale in this case?

Mr Jacobs : I do not know if I can answer it any differently from how I have answered.

Mr CIOBO: So it is the government's decision, basically?

Mr Jacobs : There is this requirement that you, in effect, have to have a home that you are living away from.

Mr CIOBO: How many 457 visa holders are there in Australia roughly? Have you got those numbers?

Mr Jacobs : No, we do not.

Mr CIOBO: Can you take that on notice? What impact—bear in mind I have not reviewed the transcript from opening submissions that witnesses made; you have the benefit of having heard their opening comments—do you see this making in terms of a net variation in the number 457 visa holders?

Mr Robinson : Again, we would have to take that on notice.

Mr CIOBO: Treasury, you must be familiar with what you think the impact is going to be. Let us move away from exact numbers to a 'vibe', as they would say in The Castle.

Mr STEPHEN JONES: The evidence, as I heard it, is that there would be more in the mining industry and less in the academic sector. That was the evidence that I heard, Mr Ciobo. Maybe you would like to direct those questions—

Ms Gower : I can give you our practical experience. I have spent time on the phone over the past couple of months talking to employees who we would like to recruit to come and work in our university and work on projects where we do not have Australians who have the skills or expertise to do the work. Of course the first question that they want to talk to me about is the cost of living in Australia and the fact that they cannot afford to move to Australia and to do that work under the new regime. For us the impact is that, for those people, where they previously may have accepted the offer, they are now not. That is the on-the-ground experience that we are now starting to deal with on a day-to-day basis.

Mr CIOBO: So what I am hearing from the Group of Eight—and correct me if I am wrong, because I do not want to verbal you—is that this is having a material impact on the ability for Australia to attract the best and brightest globally to undertake research activity here in Australia?

Ms Gower : Precisely.

Mr CIOBO: What sort of numbers would we be talking about?

Ms Gower : To give you an idea, at the moment we have 123 people here on 457 visas receiving living away from home allowance. Of that number about 80 per cent are academics at level A or level B or research assistants—entry-level academics earning between about $60,000 and $80,000 per annum. We did some scenario planning for those people, assuming that they have a family of two adults and two children living in around Kingsford in a two-bedroom apartment with two kids in one room is $500 a week rent. The difference for them under the old regime and under the new regime is that previously they would get about $2,000 net disposable income. Now they will be getting about $1,500 net disposable income per fortnight. So they have lost about $500 per fortnight, and that is about 25 per cent lower.

Mr CIOBO: So a 25 per cent reduction.

Ms Gower : You can see it when on the phone to people living overseas and talking about how much money they are going to have to spend. When they talk to their colleagues about the cost of living in Sydney and what their expenses might be, they say to me: 'Why would I do it?'

Mr CIOBO: Sure. What about for those who are already here? What is the impact?

Ms Gower: We have had people say that they need to go home. I spoke to somebody probably about three weeks ago in our faculty of science who was looking at going home.

Mr CIOBO: So the Group of Eight is already noticing an intent or an actual exodus of people as a consequence of this change?

Ms Gower: Indeed.

Mr Payne: We should clarify that that figure is just one university.

Mr Bhatt: At Sydney University we bring in about 170 to 180 people in on 457s a year. So the pool at any one time could be about 300 to 400.

Mr CIOBO: What do you think the impact of this will be on Australia's research base?

Mr Bhatt: It will be dramatic because the cost of living in Australia is more expensive and trying to bring them from the centres of research in Europe and the States to a remote place like Australia is more difficult. The cost of living is a lot more expensive here; and when they do get here on a 457 visa after jumping through hoops they get positively discriminated against, because they have got to pay for their health, their schooling—even public schooling. Maintaining a residence exemption because that is only for maintaining a residence in Australia. So we are actually positively discriminating against 457s. We are putting out the red carpet for them to come and work for us—let us share your knowledge and research—and then we are pulling the rug underneath them and saying, 'Sorry, you have got to pay for all these expenses.' We have actually lost some people already who are now not coming here.

Mr CIOBO: So this change will result in an aggregate dumbing down of Australia's labour force?

Mr Bhatt : Absolutely. And there is a multiplier effect, as you will realise, with the education sector. We are not going to be able to collaborate in research, and most of our funding comes out of specific research project funds through from ARC and NHMRC. So what we will have to do is say, 'Sorry, we can't do that project,' or 'Can you fund us more?' So another part of the government will have to reimburse us for that, which is really a bit of a round-robin.

Ms Seddon : Can I add something to that. I work for PricewaterhouseCoopers.

Mr CIOBO: An alma mater of mine.

Ms Seddon : Brisbane, I understand. My clients come from many industries. One of the things that I actually shared with the committee in my introduction was that we have actually done a formal survey of our clients. We had 121 respondents in less than a week, which was a very high participation rate. Out of that came two things I think are relevant to your question. The first is that we did the survey in early June 2012 and 14 per cent of the respondents had already sent someone home or had someone go home. That was before we even had the final form of the law. A larger percentage expected that they will be sending people home or people will be choosing to go home. So 14 per cent before we have even got law. The other interesting statistic that comes to your question is that in an international global talent war the feedback from the survey was that there was going to be a significant issue with both talent attraction and talent retention within Australia. The statistics were that 55 per cent of the respondents expected to have and were already having issues in attracting people to Australia and separately 44 per cent expect to have difficulties in retaining current talent.

I think it is interesting that those statistics show there is significant negative impact on having people coming and staying in Australia. The impact of that for our clients is a skill shortage that leads to issues in ability to deliver on projects. We are also aware anecdotally that 14 per cent of the survey respondents are actually looking at terminating loss-making projects or projects that will become loss-making as a result of the changes or that actually cannot be delivered because they do not have the right skills here. They are also considering moving services and projects offshore and so completely out of the Australian tax net.

Mr CIOBO: Are you at liberty to cite some of the actual concrete examples?

Ms Seddon : Not really, I have to say, without my clients' specific—

Mr CIOBO: Are we talking about infrastructure projects, for example, or smaller projects?

Ms Seddon : We are talking about projects that involve services some of which go to infrastructure, so things like design services that may be a part of an infrastructure project could be moved offshore. Some of the other supply contracts are just not profitable and so as a business decision people have to decide whether they can continue that or whether they have to pass the cost on to the consumer or the client. They are things I am aware of, but with the significant infrastructure projects where there is construction the need for the 457 workers is really to fill a skills gap. My view is that it is not a build it and they will come. Most of the 457 workers working on construction are actually coming to build it in the first place.

Ms Lucas : We have anecdotal evidence along those lines for the IT industry. I have come across a scenario where the thought is to move that part of the business offshore now because it is too expensive to employ the people in Australia.

Mr James : Within John Holland we have got 160 people receiving living away from home allowance today. When these announcements came out I would have had at least 30 to 40 of them ring me directly to ask me to calculate what their pay would be after the rules have come in. The majority of those said, 'I might as well leave and go back home because it is not worth while for me to be here.' That has got a significant impact on a couple of areas of our work. We bring in skilled riggers which we cannot get within Australia. That will hinder that part of our business. So it has affected us. I cannot tell you how many of those people have left because I just do not know those numbers but initial conversations are that they want to leave.

Mr CIOBO: Would you be prepared to take on notice some of those exit numbers?

Mr James : Yes.

Mr CIOBO: So you said it is impacting on some of the projects John Holland are involved in. Are you at liberty to outline what some of those projects might be?

Mr James : Not at the moment. I can come back to you.

Mr CIOBO: Are you concerned that a consequence of a skill shortage would be that it will push up your labour prices?

Mr James : It will extend the contracts, it will extend the length of the projects. It could push up labour prices if we have then got to pay more to get these people back in. So yes, it will.

Mr CIOBO: So a consequence of this is that projects take longer and cost more money to deliver. Is that what you are saying?

Mr James : Yes.

Mr Wallace : Just on that point, I think that would be the case if you looked at some of the regional areas. In the Gunnedah Basin area that draws upon the Newcastle-Hunter Valley pool of labour, if those employees do not get the cost benefits of their living away from home allowance to travel up there and stay in Gunnedah then they may have to get workers from the Gold Coast, Perth and Queensland. That means additional costs for flying those workers to the job, normally three weeks in and then a week off and fly them back. That will be a cost that would be added to the project. That is a clear example of how those costs would go up.

Mr CIOBO: Do you think that a consequence of this policy change is that there is a greater likelihood of FIFO being viewed as a solution over the top of living away from home?

Mr Wallace : It could be. But the major issue for us would be the advice you would go to workers and give about this legislation. You used the term 'devil's advocate'. If I were at a workplace meeting saying to a couple of hundred workers, 'If you do not rent out your house, your LAFHA will be tax free. If you rent out your house, your LAFHA will be treated as income,' you would ask the question about what that would mean for local communities without houses being rented. There would be a lot of vacant houses, there is a housing shortage and all those types of things. That is one issue.

But then if they rent their house their LAFHA will be treated as income. What does that do for child support payments and all those other types of things? The economic driver says, 'Don't rent out your house,' but it is going to cause lots of problems just to pick up your LAFHA and have it as a separate allowance and not have it as wages. It just opens up a minefield for confusion in workplaces all over the country.

Mr CIOBO: Do any of the industry groups have a view about whether or not a likely outcome of this is an increase in the number of FIFO workers over those living away from home?

Mr Wallace : It will not necessarily advantage FIFO because FIFO has the same problem. If they do not keep a house then the housing will become taxable to them as well, whether it is an allowance that the employees pay tax on or whether it is housing the company has to pay tax on. So there is not necessarily an advantage to FIFO. FIFO is just another form of LAFHA, in effect.

Ms Lucas : We have seen more of a move towards people being encouraged to move permanently as opposed to living away from home. That is especially for people from overseas. They perhaps apply for permanent residency straight away; what is the point of coming on a 457 visa initially?

Mr STEPHEN JONES: I might have missed something but I would have thought that by definition a FIFO worker is not living away from home.

Mr CIOBO: That is not what my question was. My question was: is there likely to be an increase in the number of FIFO workers as opposed to those who are living away from home? Can I ask something of the AMWU. You made a comment earlier that you saw this as being a $10,000 per year exercise for your average worker; is that right? Could you talk to me more about the extra cost of—

Mr Wallace : It would be different for each individual. But if you use the example of someone—say, a 23- or 24-year-old—who does not maintain a home at the moment, they receive around $600 in LAFHA arrangements now. If that was to go to a taxable arrangement because they do not maintain a home, they would have to pay $200 tax on that. If they have costs incurred that are actually $600 a week then that would be a $200 burden on their weekly pay cheque. It would have to come from their wages and not their—

Mr CIOBO: So some of the most adversely affected from this policy change would be Australia's youngest workers that are just starting out; is that what you are saying?

Mr Wallace : It would be different groups, but it could be. Yes, they could be. It could discriminate against that class indirectly with this maintaining-the-home scenario.

Mr CIOBO: I get the impression that that is your concern; is that right?

Mr Wallace : That is one of our concerns, yes.

Mr CIOBO: So the unity ticket between John Holland and the AMWU, that is—

CHAIR: There often is, actually—more than you think.

Mr Wallace : I think everyone has an interest in making sure kids get a decent start in life.

Mr CIOBO: Absolutely.

Mr Wallace : There is commonality around that.

Ms Seddon : One of the issues I have is that a lot of companies have some fantastic training programs where young workers might be in a home office but then they get sent as part of a graduate program to go and experience other parts of the organisation in different parts of Australia or internationally. By having to have the bricks and mortar, which many of them will not have because they are only starting out in their careers, essentially every time you are sending someone to another location to train them up, to give them better skills and to make them a better worker you are actually going to have to pay tax on their accommodation costs. The individuals themselves are not going to be able to afford to pay for accommodation in some of the locations that they will be sent to. But that is a significant part of many graduate programs.

Mr Wallace : I am not sure how you communicate the message to all Australians about how this is going to take place. If you imagine a scenario where someone is getting paid at the top end of LAFHA in our industry, it is around $700 to $800 if you take out the higher bit of WA. All of a sudden you come to tax time and they say: 'You have rental income. You rented out your home here. This $700 a week is now not tax-free. It is not an allowance because you are not entitled to an allowance if you have rented out your house. There is $40,000 that you need to be taxed on now.' How do you deal with that issue?

Mr CIOBO: So this represents a massive increase in the tax take by the government.

Mr Ellis : No. I think it is fair to say that the forward estimates have substantially underestimated what that tax take might be.

Mr CIOBO: Can I ask Treasury about any modelling done about the impact of this on other salary on-costs such as payroll tax, workers compensation premiums et cetera?

Mr Robinson : We have not undertaken any explicit modelling of such flow-on costs. We are aware that there would be potential flow-ons for things like family tax benefit, for example, as people's reportable fringe benefits are incorporated into the income definition, but we have not been able to quantify those.

Mr CIOBO: This measure raises an extra $1.9 billion in tax. Is that per annum or over the forward estimates?

Mr Jacobs : Over the forward estimates.

Mr CIOBO: An extra $1.9 billion in tax over the forward estimates. Is it reasonable to assume, therefore, that there are significant additional salary on-costs for employers with respect to workers comp and payroll tax?

CHAIR: And super.

Mr CIOBO: And super, yes.

Mr Robinson : Yes.

Mr CIOBO: That is a reasonable expectation. But Treasury has no idea about what that would actually be?

Mr Leggett : It would depend on the other relevant tax bases. So it is difficult to comment, because it will depend on the payroll tax base the states and territories set as well as the other tax bases.

Mr Ellis : It will definitely impact, because whether it becomes a taxable fringe benefit or a taxable allowance it will flow into the payroll tax base. In many cases, even if it is a deductible living away from home allowance, it will still flow into the payroll tax base.

Mr CIOBO: So it is a double whammy, really. You have the whammy of a $1.9 billion tax increase coupled with the double whammy of potentially having to pay more for payroll tax, superannuation et cetera.

Ms Seddon : Can I also add that some employers are going to have to pay people more money to get them to where they need them to be. So there is a third whammy, to use your terminology, that businesses will have to pay more. Labour market rates will go up. The additional thing, which we will probably get to when we get to the transitional provisions, is that many employers are considering providing some transitional support to employees, mainly because we have had this uncertainty around the transitional rules for so long. They have had to make some decisions. That is also something that would offset the revenue to the government.

Mr CIOBO: At a time when we have global economic tumult and concerns about being able to keep people in jobs, this policy change is going to make it more expensive to employ people and make it harder for people to secure a job. Is that a reasonable comment?

Ms Seddon : I think it is going to present a lot of challenges to business, which are different depending on the businesses.

Mr CIOBO: A lot of challenges meaning more expensive?

Ms Seddon : A lot of it will be more expensive. A lot of it will be just trying to get people here, the expenses of not being able to do research, the expenses of not being able to deliver on projects and the expenses of having project times pushed out because you physically cannot get the right people to the right place, or you have everyone rotating every 12 months.

Mr Bhatt : One big risk as well as that relates to physical infrastructure projects. If you can afford to pay, you may pay for that, but if it is a service that can be offshored the country is going to lose not only that marginal tax but the whole revenue base of it. I think that is a big risk. We are dumbing down the country as well.

Mr CIOBO: Has Treasury looked at that? Have you looked at the substitution aspect of this and its impact on the likelihood of sending work offshore?

Mr Robinson : No.

Mr CIOBO: Do you normally look at leakage, or not?

Mr Robinson : I think it is probably a situation where there would be a lot of uncertainty as to the extent. Trying to quantify that would be a very difficult proposition.

Mr CIOBO: But, obviously, you have around this table a number of stakeholders who have expressed similar concerns directly to Treasury as part of your consultation period. Is this something Treasury was aware of as part of that consultation period? Is it something that you have looked at?

Mr Robinson : As I said, it is not something we are able to particularly quantify.

Mr CIOBO: No. I appreciate the modelling. I am just asking whether Treasury was aware that this was an issue as a consequence of the consultation that it undertook.

Mr Robinson : We certainly considered that it was a potential outcome.

Mr CIOBO: So did you try to qualify it or did you just dismiss it?

Mr Robinson : It is not a matter of dismissing it; it is a matter of saying that there is no basis on which you can start to quantify these sorts of effects. They are highly uncertain.

Mr CIOBO: Do Treasury feel that the qualitative aspect of the evidence we have heard today that is consistent with what you have heard in your consultations is credible?

Mr Robinson : I think you would have to say there is credible evidence to suggest there might be some of that behaviour occurring.

Mr CIOBO: So there is credible evidence that, as a consequence of this change, we could see projects—especially in the services sector—go offshore?

Mr Robinson : Again, the extent to which that might occur would be hard—

Mr CIOBO: But it is credible. I think you said it was credible. Is that credible?

Mr Robinson : Yes.

Mr CIOBO: Okay. Thanks.

Dr LEIGH: Many of the arguments that seem to have been raised here are the same as those that were originally raised against the introduction of fringe benefits taxation in the 1980s—essentially, that for workers there would be some impact if the taxes were imposed. But a tax expenditure has to be paid for by the rest of the population. I was wondering if Treasury has done some work in the distribution of this tax expenditure: does it fall disproportionately on lower-paid workers or on higher-paid workers?

Mr CIOBO: Chair, I put on the record that I object to this Orwellian doublespeak. I want that on the record. This notion that it is taxation expenditure is absurd.

Dr LEIGH: Absolutely. Every time you provide a tax break, someone has to pay for it.

Mr Ciobo interjecting

Dr LEIGH: That is the clear reality. We would all love to have our taxes cut. But the cost of that then goes to someone else. I want to know from Treasury who is getting the benefit of this tax expenditure at the moment.

Mr Robinson : Dr Leigh, one of the issues that we have around the reporting of the living away from home allowance is that most of the reporting is done in aggregate in the fringe benefit tax returns, and so we not have the opportunity of a rich source of individual level data, for example, to be able to get a good understanding of what the distribution of incomes is.

Dr LEIGH: Do we learn anything from looking at the regions in which this is claimed and the industries in which this is claimed, and the average wages there?

Mr Robinson : As part of the work on the development of the policy, the ATO undertook a survey of a set number of returns where living away from home allowances were reported, and we did get a variety of high-level information from that survey which gave us a little bit of information about distribution by states and so forth.

Dr LEIGH: We only have eight jurisdictions. Does it tend to be in high-wage or low-wage jurisdictions that living away from home allowance claims are highest?

Mr Robinson : It is hard to isolate the information to particular groups.

Ms Gower : Perhaps I can help with that. We have more than 2,000 employees who get a living away from home allowance or accommodation directly provided. About 1,200 of those are in remote areas, so that is 60 per cent. For our university, the University of New South Wales, of the 123 people who are currently receiving a living away from home allowance, the 77 per cent are at level B or below, which are the entry-level academic positions; their salaries range from about $62,000 per annum to about $87,000 per annum. So, for us, the majority of LAFHA recipients are on the lower scales of our academic classification scheme.

Dr LEIGH: So in the top half of Australian wage distribution?

Ms Gower : In our industry, in terms of the various classification levels, they are at the lower end, but clearly—

Dr LEIGH: I understand, but these tax expenditures, Ms Gower, are paid for by the whole Australian population. That is the relevant comparison, because they are the people who will be paying for it.

Ms Gower : We have not done any analysis on how the higher education industry pays compared to the rest of the industries throughout Australia. But the impact in our industry is more on our lower-paid workers than on the higher-paid workers.

Dr LEIGH: I understand the arguments that are coming forward about research and about encouraging young workers to get a good start. The question we as policymakers have to answer though is whether this is the best way of achieving those goals compared to the other ways in which governments spend money to boost research and to help the careers of young Australians.

Mr Bhatt : I understand where you are coming from in saying that it is above the average wage of the average Australian. Quite often people from overseas are discriminated against, as I mentioned earlier, in health, education and all those other factors. Effectively, they have to pay twice for the same benefit.

Dr LEIGH: I worked as an academic in a corridor where I was one of only two Australian-born academics. I understand many of those issues. The challenge is whether this is really the best way of spending taxpayers' money to boost research. It has to be compared, for example, in your industry to spending the same amount of money on boosting the ARC grants. It is not obvious to me that this is the most efficient way of achieving the worthy goals Mr Ciobo spoke about.

Ms Gower : The thing we need to clarify though is these people are working on ARC and NHMRC grants. We would not invite these people unless we really needed them. If we could get people locally we would. Often the ARC and NHMRC grants are such highly specialised areas of research that there might only be a handful of people across the world who have the necessary expertise. In order for us to get them in and fulfil the requirements of the grant, we need to attract them to Australia. What we are saying is the impact on our industry, which I presume is why we have been invited here today, will be that it will make it much more difficult for us to attract those people to come and work in Australia and to meet the requirements of the ARC and NHMRC grants.

Dr LEIGH: I understand that but our role is to think about equity and fairness across the whole population. A tax break for people in occupations starting with 'b' would improve the number of biotechnologists in Australia, but I am not sure Australians would regard that as fair and equitable.

Mr BUCHHOLZ: They would not think it was fair and equitable the way that you treat taxpayers' funds at the moment.

Mr STEPHEN JONES: I want to clarify something. Is it your contention that the government should provide the tax concession in the LAFHA for 457 and associated workers whether or not they incur additional cost?

Ms Gower : What we are saying is we identified some of those impacts on the current regime, which we have highlighted in our submission. What we have always focused on are the additional expenses that people incur when living away from home. That expense may not necessarily arise from maintaining two residences, and that is where we draw a distinction.

Mr STEPHEN JONES: I understand that but I need an answer on this. Is it your contention that somebody who comes over here to work in the sector on a temporary basis should attract the tax concessions on the LAFHA even in instances where the move does not incur additional costs?

Ms Gower : No. What we are saying is that there should be a tax concession to compensate them for the additional expenses associated with living away from home.

Mr STEPHEN JONES: If there are additional expenses.

Ms Gower : Indeed.

Mr Bhatt : Can I make the point that, firstly, we only bring 457 workers in on fixed term contracts. Secondly, we reimburse them for their expenses so it is not as if they are making any cash out of the deal here. What they do overseas with their primary residence if they have one is subject to the tax laws of that foreign country and it would be too intrusive of us to go back and say tell us what happens to your housing estate in Canada or wherever it is.

Ms Gower : My experience in talking to academics is that these are not people who are experiencing a windfall; they are people who view this current tax offset as a way to make it affordable for them to come here to live and work in Australia.

Mr Bhatt : I will make another point. With respect to school fees, in New South Wales, for example, public schools charge about $8,000 or $9,000 for a 457 visa holder with children. Whilst they might be able to get a so-called tax break and you say, 'Aren't they lucky they're getting that,' on an average salary they still have to pay 70 per cent of that out of their own pocket. For somebody in that $62,000 to $87,000 bracket, with a couple of kids, that becomes very expensive.

Mr STEPHEN JONES: My understanding of your evidence is that in the case of your institution you pay actual expenses?

Mr Bhatt : We reimburse them for actual expenses or we tell them that we want to see the receipt before we will reimburse them, as opposed to, 'Here's an allowance.'

CHAIR: I have a couple of questions before we go to transition arrangements. The submissions we have now received and the evidence to date, as I understand it, have been fairly consistent with the other consultation processes. Has there been any change—and I guess I am talking to Treasury—in views over that time or is this pretty much the feedback you received when the consultation process—

Mr Jacobs : The submissions have been pretty consistent as we have gone through. The government's approach has changed through that but the original submissions still stand. Obviously different approaches raise different issues and have different benefits and different costs.

CHAIR: Just to clarify whether LAFHA is income. For a business there are all the on-costs associated with paying a salary, all the super and payroll tax and all the rest of it is on top. For the employee, all the calculations—family tax benefit part A, child support—all of those things—

Mr Leggett : If there are means-tested impacts, then they will flow through. So if you have PAYG allowance it will increase their taxable income. If they are entitled to a deduction for those expenses, under the new system there will be no impact. To the extent that they are not entitled to these deductions because they do not maintain a residence or it is outside the 12-month period, then there is an increase in their taxable income and that may have flow-on impacts for other government benefits that are calculated on the basis of taxable income.

CHAIR: So the employee has two options: they can submit a PAYG variation form to take the deductions into account on a weekly basis?

Mr Leggett : To avoid withholding upfront, yes, to deal with the cash flow impacts.

CHAIR: Which is a compliance burden, I guess. Or they can do it at the end of the year and everything gets readjusted and there is a big mess.

Mr Leggett : Reconciliation—and they get a refund on their tax return.

CHAIR: Transition arrangements. Acknowledging that there are no transition arrangements for 457 visa holders who are currently under contract—I think we have covered that one as much as we probably need to.

Ms Seddon : Could I add one point to that. This matter is referred to in several of the submissions that were made in February, May and June. We have entered into double-taxation treaties with many countries. Those treaties include what is called a non-discrimination clause. Citizens of that country can ask to be treated as a citizen of Australia. We are of the view that the transitional rules fly in the face of those non-discrimination articles. Therefore, I would think it is reasonable to expect that there will be several applications coming in if these changes are passed into law.

CHAIR: I read that in your submission and a number of others and have asked for a bit of a briefing on that.

Mr Jacobs : We have considered those issues in developing the legislation and we do not think they breach double-tax agreements. The 'Statement of Compatibility with Human Rights' in the explanatory memorandum has some information about that.

Ms Seddon : I am not talking about the ongoing rules; I am talking about the transitional rules.

Mr Leggett : Even on a transitional basis, we have considered those issues and, in our opinion, they do not breach our double-tax agreements.

CHAIR: We have received the submission and we know it is there. There was also mention in a couple of the submissions about the DIAC rules and if you change the payment arrangements for an overseas worker you have to get approval through DIAC. Does anybody have any further information on that, otherwise I will just go to DIAC and get it.

Mr Bhatt : Under existing DIAC rules, we need to notify DIAC again of any change in their visa condition.

CHAIR: Do you consider that you would have to notify DIAC for every one of your 457 visa holders?

Mr Bhatt : Probably not, no, because they have not changed their condition of employment.

CHAIR: Regarding other transition arrangements: 'material change in a contract'.

Mr Ellis : Can I start by saying that the legislation does not actually use those words. The legislation uses the words 'termination of a contract'. 'Material' is something that has been imported into it through the explanatory memorandum and even then the interpretation of what 'material' might be will mean that most people will not get the transition for very long. It is still a concern that, if you look strictly at the words in the legislation: any time and any variation, that is it; it is all over.

CHAIR: Is that Treasury's understanding—that if I get a CPI adjustment, for example, that is the end?

Mr Jacobs : No. We would like to say that, regarding the issues that have been raised throughout this, about the uncertainty that is created by the explanation that is in the explanatory memorandum, we are working on ways in which we could clarify that—making it more certain that there has to be a material variation and not just a change in pay rates as a result of a manual pay increase. We would look at ways at how we could provide greater certainty about the level of variation that is required before we would say, 'You're into a new employment arrangement for the purpose of the 12-months rule.'

CHAIR: Does that include promotion?

Mr Jacobs : This is part of the work that we want to do. It could be that that is a new arrangement, but this is what we will seek to clarify. I guess one option for us is a better advised explanatory memorandum.

CHAIR: I have actually read your submission, so I can make the arguments for you, but I think you need to do that yourselves. If you have other issues on the transition arrangements, now is your chance.

Mr Lucas : We would strongly recommend that the idea be that the variation is to do with the actual living away from home arrangements. It is about whether you are actually required to live away from home or move to a different place, or whatever, or the pay attached to that—that is, the payment of living away from home benefits or allowances rather than it being anything to do with other salary payments, which might be seen as totally separate from your living away from home arrangements. I think that is clear in our submission.

Mr Ellis : Even then, if your rent varies or if the tax office annual reasonable amounts for food varies, that should not be a variation. That defeats the whole purpose of the transition arrangements. I would go slightly further than what I think I heard Elizabeth say in that it should only be if there is some sort of variation in the arrangements relating to you living away from home. I do not think that pay rises, whether they be annual pay rises or for promotion or for anything else, should impact. If you have been living away from home and otherwise qualify for the transition, it should not matter that you go through your normal cycle of remuneration reviews and promotion.

Ms Seddon : I strongly support that a pay rise or a promotion of itself should not cause an issue. If I could take it just one step further on living away from home, if someone chooses to switch between a reimbursement or an allowance, then that should not be a material variation, because you are still receiving a benefit. I would also like to submit that, if there is an extension of time to a living away from home arrangement because of a business need—and our submission includes an example where a project runs over time, which happens, and someone is therefore needed for another six or 12 months to the original living away from home agreement, and they are still doing the same thing, they are still living away from home and the reason for the change is that there is a business need and an extension to the project time—it should not be a variation to an employment contract for the purpose of the transitional rules.

Ms Cleaver : I think we all have to remember that employees have to determine in their own tax return when their deduction ceases. We have done a little scenario just with residents. It is the same employee, the same base engineer, but it just depends on whether he maintained a home or did not or the time of the year he entered into the contracted promotion. There are six scenarios and five of those have a different outcome in terms of when his deduction ceases. How can individual employees like the AMWU guys work out when their transitional arrangements ceased and their deductions ceased? I am happy to table that.

CHAIR: Yes. We will have to do a little thing at the end to accept it. We will wind up. I am just running through my list to make sure I have covered all the issues. I ask the universities: how long are you a standard 457 contracts?

Mr Bhatt : The 457 visas are for four years and our fixed term contracts are for four years as well—for five years maximum, subject to the projects.

Ms Gower : But often the contract term depends on the purpose of the person being in Australia. If it is for a particular research grant the period of the contract would align with the period of the grant, and that could be anywhere between one year and four years.

CHAIR: Can I go back again very quickly to the drive-in drive-out people who use their own vehicles; I think I was the only one who played devil's advocate on that. Does anyone else have an issue with the fact that the treatment of drive-in drive-out varies depending on whether the vehicle is provided or whether you use your own and are reimbursed?

Mr Wallace : I am not exactly sure. There are individual circumstances in what happens on site.

CHAIR: I understand.

Mr Wallace : I did want to make one point on the transitional stuff, on the effect on awards and agreements. Some agreements will say at the moment that they get paid a $600 tax-free allowance. With the introduction of the legislation the employer would still have to abide by that obligation in the agreement or it would be a breach of contract. So therefore they would have to provide the employee $600 without having to pay tax on it. But if the employee rented out their house they would not be, I guess, available for that, so the employer would have to make up the tax payment, which could be as much as $200 per person. The company could not breach the agreement or they would be liable to all sorts of things. So there is a transitional arrangement with awards and agreements that would come into effect.

Mr Stacey : The employer would have to gross up the payment or the PAYG that the employee will bear so that their after-tax position remained at $600. So the cost would then go to, say, $1,000 for the employer.

Mr Ellis : And that is the real concern. I have one client in the construction industry where, clearly across a whole range of things but including infrastructure projects, their annual LAFHA payments purely and simply under awards are in the realm of $28 million. So if they find themselves in a situation where they have to gross those payments up, that is a substantial cost for them in an environment that is pretty tough.

Mr Le Compte : And because the contracts are on foot they would not be able to factor that back into the arrangements with the client.

Mr Ellis : I could imagine the employer saying to the unions, 'We want to vary the agreement to give workers $200 a week less.' The workers are not going to vote for those variations to stop the employer paying. So there is no way out of it, really, for them than to pay it.

CHAIR: Are there any other final comments?

Ms Cleaver : Yes. We have talked about the employees' lot but there is still the accommodation directly provided by the company that is in the FBT net and that onus on the company to work out whether we are going to have an 'otherwise deductible' for our FBT purposes in terms of what information we can get from employees about them maintaining their own home; that is particularly onerous. Of our situation we are providing 1,600 employees camp or direct accommodation. How do we prove whether they are maintaining their own home to get that otherwise deductible reduction, as a practical matter?

CHAIR: Yes. I understand the tax office designed a form or there will be a form for that.

Ms Cleaver : That is the pay-as-you-go variation, but I do not think that is going to help us in terms of our liability for FBT—

Mr Leggett : With the otherwise deductible rule, if the same basis applies as with every other part of the otherwise deductible system, employers will have to get a declaration from the employee at the end of the FBT year. The employee basically claims that, 'Yes, I would have been entitled to a deduction had I been given the money—

Ms Cleaver : So for our 1,600 people, monitoring when they moved into accommodation, when they moved out for the 12 months, asking them if they are maintaining their own home, whether they are renting it out to someone—don't you think that is a slight invasion of privacy? And how are we going to prove that?

Mr Leggett : The employee does not have to claim the information in there. All they have to do is tell you that it is otherwise deductible or not. That is what happens in the declaration.

Ms Cleaver : It is us that pay that FBT, not the employee. So they will not care.

Mr Leggett : But in the declaration the employee does not explain why they can get the deduction; they just explain that they are—

Mr Ellis : What if they give a declaration when they are clearly not entitled to?

Mr Leggett : That is an issue with the existing otherwise deductible system. There are penalties for employees who happen to lie—

Mr Ellis : But there is much more risk around this, though.

Ms Cleaver : It will get much worse.

Mr CIOBO: That is an interesting comment.

CHAIR: I think it was penalties for employees, you said.

Mr Leggett : Yes.

Mr Ellis : No, employers.

Mr Leggett : In the declaration, it would have been the employee.

CHAIR: But I understand the compliance burden issue because of the changes as well.

Mr CIOBO: Can I explore that further. You are saying employers will now be obliged to make personal inquiries about their employees' status with respect to homeownership or rental?

Ms Cleaver : Yes, absolutely.

Mr CIOBO: And failure to undertake those inquiries will possibly result in what consequences?

Ms Cleaver : We will pay the fringe benefits on the accommodation provided at the rate it is provided at. So the accommodation in a mining camp might be quite high. It might be $400 or $500 a day. It is not remote, because we have a lot of mining sites or camp sites that are not remote.

Mr CIOBO: As an employer, do you have the right to ask those questions?

Ms Cleaver : I don't know. I don't think so.

Mr Bhatt : I think that breaches privacy.

Mr CIOBO: I am interested to know: has Treasury looked at that?

Mr Leggett : We have to clarify that. Employers do not need to ask employees those questions and employees do not have to provide that information. All the employer needs to get from the employee is a declaration that it is otherwise deductible to the employee, in line with the otherwise deductible rule as it applies throughout the entire FBT system. So long as the employer has that declaration in their hands, the employer has done all they have to do and it is exempt from FBT.

Mr CIOBO: If an employee does not provide that declaration?

Mr Leggett : Then it is taxable to the employer.

Mr CIOBO: Is that a common problem?

Mr Leggett : It has not been raised with us as a common problem with the operation of the FBT system to date.

Mr CIOBO: What about where an employee has left the employ of someone? How do you track down that paperwork?

Mr Leggett : It has not been an issue that has been raised with us in the last 20-odd or 30 years that the FBT system has been operating.

Ms Cleaver : We pay that. Last year we paid half a million dollars to walk-out employees who did not give us a declaration. So we just bear the cost.

CHAIR:    It is an existing problem. It is not new.

Mr CIOBO: Why would Treasury be completely oblivious to, in this particular case, employers having to pay hundreds of thousands of dollars and, in aggregate terms, millions of dollars of additional tax because employees have left? Why would you be unaware of that when clearly it is a major problem for employers?

Mr Leggett : We can only be made aware of these issues if they are brought to our attention. If they are not brought to our attention—

Mr CIOBO: So it is the employers' fault?

Mr Leggett : We cannot be out there presuming what is happening in practice. If there are concerns with the FBT system, there are mechanisms available for employers to bring them to our attention and for us to act on them. Those mechanisms have not been used in this case.

Mr Jacobs : We could invite the ATO or they could take on notice whether or not those issues have been raised.

Ms Cleaver : They have been becoming more widespread with this issue of maintaining their own homes. We can bear half a million dollars worth of costs, but for potentially 1,500 residents who are not maintaining their own homes that is a huge cost.

Mr CIOBO: What is the ATO's view?

Mr Bailey : It is an issue in the current system, but I will take on notice how many complaints we have had about it. Anecdotally, we do not seem to get a huge amount of complaints about the otherwise deductible rule.

Mr CIOBO: That is by volume, I am assuming?

Mr Bailey : By volume?

Mr CIOBO: Yes, not by value.

Mr Bailey : No.

Mr Ellis : The difference is that it is relatively straightforward in most scenarios where the otherwise deductible rule now applies. Employees know if they have incurred an expense that relates to their work. This is much more complex. As our colleagues from the union over there will testify, it is going to affect blue-collar workers who are not bookkeepers and do not know much about tax. The chances are they are going to give an incorrect declaration or they are not going to give one. Either way, that becomes an issue from an employer perspective.

Mr CIOBO: I can absolutely have sympathy for that. This is in no way maligning employees but, human nature being what it is, if it does not directly impact on you, I think most people would feel less inclined to be particularly concerned about the impact it might have on a former employer, especially if you have ceased employment and especially if you left in bitter circumstances. Do you think it is a bit of a luxury for the ATO to adopt the view that it is not really a problem for them?

Mr Bailey : People can take these policy issues to government and suggest changes to the FBT law.

Mr CIOBO: I think that is what they are doing today.

Mr Bailey : It does not seem to be a huge issue, by volume. I can take it on notice how many complaints we have received.

Mr CIOBO: I have employer stakeholders saying that they can absorb a cost of $500,000. That is a nice position to be in, but clearly the evidence we have taken just in the last five minutes makes it clear that this is a problem and it is going to become a bigger problem. What is your response to that?

Mr Bailey : I think we should give an evidence based answer to that and do an analysis of the complaints we have received thus far.

Mr CIOBO: So we are pushing ahead with this system—and Treasury was completely unaware that this was even an issue—ignorant of the consequences of this on employers. Because this is happening. That is why we are reviewing it. Is that the situation? You have not actually looked at this before? The ATO says, 'Let's adopt an evidence based approach.' You were unaware that this was a problem.

Mr Jacobs : In effect we are building on an existing system, which is the ability for employees to give employers declarations.

Mr CIOBO: It is a problem the ATO acknowledges exists. So there is a system already that has a problem that is now going to be compounded. So you are pushing ahead ignorant of the problem or unaware of the problem? The evidence we just took was that you were unaware of the problem.

Mr Jacobs : We would say that it has not been brought to our attention that there are significant issues with the use of declarations.

Mr CIOBO: So, now that it has been brought to your attention, what is Treasury's view?

Mr Jacobs : It really is a matter for how employers go about their arrangements in terms of requiring employees to make to make declarations.

Mr CIOBO: I am hearing that it is not Treasury's problem.

Mr Jacobs : We will review the submissions that have been made. The ATO have said they will look at what evidence they have had in the past, and we will see what can be done in terms of addressing those issues.

Mr CIOBO: It is a pretty big problem, isn't it? If you have an increased focus on the need to substantiate this, there is already an existing problem and this is about to become much more widespread—I am actually a little indifferent to the by-volume issue and am more concerned about the by-value, although I would like to adopt best practice and say that this should apply as a matter of importance full stop—it is potentially a significant problem, isn't it?

Mr Jacobs : You have other people that you could ask about the same issue.

Mr CIOBO: I am asking Treasury. They are saying it is a problem. I am asking whether you acknowledge that it is a problem.

Mr Jacobs : We have heard from one, and I can understand that from that perspective it is a problem for that employer. What arrangements could be put in place to address that—

Mr Ellis : It is a problem of the new regime.

CHAIR: Okay. We might have to leave it there. It is certainly something that has been raised in terms of the changes to LAFHA. It is now with this inquiry. Did anyone have a final comment?

Ms Gower : There is also an issue that universities had flagged about a potential unintended impact on two other unique categories of visa holders—419 visa holders and 442 visa holders—which are specific to the university sector. Those are visiting academics and occupational trainees. I do not know if there is some time to talk about that issue, but it is certainly a pressing issue in the view of the Group of Eight universities.

CHAIR: There is probably not time to talk about it. I have read your submission but do not recall seeing it in there. Is it in the submission?

Ms Gower : It is in the submission, yes.

CHAIR: Then we will all go back to your submission.

Ms Gower : Thank you.

CHAIR: It is the wish of the committee that the document titled 'Issue to new arrangements: transitional and employees', presented by the Australian Constructors Association, be taken as evidence and included in the committee's records as an exhibit. There being no objection, it is so ordered. Thank you for your attendance here today. If you have been asked to provide additional material, would you please forward it to the secretariat as soon as possible. You will be sent a copy of the transcript of your evidence to which you may make corrections of fact. Please check with the Hansard reporter before you leave in case they need to clarify any details concerning your evidence. Can I have a resolution that the committee authorise publication, including parliamentary database, of the proof of transcript of the evidence given before it at the public hearing today?

Mr CIOBO: So moved.

CHAIR: There being no objection, it is so resolved. I declare this public hearing closed.

Committee adjourned at 12 : 23