July 2023: Tax deductions

Claiming GST credits for employee expense reimbursements

The ATO reminds employers to be aware of when they can (and cannot) claim GST input tax credits on employee reimbursements.

Taxpayers may be entitled to claim GST input tax credits for payments they have made to reimburse employees for a taxable expense that is directly related to their business activities.  A ‘reimbursement’ is provided when a taxpayer pays their employee the amount, or part of the amount, of a particular work-related purchase they make.

Taxpayers are not entitled to a GST input tax credit if they pay their employee an allowance, or make a payment based on a notional expense, such as a cents-per-kilometre payment, travel, or meal allowance.  An ‘allowance’ is provided when a taxpayer pays their employee an amount for an estimated expense without requiring them to repay any excess.

Taxpayers are also not entitled to a GST input tax credit if:

  • they reimburse non-deductible expenses (such as entertainment expenses);
  • they reimburse expenses that relate to input-taxed supplies that they make; or
  • their employee is otherwise entitled to the GST input tax credit

Taxpayers should remember that, as with all GST input tax credit claims, they will be expected to hold sufficient evidence to substantiate their claim.  This will generally be a tax invoice for the purchase that is being reimbursed.

The ATO advises taxpayers who have made a mistake, or who have incorrectly claimed GST input tax credits on items that were not reimbursements, to make a voluntary disclosure.

Residential property purchased illegal SMSF schemes

The ATO has recently warned taxpayers to watch out for illegal early release schemes that use an SMSF to help members buy property in their personal name.

These schemes often target first home buyers wanting to enter the Australian property market who are purchasing a house and land package.  They may be structured differently, but typically involve the following:

  • set up or use of an SMSF;
  • roll-over of a member’s super benefits from an existing fund to the SMSF;
  • SMSF investing in a property trust for a fixed period and rate of return, being a contributory fund with other investors;
  • on-lending of money by the property trust to individuals to help them purchase real property, secured by mortgages over the property.

Once the investment is in place, the member gains access to money from a third-party entity to help the fund purchase residential property under an arrangement commonly referred to as a ‘loan’.

Serious penalties apply for trustees of SMSFs that have breached the super laws, including being personally liable to pay an administrative penalty, and being disqualified from acting as trustee.

The ATO advises SMSF trustees who are involved in these types of schemes to make a voluntary disclosure.

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Why is my tax refund so small?

As part of the previous Government’s efforts to flatten out the progressive individual income tax system, a time-limited low and middle income tax offset was introduced. The lifespan of the offset was extended twice, partly as a stimulus measure in response to COVID-19. The offset delivered up to $1,080 from 2018-19 to 2020-21, and up to $1,500 in 2021-22 for those earning up to $126,000. This was a significant boost for many people each tax time and bolstered the tax returns of millions of Australians. For many, the end of this offset has meant that their tax refund has reduced dramatically compared to previous years.

Do we pay more tax than other nations?

Australia relies heavily on income tax, collecting 40% of tax revenue from personal income. The Employee tax on labour income looks at our take home pay once tax is taken out and benefits have been added back in. This shows that the take home pay of an average single worker is 77% of their gross wage compared to the OCED average of 75.4%. For the average worker with a family (one married earner with 2 children), once tax and family benefits are taken into account, the Australian take home pay average is 84.1% compared to the OECD average of 85.9%. All of this means that Australia is a high taxing nation but returns much of that in the form of means tested benefits.

Is a second job worth it?

From a tax perspective, Australia has a progressive income tax system – the more you earn the more tax you pay, and access to social benefits tapers off.  It’s important when looking at a second job to understand your overall position – how much you are likely to earn, your costs of generating income, and what this income level will mean.

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Changes to deductions this tax time

Taxpayers who are small business owners operating from home, or who use a vehicle for business purposes, need to be aware of some changes when claiming deductions this tax time, including the following.

Cents-per-kilometre method – The cents-per-kilometre method for claiming car expenses increased from 72 cents to 78 cents per kilometre in the 2023 income year.

Taxpayers can use this method if they are a sole trader or in a partnership where at least one partner is an individual.  This method is based on a set rate for each kilometre they travel for work-related use and allows them to claim a maximum of 5,000 kilometres per car, each year.

For taxpayers using this method, the 78 cents per kilometre rate covers all their vehicle running expenses, including registration, fuel, servicing, insurance and depreciation.  Taxpayers using this method cannot claim these costs separately.

Car limit for business owners – The car limit has also increased to $64,741 for the 2023 income year.  The car limit is the maximum value taxpayers can use to work out the depreciation of passenger vehicles (excluding motorcycles or similar vehicles) designed to carry a load of less than one tonne and fewer than nine passengers.

Work-from-home business expenses – For the 2023 income year, the ‘fixed rate method’ (for taxpayers operating their business from home) increased from 52 cents to 67 cents per hour worked from home, and taxpayers are no longer required to have a dedicated home office space.

The fixed-rate method covers electricity, gas, stationery, computer consumables, internet, and phone usage.  Taxpayers can also claim separate deductions for expenses not included in the hourly rate, such as the decline in value of depreciating assets, e.g., laptops or office furniture.

There have also been changes to the records taxpayers need to keep for their work-from-home deductions.  For more information, taxpayers can refer to ‘records you need to keep’ on the ATO’s website.

Lodgment requirements for non-charitable not-for-profit entities

The ATO has recently advised that, from 1 July 2023, non-charitable not-for-profit entities with an active ABN which self-assess as income tax exempt, will be required to lodge an annual self-review return to access an income tax exemption.

The new reporting requirements do not apply to entities that do not have an ABN, or to charities registered with the Australian Charities and Not-for-profits Commission (‘ACNC’).

The annual self-review return is required to be lodged from the 2024 financial year.  It will be available for lodgment from 1 July 2024 using the existing Online Services platform.  For entities that satisfy the legislative requirements for an income tax exemption, the first lodgment of the new return is not due until 1 July 2024.

Non-charitable entities that do not satisfy the legislative requirements for an income tax exemption may be taxable.  The ATO advises these entities as follows: “Don’t worry, you have time to prepare.  We’re working through the support you may need to work out your assessable income so you can lodge a Return Not Necessary if your assessable income is under $416 or an Income Tax Return if your assessable income is greater than $416.”


Use of an individual’s fame by related entities

The ATO recently released Taxation Determination TD 2023/4 – Income tax: use of an individual’s fame by related entities, (previously released in draft form as TD 2022/D3) to help individuals understand the income tax implications of the use of their fame.

The determination applies to arrangements where an individual with fame establishes a related entity (e.g., a family trust or company), and enters into an agreement with that entity for the use of their name, image, likeness, identity, reputation and signature (referred to as ‘fame’ for the purposes of the determination).  The related entity then agrees with other entities for their authorised use of the individual’s fame in return for a fee.

In Australian law, an individual with fame has no property in that fame, and therefore cannot vest or transfer any property in their fame to another entity.  Exploitation of an individual’s fame can be done by way of agreement for a fee.  Where a related entity is a party to such an agreement, it is incapable of authorising the use of the individual’s fame by other entities, as the agreement does not vest any property in the related entity.  The fees paid for use of the individual’s fame will be ordinary income of the individual and assessable to them under S.6-5 of the ITAA 1997 as ordinary income.

Under the compliance approach, the ATO will not devote compliance resources to apply the views expressed in the new TD  to income derived before 1 July 2023 from arrangements which are consistent with the principles outlined in Draft Practical Compliance Guideline PCG 2017/D11 (which was withdrawn on 24 August 2018).

Note that the ATO’s prior guidance only applied to professional sportspeople, but TD 2023/4 applies to entertainers, actors, entrepreneurs, artists, influencers and professional sportspeople, as well as other public figures.

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