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Notes Day 1

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NTAA Member #3105935 (Ravinder Chukka)

NTAA’s 2021
TAX SCHOOLS
DAY 1 SEMINAR

Presented by
James Deliyannis & Rebecca Morgan

on behalf of the
National Tax & Accountants' Association Ltd.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

IMPORTANT INFORMATION

Statement of purpose and intention

These seminar materials have been produced for the purpose of continuing professional
education seminars provided by the National Tax and Accountants’ Association Ltd (‘NTAA’) to its
members. Those members are professional accountants, tax agents and tax advisers to whom
the NTAA provides continuing education in relation to matters of taxation and accounting.
The information contained in these seminar materials together with anything said at any time
during the seminars which are conducted by reference to it, including during periods of informal
discussions, (‘seminar information’) is intended to be educational and used as a guide only. The
seminar information is not intended to constitute advice.
A person should not act on the basis of the seminar information as it has been generalised for
educational purposes. In particular, the seminar information does not consider all of the matters
that might be relevant to a particular client in particular circumstances. As the seminar information
may apply differently to different people in different circumstances, the seminar information
should not be used as a substitute for expert advice.
Seminar information is not financial product advice.
The NTAA and those who present the seminar information do not hold an Australian Financial
Services Licence nor are they otherwise authorised to provide financial product advice pursuant
to the Corporations Act 2001.
Whenever you see this symbol in these seminar materials, it identifies an example of a matter
which may require the intervention of a person who is licensed or authorised, in order to give
financial product advice. This has been done to highlight areas of particular concern. Note that it
should not be assumed that, because there is no warning symbol, no licence or authorisation is
required.
A person who is not licensed or authorised should not give financial product advice. An
unlicensed or unauthorised person can however provide factual information. ASIC regulatory
guides 36 and 244 explain the difference between financial product advice and factual information
(it is also noted that a limited exemption applies to registered tax agents or BAS agents (within
the meaning of the Tax Agent Services Act 2009). That exemption is set out at S.766B(5)(c) of
the Corporations Act 2001).
Private Binding Rulings
Any Private Binding Ruling (‘PBR’) referred to in these seminar materials (as published on the
ATO’s register) cannot be relied upon as precedent or used for determining how the ATO will
apply the law in other cases. This is because a PBR is only binding on the ATO in relation to the
specific taxpayer to whom the ruling was issued, some of the material facts have been removed
in preparing the edited version for publication on the ATO’s website, and the PBR has not been
updated by the ATO to reflect, for example, changes in legislation and any changes in the ATO’s
view on how the law applies.
Disclaimer
The NTAA, its directors, employees, contractors, consultants, presenters, related entities, authors
and anyone else involved in the production of the seminar information, expressly disclaim any
and all liability to any person, whether a purchaser or not, for the consequences of anything done
or omitted to be done by any such person relying on any part or the whole of the seminar
information, including the appearance or omission of a warning symbol.
The seminar information may be subject to change as taxation, superannuation and related laws
and practices alter frequently and without warning.
All persons and other entities appearing in any Examples or Case Studies in these seminar
materials are fictitious. Any resemblance to real persons or entities, living, dead or otherwise, is
purely coincidental.

© National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

Exemptions and concessions

The seminar information has not taken into account the various Legislation, Practice Statements,
Revenue Rulings and General Guidelines issued by State and Territory revenue authorities. This
may have an effect on the application of any exemptions and concessions referred to in these
seminar materials. The application of exemptions and concessions are further subject to all
relevant conditions and requirements being met.
Copyright
© Copyright 2021 National Tax & Accountants' Association Ltd.
All rights reserved. Except as permitted by the Copyright Act 1968, no part of this information
may be reproduced or published in any form or by any means, electronic or mechanical, including
photocopying, recording, or by information storage or retrieval system, without prior written
permission from NTAA.
Reproduction in unaltered form for your personal, non-commercial use is permitted. Other than
for any use permitted under the Copyright Act 1968, all other rights are reserved.
Law
The law is stated as at 31 March 2021.
Acknowledgments
The preparation of these seminar materials has involved a tremendous amount of work and
commitment by James Deliyannis, Senior Taxation Manager.

A special thank you should also go to Rebecca Morgan, Taxation Manager, for her dedicated
assistance in writing and reviewing various segments of these seminar materials.

Thank you also to the following people:

• Siobhan Simpson, Taxation Manager, for her assistance in writing the “New ATO rulings for
travel expense claims” segment of these seminar materials.
• Audrey Teoh, Taxation Specialist, for her assistance in reviewing parts of these seminar
materials.
• Melanie Cvetkovic, Digital Marketing Coordinator, for her assistance in grammatically
reviewing these seminar materials.
• Rebecca Morgan, Taxation Manager, for updating the 2021 Day 1 Tax Schools software.
• Kristyn House, Marketing Manager, for her assistance with project managing the seminar
and with these seminar materials.
• Spresa Kurto, Personal Assistant, for her assistance in collating these seminar materials.
Finally, a special thank you to the families of the presenters, for their understanding and support
whilst James and Rebecca undertake their preparation and film/present this seminar.

Presented by:

James Deliyannis, Senior Taxation Manager

&
Rebecca Morgan, Taxation Manager
On behalf of the National Tax & Accountants’ Association Ltd
29-33 Palmerston Crescent
South Melbourne Vic 3205
Telephone : (03) 9209 9999 Facsimile : (03) 9686 4744

© National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

List of common acronyms

We (along with the ATO, and most others in the tax world) often use acronyms to shorten otherwise
unwieldy tax and related terms. Following is a list of some of the most common acronyms used in
tax and superannuation discussions. This is designed to be a handy, quick-reference guide, but it
should be noted that it is not intended to be exhaustive, and not all of the acronyms set out below
will necessarily be used in this set of seminar notes.
AAT Administrative Appeals Tribunal
ABN Australian Business Number
ABP Account based pension
ACN Australian Company Number
ACNC Australian Charities and Not-for-profits Commission
ACR Auditor contravention report
AFSL Australian Financial Services Licence
APES Accounting Professional and Ethical Standard(s)
APRA Australian Prudential Regulation Authority
APSI Alienation of Personal Services Income
AR Authorised Representative
ASIC Australian Securities and Investments Commission
ASX Australian Securities Exchange
ATI Adjusted Taxable Income
ATO Australian Taxation Office
ATO ID ATO Interpretative Decision
AUASB Auditing and Assurance Standards Board
AWOTE Average Weekly Ordinary Time Earnings
BA Bankruptcy Act 1966
BCT Business Continuity Test
BDBN Binding death benefit nomination
BFA Binding financial agreement
BRE Base rate entity
BRP Business real property
BSA Buy-sell agreement
CA Corporations Act 2001
CC Concessional contribution
CDBIS Capped Defined Benefit Income Stream
CGT Capital Gains Tax
CM&C Central Management and Control
CMT Child maintenance trust
COR Condition of release
COT Continuity of ownership test
CRB Credit Reporting Bureau
CSHC Commonwealth seniors health card
DAS Dividend Access Share
DASP Departing Australia Superannuation Payment
DCT Deputy Commissioner of Taxation
DICTO Dependant (Invalid and Carer) Tax Offset
DHS Department of Human Services (including Centrelink)

© National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

DIS Decision Impact Statement

DPN Director penalty notice
DV Diminishing Value
DVA Department of Veteran Affairs
ECC Excess concessional contribution
ECPI Exempt current pension income
ECT Excess contributions tax
ED Exposure Draft
EFLE Entertainment facility leasing expense
ENCC Excess non-concessional contribution
EM Explanatory memorandum (to a Bill)
ESS Employee Share Scheme
ETB Excess transfer balance
ETP Employment termination payment
FBT Fringe Benefits Tax
FBTAA Fringe Benefits Tax (Assessment) Act 1986
FCA Federal Court of Australia
FCAFC or FFC Federal Court of Australia (Full Court) or Full Federal Court
FCT Federal Commissioner of Taxation
FL Act or FLA Family Law Act 1975
FLS Regulations Family Law (Superannuation) Regulations 2001
FMDs Farm Management Deposits
FOFA Future of Financial Advice (reforms)
FWA Fair Work Act 2009
GIC General interest charge
GST Goods and Services Tax
GST Act A New Tax System (Goods and Services Tax) Act 1999
GSTD Good and Services Tax Determination
GSTR Goods and Services Tax Ruling
ID Interpretative Decision
IFBA Individual Fringe Benefits Amount
IGT Inspector-General of Taxation
IHS In-house software
IPP Individual Professional Practitioner
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
ITAR Income Tax Assessment Regulations 1997
ITC Input tax credit
ITRA Income Tax Rates Act 1986
IT(TP)A Income Tax (Transitional Provisions) Act 1997
JV Joint venture
LAFH Living-away-from-home
LITO Low income tax offset
LMITO Low and middle income tax offset
LCG (or LCR) Law Companion Guideline (or Law Companion Ruling)
LPR Legal personal representative

© National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

LRBA Limited recourse borrowing arrangement

LTCs Low tax contributions
LVP Low-value pool
LVR Loan-to-value ratio
MLP Market linked pension
MNAV Maximum net asset value (test)
MR or MRE Main residence or Main residence exemption
MSV Margin Scheme Valuation
MVPR Market valuation private ruling
MVSR Market Value Substitution Rule
NALI Non-arm’s length income
NCC Non-concessional contribution
NCL Non-commercial loss
NGUT Non-geared unit trust
NTLG National Tax Liaison Group
PAYGW Pay-as-you-go withholding
PB Preserved benefit
PBI Public Benevolent Institution
PBR Private binding ruling
PCG Practical Compliance Guideline
PDS Product Disclosure Statement
PHI Private Health Insurance
PII Professional indemnity insurance
PPR Promoter penalty regime
PSB Personal Services Business
PSI Personal Services Income
PSLA Practice Statement Law Administration
PUA Personal use asset
RESC Reportable Employer Superannuation Contribution
RFB or RFBA Reportable Fringe Benefits or Reportable Fringe Benefits Amount
RNPB Restricted non-preserved benefit
RSA Retirement savings account
RSE Registrable Superannuation Entity
SAF Small APRA Fund
SAN SMSF Advisers Network
SBCs Small Business Concessions
SBE Small Business Entity
SBPP Small business participation percentage
SBR Standard Business Reporting
SBRR Small Business Restructure Rollover
SBT Same business test
SCT Superannuation Complaints Tribunal
SG Superannuation guarantee
SGAA Superannuation Guarantee (Administration) Act 1992
SGC Superannuation guarantee charge
SIC Shortfall interest charge

© National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

SIRN Superannuation Industry Relationship Network

SIS Act Superannuation Industry (Supervision) Act 1993
SIS Regs Superannuation Industry (Supervision) Regulations 1994
SMSF Self-managed superannuation fund
SMSFD Self Managed Superannuation Fund Determination
SMSFR Self Managed Superannuation Fund Ruling
SSA Salary sacrifice arrangement
STP Single Touch Payroll
TA Taxpayer Alert
TAA 1953 Taxation Administration Act 1953
TAP Taxable Australian Property
TARP Taxable Australian Real Property
TASA Tax Agent Services Act 2009
TASR Tax Agent Services Regulations 2009
TB Transfer balance (e.g., transfer balance cap or transfer balance account)
TBA Transfer Balance Account
TBAR Transfer Balance Account Report
TBC Transfer Balance Cap
TD Taxation Determination
TFN Tax file number
TMC Terminal medical condition
TOTD Transparency of Tax Debt
TPB Tax Practitioners Board
TPD Total and permanent disablement
TR Taxation Ruling
TRIS Transition to retirement income stream
TSB Total Superannuation Balance
UCA Uniform Capital Allowance (depreciation rules)
UNPB Unrestricted non-preserved benefit
UPE Unpaid present entitlement
WRE Work-related expense

NOTES TIP – Searching the notes

It is possible to search all of our notes online. Simply go to the homepage of our website
(ntaa.com.au), hover over the ‘Products’ tab along the top menu bar and click ‘Notes Online’
– this will take you to a page which gives you the option of searching our notes. In particular,
the second search option field will pick up words in the online PDF copy of the Table of
Contents for each set of notes. The results include a link which allows you to open and view
the Table of Contents instantly (and if you don't have the relevant set of notes, it's also easy
to then buy the Seminar Notes).

© National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

WHAT’S NEW FOR INDIVIDUALS ................................................................................................ 1

An NTAA guide to recent developments affecting the 2021 Individual (‘I’) return ................. 3

1. Bringing forward the Personal Income Tax Plan to 2021 – an economic

stimulus measure ............................................................................................................. 3

2. Sole trader enhancement for ‘profile compare’ ............................................................. 5

3. Granular data update for the 2021 ‘I’ return ................................................................... 6

4. Managing JobKeeper prefill information ........................................................................ 6

4.1 ATO provides JobKeeper prefill solution for 2021 .................................................. 7

5. New reporting rules for the new temporary full expensing depreciation
measure in 2021 ................................................................................................................ 8

5.1 Background to the temporary full expensing measure ........................................... 8

5.2 The new temporary full expensing opt-out rules ................................................... 10

6. Proposed changes to the 2021 ‘I’ return under proposed private health
insurance reforms .......................................................................................................... 13

6.1 Proposed changes to completing the PHI policy details section of the 2021
‘I’ return ................................................................................................................. 13

7. Increased reporting rules for testamentary trust distributions to minors ................ 14

7.1 What was the perceived problem with S.102AG(2)(a)? ........................................ 15

7.2 Recent testamentary trust integrity rules introduced ............................................ 15

7.3 The impact of the new rules on the 2021 ‘I’ return................................................ 16

8. Avoiding the dangers with claiming business losses on the 2021 ‘I’ return ............ 17

8.1 An overview to applying the NCL rules in Division 35 .......................................... 17

8.2 A step-by-step consolidated guide to reporting business losses on the 2021

‘I’ return under the NCL rules ................................................................................ 19

Increased Small Business Income Tax Offset (‘SBITO’) applies for 2021 ............................. 25

1. Which individuals are eligible for the increased SBITO in the 2021 income year?.. 25

© National Tax & Accountants’ Association Ltd: May – July 2021 i

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

2. How is the SBITO calculated for an eligible individual for the 2021 income year? . 26

2.1 Determining an individual’s ‘total net small business income’ for the 2021
income year .......................................................................................................... 26

3. SBITO reporting obligations on 2021 ‘I’ return ............................................................ 28

4. Common questions in relation to the SBITO ............................................................... 29

Major developments for individuals using their home for work or business ....................... 31

1. Tribunal allows ‘on-call’ employee to claim home occupancy expenses –

McAteer’s case ............................................................................................................... 31

1.1 The background to claiming home occupancy expenses ..................................... 31

1.2 The background to McAteer’s case ...................................................................... 33

1.3 The Tribunal’s decision in McAteer’s case ........................................................... 34

1.4 NTAA comment – Implications of the Tribunal’s decision in McAteer’s case ....... 36

1.5 The CGT main residence exemption danger where a claim for occupancy
expenses is available ........................................................................................... 37

2. ATO extends 80 cents per hour method for home office ‘running expenses’
to 30 June 2021 ............................................................................................................... 39

2.1 Comparing the different methods for claiming home office ‘running expenses’ on
the 2021 ‘I’ return.................................................................................................. 39

2.2 Common questions with claiming deductions when using a home for work
or business ........................................................................................................... 45

3. New dangers with applying CGT concessions for homes that are partly used
for business .................................................................................................................... 48

3.1 Recent decisions create uncertainty with applying the SBCs for homes that
are partly used for business ................................................................................. 48

NEW ATO rulings for travel expense claims ............................................................................ 51

1. The ATO’s general deductibility principles for claiming transport expenses .......... 52

1.1 Travel between home and a regular workplace.................................................... 53

1.2 Travel between regular workplaces ...................................................................... 59

1.3 Travel to an ‘alternative’ workplace ...................................................................... 60

ii © National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

2. The ATO’s general deductibility principles for claiming accommodation

and meal expenses ......................................................................................................... 61

2.1 Key factors to consider in determining the deductibility of accommodation

and meal expenditure ........................................................................................... 61

2.2 Factors that indicate when an employee is LAFH ................................................ 63

3. Dealing with the deductibility of travel expenses in common travel scenarios ....... 65

3.1 Employees who work concurrently at multiple offices or worksites for

the same employer ............................................................................................... 65

3.2 Employee secondment arrangements .................................................................. 69

3.3 Employees who combine deductible short-term work travel with a private
stay-over (such as a holiday) ................................................................................ 71

3.4 Employees who are working on a FIFO basis ...................................................... 75

3.5 Employees working from home during COVID-19 who travel into work for
meetings, to pick up files, etc. ............................................................................... 77

3.6 Employees travelling for work who are (or have been) required to
quarantine due to COVID-19 ................................................................................ 78

Latest tax issues for landlords who are affected by COVID-19 .............................................. 79

1. Can a landlord claim rental deductions during rent-free or reduced

rental periods? ................................................................................................................ 80

2. The deductibility of interest expenses when landlords have deferred

loan repayments ............................................................................................................. 81

3. Income tax treatment of back payments of rent or insurance received for

‘loss of rent’ .................................................................................................................... 81

4. The tax treatment of Government assistance received by landlords ........................ 83

4.1 Rent relief grants received by landlords who have provided rent reduction
relief to tenants ..................................................................................................... 83

4.2 Land tax relief provided to eligible landlords ......................................................... 84

5. Issues for short-term rental accommodation .............................................................. 86

6. Tax issues for landlords who default on a rental property loan ................................ 87

6.1 What are the CGT consequences of a rental property being sold by a
mortgagee in possession (e.g., bank)?................................................................. 87

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

6.2 How is any income derived from a property whilst the mortgagee (e.g., bank)
is in possession treated? ...................................................................................... 87

7. Can a landlord claim new COVID-19 immediate write-offs for rental property
assets? ............................................................................................................................ 88

Latest NTAA guide on when a client is carrying on a rental property business .................. 89

1. Key factors to consider when identifying a rental property business ...................... 89

1.1 Summary of relevant case law and ATO guidance relating to carrying on
a rental property business .................................................................................... 90

2. The classification of properties used for short-term (holiday) rental – ATO

guidelines ........................................................................................................................ 93

3. The tax implications associated with a rental property business in the

2021 income year............................................................................................................ 94

Individual director denied deduction for settlement payment for insolvent trading ........... 98

1. The background to Duncan’s case ............................................................................... 98

2. The Tribunal’s decision in Duncan’s case ................................................................. 100

2.1 Whether the taxpayer’s settlement payment was incurred in gaining

or producing assessable income ........................................................................ 100

2.2 Whether the taxpayer’s settlement payment was capital or of a capital nature.. 101

New residency developments for outbound and inbound individuals ................................ 102

1. An overview to determining an individual’s tax residency status – the

residency tests ............................................................................................................. 102

1.1 Flow-chart for determining individual tax residency............................................ 103

2. Recent Court decision highlights how DTAs affect tax residency and the
tax outcomes ................................................................................................................ 104

2.1 The background to Pike’s case .......................................................................... 104

2.2 The Federal Court’s decision in Pike’s case....................................................... 105

2.3 The Full Federal Court’s decision in Pike’s case ................................................ 108

2.4 The implications of Pike’s case – NTAA comment ............................................. 110

iv © National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

3. Recent decisions scrutinise the application of the 183-day test for residency...... 111

3.1 The 183-day test and full-year residency ............................................................ 111

3.2 The 183-day test and outbound taxpayers ......................................................... 112

4. ATO guidance on tax residency issues arising from COVID-19 travel bans .......... 112

4.1 Residency and source of income issues for individuals stranded in or out of
Australia .............................................................................................................. 113

Tribunal scrutinises an employee’s claim for a ‘work horse’ vehicle – Bell’s case ........... 117

1. The background to Bell’s case .................................................................................... 117

2. The Tribunal’s decision in Bell’s case ........................................................................ 118

2.1 Whether the taxpayer’s travel between home and work was
employment-related (or deductible) travel .......................................................... 119

2.2 Whether the taxpayer had established a proportion of employment-related

use of his motor vehicle ...................................................................................... 120

3. NTAA comment – Implications of the Tribunal’s decision in Bell’s case ............... 121

Tribunal scrutinises an employee’s claims for work expenses – Lambourne’s case ........ 124

1. The background to Lambourne’s case ....................................................................... 124

2. The Tribunal’s decision in Lambourne’s case ........................................................... 127

2.1 The Tribunal’s decision in relation to the taxpayer’s clothing expense claim ..... 128

2.2 The Tribunal’s decision in relation to the taxpayer’s other work-related

expenses claim ................................................................................................... 128

2.3 NTAA comment – Implications of Tribunal’s decision in Lambourne’s case ...... 129

Changes to the contribution rules apply from 1 July 2020 ................................................... 133

1. Increasing the age criteria when applying the ‘work test’ for voluntary
contributions ................................................................................................................. 133

1.1 When does an individual satisfy the ‘work test’? ................................................ 134

2. Increasing the age criteria for being able to make spouse contributions .............. 134

2.1 Claiming the spouse contributions tax offset from 1 July 2020 at Item T3 ......... 135

© National Tax & Accountants’ Association Ltd: May – July 2021 v

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

3. Expanding access to the ‘bring forward’ rule for NCCs from 1 July 2020 .............. 136

3.1 When can an individual access the ‘bring forward rule’ for NCCs in 2021
under the proposed change?.............................................................................. 136

THE ATO’S 2021 AUDIT WARNING AREAS FOR INDIVIDUALS .......................................... 139

1. Latest developments affecting data matching .......................................................... 142

1.1 The latest (key) data matching programs ........................................................... 142

2. The latest assault on work-related expense claims for individual taxpayers......... 148

2.1 Tax Practitioners Board (‘TPB’) increases its assault on tax agents
claiming excessive work expenses..................................................................... 148

2.2 Tribunal reviews the TPB’s decision to terminate a tax agent’s registration
on the grounds of incompetency ........................................................................ 149

2.3 ATO targets clothing and laundry expense claims ............................................. 158

2.4 ATO targets common errors with car expense claims under the log
book method ....................................................................................................... 163

3. Interest deductions for rental properties in the ATO’s firing line – high
risk claims! .................................................................................................................... 168

3.1 Interest deductions checklist for landlords.......................................................... 169

4. ATO targets super withdrawals under the new temporary COVID-19

early release scheme ................................................................................................... 172

4.1 Who was eligible to access their super under the temporary COVID-19
condition of release? .......................................................................................... 172

4.2 ATO data matching seeks to identify incorrect use of the NEW COVID-19
condition of release ............................................................................................ 173

5. Claims for personal super contributions in the ATO’s firing line in light of
COVID-19 ....................................................................................................................... 175

5.1 The ATO’s traditional audit focus on claims for personal contributions –
the ‘deduction notice’ requirements .................................................................... 176

5.2 New ATO compliance issues emerge with claims for personal contributions
in light of COVID-19............................................................................................ 176

vi © National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
2021 Tax Schools Day 1

A TAX-EFFECTIVE GUIDE FOR EMPLOYEES WHO LOSE THEIR JOB ............................... 181

1. Taxing tips and traps for employees receiving employment termination

payments (‘ETPs’)......................................................................................................... 184

1.1 Identifying when a payment is a life benefit ETP ................................................ 184

1.2 Applying the concessional tax rules for life benefit ETPs ................................... 185

1.3 Reporting a life benefit ETP on the 2021 ‘I’ return .............................................. 189

2. Dealing with legal expenses that relate to disputes on termination of

employment ................................................................................................................... 191

2.1 Deductibility of legal expenses related to a dispute on termination of

employment ........................................................................................................ 191

2.2 Tax treatment of an amount received by an employee in respect of

legal expenses .................................................................................................... 193

3. Identifying when self-education expenses can be claimed for employees

who lose their job ......................................................................................................... 194

3.1 Claiming self-education expenses incurred before termination of an

employee’s employment ..................................................................................... 194

3.2 Claiming self-education expenses incurred after termination of an

employee’s employment ..................................................................................... 195

4. Transferring an existing novated leased car to a new employer – after-tax

savings! ......................................................................................................................... 197

4.1 The benefits of transferring an existing leased vehicle to a new employer

under a new novation agreement ....................................................................... 197

Notes .......................................................................................................................................... 201

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

WHAT’S NEW FOR INDIVIDUALS

© National Tax & Accountants’ Association Ltd: May – July 2021 1

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

Notes
...........................................................................................................................................................

...........................................................................................................................................................

2 © National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

An NTAA guide to recent developments

affecting the 2021 Individual (‘I’) return
In recent years, the ATO’s increased desire to collect and collate more information about the
income tax and personal affairs of individual clients (coupled with ongoing tax law reforms) has
created an evolving individual tax return (i.e., ‘I’ return), which has become a more sophisticated
information gathering tool to facilitate the ATO’s compliance activities for individual taxpayers.

In the past 12 months, a number of developments have created new reporting obligations on the
2021 ‘I’ return and will facilitate the ATO’s increased focus on ensuring that the individual tax return
is correctly prepared for individual taxpayers. Furthermore, the expected increase in the number
of businesses reporting tax losses on the ‘I’ return in light of the economic impact of COVID-19 will
likely increase the risk of reporting errors (especially under the non-commercial loss (‘NCL’) rules).

Some of the key developments affecting the 2021 ‘I’ return include the following:
(a) Developments relating to the ATO’s individual income tax return profile compare service
(which provides early warning mechanisms) and the ATO’s granular data program (which
provides ‘line item’ information to the ATO when completing the 2021 ‘I’ return).
(b) New reporting obligations on the 2021 ‘I’ return as a result of the Government’s economic
response to the COVID-19 pandemic, particularly in relation to the JobKeeper payments and
the new temporary full expensing measure in relation to eligible depreciating assets.
(c) New disclosure requirements on the ‘I’ return, following the recent tightening of the rules
relating to the taxation of testamentary trust income distributed to minors.
(d) Potential traps with claiming business losses on the 2021 ‘I’ return under the NCL rules,
in light of more businesses being expected to generate tax losses from their activities as a
result of the economic impact of COVID-19.

These seminar notes will address the above (and other) developments affecting the 2021 ‘I’ return,
based on draft ATO information available at the time of writing.

All section references in this segment of the notes are to the ITAA 1997, unless otherwise indicated.

1. Bringing forward the Personal Income Tax

Plan to 2021 – an economic stimulus measure
In Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020, which
received Royal Assent on 14 October 2020, the Government brought forward Stage 2 of its
Personal Income Tax Plan (which was due to commence from 1 July 2022 – i.e., from the 2023
income year) to the 2021 and later income years.

This change was motivated by the desire to assist in creating much needed economic stimulus in
the wake of the COVID-19 pandemic.

Broadly, this change primarily involved the following:

• Increasing the upper threshold of the 19% personal income tax bracket from $37,000 to
$45,000, and increasing the upper threshold of the 32.5% personal income tax bracket from
$90,000 to $120,000.
• Increasing the maximum Low Income Tax Offset (‘LITO’) from $445 to $700 and adjusting the
phase out rules.
• Retaining the Low and Middle Income Tax Offset (‘LMITO’) for the 2021 income year prior
to its removal from the 2022 income year.

© National Tax & Accountants’ Association Ltd: May – July 2021 3

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NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

Based on the above change, the following marginal tax rates and thresholds now apply
(exclusive of the Medicare levy where applicable) for the 2021 income year for resident individuals:

2021 Tax Rates For Resident Individuals

Taxable income Tax on this income

$0 - $18,200 Nil
$18,201 - $45,000 19 cents for each $1 over $18,200
$45,001 - $120,000 $5,092 plus 32.5 cents for each $1 over $45,000
$120,001 - $180,000 $29,467 plus 37 cents for each $1 over $120,000
$180,000 and over $51,667 plus 45 cents for each $1 over $180,000

Similar adjustments were also made to the tax rates for non-residents (or foreign residents) and
the tax rates for Working Holiday Makers (‘WHMs’).
Furthermore, the LITO increase from $455 to $700 for the 2021 income year and associated
phase-out rule changes were implemented as outlined in the following table:

2021 Low Income Tax Offset (‘LITO’)

Taxable income Amount of tax offset

$37,500 or less $700

$37,501 - $45,000 $700 minus 5 cents for each $1 over $37,500
$45,001 - $66,667 $325 minus 1.5 cents for each $1 over 45,000

The Low and Middle Income Tax Offset (‘LMITO’) was also retained for the 2021 income year,
with the relevant rates and phase-in and phase-out rules outlined in the following table:

2021 Low and Middle Income Tax Offset (‘LMITO’)

Taxable income Amount of tax offset

$0 - $37,000 $255
$37,001 - $48,000 $255 plus 7.5 cents for each $1 over $37,000
$48,001 - $90,000 $1,080
$90,001 and over $1,080 less 3 cents for each $1 over $90,000

TAX TIP – 2021 effective tax-free thresholds after tax offsets

The availability of tax offsets effectively increases the tax-free threshold of $18,200 for lower
income earning taxpayers entitled to tax offsets, such as the LITO and the LMITO (and also the
Seniors and Pensioners Tax Offset (‘SAPTO’) for many older eligible Australians).
For example, for the 2021 income year, the combination of the increased $700 LITO, the $18,200
tax-free threshold and the $255 minimum LMITO effectively allows low income taxpayers to earn
up to an effective tax-free threshold of $23,226 (i.e., $18,200 + $955/0.19), excluding the Medicare
levy (if applicable).

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NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

2. Sole trader enhancement for ‘profile compare’

In recent years, the ATO has introduced the ‘Individual Income Tax Return Profile Compare’
(‘IITR Profile Compare’) service which is an optional software enhancement that may be offered
by a tax agent’s digital service provider.

The IITR Profile Compare service is a ‘functionality’ designed for tax agents acting on behalf of
individuals, and is intended to help tax agents and their clients lodge a correct income tax return
(e.g., by identifying potentially risky claims during the preparation of the ‘I’ return).

This is done by providing messaging where a real-time risk assessment identifies data at certain
fields as anomalous (e.g., where claims appear high compared to similar taxpayers, or where it
appears that data may be missing based on prior-year information).

For example, where a taxpayer’s work-related expense claims (i.e., claimed at Items D1 to D5) are
identified as being unusually higher in comparison to similar taxpayers, a tax agent who has
selected this service through their software may receive a real-time message, such as the following:
“Your total work-related expenses of $xxx are high compared to others in your
occupation with similar income. Please review these amounts, particularly your claims
for car and other deductions.” [Emphasis added]

TAX TIP – Real-time messages should not trigger an ATO audit

According to the ATO, real-time messages generated by the ‘IITR Profile Compare’ service are
advisory only. This means that receiving a message does not mean that a claim is incorrect as
such, but the message is merely intended to prompt the tax agent and their client to consider the
amount being reported on the ‘I’ return (e.g., the work-related expense being claimed).

Under this optional real-time messaging enhancement, messaging for clients has previously been
(and will continue to be) available for the following labels of the ‘I’ return:
• Interest income and Dividend income (at Items 10 and 11, respectively).
• Work-related expenses (at Items D1 to D5).
• Cost of managing tax affairs – other expenses incurred (at Item D10).
• Other deductions – other (at Item D15).
• Rental interest (at Item 21, label Q).

For the 2021 income year (i.e., in respect of the 2020 ‘I’ return), the IITR Profile Compare service
is being expanded to include the following two labels associated with business income, both of
which are included at Item P8 – Business income and expenses in the Business and
Professional Items schedule, including:
• Cost of sales (reproduced below).

• Total expenses (reproduced below).

This expansion is primarily designed to include checks for sole trader income and deductions and
the ATO has advised that future expansion in the small business market is planned for future years.

© National Tax & Accountants’ Association Ltd: May – July 2021 5

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

3. Granular data update for the 2021 ‘I’ return

Another recent trend relating to general ‘I’ return compliance has resulted from the ATO directing
more compliance resources towards ensuring that tax deductions (particularly for work-related
expenses) are correctly claimed by individual taxpayers. This was mainly driven by the increasingly
high error rate identified by the ATO via its tax gap analysis for ‘individuals not in business’.

As part of the ATO’s initiative to increase the quantity and quality of data collected through
individual tax returns, the ATO first introduced its granular data (i.e., line entry data) in 2019,
specifically targeted at deductions claimed on electronically lodged ‘I’ returns. In particular, the
‘Deductions schedule’ required tax agents to provide granular data (i.e., descriptive data) relating
to deductions claimed at Items D1 to D15 of the ‘I’ return. Practically, this meant that in many
deduction labels, software providers were required to create additional repeating fields to assist
tax agents to provide granular data for deductions (i.e., to record the individual descriptions and
amounts of deductions being claimed at Items D1 to D15 of the ‘I’ return, such as a total amount
claimed for ‘stationery items’).

The granular (line entry) data requirements were further upgraded for the 2020 income year with
the inclusion of two additional schedules, being a new ‘Income details schedule’ and a new
‘Multi-property rental schedule’ (which complemented the existing ‘deductions schedule’), as
well as updated ‘Capital gains tax’ and ‘Non-resident foreign income’ schedules.

Ultimately, these changes ensured that the same information was provided by taxpayers across all
electronically lodged ‘I’ returns, whether it was via myTax processes or tax agent lodgment.

TAX TIP – ATO improvements to granular data program for 2021

While no further expansion of the granular data requirements has been directly flagged in relation
to the labels of the 2021 ‘I’ return, the ATO has announced that it will improve its provision of
granular data for tax agents so as to ensure consistency in data collection for ‘I’ returns across all
electronic channels (e.g., returns lodged through myTax and returns lodged through tax agents).
This means that the ATO’s ‘Copy of Return service’ has been expanded to include the granular
data from the abovementioned line entry schedules. This will ensure tax agents will have access
to the detailed line item information (including the descriptive and textual elements) provided to the
ATO in previously lodged returns (i.e., by previous tax agents or by the client through myTax).

4. Managing JobKeeper prefill information

By way of background, JobKeeper payments (i.e., periodic wage subsidy payments) were made
by the Government via the ATO to eligible businesses, to retain staff and continue trading during a
period of reduced turnover (generally as a result of the COVID-19 pandemic) with respect to both
eligible employees and in certain circumstances, an eligible business participant.

The original JobKeeper Scheme (‘JKS’) ran from 30 March 2020 to 27 September 2020, with a
fortnightly payment of $1,500 per eligible employee and/or business participant. The Government
subsequently extended the JKS (i.e., in the form of JobKeeper 2.0) from 28 September 2020 to
28 March 2021, with key changes including reduced and dual payment rates for those continuing
to experience qualifying reduced turnover.

TAX WARNING – JobKeeper payments are assessable income

As JobKeeper payments were designed to support businesses during a period of reduced turnover,
they qualify as ordinary income and are included in the recipient business taxpayer’s assessable
income. As a result, JobKeeper payments (whether paid in relation to eligible employees or eligible
business participants) are treated as ordinary assessable income of the recipient entity (e.g.,
sole trader) under S.6-5.

6 © National Tax & Accountants’ Association Ltd: May – July 2021

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

Notably, JobKeeper payments are not subject to GST (and are not required to be reported on the
recipient business taxpayer’s BAS).

TAX TIP – JobKeeper payments not included in aggregated turnover

The ATO has recently confirmed that, whilst JobKeeper payments are ordinary income, they are
not “ordinary income incurred in the ordinary course of carrying on a business”. As a result,
JobKeeper payments received by an eligible business taxpayer are not included in the calculation
of a taxpayer’s aggregated turnover, for the purposes of determining eligibility for various
concessions (e.g., whether the taxpayer qualifies as a Small Business Entity (‘SBE’)).

Furthermore, when the JobKeeper subsidy is derived for income tax purposes is generally the
same regardless of whether a taxpayer is an accruals or cash basis taxpayer. This has particular
relevance for the JobKeeper fortnights ending in June 2020, primarily because:
• For a business operating on an accruals basis (i.e., for tax derivation purposes), the
business does not derive the subsidy unless and until it completes and provides a valid ‘monthly
business declaration’ (i.e., by the 14th day after the end of the relevant month). Therefore, with
respect to JobKeeper fortnights ending in June 2020, such a taxpayer will derive the subsidy
when it lodges its declaration in July 2020 (i.e., in the 2021 income year).
• For a business operating on a cash basis (i.e., for tax derivation purposes), the business
will derive the subsidy when it is paid. For JobKeeper fortnights ending in June 2020, the
taxpayer will again derive the subsidy when it is paid in July 2020 (i.e., upon lodgment of the
monthly declaration), being in the 2021 income year.

Despite being assessable income, JobKeeper payments included in a business entity’s assessable
income should generally (over time) be fully offset against any deductible salary and wage
payments made to eligible employees (which are deductible under S.8-1). Note, however, there
will be a timing difference based on the fact that wages paid with respect to the June 2020
JobKeeper fortnights are deductible in June 2020 (i.e., when paid), whereas the JobKeeper
payments with respect to these fortnights are assessable in July 2020 as noted above (i.e., in the
2021 income year).

TAX WARNING – Tax treatment of JobKeeper payments paid for an

eligible business participant (e.g., a sole trader)
Whilst the JobKeeper payment is generally tax neutral when received by a business entity with
respect to an eligible employee (i.e., subject to the timing difference discussed above), the tax
implications of receiving the subsidy differ where a business receives the subsidy with respect to
its nominated eligible business participant. This is primarily because, unlike for eligible employees,
there is no requirement to pay a deductible JobKeeper payment to an eligible business recipient.
Indeed, for a sole trader directly receiving the JobKeeper payment as an eligible business
participant, the payment is simply assessable income and taxed at their relevant marginal tax rate.

4.1 ATO provides JobKeeper prefill solution for 2021

The ATO has recently announced that it will implement a prefill solution for assessable JobKeeper
payments made to self-employed individual taxpayers (i.e., sole traders) both for themselves
as eligible business participants and for any of their eligible employees, to ensure that assessable
JobKeeper payments are not under-reported on the ‘I’ return for a sole trader client.

For this purpose, JobKeeper payment data will be provided by the ATO to clients as ‘information
only’ and will not be ‘mapped’ to a specific label of the 2021 ‘I’ return. This means that sole traders
(and their tax agents) will be electronically prompted to review the JobKeeper information provided
by the ATO (in the form of the new ‘Prefill JobKeeper payment information only report solution’),
so that the correct assessable JobKeeper payments are reported at the business income labels of
a sole trader’s 2021 ‘I’ return.

© National Tax & Accountants’ Association Ltd: May – July 2021 7

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

The ATO has provided the following example of what would be displayed to a tax agent by their
digital service provider where a sole trader is identified by the ATO as having received a JobKeeper
payment:
“Your client received JobKeeper Wage Subsidy payments which needs to be included in
business income. This data is shown for information only.”
Assessable JobKeeper payments made to an eligible sole trader (both for themselves as eligible
business participants and for any of their eligible employees) are required to be included as income
in the sole trader’s 2021 ‘I’ return at Item P8 - Business income and expenses, Assessable
Government Industry Payments (either at label G (primary production) or label H (non-
primary production)) (as reproduced below).

TAX TIP – Non-individual entities and JobKeeper payments

The ATO’s prefill solution is only available for individual taxpayers (i.e., sole traders). As a result,
non-individual entities (i.e., partnerships, companies or trusts) will not receive the JobKeeper
payment prefill information and will instead receive a separate mailout to educate and advise them
to include the JobKeeper payments as part of their business income in their 2021 income tax return.
Sole traders will also receive the same mailout as non-individual taxpayers by means of additional
support (i.e., as well as the new Prefill JobKeeper payment information only report solution).

5. New reporting rules for the new temporary full

expensing depreciation measure in 2021
The ATO is introducing new disclosure requirements on the 2021 ‘I’ return, which (amongst other
things) will facilitate eligible sole traders who have chosen to ‘opt-out’ of applying the temporary
full expensing depreciation measures in the 2021 income year. Refer to new Item P11 –
Temporary full expensing, labels C to G, on page 14 of the 2021 ‘I’ return.

5.1 Background to the temporary full expensing measure

The new temporary full expensing depreciation measure was introduced to provide further
economic support (and stimulus) for businesses with an aggregated turnover of (generally) less
than $5 billion, as a result of COVID-19. Refer to the Treasury Laws Amendment (A Tax Plan for
the COVID-19 Economic Recovery) Act 2020. The operation of the new temporary full expensing
depreciation measure varies depending on whether a taxpayer (e.g., a sole trader) is a:

• small business entity (‘SBE’) (i.e., an entity with an aggregated turnover of less than $10 million)
using the simplified SBE depreciation rules – refer to Subdivision 328-D; or
• business entity (including an SBE not using the SBE depreciation rules) with an aggregated
turnover of (generally) less than $5 billion – refer to Subdivision 40-BB of the Income Tax
(Transitional Provisions) Act 1997 (‘ITTPA’).

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NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

For both types of taxpayers, the temporary full expensing measure basically enables an eligible
taxpayer (e.g., a sole trader) to deduct the full cost of eligible depreciating assets that are used
in carrying on a business and are:
• first held (e.g., acquired); and
• first used (or installed ready for use) for a taxable purpose;
from 7:30pm (legal Canberra time) on 6 October 2020 (‘2020 Budget time’) to 30 June 2022.
Note that, there is no limit on the number or the total cost of depreciating assets (or improvements)
that can be fully expensed in an income year under the temporary full expensing measure.
Refer to S.328-181(2) of the ITTPA and S.40-160(1) and S.40-160(3)(a) of the ITTPA.

TAX WARNING – Assets not eligible for temporary full expensing

Certain depreciating assets are not eligible for the new temporary full expensing measure.
For taxpayers using the simplified SBE depreciation rules, assets otherwise excluded from this
regime under S.328-175 (e.g., rental property assets) cannot be fully expensed under the SBE
depreciation regime. Instead, many of these excluded assets will default to being depreciated
under the Division 40 capital allowance rules (discussed below). Refer to S.328-181 of the ITTPA.
For taxpayers utilising the Division 40 capital allowance rules (and therefore potentially
temporary full expensing under Subdivision 40-BB of the ITAA), the types of depreciating assets
that are specifically not eligible for temporary full expensing broadly include:
(a) assets that are not reasonably expected to be used principally in Australia for the principal
purpose of carrying on a business;
(b) eligible work-related items (under S.58X of the FBT Act) where the benefit is provided as an
expense payment fringe benefit or a property benefit;
(c) building or capital works deductible under Division 43 (i.e., at 2.5% or 4%);
(d) certain film assets and primary production assets such as water facilities and fencing;
(e) assets allocated to a low-value pool or software development pool; and
(f) assets for which a balancing adjustment event has occurred during the year.
Refer to S.40-150 and S.40-160(1)(e) of the ITTPA.
For the sake of completeness, larger businesses (i.e., businesses with an aggregated turnover of
$50 million or more but (generally) less than $5 billion are not eligible for temporary full expensing
in respect of the acquisition of secondhand assets and/or assets that the taxpayer had committed
to acquiring before the 2020 Budget time.

Furthermore, under the temporary full expensing depreciation measure, eligible sole traders are
also able to claim (deduct) the following:
(a) Eligible SBE sole traders using the simplified SBE depreciation rules can claim:
• the full cost of improvements (i.e., second element costs) incurred from the 2020 Budget
time to 30 June 2022 in relation to a depreciating asset that was either fully expensed (or
written off under a previously applicable IAWO threshold) in a prior year; and
• the total balance an SBE sole trader’s low pool value (i.e., their closing general SB pool
balance before current year depreciation claims are applied) with respect to both the 2021
and 2022 income years. Refer to S.328-181(3), (4) and (5) of the ITTPA.

© National Tax & Accountants’ Association Ltd: May – July 2021 9

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

(b) Eligible sole traders not using the simplified SBE depreciation rules can claim the full
cost of improvements (i.e., second element costs) incurred in relation to eligible depreciating
assets from the 2020 Budget time to 30 June 2022, whether those assets were acquired
before or after the 2020 Budget time. Refer to S.40-160(3) and S.40-170 of the ITTPA.

As a result, temporary full expensing can apply in respect of eligible depreciating assets in the
2021 and/or 2022 income years.

5.2 The new temporary full expensing opt-out rules

The default position is that businesses (including sole traders) able to fully expense the cost of
eligible depreciating assets and their improvements must apply (where applicable) temporary full
expensing and make their claim. Refer to S.40-145 and S.328-181 of the ITTPA and S.328-180.
Despite this, the Government subsequently introduced further legislation to allow certain eligible
businesses to opt-out of claiming the full deduction on an asset-by-asset basis. Refer to
Treasury Laws Amendment (Measures No.6) Act 2020 and S.40-190 of ITTPA.
In particular, these new opt-out rules allow taxpayers that calculate their depreciation (or decline in
value deductions) for assets under Division 40 (i.e., capital allowance (effective life) depreciation)
to make an irrevocable choice to opt-out of the new temporary full expensing measure on an
asset-by-asset basis.
Furthermore, similar opt-out rules also allow eligible taxpayers to opt-out of the Backing Business
Investment (‘BBI’) depreciation concession (refer below) on an asset-by-asset basis (where
relevant). Refer to S.40-137 of the ITTPA.

TAX TIP – Opting out could be more beneficial for some sole traders
In some cases, opting out of the temporary full expensing measure for one or more depreciating
assets could be more beneficial for a sole trader. This will be particularly the case where the after-
tax value of an up-front (or immediate) deduction for the cost of an asset in an income year (e.g.,
the 2021 income year) is not as beneficial to a sole trader as the after-tax value of claiming the
same depreciation deduction over a number of years (e.g., over the asset’s effective life).
For example, assume that a sole trader has an annual taxable income of $220,000 (which means
that $40,000 of taxable income is being subject to tax at the top marginal rate). In this case, if the
sole trader purchases a depreciable asset costing $160,000, writing off the asset in the year of
purchase under the temporary expensing measure would mean that the sole trader is only getting
the benefit of a deduction at the top marginal rate on $40,000 of the asset’s cost.
In contrast, if the asset is being depreciated over its effective life, a greater portion of the asset’s
cost over time (i.e., more than $40,000) would be deducted against the sole trader’s income at the
top marginal rate.

TAX WARNING – SBE taxpayers cannot directly opt-out

The new opt-out rules noted above do not apply to SBE taxpayers using the simplified SBE
depreciation rules under Subdivision 328-D (i.e., the SBE temporary full expensing, the SBE
$150,000 instant asset write-off and the general SB pooling). This means that an SBE taxpayer
cannot directly opt-out of the SBE temporary full expensing regime under the new opt-out rules.
This appears to be a legislative oversight by the Government, particularly as it is SBE taxpayers
(and most commonly sole traders) who may find themselves in the position that they do not wish
to avail themselves of the new temporary full expensing measures.
Despite this, an SBE taxpayer may still be able to indirectly avoid the new temporary full expensing
measure for newly acquired assets, as discussed further below.

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NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

5.2.1 What are the consequences of directly opting-out?

If a sole trader (not using the simplified SBE depreciation rules) directly opts-out of temporary
full expensing under Division 40, the following depreciation options should be considered:
(a) The $150,000 instant asset write-off (‘IAWO’) for medium sized businesses (i.e., businesses
with an aggregated turnover of $10 million or more and less than $500 million), which is
applicable for eligible assets that are:
• acquired at or after 7:30pm (AEDT) on 2 April 2019 and on or before 31 December 2020;
and
• first use or installed ready for use from 12 March 2020 to 30 June 2021.
Therefore, an SBE sole trader (i.e., with aggregated turnover of less than $10 million) not
using the SBE depreciation rules is not eligible to claim the $150,000 instant asset write-off
under these rules. Refer to S.40-82(4)(a) and S.40-82(4A)(b), and S.328-181 of the ITTPA.
(b) The Backing Business Investment (‘BBI’) accelerated depreciation concession, which
allows businesses with an aggregated turnover of less than $500 million (including SBEs
choosing not to use the simplified SBE depreciation rules) to depreciate eligible new assets at
an accelerated rate, where those new assets are first held and used (or installed ready for use)
between 12 March 2020 and 30 June 2021. This concession effectively allows taxpayers a
Division 40 depreciation deduction, which is broadly equal to 50% of the cost of the asset in
the year of purchase plus the asset’s usual effective life decline in value (or depreciation) in
the year of purchase (based on the remaining cost of the asset) and in later years.
However, just like for the new temporary full expensing, eligible taxpayers are also be able to
opt-out of the Division 40 BBI accelerated depreciation concession (where applicable) on an
asset-by-asset basis. Refer to Subdivision 40-BA and S.40-137 of the ITTPA.

TAX WARNING – New reporting obligations for BBI opt-out – Item P12
Where an eligible sole trader opts-out of the BBI accelerated depreciation concession in respect
of one or more depreciating assets in the 2021 income year, new Item P12 - Backing business
investment opt-out, page 14, of the 2021 ‘I’ return will need to be completed. Ultimately, this
represents the ‘approved form’ to opt-out of the BBI accelerated depreciation concessions and also
provides certain details to the ATO about a sole trader’s choice to opt-out of this concession.

(c) Effective life depreciation – Where the $150,000 IAWO does not apply (which will be the
case for the majority of sole traders with aggregated turnover of less than $10 million) and the
BBI does not apply (or the sole trader has opted-out of the BBI) in respect of a depreciating
asset, decline in value (or depreciation) deductions for the asset will generally be claimed
under the Division 40 capital allowance rules, usually over the asset’s effective life.

5.2.2 Opting-out of the temporary full expensing measure for sole

traders not using the SBE depreciation rules – Item P11
The choice to opt-out of the temporary full expensing measure (for a sole trader not using the SBE
depreciation rules) in respect of one or more assets must be made in the approved form (generally
by the time the taxpayer lodges their tax return for the income year to which the choice relates),
and is irrevocable. Refer to S.40-190 of the ITTPA and S.388-55 of Schedule 1 of the TAA 1953.

© National Tax & Accountants’ Association Ltd: May – July 2021 11

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What’s new for individuals

To facilitate this choice, the ATO is inserting new Item P11 – Temporary full expensing in the
2021 ‘I’ return (Business and Professional Items Schedule), as reproduced below.

Although draft instructions regarding Item P11 – Temporary full expensing were not available at
the time of writing, it appears that Item P11 also requires additional reporting of the dollar amount
of full expensing claims made, as well as the number of assets the measure has been applied to.

TAX TIP – Opting-out of SBE full expensing for sole traders using the
SBE depreciation rules – the three-step action plan for 2021
As noted above, the new opt-out rules do not apply to SBE taxpayers (i.e., with an aggregated
turnover of less than $10 million) using the simplified SBE depreciation rules under Subdivision
328-D. Despite this, SBE sole traders could still avoid the temporary full expensing measure
(where preferable) in respect of the purchase of a depreciating asset in the 2021 income year.
This would require a three-step action plan, with the following steps:
1. Opt-out of the simplified SBE depreciation rules (i.e., such a choice would be evidenced by
the manner in which the sole trader’s return is prepared, as there is no specific label or form
required to make such a choice).
2. Opt-out of the new temporary full expensing under Subdivision 40-BB of the ITTPA by
completing Item P11 – Temporary full expensing on page 14 the 2021 ‘I’ return.
3. Where relevant, opt-out of the BBI depreciation concession (i.e., under Subdivision 40-BA of
the ITTPA) by completing Item P12 - Backing business investment opt out, on page 14 of
the 2021 ‘I’ return (as referred to above).
This would ultimately allow the SBE taxpayer (e.g., sole trader) to claim depreciation on any newly
acquired assets based on their effective life under the Division 40 uniform capital allowance rules.
It is important to remember that if a taxpayer opts-out (or remains opted-out) of the simplified SBE
depreciation rules in the 2022 income year, the suspension of the five-year lock-out rule will end.
This means that the taxpayer will not be able to opt-back into the simplified SBE depreciation rules
again until the 2028 income year. Refer to S.328-180(2) and (3) of the ITTPA and S.328-175(10).

TAX WARNING – No action plan available for SBE pooled assets

The three-step action plan does not provide assistance to taxpayers using simplified SBE
depreciation with respect to their low pool value balance as at 30 June 2021 (or 30 June 2022)
(i.e., basically, the closing balance of the SBE pool, before applying current year deductions). This
is because, under the new temporary full expensing rules, taxpayers are required to fully expense
the value of their closing balance prior to current year deductions (i.e., their low pool value) for both
the 2021 and 2022 income years.
Furthermore, even where a taxpayer opts-out of (i.e., chooses not to apply or is no longer eligible
to use) the simplified SBE depreciation rules, they would still retain their SBE pool (i.e., comprising
assets acquired in previous income years). As a result, they would still be required to claim a
deduction for the full value of their low pool value under the SBE temporary full expensing rules
still applicable to their pool. Refer to S.328-181(5) of the ITTPA.

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What’s new for individuals

6. Proposed changes to the 2021 ‘I’ return under

proposed private health insurance reforms
In the 6 October 2020 Federal Budget, the Government announced that it would:
• increase the maximum age of dependants allowed under family private health insurance
(‘PHI’) policies from the current 24 years of age to 31 years of age; and
• completely remove the age limit for dependants with a disability and allow such dependants
to have a partner.
Taxpayers who are covered as a dependent child (or as proposed from 1 April 2021, a dependent
person) on a private health insurance policy are not entitled to a PHI rebate, but will be exempt
from paying any applicable Medicare Levy Surcharge.
The increase in the PHI dependant age limit is being made primarily in response to the dropping
numbers of young people both taking out and retaining PHI policies. In particular, the
Government’s announcements were aimed at improving the affordability, value, and attractiveness
of private health insurance, particularly for younger Australians. That is, arguably, keeping younger
people insured reduces the overall costs of PHI premiums, given that, if young people decide to
drop PHI cover, the remaining age (and associated risks) of those who still have PHI rises.
The logic behind these reforms is to broadly secure continuity of cover for younger people,
effectively extending the dependant’s age limit to a time when young people are more likely to have
higher paying jobs and be more financially secure. In turn, this means that it will be more likely that
they will then take out their own policies once they are no longer covered under a family policy.

TAX TIP – Legislation on the PHI reforms recently introduced

To implement these changes, the Private Health Insurance Legislation Amendment (Age of
Dependents) Bill 2020 was recently introduced into Parliament (and was before the Senate at the
time of writing).
If passed, from 1 April 2021, the reforms will mean that a dependent person who can be covered
under a family private health insurance policy (rather than their own policy) can either be a:
• dependent child (i.e., where they were under 25 years of age before 1 April 2021);
• dependent person (i.e., where they were under 32 years of age on or after 1 April 2021); or a
• dependent person with a disability, regardless of their age.
Importantly, the relevant explanatory memorandum makes it clear that the amendments do not
make it mandatory for private health insurers to offer this increased coverage for family products.

6.1 Proposed changes to completing the PHI policy details

section of the 2021 ‘I’ return
In a pre-emptive move, the ATO has indicated that, if the PHI reforms currently before Parliament
(i.e., at the time of writing) are passed, it will make reporting changes affecting the completion of
the Private health insurance policy details section (on page 5) of the 2021 ‘I’ return.

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More specifically, the ATO will be updating one of the six tax claim codes (i.e., Codes A to F) that
are used to indicate a taxpayer’s family status on 30 June for the purpose of determining the
amount of the PHI rebate an eligible taxpayer is entitled to receive.
The code that will be updated is Code F, which is currently used where a dependent child is
covered by a PHI policy (with their family or independently). In this case, the dependent child is
required to provide their PHI details in their tax return, including Code F, in order to avoid becoming
liable for any applicable Medicare levy surcharge.
In particular, tax claim Code F will have existing edit rules amended in order to:
• update an existing edit rule that restricts use of tax claim Code F to under 25-years old; and
• remove an existing edit rule that restricts use of tax claim Code F to taxpayers without a spouse.

7. Increased reporting rules for testamentary

trust distributions to minors
Income derived by a minor (i.e., a person under the age of 18 at the end of the relevant income
year) is generally taxed at penalty rates in accordance with Division 6AA of the ITAA 1936. This
is designed to discourage taxpayers from splitting income amongst their children (or grandchildren)
in order to minimise tax. However, there are two important exceptions to this rule, as follows:
1. Where the minor is an ‘excepted person’ (which includes minors that are engaged in full-time
occupation on the last day of the income year, or who suffer from a disability) – refer to S.102AC.
2. Where the income received by (or distributed to) the minor is ‘excepted assessable income’
or ‘excepted trust income’ – refer to S.102AE and S.102AG, respectively.
In the context of testamentary trusts, significant tax planning opportunities can be achieved where
the trust income distributed to a minor qualifies as ‘excepted trust income’, as such income is
generally taxed at ordinary resident adult tax rates (i.e., the penalty rates do not apply).

Specifically, S.102AG(2)(a) of the ITAA 1936 provides that an amount included in the assessable
income of a trust is ‘excepted trust income’ in relation to a beneficiary, to the extent to which the
amount is assessable income of a trust estate that resulted from:
(a) a Will, codicil or a court order that varied or modified the provisions of a Will or codicil; or
(b) an intestacy or a court order that varied or modified the application, in relation to the deceased
estate, of the provisions of the law relating to the distribution of the estates of persons who
died intestate.

TAX TIP – Division 6AA exception for testamentary trusts

By design, this concession is intended to apply for a testamentary trust where one or more assets
owned by the deceased is directed (usually be their Will) to be held on testamentary trust.
Where this is the case, all of the assessable income generated by those assets will be ‘excepted
trust income’, in which case, the penalty rates of tax in Division 6AA will not apply (i.e., the resident
adult tax rates will apply instead). In addition, if the assessable income derived from those assets
is used to generate further assessable income in a later income year (i.e., the earnings on
earnings), that assessable income will also be excepted trust income. Furthermore, in the event
that such an asset is sold and the proceeds are re-invested in another asset, the assessable
income derived from that other asset will also be excepted trust income.

Recently, the Government amended Division 6AA of the ITAA 1936 by Treasury Laws Amendment
(2019 Measures No.3) Act 2019 to ensure that, broadly from 1 July 2019, these tax concessions
available to minors in relation to income from a testamentary trust only apply in respect of income
generated from assets of the deceased estate that are transferred to the testamentary trust (or the
proceeds from the disposal or investment of those assets).

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7.1 What was the perceived problem with S.102AG(2)(a)?

This recent legislative amendment (which applies to assets acquired or transferred to a
testamentary trust from the 2020 income year) primarily dealt with a perceived loophole with
respect to the Division 6AA exception for testamentary trusts in S.102AG(2)(a) that allowed the
concessions to be exploited.

In particular, S.102AG(2)(a) did not specify that the assessable income of the testamentary trust
had to be derived from assets of the deceased estate (or from assets representing assets of the
deceased estate). As a result, assets unrelated to a deceased estate that were injected into (e.g.,
transferred or loaned to) a testamentary trust could (subject to anti-avoidance rules – refer below)
generate excepted trust income that was not subject to the penalty rates of tax in Division 6AA for
a minor beneficiary. That is, the assessable income derived from that ‘injected asset’ would also
get the benefit of being excepted trust income of the minor. This was an unintended consequence,
which allowed some taxpayers to inappropriately obtain the benefit of concessional tax treatment.

Despite this concern, it should be noted that, prior to the most recent amendments, Division 6AA
was (and continues to be) safeguarded by two anti-avoidance provisions, broadly as follows:
• If any two or more parties to any act or transaction directly or indirectly connected with the
derivation of excepted assessable income were not dealing at arm’s length (e.g., the
testamentary trust receives above-market rent from a related party for a rental property), only
the amount that would have been derived from an arm’s length dealing is ‘excepted trust
income’. Refer to S.102AG(3).
• If any assessable income derived directly or indirectly as a result of an agreement or scheme
entered into for the purpose (other than an incidental purpose) of securing that the assessable
income would be ‘excepted trust income’ (e.g., a discretionary trust distributes income to the
testamentary trust), then that assessable income will not be ‘excepted income’. Refer to
S.102AG(4).
Consequently, if an asset was transferred to a testamentary trust for less than its market value (i.e.,
for non-arm’s length consideration), the assessable income derived from that asset would likely
attract the operation of these provisions, meaning that none of the income derived from the asset
will be ‘excepted trust income’.

However, while it would appear that these pre-existing anti-avoidance provisions already applied
to prevent the identified loophole (noted above) from being exploited, the Government’s recent
additional integrity measure was designed to put this beyond doubt.

7.2 Recent testamentary trust integrity rules introduced

In broad terms, the recent amendments to Division 6AA explicitly limit the tax concessions available
to minors in relation to income from a testamentary trust to income derived from assets in the
testamentary trust that were transferred from the deceased estate or subsequently accumulated.
This is achieved by imposing additional conditions that must be met to ensure that there is a
connection between the asset and the deceased estate in order for the testamentary trust’s
income to qualify as excepted trust income under S.102AG(2)(a).
In particular, for income of a testamentary trust to be considered ‘excepted trust income’ under
S.102AG(2)(a), S.102AG(2AA) requires both of the following (additional) conditions to be satisfied:
(a) The assessable income must be derived by the testamentary trust from property.
(b) The property satisfies any of the following three requirements:
(i) The first requirement – the property was transferred to the testamentary trust (to benefit
the beneficiary) from the estate of the deceased person concerned, as a result of the Will,
codicil, intestacy or order of a court (as mentioned in S.102AG(2)(a)).
(ii) The second requirement – the property represents accumulations of income or capital
from property that satisfies the first requirement.

© National Tax & Accountants’ Association Ltd: May – July 2021 15

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What’s new for individuals

(iii) The third requirement – the property represents accumulations of income or capital from
property that satisfies the second requirement or from property that has already satisfied
this (third) requirement.
Note that these new requirements apply in relation to assets acquired by or transferred to the
trustee of a testamentary trust estate on or after 1 July 2019 (i.e., from the 2020 income year).

TAX TIP – Injection of assets may lead to administrative nightmare

As a result of these new amendments, to the extent that no assets are injected into a testamentary
trust, all of the testamentary trust’s assessable income will be ‘excepted trust income’, subject to
the operation of the anti-avoidance provisions in S.102AG(3) and (4) discussed above.
Effectively, the recent amendments provide a clear incentive for testamentary trusts to avoid
allowing any assets to be injected into the trust. To do otherwise could potentially lead to an
accounting and administrative nightmare, due to the need to track the assessable income from the
various different assets, not to mention the need to ensure allowable deductions are allocated in a
reasonable manner accordingly.

7.3 The impact of the new rules on the 2021 ‘I’ return
As a result of these recent Division 6AA amendments, it appears that the ATO is determined to
ensure that it has a clearer picture of what income (and what classification of income) is being
distributed from testamentary trusts to minor beneficiaries.
In particular, the Trust Tax return was amended from the 2020 income year to incorporate a new
identifying code and label, as follows:
1. New code ‘E – Testamentary Trust’ was added to the existing group of codes for the type of
trust (to clearly identify when a trust return relates specifically to a testamentary trust).
2. New label C1 – Division 6AA eligible income was included in the Trust Tax Return Statement
of Distribution section (to identify the income of a minor that is subject to Division 6AA penalty
tax rates), for each presently entitled minor beneficiary of all trusts (not just testamentary trusts).

TAX WARNING – New ‘Testamentary Trust’ code for 2021 ‘I’ return
To facilitate the recent integrity rules for Division 6AA and the above changes to the Trust Tax
return, based on draft ATO tax return specifications at the time of writing, the ATO will be adding a
new ‘Testamentary Trust’ code at Item 13 – Partnerships and Trusts on page 8 of the 2021 ‘I’
return, next to the ‘amount fields’ for:
• label L – Share of net income from trusts (primary production); and

• label U – Share of net income from trusts less capital gains, foreign income and franked
distributions.

The purpose of this new code is to correctly identify individuals (including minors) who receive
income from a testamentary trust.

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What’s new for individuals

8. Avoiding the dangers with claiming business

losses on the 2021 ‘I’ return
The introduction of the non-commercial loss (‘NCL’) rules in Division 35 of the ITAA 1997 on 1 July
2000 (which broadly prevent tax losses incurred by individuals from business activities from being
deducted against other income unless certain tests are satisfied) created significant reporting
changes on the ‘I’ return for individuals with tax losses from business activities. This included the
introduction of Item P9 – Business loss activity details of the ‘I’ return.
Further developments affecting the NCL rules (including related reporting rules) have only added
to the complexity associated with completing the ‘I’ return for clients with business losses, resulting
in reporting errors and traps for these clients. These developments include the following:
• The introduction of the $250,000 income test for being able to access certain NCL tests.
• Modified reporting requirements for individuals relying on the Commissioner’s discretion in order
to claim their business losses.
• Modified reporting requirements for individuals with business-related income that is declared at
labels of the ‘I’ return other than the key business income labels.
It has also been identified that deferred tax losses from business activities under the NCL rules
have not been correctly carried forward. In particular, it has been identified that deferred business
losses under the NCL rules have been treated as normal carry forward tax losses, resulting in these
tax losses being deducted against other income (e.g., salary income and investment income) in a
later income year without the NCL rules being applied.

TAX WARNING – Increased business losses due to COVID-19

It is anticipated that more businesses will generate tax losses from their activities as a result of the
economic impact of COVID-19, thereby increasing the risk of errors occurring when reporting tax
losses from business activities on the 2021 ‘I’ return under the NCL rules.

8.1 An overview to applying the NCL rules in Division 35

Under the NCL rules in Division 35, a sole trader or individual partner who incurs an overall tax
loss from a business activity for an income year cannot deduct the loss against their other
assessable income (if any) in the same year, unless at least one of certain tests (‘the NCL tests’)
is satisfied. These tests are briefly summarised as follows:
(a) The $40,000 exception – This test (or exception) is satisfied where the business activity
qualifies as a primary production or professional arts business and the taxpayer’s assessable
income (excluding net capital gains) from other sources (i.e., from sources unrelated to the
business activity) is less than $40,000. Refer to S.35-10(4).
(b) The four NCL tests – Where the individual’s ‘income’ for NCL purposes (refer below) is less
than $250,000, the business activity meets any one of the following tests for the income year:
• The $20,000 assessable income test – This basically requires that the assessable income
from the business activity is at least $20,000 for the income year.
• The 3 out of 5 year profits test – This basically requires that the business activity has
produced a profit in at least three of the last five income years (including the current year).
• The $500,000 real property test – This basically requires that the market value of real
property used in the business on a continuing basis is at least $500,000 (generally, at the
end of the income year).
• The $100,000 other assets test – This basically requires that the value of any other
(prescribed) assets used in the business on a continuing basis (e.g., depreciating assets
and trading stock) is at least $100,000 (generally, at the end of the income year).

© National Tax & Accountants’ Association Ltd: May – July 2021 17

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TAX TIP – Immediate write-offs reduce value of other assets

The value of a depreciating asset for the purposes of the $100,000 other assets test is the asset’s
written down value (i.e., basically, the asset’s cost less deductible depreciation or decline in
value amounts). Refer to S.35-45(2) and S.45-40(3).
Therefore, where a depreciating asset is eligible for an immediate (or instant) write-off in the year
of purchase (e.g., the temporary full expensing of depreciating assets or the $150,000 instant asset
write-off concession for eligible business taxpayers), the asset’s written down value will be $0.

Note that, an individual’s ‘income’ for NCL purposes basically comprises their taxable income
(disregarding the tax loss from the business activity), total reportable fringe benefits amounts,
reportable superannuation contributions and net investment losses. Refer to S.35-10(2E).
(c) The Commissioner’s discretion – The Commissioner has exercised his discretion under
S.35-55 (by way of a product ruling or a private binding ruling) to allow the relevant tax loss
from the business activity to be claimed in any of the following situations:
(i) The business was (or will be) affected by special circumstances beyond the control of the
operators of the business (e.g., a fire, flood, drought, diseases affecting livestock or crops,
a pest plague or a hailstorm). This is intended to cover a business activity that would
have satisfied one of the four tests if it were not for special circumstances.
(ii) Where the individual’s ‘income’ for NCL purposes (refer above) is less than $250,000:
• the business activity, because of its nature, has not satisfied (or will not satisfy) one
of the four objective tests noted above; and
• there is an objective expectation (based on evidence from independent sources, where
available) that the activity will either meet one of the four ‘objective tests’ or produce a
profit within a period that is commercially viable for the industry concerned. This is
intended to cover a business activity that has a lead time between its commencement
and the production of any assessable income.
(iii) Where the individual’s ‘income’ for NCL purposes (refer above) is $250,000 or more:
• the business activity, because of its nature, has not produced (or will not produce) a
profit; and
• there is an objective expectation (based on evidence from independent sources, where
available) that the activity will produce a profit, within a period that is commercially
viable for the industry concerned. This is intended to cover a business activity that has
a lead time between its commencement and the production of any assessable income.

Where an individual carries on two or more separate business activities (whether alone and/or in
partnership), any activities that are of a ‘similar kind’ can be grouped and treated as the one
business activity for the purposes of applying the NCL rules. Otherwise, the NCL tests will need to
be applied separately to each business activity that generates a tax loss. Refer to S.35-10(3) and
TR 2001/14 (which, amongst other things, provides guidance on ‘similar’ business activities).

TAX WARNING – Deferring a tax loss under the NCL rules

Where none of the above tests (including the $40,000 exception and the Commissioner’s
discretion) are satisfied for a business activity for an income year, the tax loss from the activity
cannot be deducted against other assessable income (if any) in the same income year.
Instead, the tax loss is carried forward and treated as a ‘deemed’ deduction against assessable
income from the same (or a similar) business activity in the next income year in which it is carried
on. If the business makes another tax loss in the next income year (i.e., after deducting the deferred
tax loss from the previous year), the NCL rules are required to be applied again. Refer to S.35-10.

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8.2 A step-by-step consolidated guide to reporting business

losses on the 2021 ‘I’ return under the NCL rules
Where an individual incurs a tax loss from a business activity either alone or in a partnership for
the 2021 income year, certain key reporting obligations apply when completing the 2021 ‘I’ return.

The following 4-step process outlines the key reporting obligations on the ‘I’ return for a sole trader
and an individual partner in a partnership incurring a tax loss from a business activity in Australia
in the 2021 income year.

Step 1 – Report the tax loss from the business activity as usual
The tax loss from the business activity should be reported on the 2021 ‘I’ return in the normal way,
according to whether the individual is a sole trader or a partner in a partnership, basically as follows:

1. Sole trader with a business loss – The following key reporting obligations on the 2021 ‘I’ return
should be considered for a sole trader with a tax loss from a business activity:
(a) Item P1 – Personal services income (PSI) (page 12) should be completed to indicate
whether the income derived from the business activity was PSI and, if so, whether the
income derived was from conducting a personal services business (‘PSB’).
Income is PSI where it is derived mainly (i.e., more than 50%) from the personal efforts and
skills of the individual themselves, rather than mainly from the use of assets/equipment.
Income is basically derived from conducting a PSB where either the results test, the
unrelated clients test, the business premises test or the employment test is satisfied.
Where the income from the business activity is PSI, and the income is not derived from
conducting a PSB, the following reporting obligations arise:
• Label A – Net PSI (at Item P1) must be completed to report any tax loss from the activity
(which must be calculated under the PSI rules in Divisions 85 to 87 – particularly the
rules in Divisions 85, which deny a deduction for certain PSI-related expenses).
Note that, any deferred tax loss from the activity carried forward under the NCL rules
from the 2020 income year must generally be reported at label L – Total amount of
other deductions against PSI and taken into account in calculating any tax loss from
the activity for the 2021 income year (which is reported at label A).
• Item 14 – Personal services income (PSI) (page 8) should be completed to report any
tax loss from the activity that has been reported at Item P1, label A.

(b) Item P8 – Business income and expenses (page 13) should be completed where either,
the income derived from the business activity is not PSI or the income is PSI but it is derived
from conducting a PSB. Completing Item P8 essentially involves reporting:
• all income and expense details for the business activity at the relevant income and
expense labels at Item P8 (together with any reconciliation items); and
• the net loss from the activity at label Y (Primary production) or label Z (Non-primary
production) – Net income or loss from business.

TAX WARNING – Reporting any deferred loss from 2020

Where a sole trader has a deferred business loss from the 2020 income year in respect of the same
(or a similar) business activity, this must be taken into account in calculating whether there is an
overall tax loss from the activity in the 2021 income year.
To ensure that a 2020 deferred tax loss from the same (or a similar) business activity is correctly
deferred and taken into account in the 2021 income year, such a loss must be reported at Item P8,
label D (Primary production) or label E (Non-primary production) – Deferred non-commercial
business losses from a prior income year.

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• Item 15 – Net income or loss from business, labels B or C (page 9) of the return should
then be completed to report any net loss reported for the business activity at labels Y or Z
of Item P8 (i.e., after taking into account a deferred tax loss from the previous income year).
2. Individual partner with a business loss – A partner’s share of a partnership’s net income or
net loss from a business activity must be reported at Item 13 – Partnerships and trusts (page
8) of the 2021 ‘I’ return, at label N (Primary production) or label O (Non-primary production).
Furthermore, any allowable deductions the individual partner can claim in respect of their share
of the partnership’s net income or loss must be reported at either label X (Primary production)
or label Y (Non-primary production). These deductions are taken into account in determining
whether the partner has an overall tax loss related to the partnership’s business activity.

TAX WARNING – Reporting any deferred loss from 2020 for partners
Where a partner has deferred business loss from the 2020 income year in respect of the same (or
a similar) business activity, this must be taken into account in calculating whether the partner has
an overall tax loss from the business activity in the 2021 income year under the NCL rules. To
ensure that a 2020 deferred tax loss from the same (or a similar) business activity is correctly
deferred and taken into account in the 2021 income year, such a loss must be reported at labels
X or Y at Item 13 – Partnerships and trusts (i.e., as an ‘other deduction’ to the partner).

Note that, a foreign business loss is reported at Item 20, label M, page 10 of the 2021 ‘I’ return.

Step 2 – Reporting details of an overall tax loss from a business

activity under the NCL rules – Item P9
Item P9 (page 14) must be completed where a tax loss is recorded at certain labels, including:
• Item P1 – Personal services income, label A – Net PSI, and Item 14 – Personal services
income, label A (i.e., where the PSI rules apply);
• Item P8 – Business income and expenses, labels Y or label Z, and Item 15 – Net income or
loss from business, labels B or C (i.e., where the PSI rules do not apply); or
• Item 13 – Partnerships and trusts (for a partner in a partnership).

Note that, Item P9 must also be completed for a foreign business loss reported at Item 20.
Generally, Item P9 must be completed in respect of a tax loss that is incurred for an income year
(e.g., 2021 income year) from each separate business activity carried on by an individual as a sole
trader or as a partner in a partnership, where the tax loss has been reported at any of the above
labels (e.g., Item 13, Item 14 or Item 15). Where separate (but ‘similar’) business activities have
been grouped under the NCL rules, Item P9 is only required to be completed for the grouped
activities (i.e., as the one activity) where there is an overall tax loss from the grouped activities.
The basic purpose of Item P9 is to record whether or not any of the NCL tests have been passed
in respect of a business activity (including grouped activities) and, therefore, whether the tax loss
from the activity can be deducted against the taxpayer’s other assessable income (if any).

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Recording whether an NCL test is passed for an activity – ‘Type of loss’ code
In reporting whether the relevant business activity has passed one of the NCL tests, one of the
codes outlined in the following table must be recorded at label G – Type of loss, according to
whichever code is the most appropriate in a given situation.

Code Description

0 This code is used if an individual only has a tax loss from a passive investment
(e.g., a rental property) in a partnership reported at Item 13 – Partnerships and
trusts, label O (Distributions from partnerships – Non-primary production).
In this case, the following information should be reported at Item P9:
• The description of the activity should be reported as ‘Investment’ at label D
– Description of activity.
• The industry code ‘67110’ (i.e., Residential property owners) should be
reported at label E – Industry code.
• ‘P’ for partnership should be reported at label F – Partnership (P) or sole
trader (S).
• ‘0’ should be reported as the type of loss code at label G – Type of loss.
• $0 should be reported as the tax loss at label I – Net loss.
1 Business activity passes the $20,000 assessable income test and the
individual’s ‘income’ for NCL purposes is less than $250,000.
2 Business activity passes the 3 out of 5 years profits test and the individual’s
‘income’ for NCL purposes is less than $250,000.
3 Business activity passes the $500,000 real property test and the individual’s
‘income’ for NCL purposes is less than $250,000.
4 Business activity passes the $100,000 other assets test and the individual’s
‘income’ for NCL purposes is less than $250,000.

5 The Commissioner has issued a product ruling or a private binding ruling (‘PBR’)
advising that his discretion has been exercised to allow the tax loss from the
business activity to be claimed as a deduction in the current income year.
In this case, apart from reporting code 5 at label G – Type of loss, the following
(additional) information should be reported at Item P9 in relation to the product
ruling or the private binding ruling received by the individual:
(a) For a product ruling, record:
• ‘PR’ at label C – Reference for code 5;
• The ‘year’ of the product ruling at label Y – Year; and
• The ‘product ruling number’ at label A – Number.
(b) For a PBR, record ‘AN’ at label C – Reference for code 5.

6 The $40,000 exception applies for a professional arts business.

7 The $40,000 exception applies for a primary production business.

8 None of the above codes apply (including none of the NCL tests apply).

© National Tax & Accountants’ Association Ltd: May – July 2021 21

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Step 3 – Adding back a deferred tax loss where none of the NCL tests
are satisfied – Item 16
Where none of the NCL tests are satisfied in respect of a tax loss from a business activity in the
2021 income year (for a sole trader or individual partner), the loss is not deductible against other
income for the year and must be deferred (or carried forward) to the next income year in which the
business (or one of a similar kind) is carried on.
To ensure the tax loss is not deducted against other assessable income in the 2021 income year,
the loss must be ‘added-back’ by being reported (and therefore included as assessable income) at
Item 16 – Deferred non-commercial business losses (page 9).

Step 4 – Modified reporting rules for Item P9 and Item 16 – Individuals

with business-related income at other labels of the return
Situations will arise where an individual has a tax loss from a business activity in Australia for the
2021 income year that has been reported at the key business income labels of the return (e.g., at
Item P8 and Item 15 of the 2021 ‘I’ return for a sole trader), and the individual has other business-
related assessable income amounts disclosed elsewhere on the ‘I’ return. This can include:
• interest income derived from business bank accounts (reported at Item 10 – Gross interest
(page 2) of the 2021 ‘I’ return), but not interest on an FMD;
• an FMD repayment in respect of a primary production business (reported at Item 17 – Net farm
management deposits or repayments, label N (Early repayments – natural disaster and
drought) or label R (Other repayments) (page 9) of the 2021 ‘I’ return); and/or
• a net capital gain attributable to the disposal of a CGT (business) asset while carrying on the
business (reported at Item 18 – Capital gains (page 9) of the 2021 ‘I’ return).
These assessable income amounts will generally be considered to be assessable income from the
business activity for the purposes of calculating any overall tax loss from the business under the
NCL rules. This is because, for the purposes of the NCL rules, a tax loss from a business activity
for an income year arises where the amounts attributable to the business activity for the year that
could otherwise be deducted exceed the assessable income from the business activity. Refer to
S.35-10(2) and paragraphs 92A to 92E of TR 2001/14.
This approach has been confirmed/supported by the ATO’s tax return instructions for completing
Item P9 (e.g., refer to the ATO’s Business and professional items 2020 instructions). In particular,
these instructions provide a calculation worksheet (refer to ‘Worksheet 1a’) to allow individuals
in these situations to determine whether there is an overall tax loss from their business activity for
NCL purposes. The ATO’s worksheet effectively offsets all other business-related assessable
income amounts disclosed elsewhere on the ‘I’ return, against a tax loss from the activity disclosed
at the key business labels (e.g., at Item 15 for a sole trader not affected by the PSI rules).
Where this results in a reduced tax loss or an overall tax profit from the business activity, the
following modified reporting rules apply at Item P9 and Item 16 for the activity:
(a) Reduced tax loss from business activity – It is the reduced tax loss that is:
• reported at Item P9, label I – Net loss; and
• ‘added back’ at Item 16 – Deferred non-commercial business losses.

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(b) Overall tax profit (or ‘zero’ net profit) for the business activity – Item P9 must still be
completed for the business activity in the normal manner (if you do not have a tax loss from
another business activity), but with the following modifications:
• Code ‘5’ should be reported as the type of loss code at label G – Type of loss.
• ‘AN’ should be reported as the reference for code 5 at label C – Reference for code 5.
• The number ‘200926’ should be reported at label A – Number.
• $0 should be reported as the tax loss at label I – Net loss.

EXAMPLE 1 – Completing the 2021 ‘I’ return for a business loss

Patrick is a part-time employee earning an annual salary of $120,000.
Patrick also carries on a beef cattle primary production business as a sole trader, which had a
deferred tax loss under the NCL rules of $4,000 from the 2020 income year. For the 2021
income year, Patrick’s beef cattle business generated assessable income of $18,000 and had
allowable deductions of $24,000, resulting in a tax loss of $6,000.
After taking into account the 2020 deferred tax loss of $4,000, Patrick’s overall tax loss from his
beef cattle business for the 2021 income year is $10,000 (i.e., $4,000 deferred tax loss from 2020
+ $6,000 tax loss for 2021). Assuming that none of the NCL tests are satisfied, Patrick’s overall
business loss cannot be claimed as a deduction against his other assessable income (i.e., salary
income) for the 2021 income year, but must be deferred (or carried forward) as a deduction against
assessable income from the business activity in the 2022 income year (assuming it continues).
Completing the key labels on the 2021 ‘I’ return for Patrick’s business loss
The following is a summary of the key labels that would need to be completed when preparing
Patrick’s 2021 ‘I’ return to ensure that the NCL rules are correctly apply in respect of Patrick’s
overall business loss of $10,000 for the 2021 income year.
Step 1 – Recording Patrick’s overall tax loss for 2021 at Item P8 and Item 15
(a) Item P8 (page 13) – The following amounts must be reported at Item P8 (page 13):
• Patrick’s 2021 tax loss of $6,000 must be reported at label B – Net income or loss from
business this year (Primary production).
• Patrick’s 2020 deferred tax loss of $4,000 must be reported at label D – Deferred non-
commercial losses from a prior year (Primary production).
• Patrick’s overall tax loss of $10,000 for the 2021 income year must be reported at label Y
– Net income or loss from business (Primary production).
(b) Item 15 (page 9) – Patrick’s overall tax loss of $10,000 must also be reported at Item 15 – Net
income or loss from business, label B (Primary production).
Step 2 – Record whether the NCL rules apply at Item P9
As Patrick’s business activity generated an overall tax loss for the 2021 income year (as reported
at Item 15), Item P9 must also be completed to ensure that the NCL rules are applied, as follows:

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Step 3 – Add-back 2021 deferred tax loss under NCL rules (Item 16)
As none of the NCL tests were satisfied by Patrick’s business activity, the $10,000 overall tax loss
reported (and effectively claimed) at Item 15 must be added-back so that it cannot be deducted
against Patrick’s other assessable income (e.g., salary income).
To add-back Patrick’s overall tax loss of $10,000, the loss must be recorded at Item 16 – Deferred
non-commercial business losses, labels G and I (page 9).

What if Patrick withdrew $9,000 from an FMD account in the 2021 income year related to his
beef cattle business (reported at Item 17 – Net farm management deposits or repayments)?
In this case, Patrick’s assessable FMD withdrawal must be taken into account in determining
whether he has an overall tax loss from his business activity under the NCL rules.
Once this amount is offset against his $10,000 tax loss reported at Item P8 and Item 15, Patrick’s
overall tax loss from his business activity for the 2021 income year is $1,000 (i.e., $10,000 tax
loss less $9,000 assessable FMD withdrawal).
As a result, although Item P8 and Item 15 of Patrick’s 2021 ‘I’ return would still report a tax loss of
$10,000 (as part of Step 1 above), the following modifications apply for Item P9 and Item 16:
• At Item P9 (as part of Step 2 above), the amount reported at label I – Net loss is $1,000.
• At Item 16 (as part of Step 3 above) the amount reported at labels G and I is $1,000.
These reporting modifications ensure that the $10,000 tax loss reported at Item 15 is offset against
the $9,000 assessable FMD withdrawal reported at Item 17, with the remaining (or overall) tax loss
of $1,000 being deferred under the NCL rules at Item P9, label I and at Item 16.
What if Patrick’s FMD withdrawal during the 2021 income year was $11,000 instead?
In this case, Patrick’s business activity will generate an overall tax profit of $1,000 (i.e., $10,000
tax loss at Item P8 and Item 15 less $11,000 assessable FMD withdrawal at Item 17).
As a result, although Item P8 and Item 15 of Patrick’s 2021 ‘I’ return would still report a tax loss of
$10,000 (as part of Step 1 above), the following modifications apply for Item P9 and Item 16:
• At Item P9 (as part of Step 2 above), different reporting rules apply for label G – Type of loss,
label C – Reference for code 5, label A – Number and for label I – Net loss, as follows:

• At Item 16 (as part of Step 3 above), the amount reported at labels G and I is $0.
These reporting modifications ensure that the $10,000 tax loss reported at Item 15 is fully offset
against the $11,000 assessable FMD withdrawal reported at Item 17.

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Increased Small Business Income Tax

Offset (‘SBITO’) applies for 2021
Since 1 July 2015, individuals in receipt of business income either directly as an eligible sole trader
or from an eligible small business entity (‘SBE’) (other than a corporate tax entity) have been
entitled to a discount (‘tax discount’) on the income tax that is payable in respect of their ‘total net
small business income’. This tax discount has been available in the form of a non-refundable tax
offset (i.e., the SBITO) under Subdivision 328-F of the ITAA 1997.

The SBITO was originally calculated as 5% of an eligible individual’s tax liability attributed to their
net small business income (capped at $1,000). The SBITO discount rate (or percentage) then
increased to 8% for the 2017 to 2020 income years, and will increase to 13% for the 2021 income
year (and then to 16% from the 2022 income year), as outlined in the following table. Refer to
S.328-360 of the ITAA 1997.

Income Year SBITO Discount Rate

2016 5%

2017 to 2020 8%

2021 13%

2022 and later years 16%

TAX WARNING – Annual SBITO cap amount of $1,000 per individual

Despite the increase in the SBITO discount rate (i.e., to 13%) for the 2021 income year, an
individual’s overall SBITO entitlement for the income year will continue to be capped at $1,000.
Also, an eligible individual taxpayer is only able to claim one SBITO for an income year, irrespective
of the number of sources of ‘total net small business income’ they have. For example, where an
SBE sole trader also receives net small business income from an SBE partnership in which they
are a partner for an income year, their total SBITO entitlement for the year will still be limited to (or
capped at) $1,000. Refer to S.328-360(2) of the ITAA 1997.

These seminar notes will address some of the key features of (and common issues often raised in
relation to) the SBITO, in light of the increased SBITO discount rate (or percentage).

Note that, all legislative references in this segment of the notes are to the ITAA 1997, unless
otherwise indicated.

1. Which individuals are eligible for the increased

SBITO in the 2021 income year?
An individual is eligible for the SBITO for the 2021 income year where either or both of the following
conditions are satisfied:
(a) The individual is an SBE sole trader for the income year. Refer to S.328-355(a).
(b) The individual’s assessable income for the year includes a share of the net income of an SBE
that is not a corporate tax entity. In other words, the individual is a partner of an SBE
partnership or a beneficiary of an SBE trust, and their assessable income for the year
includes a share of the partnership or trust’s net income for the year. Refer to S.328-355(b).

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Broadly, an entity is an SBE (e.g., an SBE sole trader, partnership or trust) for an income year
(‘current year’) where the entity carries on a business and has an ‘aggregated turnover’ of less
than the relevant turnover threshold (i.e., currently for SBITO purposes, less than $5 million).
Note that, this is a lower aggregated turnover threshold compared to the aggregated turnover
threshold for other SBE concessions (e.g., which is currently less than $10 million for certain other
SBE concessions other than the small business CGT concessions).

For these purposes, an entity’s ‘aggregated turnover’ for an income year is equal to its ‘annual
turnover’ for the year, together with the ‘annual turnover’ of any ‘connected entities’ and ‘affiliates’.
The ‘annual turnover’ of an entity is the GST-exclusive amount of all ‘ordinary income’ derived
by the entity in the ordinary course of its business. Refer to S.328-357 and Subdivision 328-C
(i.e., S.328-105 to S.328-130).

2. How is the SBITO calculated for an eligible

individual for the 2021 income year?
Broadly, the SBITO for the 2021 income year is calculated as a percentage of that part of an eligible
individual’s tax liability for the year that is attributable to their ‘total net small business income’
for the year (i.e., so much of their taxable income that is derived from their own small business
activities and/or from an SBE partnership and/or an SBE trust). Refer to S.328-360.

Specifically, an eligible individual’s SBITO entitlement for the 2021 income year is calculated by:
• determining the percentage of the individual’s taxable income for the year that represents their
‘total net small business income’;
• applying this percentage to the individual’s basic income tax liability for the year (which does
not include the Medicare levy or the Medicare levy surcharge); and
• applying the relevant tax discount percentage (i.e., 13% for the 2021 income year) to the result
at (b) above, but capped to $1,000. The result is the tax offset amount for the year.

TAX TIP – Formulaic SBITO calculation for the 2021 income year
In other words, the amount of the offset for the 2021 income year is equal to 13% of the following:

2.1 Determining an individual’s ‘total net small business

income’ for the 2021 income year
An individual’s ‘total net small business income’ for the 2021 income year (which will potentially
be eligible for the tax discount) is calculated as the sum of the following:
1. The ‘net small business income’ the individual derives directly as an SBE (i.e., as an SBE sole
trader) during the year.
2. The individual’s share of an SBE partnership or trust’s ‘net small business income’ included in
their assessable income, less any deductions available to the individual partner or beneficiary
to the extent they are attributable to that share. Refer to S.328-360(1).

Where an SBE’s ‘net small business income’ is negative (i.e., the assessable income included in
the entity’s net small business income is less than the deductions related to that income), the
entity’s net small business income for the year is taken to be zero. Refer to S.328-365(2).

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Furthermore, an individual’s ‘total net small business income’ for an income year is capped at the
amount of their taxable income for the year. Refer to S.328-360(1). Modified rules also apply in
calculating the ‘total net small business income’ of a minor (i.e., a child under the age of 18) who
is a ‘prescribed person’ under S.102AC of the ITAA 1936. Refer to S.328-375.

2.1.1 Excluded assessable amounts and deductible expenses

When calculating an SBE’s ‘total net small business income’, the following two assessable income
amounts are specifically excluded:
• Net capital gains – even those related to ‘business’ assets. Refer to S.328-365(1)(a).
• Personal Services Income (‘PSI’) – PSI that is not derived from conducting a personal services
business (‘PSB’). Refer to S.328-365(1)(b).

Additionally, when calculating ‘total net small business income’, the following deductible amounts
are also specifically excluded (which will increase a taxpayer’s total net small business income):
• Deductions for tax-related expenses (under S.25-5).
• Deductions for gifts or contributions (under Division 30).
• Deductions for personal superannuation contributions (under Subdivision 290-C).

TAX WARNING – Prior year (carry forward) tax losses are also ignored
An SBE’s prior year tax losses carried forward to the current year are not attributable to the income
earned by the entity in the current year, which means that such tax losses are generally not treated
as deductible in working out the entity’s ‘net small business income’ in the current year.
However, as an exception to this rule, prior year tax losses that have been previously deferred by
an individual under the non-commercial loss (‘NCL’) rules in Division 35 that can now be claimed
as a deduction in the current year (e.g., because the same or a ‘similar’ business activity is being
carried on) will reduce the individual’s ‘net small business income’ in the current year.
However, if the individual’s business activity generates an overall tax loss in the current year (after
taking into account any deductible deferred tax loss from a prior income year), the NCL rules need
to be applied once again in determining whether the overall tax loss in the current year can be
claimed as a tax deduction against the individual’s other assessable income.

TAX TIP – NTAA’s SBITO Calculation worksheet for 2021

The NTAA has developed a five-step SBITO calculation worksheet, which can be used to
calculate an eligible individual’s SBITO entitlement for the 2021 income year. The SBITO
calculation worksheet is available on the NTAA’s 2021 Day 1 Tax Schools Software.
The following example illustrates how to calculate the SBITO entitlement for an eligible individual
for the 2021 income year, based on the NTAA’s five-step SBITO calculation worksheet.

EXAMPLE 2 – Calculating the SBITO for the 2021 income year

Kristyn is an SBE sole trader selling cowgirl fashion online during the 2021 income year, which
generated $80,000 net small business income for this income year.
Kristyn is also a partner in an SBE partnership with her friend Heather, running a separate online
fashion store selling Bohemian style clothing. For the 2021 income year, the partnership had a
net small business income of $40,000, of which $20,000 (i.e., 50%) is included in Kristyn’s
assessable income.
Kristyn also has taxable income related to investments for the 2021 income year of $10,000.

© National Tax & Accountants’ Association Ltd: May – July 2021 27

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Calculating Kristyn’s SBITO entitlement for the 2021 income year

Kristyn’s SBITO (or 13% tax discount) for the 2021 income year will be calculated as follows:
Step 1: Kristyn determines the following:
• 2021 Taxable income $110,000 u
• 2021 Basic income tax liability $ 26,217 v
• 2021 Total net small business income $100,000 w
Step 2: Determining the percentage that represents net small business income
$100,000 Total net small business income / $110,000 taxable income = 0.909 or 90.9%
Step 3: Multiply basic tax liability by the ‘Step 2’ percentage
$26,217 x 90.9% = $23,831 (rounded)
Step 4: Multiply ‘Step 3’ by 13%
$23,831 x 13% = $3,098 (rounded)
Step 5: SBITO limited to $1,000
As the ‘Step 4’ result exceeds $1,000, Kristyn’s SBITO is capped at $1,000.

u $80,000 (sole trader net small business income) + $20,000 (share of partnership net small business
income) + $10,000 investment income.
v Basic tax liability does not include the Medicare levy or the Medicare levy surcharge. Refer to S.4-10(3)
of the ITAA 1997.
w 80,000 (sole trader net small business income) + $20,000 (share of partnership net small business
income).

3. SBITO reporting obligations on 2021 ‘I’ return

The ATO automatically calculates an individual taxpayer’s SBITO entitlement (if any) based on the
individual’s ‘net small business income’, reported at the following labels of the 2021 ‘I’ return:
(a) For an SBE sole trader – At Item 15 – Net income or loss from business, label A – Net
small business income.

(b) For a partner of an SBE partnership or a beneficiary of an SBE trust – Their share of the
partnership’s or trust’s ‘net small business income’ (but only to the extent it is included in their
assessable income) will be recorded at Item 13 – Partnerships and trusts, at either:
• label D – Partnership share of net small business income less deductions
attributable to that share; or
• label E – Trust share of net small business income less deductions attributable to
that share.

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Furthermore, an SBE partnership and an SBE trust will be required to report its total net
small business income (from one or more business activities) on its own tax return for the 2021
income year. This information (also reported on an SBE partnership and trust’s ‘Statement
of distribution’ for an individual partner or beneficiary) will be used as the basis for completing
Item 13 of the individual’s 2021 tax return (i.e., when completing Item 13, labels D and/or E).

TAX WARNING – Common reporting traps previously advised by ATO

The ATO has previously advised that the net small business income labels (i.e., Item 15, label A,
and Item 13, labels B and C) are merely reporting labels. This means the following:
• The relevant amounts are not added to the individual’s taxable income, but will be taken into
account by the ATO in calculating the individual’s SBITO entitlement for the 2021 income year.
• An SBE sole trader’s net income from business must continue to be reported at the relevant
business income labels of the return (e.g., at Item P8 – Business income and expenses, and
at Item 15 – Net income or loss from business, labels B or C).
• A partner’s share of a partnership’s net income, or beneficiary’s share of a trust’s net income,
must continue to be reported at the relevant labels of the return (i.e., at Item 13).
Furthermore, the ‘Net small business income’ amount of an SBE sole trader, reported at Item 15,
label A, must exclude income which is not eligible for the SBITO, such as PSI (that is not derived
from conducting a PSB), net capital gains, salary or wages income and director’s fees.
For a partner in an SBE partnership or for a beneficiary of an SBE trust, their assessable share
of the SBE’s net small business income reported at Item 13, labels D or E, must be reduced (at
these labels) by any deductions the individual can personally claim against such income. These
may include deductible interest expenses that relate to a partner’s borrowings used to acquire their
interest in the partnership, a partner’s deferred NCL from a prior income year, and any deemed
deduction related to eligible water facilities, landcare operations and horticultural plants.

Note that, once the ATO has calculated an eligible individual’s SBITO entitlement, the amount will
be reported by the ATO as a non-refundable tax offset on the individual’s notice of assessment.

4. Common questions in relation to the SBITO

The following questions are often raised by tax agents with the NTAA in relation to the SBITO.

Question 1 – Is an individual trustee eligible for the SBITO in respect

of net income of an SBE trust?
No. An individual trustee (nor indeed any trustee) who is liable to pay tax on any net income of an
SBE trust is not entitled to the SBITO (or tax discount) in respect of any tax payable:
• under S.99 or S.99A of the ITAA 1936; or
• on behalf of a beneficiary under S.98 of the ITAA 1936 (e.g., where the beneficiary is under a
legal disability). In such instances, only the relevant individual beneficiary could be eligible to
claim the SBITO if they are required to lodge a tax return (e.g., under S.100 of ITAA 1936).

This is because the SBITO is only available to individuals, other than individuals in their capacity
as the trustee of a trust. Refer to S.960-100(4).

Question 2 – Are the results of multiple business activities combined

when calculating ‘total net small business income’?
Where an eligible individual receives net small business income from multiple business activities
in an income year (whether as an SBE sole trader and/or as a partner in an SBE partnership and/or
as a beneficiary of an SBE trust), the individual’s ‘total net small business income’ (for the purposes
of the SBITO) is generally calculated by combining the results of all such activities.

© National Tax & Accountants’ Association Ltd: May – July 2021 29

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However, if one or more business activities for an SBE sole trader (or for a partner in an SBE
partnership) generates a tax loss for the year, the NCL rules in Division 35 must first be applied to
determine whether the tax loss can be deducted against other income (i.e., against the tax profit
generated from another business activity). In effect, any tax loss unable to be claimed because of
the NCL rules (i.e., because the relevant loss needs to be deferred or quarantined) will not be
taken into account in working out the individual’s ‘net small business income’ for that income year.

Question 3 – Is the SBITO available where an individual receives net

small business income through an interposed trust that
itself does not carry on a business?
No. The ATO has previously advised the NTAA that an individual will not be entitled to the SBITO
for an income year where they merely derive income as a beneficiary of a discretionary trust that
does not carry on business, where the discretionary trust receives a share of net small business
income as a partner in an SBE partnership or as a unit holder of an SBE unit trust. In other words,
where an individual does not derive a share of net small business income of an SBE partnership
or of an SBE trust directly from the SBE, they will not be entitled to claim the SBITO.

This is because the SBITO provisions do not contain any ‘look-through’ provisions where ‘net small
business income’ is effectively distributed to an individual via passive entities (i.e., entities that are
not SBEs in their own right).

As indicated above, this can prove problematic for an SBE partnership of discretionary trusts,
primarily because it is the partnership (rather than the partners) that is the SBE. Refer to S.328-
110(6). As a result, individual beneficiaries of a non-SBE discretionary trust ‘partner’ will not be
considered to have received a share of ‘net small business income’ from the SBE partnership (for
the purposes of the SBITO). On this basis, an individual beneficiary will have no entitlement to
claim the SBITO in respect of distributions received from a non-SBE discretionary trust partner.

Furthermore, similar problems present themselves in other multi-tiered business structures, such
as an SBE unit trust, where the unit holders of the trust are ‘passive’ discretionary trusts, rather
than the ultimate individual beneficiaries. Again, in such a case, the individual beneficiary is
receiving a distribution of income from a passive discretionary trust that is not an SBE, which
means that they do not satisfy the eligibility requirement in S.328-355(b).

Question 4 – Can SBITO claims be maximised for trust beneficiaries

by paying larger distributions and lower salaries?
Situations will arise where an individual is an employee of an SBE trust, as well as a beneficiary of
the trust. In these instances, the SBITO cannot be claimed by the individual in respect of any
salary or wages income paid to them as an employee. Furthermore, any such salary or wages
income will have the effect of reducing the SBE trust’s net small business income (i.e., by way of a
deduction), thereby reducing the amount of such income that can be distributed to the individual
as a beneficiary. In turn, this reduces the income that could potentially be eligible for the tax
discount (i.e., the SBITO) in the hands of the individual beneficiary who is also earning salary or
wages income from the trust. Refer to S.328-365(1)(b).

As a result, in these situations, the SBITO can be maximised by increasing the amount of trust
distributions made (and reducing the amount of salary or wages paid) to such eligible beneficiaries
(subject to the $1,000 annual SBITO cap). However, in paying a lower salary or wages amount,
consideration should be given to how this would impact related issues, such as the employee’s
superannuation guarantee entitlements (and/or the employer’s superannuation reporting
obligations), as well as possible employer payroll and work cover implications.

When dealing with a discretionary trust (that is an SBE), it should also be remembered that there
is no restriction on the number of eligible individual beneficiaries who can benefit from the SBITO
with respect to the net small business income of the relevant trust. However, any distributions of
a trust’s net business income to a minor (i.e., a child under the age of 18) who is a ‘prescribed
person’ under S.102AC of the ITAA 1936 will not be eligible for the SBITO.

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Major developments for individuals using

their home for work or business
In recent years, it has become increasingly common for more individuals to use part of their home
for work or business. This has particularly been the case in the past 12 months as a result of the
COVID-19 pandemic.

There are certain tax issues that are often raised when an individual uses part of their home for
work or business (i.e., for income-earning purposes), such as:
• whether claims can be made for additional running expenses (e.g., electricity and gas) and/or
occupancy expenses (e.g., mortgage interest and council rates); and
• how the CGT main residence exemption is affected (and whether the small business CGT
concessions could be available) when an individual’s home is eventually sold.

These seminar notes will address the following recent developments that will affect individuals
using their home for work or business:
1. The Tribunal’s decision in McAteer v FCT [2020] AATA 1795, which dealt with a home office
occupancy expenses claim for an IT employee who was required by his employer to be ‘on-
call’ 24 hours a day for one week in every four weeks, and was required to perform his after-
hours work from home using computer equipment provided by his employer.
2. The ATO’s extension of its temporary 80 cents per hour (short-cut method) method for
claiming home office running expenses until 30 June 2021.
3. New dangers with applying the CGT small business concessions for individual taxpayers who
partly use their home to carry on a business, following the recent decisions in Rus v FCT
[2018] AATA 1854, FCT v Eichmann [2019] FCA 2155 and Eichmann v FCT [2020] FCAFC 155.
All legislative references in this segment are a reference to the ITAA 1997, unless otherwise stated.

1. Tribunal allows ‘on-call’ employee to claim

home occupancy expenses – McAteer’s case
An employee’s claim for home office occupancy expenses (e.g., mortgage interest, council rates
and insurance) was recently challenged by the ATO at the Administrative Appeals Tribunal (‘the
Tribunal’) in McAteer v FCT [2020] AATA 1795 (‘McAteer’s case’).

More specifically, in McAteer’s case, an IT employee was required by his employer to be on-call
24 hours a day for one week in every four weeks (based on a roster), and was required to perform
his after-hours work during this period from his home using computer equipment provided by his
employer. The taxpayer was entitled to claim a portion of his occupancy expenses (e.g.,
mortgage interest and rates) related to part of his home that was exclusively used for this purpose.

1.1 The background to claiming home occupancy expenses

Generally, expenses associated with a taxpayer’s home are private in nature and do not qualify for
a deduction under S.8-1. However, where part of a taxpayer’s home is used for genuine work-
related activities or for business purposes, the Courts (and the ATO) have traditionally recognised
that deductions may be available for the following two categories of expenses:
(a) Additional running expenses (e.g., electricity, gas, cleaning and depreciation of office
furniture and equipment).
(b) A portion of occupancy expenses (e.g., mortgage interest, rent, council rates and building
insurance), but only where a taxpayer’s home has the character of a ‘place of business’.

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It has been traditionally accepted that deductions for occupancy expenses related to a taxpayer’s
home (e.g., mortgage interest, council rates and building insurance) can only be claimed where
the taxpayer’s home (including part of the home) has the character of a ‘place of business’.

Where an area of a taxpayer’s home is regarded as a ‘place of business’, deductions for occupancy
expenses are usually claimed on a floor area basis (i.e., the floor area of the part of the home that
has the character of a ‘place of business’, as a proportion of the total floor area of the home).
However, where the area of a taxpayer’s home is a place of business for only part of an income
year, occupancy expenses would generally need to be apportioned on both a floor area and a
time basis (with the time apportionment reflecting the period during the year that the relevant area
of the taxpayer’s home was used for income producing or work-related purposes).
Where part of a taxpayer’s home has the character of a ‘place of business’, claims can generally
also be made for additional running expenses (e.g., electricity and gas) incurred by the taxpayer.

TAX WARNING – Home used for work as a ‘matter of convenience’

The situation of a taxpayer’s home having the character of a ‘place of business’ can be
distinguished from the more common situation where a taxpayer merely uses part of their home
(e.g., a home office) as a matter of convenience (e.g., an employee uses their home to undertake
work that would otherwise be done at the employee’s regular place of employment).
In this case, no deductions can be claimed for occupancy expenses. Deductions can only be
claimed for additional home office running expenses (e.g., electricity, gas, depreciation of office
furniture/equipment and telephone). Refer to TR 93/30 and PS LA 2001/6.

1.1.1 When does a home have the character of a ‘place of business’?

It is generally accepted that an area of a taxpayer’s home that is used for work or business will
have the character of a ‘place of business’ in either of the following two situations:
(a) Area used to carry on a business – The area is set aside exclusively for the carrying on of
a business by the taxpayer.
In this regard, at paragraph 5 of TR 93/30, the ATO advises that the following factors may
indicate that an area set aside at a taxpayer’s home has the character of a place of business:
• The area is clearly identifiable as a place of business.
• The area is not readily suitable or adaptable for use for private or domestic purposes
in association with the home generally.
• The area is used exclusively (or almost exclusively) for carrying on a business.
• The area is used regularly for visits of clients or customers.

TAX TIP – Examples of taxpayers carrying on business from home

Common examples of when part of a taxpayer’s home is likely to have the character of a place of
business under this category include the following:
• A medical practitioner or a dentist uses part of their home to conduct their practice (e.g.,
comprising a reception/waiting area and two rooms that are used for consulting with patients).
• A self-employed tradesperson (such as a painter, plumber or electrician) uses a room in their
home, or a portion of their property (e.g., a shed or garage), as a base from which to operate
their business (e.g., to make contracts, meet clients, make calls, store materials, etc.).
• A self-employed architect uses a dedicated room in their home to carry on business (e.g., to
organise work, to develop plans and drawings, and for client meetings).

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(b) Area used as sole base of operations – The area is used as the taxpayer’s sole base of
operations for income producing activities. This can extend the concept of an area in a
taxpayer’s home having the character of a ‘place of business’ to those situations where the
taxpayer may not be carrying on a business as such (i.e., in the traditional sense, as noted
above). Refer to paragraphs 4 and 12 of TR 93/30.
However, in order for an area of a taxpayer’s home (e.g., a home office) to be considered a
sole base of operations, the taxpayer must show that, as a matter of fact:
• it is a requirement inherent in the nature of the taxpayer's activities that the taxpayer needs
a place of work (or business);
• the taxpayer's circumstances are such that there is no alternative place of work (or
business), thereby making it necessary to work from home (i.e., the taxpayer must be able
to show that they are not merely working from home because it is convenient to do so); and
• the relevant area of the home is used exclusively (or almost exclusively) for income
producing purposes.

TAX TIP – Examples of taxpayers who have been considered to have

a sole base of operations at home
Examples of where the Courts and Tribunals have accepted that part of a taxpayer’s home was
used as their sole base of operations include the following:
(a) A self-employed script writer using one room of a flat for writing purposes and for meetings
with television station staff – refer to Swinford v FCT 84 ATC 4803.
(b) An employee architect conducting a small private practice from home – refer to Case F53 74
ATC 294.
(c) A country sales manager for an oil company (who was not provided with a place to work by
his employer) using part of his residence to carry out his work duties (e.g., to compose reports
for dispatch to head office, and to deal with incoming and outgoing correspondence and
telephone calls) – refer to Case T48 86 ATC 389.
(d) A taxpayer using a leased house which was fitted out with a home office to carry out his work
duties, as his employer did not provide him with an office or any accommodation – refer to
Nicoll v FCT [2002] AATA 1157.

1.2 The background to McAteer’s case

The relevant facts and circumstances regarding McAteer’s case (which is also based on evidence
provided at the Tribunal hearing) can be summarised as follows:
1. Taxpayer’s employment – During the 2017 and 2018 income years (‘the relevant years’), the
taxpayer (Mr McAteer) was employed as a “Database Team Lead, Oracle Platform Services”
for the Westpac Bank (‘Westpac’). The taxpayer’s team maintained the Bank’s computer
system and was required to provide 24/7 on-call support based on a roster.
2. Use of taxpayer’s home to perform work while on-call – The taxpayer was required to be
on-call 24 hours a day for one week in every four weeks (based on a roster), in case he was
needed to attend to a problem or malfunction with the Bank’s computer system.
During these one week on-call periods, the taxpayer’s working arrangements were as follows:
(a) The taxpayer was required to perform his after-hours work from home during these periods.
In particular, he could not practicably be located in his employer’s premises after hours
during these periods, as access to those premises after hours was quite difficult (e.g., a
special form had to be completed in advance, air-conditioning would need to have been
switched on and security would need to have been provided).

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(b) Westpac had provided the taxpayer with computers and other equipment for use in his work
at home – based on the evidence, the taxpayer was required to keep this equipment at his
home so that he could perform his duties during after-hours while on-call. The taxpayer
also had a number of computers he kept at various places in his home which he used as
part of his work.
(c) The taxpayer’s home had four levels, as follows:
• At the bottom level was a garage and a storage space.
• Half a level above the garage was a study/computer lab (‘study’), which was also used
as an entry to the rest of the house through a front door that required passage through
the study.
• In the middle was a kitchen, family room, living room and dining room.
• At the top was family bedrooms and bathrooms.

3. Taxpayer’s home office claims – For the relevant years, the taxpayer claimed deductions for
occupancy costs (e.g., interest and council rates) relating to various areas of his home in which
computers that he used for work had been installed, including the storage space (at the bottom
level), the study (half a level above the garage) and the living room (in the middle level).
The taxpayer also claimed running expenses in relation to his home, such as electricity, gas,
internet, phone and water use.
Although the taxpayer eventually conceded that his occupancy expenses claim related to the
living room area could not be sustained, he argued that his occupancy expenses related to the
study and storage space were deductible. This is because these areas had been used wholly
for work purposes in the relevant years, namely that:
• the study was wholly dedicated to work computers; and
• the storage space was used to store books, manuals and records relating to his employment.

4. ATO’s audit and adjustments – Following an audit of the taxpayer’s home office claims, the
Commissioner disallowed all claims for occupancy expenses and allowed certain running
expenses claimed (e.g., electricity and internet) in accordance with TR 93/30.
The ATO issued amended assessments for the relevant income years and the taxpayer
subsequently objected to those amended assessments. The taxpayer’s objections were
disallowed by the ATO and the taxpayer then requested a review of his claims by the Tribunal.

5. Taxpayer’s ‘live chat’ with the ATO – After the taxpayer was advised by the ATO that his
home office claims for the relevant years were being audited, the taxpayer instituted a ‘live chat’
on the ATO website and was told that it was correct to claim occupancy expenses like “interest,
rates, gas and electricity”. However, the taxpayer did not give details to the ATO of his home
office, employment conditions, job or the amount of the expenses. Furthermore, the taxpayer
did not specifically request advice from the ATO in the form of an oral ruling.
After lodging an objection against the amended assessments, the taxpayer again contacted the
ATO and this time requested an oral ruling. He was advised that the transcript of the ‘live chat’
counted as an oral ruling and that he should wait for the objection decision to be made.
On this basis, it appears that the taxpayer argued that the ‘live chat’ with the ATO was an oral
ruling and that the Commissioner was bound by the advice provided (i.e., that it was correct to
claim occupancy expenses like in “like interest, rates, gas and electricity”).

1.3 The Tribunal’s decision in McAteer’s case

The key issue that was considered by the Tribunal was whether the taxpayer was entitled to claim
a portion of his occupancy expenses under S.8-1 of the ITAA 1997 during the periods (one week
out of four weeks) that he used his home for work-related purposes while on-call 24 hours a day.

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The Tribunal held that the taxpayer was entitled to a deduction for a portion of the occupancy
expenses that related to the study only, but not for the storage space.

The Tribunal’s conclusion was based on the following two key reasons:
(a) The taxpayer did not work from home merely as a matter of convenience – The Tribunal
accepted that the taxpayer’s use of the study (half a level above the garage) during the periods
that he was rostered on-call 24 hours a day was not merely a matter of convenience.
The Tribunal found that it was an implicit requirement of the taxpayer’s employment that he
use his home to some extent to keep significant equipment supplied by his employer so that
he could perform his work duties when called at any time while rostered on-call 24 hours a
day.
Furthermore, the Tribunal presumed that if the taxpayer had not agreed to use his home for
this purpose, his employment would have ultimately been terminated, as follows:
“If he did not agree to use his home to contain the equipment, presumably his
employment in his role would ultimately terminate and his source of income from that
employer would likely cease. The occasion of the outgoings referable to the
study/lab are a result of the taxpayer holding his particular job.” [Emphasis added]

(b) Study area was set aside exclusively for work purposes – The Tribunal was satisfied that
the study had been set aside exclusively for work-related purposes (i.e., as part of deriving
the taxpayer’s employment income). This is essentially because the study:
• was used to house computer equipment;
• did not look conducive to other uses;
• did not lose its identity simply because it was used incidentally as an entrance to the
taxpayer’s home.
In contrast, based on the evidence, the Tribunal was not persuaded that the storage area in
the taxpayer’s home had been set aside exclusively for storing work-related materials. In
particular, the materials were unspecified and the quantum of them was unclear.
The Tribunal had also noted that, even though certain parts of the areas in the middle level of
the taxpayer’s home (i.e., the family room and dining room) may have been used to house the
computer equipment, these areas were not dedicated exclusively to the taxpayer’s work.

TAX WARNING – Apportionment of taxpayer’s occupancy expenses

remitted to the ATO
In relation to the amount of occupancy expenses the taxpayer could claim in relation to the study,
the Tribunal remitted this matter to the ATO for further consideration, taking into account both:
• the floor area of the study, relative to the floor area of the taxpayer’s home; and
• the time during the year that the study was used for work purposes (other than as a matter of
convenience).
Despite remitting this apportionment issue to the ATO, the Tribunal indicated that, in each week
(out of the four weeks) that the taxpayer was required to use his employer’s equipment at home
while on-call 24 hours a day, the taxpayer would have been expected to perform work at home
using his study (other than as a matter of convenience) between the hours of 7pm and 7am on
weekdays, and for 24 hours a day on weekends.
According to the Tribunal, this would amount to work use (other than as a matter of convenience)
of 108 hours (i.e., 5 days x 12 hours per day, plus 2 days x 24 hours) out of a total of 168 hours
in the one week (i.e., 7 days x 24 hours). According to the Tribunal, any other work use of the
taxpayer’s study would be considered and treated as work use as a matter of convenience (for
which occupancy expenses would not be deductible under S.8-1).

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1.3.1 Tribunal held that taxpayer’s ‘live chat’ was not an oral ruling
With regards to the ATO ‘live chat’ advising that it was correct to claim occupancy expenses and
that the taxpayer could rely on a transcript of the chat as an oral ruling, the Tribunal found that it
was not an oral ruling. This is because, according to the Tribunal, a request for an oral ruling must
use the words ‘oral ruling’ or something so similar that there is no ambiguity, which was not done
by the taxpayer (Mr McAteer) in this case.

The Tribunal also noted that it was also doubtful that a live chat (which is a typed conversation
between parties) would count as oral advice. In any case, the taxpayer had not acted on the advice
(as evidenced, for example, by the fact that the live chat occurred after lodgment of the tax returns
making the home office claims) and, therefore, he had not suffered any prejudice to his position as
a result of the incorrect advice.

1.4 NTAA comment – Implications of the Tribunal’s

decision in McAteer’s case
1. Significant and positive decision for on-call employees – The Tribunal’s decision in
McAteer’s case is a significant and positive decision, especially for on-call employees who are
normally provided with a place of work (e.g., an office or desk) at their employer’s business
premises from which to carry out their work duties, but are required to be ‘on-call’ after hours
and to carry out their after-hours ‘on-call’ duties from their home.
This is because, traditionally, an employee has generally only been entitled to claim a deduction
for occupancy expenses related to using part of their home to carry out their work duties, where
no other work location has been provided by their employer, thereby making it necessary to
work from home. In this case, the relevant part of an employee’s home would be considered to
be a ‘sole base of operations’. For example, this was the situation in:
• Case T48 86 ATC 389 – where a country sales manager for an oil company (who was not
provided with a place to work by his employer) used part of his residence to carry out his
work duties (e.g., to compose reports for dispatch to head office, and to deal with incoming
and outgoing correspondence and telephone calls); and
• Nicoll v FCT [2002] AATA 1157 – where a taxpayer used a leased house which was fitted
out with a home office to carry out his work duties, as his employer did not provide him with
an office or any accommodation.
In McAteer’s case, despite the fact that the employee had a regular place of work from which to
carry out his work activities (i.e., at his employer’s business premises), the Tribunal accepted
that working from home when rostered on call after hours was a requirement of his
employer rather than a matter of convenience. In making this conclusion, the Tribunal had
also concluded that it suited the employer’s business generally that rostered after hours work
be conducted from the taxpayer’s home (i.e., because access to those premises after-hours
was quite difficult – e.g., a special form had to be completed, air-conditioning would need to
have been switched on and security would need to have been provided).
The Tribunal also held that, at all other times (i.e., during ordinary business hours), it was simply
convenient for the taxpayer to work from home (i.e., presumably because the employer provided
a place of employment during ordinary business hours five days per week).

TAX TIP – Tribunal’s decision may provide greater scope for on-call
employees to claim occupancy expenses
The Tribunal’s decision in McAteer’s case potentially provides scope for other on-call employees
working from home in similar circumstances to claim occupancy expenses related to the use of
their home for work-related purposes.

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However, before occupancy expenses are claimed for an on-call employee who works from home,
employees need to demonstrate (amongst other things) the following:
(a) The employee does not work from home while on-call as a matter of convenience, but
rather as a specific requirement of their employment – this involves having to establish that no
other workplace is provided to the employee by their employer during the period the employee
is required to work from home.
(b) The relevant area of the employee’s home is set aside and used exclusively (or almost
exclusively) for work purposes – this involves establishing that the relevant area (e.g., a
study) is dedicated exclusively for work-related purposes and is not, for example, readily
available for private (e.g., family) or domestic purposes.
In addition, occupancy expenses must be apportioned (on both a floor area and time basis), to
ensure that deductions are only claimed to the extent of the work-related use of the relevant area
(e.g., a study) of an employee’s home.

2. Complying with the requirements for an ATO ‘oral ruling’ – The Tribunal’s decision in
McAteer’s case is also a timely reminder for taxpayers to ensure they comply with the
requirements for obtaining a binding oral ruling from the ATO if they intend to rely on the advice
provided. For example, a taxpayer must apply for an oral ruling orally, in the manner approved
by the Commissioner (which includes contacting the ATO to request advice in the form of an
oral ruling about the application of a relevant provision of tax law to a specified arrangement).
Refer to S.360-5 of Schedule 1 to the TAA 1953 and also to PS LA 2008/3 (which provides
practical guidance on applying for an oral ruling).

1.5 The CGT main residence exemption danger where a

claim for occupancy expenses is available
Where an individual is entitled to claim a deduction for occupancy expenses (e.g., mortgage
interest, rent, rates and insurance) associated with using part of their home as a sole base of
operations (or as a place of business), this will affect the application of the CGT main residence
exemption when the home is eventually sold.
More specifically, under S.118-190, the main residence exemption is effectively reduced (i.e., only
a partial exemption applies) where both the following apply:
(a) A taxpayer’s dwelling has the character of a ‘place of business’ (e.g., sole base of operations)
for part or all of the period during which the dwelling was used as their main residence.
(b) If the taxpayer had borrowed money to acquire the dwelling (or their ownership interest in it),
they would have been able to claim a tax deduction for some or all of the interest incurred.

TAX WARNING – Calculating taxable portion of capital gain (or loss)

In these circumstances, the taxable portion of any capital gain (or available capital loss) that arises
on the disposal of the dwelling is calculated according to:
• the extent to which the taxpayer’s home was used to carry on a business or as a sole base of
operations (i.e., this is basically determined on the basis of floor area, unless this portion of the
taxpayer’s home is of a greater or lesser proportionate value than the rest of the dwelling); and
• the period over which the taxpayer’s home was used for any of these purposes.
Note that where a taxpayer uses their main residence to carry on business (or as a sole base of
operations) for the first time after 7.30pm on 20 August 1996, the market value rule in S.118-192
may apply to effectively reset the cost base and ownership period for the dwelling at the time it
was first used for these purposes. This will affect the way in which the taxable portion of any capital
gain or loss is calculated when the dwelling is sold.

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1.5.1 The danger with choosing not to claim occupancy expenses

It is often argued that S.118-190 does not apply to reduce the CGT main residence exemption
where an individual simply chooses not to claim occupancy expenses to which they are entitled in
relation to part of a dwelling concurrently used for income-producing purposes.
However, this is not correct. Section 118-190 applies as soon as an individual is entitled to claim
mortgage interest actually incurred in respect of the dwelling (or would have been entitled to claim
mortgage interest if they had borrowed to acquire the dwelling or their ownership interest in it).
Therefore, the fact that an individual chooses not to make a claim for occupancy expenses incurred
(e.g., mortgage interest) does not affect the application of S.118-190 (i.e., the provision can still
apply to reduce the main residence exemption when the relevant dwelling is eventually sold).

1.5.2 Owning a dwelling in another person’s name (e.g., a spouse) –

the solution to the CGT main residence exemption problem!
The main residence exemption can only be reduced under S.118-190 where the taxpayer who
owns the dwelling (or has an ownership interest in it) uses the dwelling as a place of business (i.e.,
as a sole base of operations or to carry on a business).
Therefore, if a taxpayer who uses a dwelling as a place of business does not have an ownership
interest in the dwelling (e.g., the dwelling is solely owned by the taxpayer’s spouse), S.118-190 will
not apply to reduce the CGT main residence exemption if the person (e.g., the taxpayer’s spouse)
who owns the dwelling (or has an ownership interest in it) is not using the dwelling for income-
earning purposes. This is because, in this case, the owner of the dwelling would not be entitled to
claim mortgage interest expenses in relation to the dwelling.
From a planning perspective, where a taxpayer uses part of their home as a place of business (i.e.,
as a sole base of operations or to carry on a business), the dwelling could still retain the full main
residence exemption when it is sold if it is owned solely in the name of the taxpayer’s spouse (or
some other family member). However, in these circumstances, occupancy expenses (e.g.,
mortgage interest) incurred by the spouse (or other family member) would not be deductible under
S.8-1 if the spouse (or other family member) is not using the property for income-earning purposes.

EXAMPLE 3 – Individual uses home as a sole base of operations

Paul is an employee who recently sold a dwelling that was owned jointly by Paul and his wife, Jill,
for 12 years and used as their main residence during their entire ownership period. The disposal
generated a total (initial) capital gain of $600,000 (or $300,000 each for Paul and Jill).
For the last eight years, Paul used a dedicated office in his home exclusively as a sole base of
operations in performing his work-related duties, as his employer did not provide him with a
workplace from which to carry out his work duties. Paul’s office took up approximately 8% of the
total area of his home, which was used as the basis for Paul claiming his share of the occupancy
expenses incurred in relation to the dwelling (e.g., mortgage interest and council rates).
As Paul used his home concurrently as a sole base of operations (i.e., to the extent of 8% by floor
area) for eight out of his 12-year ownership period, part of his initial capital gain of $300,000 is not
eligible for the main residence exemption because of S.118-190.
On this basis, the taxable portion of Paul’s capital gain is broadly $8,000, calculated as: $300,000
x 8% (area of home office) x 8 years/12 years (income-producing period) x 50% (CGT discount).
What if Paul’s home was solely owned by his wife, Jill?
In this case, as Jill would have a 100% ownership interest in the dwelling and the dwelling is not
used by her at all for income-earning purposes, she would be eligible for a full CGT main
residence exemption on the disposal of the dwelling (i.e., S.118-190 would not apply to Jill given
that she would not be entitled to claim any interest deductions in respect of the dwelling). As a
result, Jill’s initial $600,000 capital gain on disposal would be reduced to nil.

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2. ATO extends 80 cents per hour method for

home office ‘running expenses’ to 30 June 2021
Additional running expenses incurred as a result of working from home can generally be claimed
where a taxpayer uses their home to carry out genuine income-earning activities. This can include
an employee who chooses to do some work at home as a matter of convenience or uses their
home as a sole base of operations. This can also include a self-employed individual (e.g., a
tradesperson, a hairdresser or a doctor) who uses part of their home to carry on a business.

Additional running expenses associated with working from home (being the difference between
what was actually incurred for running costs and what would have been incurred if the taxpayer
was not working from home) can include the following:
• Electricity expenses (e.g., in relation to heating, cooling, lighting and electrical items, such as
a computer and a printer being used for work).
• Gas expenses (e.g., in relation to heating).
• Cleaning costs for a dedicated work area at home (e.g., for a dedicated home office).
• Phone (including mobile phone) and internet expenses.
• Computer consumables (e.g., printer paper and printer cartridges).
• Depreciation of office furniture and furnishings (e.g., an office desk and a chair).
• Depreciation of home office equipment (e.g., computers and printers).

TAX TIP – ATO’s new optional 80 cents per hour method for claiming
home office running costs in light of COVID-19
In early April 2020, the ATO introduced a new simplified optional temporary shortcut method for
claiming additional running expenses incurred by an individual genuinely using their home for
work or business, in light of the COVID-19 pandemic. Under this method, eligible individuals are
able to claim deductions for all additional running expenses incurred as a result of genuinely
working from home, based on a fixed hourly rate of 80 cents for each hour worked at home.
Refer to Practical Compliance Guideline (‘PCG’) 2020/3.
When the ATO’s new optional 80 cents per hour method was first introduced, it was available to
be applied in respect of home office running expense claims for the period 1 March 2020 to 30
June 2020. This period was then subsequently extended by the ATO on three occasions, with the
most recent extension being to 30 June 2021. As a result, the new 80 cents per hour method can
be used in respect of home office running expense claims for individuals who are genuinely working
from home for the entire 2021 income year.
The 80 cents per hour method is an optional method for claiming additional running expenses
while working from home, and can be used instead of:
• the existing ‘52 cents per hour method’ (which only covers heating, cooling, lighting, cleaning
and depreciation of office furniture); and/or
• the ‘actual method’ – which involves analysing separate running costs associated with working
from home and claiming the work-related portion of such costs.

2.1 Comparing the different methods for claiming home

office ‘running expenses’ on the 2021 ‘I’ return
As a result of the new 80 cents per hour method, there are three alternative methods available
for claiming additional home office ‘running expenses’ for the 2021 income year. These methods
are the ‘80 cents per hour method’, the ‘52 cents per hour method’ and the ‘actual method’,
whose key features are summarised in the following table.

© National Tax & Accountants’ Association Ltd: May – July 2021 39

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
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NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
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NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
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NTAA Member #3105935 (Ravinder Chukka)

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What’s new for individuals

2.1.1 The danger with using the 80 cents per hour method for clients
who purchase computer consumables and/or equipment
The ATO’s 80 cents per hour method is generally a more simplified method for claiming additional
home office running expenses compared to using both of the existing claim methods, being the 52
cents per hour method (in respect of heating, cooling, lighting, cleaning and depreciation of office
furniture) and the ‘actual method’ (in respect of all other additional running expenses).

This is particularly because, under the 80 cents per hour method:

• claims for all home office running expenses are simply based on a fixed hourly rate of 80 cents
for each hour worked at home;
• an individual is only required to keep a record of the number of hours worked from home (e.g.,
a diary or timesheets), and is not required to provide written evidence of their claim; and
• there is no requirement to have a separate or dedicated area at home set aside for working.

Many individuals working from home in the past 12 months would generally have incurred a greater
amount of additional running expenses as a result of working from home more frequently (e.g., on
a full-time basis). For example, many individuals in this situation may have:
(a) incurred more expenditure on computer consumables (e.g., printer cartridges and paper),
which would otherwise be deductible (to the extent of the work-related or business portion)
under the ‘actual method’; and/or
(b) purchased new equipment (e.g., a computer, including a laptop, and/or a printer), which
would otherwise be eligible for a depreciation claim (to the extent of the work-related or
business use of the asset) under the ‘actual method’. A depreciation claim may include an
immediate write-off claim under one of a number of different write-off concessions, such as:
• the $300 immediate write-off concession for assets predominantly used for work-related
purposes and costing less than $300;
• the $150,000 instant asset write-off concession for assets acquired by eligible businesses
costing less than $150,000; or
• the temporary full expensing of assets concession for assets acquired by eligible
businesses after 6 October 2020.

TAX WARNING – Existing claim methods may generate higher claims

compared to the 80 cents per hour method
Where the 80 cents per hour method is used in these situations, separate claims cannot be made
for any additional running costs associated with working from home, including:
• the purchase of computer consumables; and
• depreciation (including an immediate write-off, where applicable) in respect of equipment
purchases.
As a result, a taxpayer who has been regularly working from home (especially due to COVID-19)
and has purchased computer consumables (e.g., printer cartridges and paper) and/or equipment
(e.g., a computer and a printer) may be better off claiming deductions for all home office running
costs using the existing claim methods (i.e., the 52 cents per hour method and/or ‘actual
method’). This is because, in these situations, the existing claim methods are more likely to
produce a higher claim compared to the 80 cents per hour method.
However, the additional compliance costs associated with using the existing claim methods
(especially the ‘actual method’) compared to the 80 cents per hour method, would need to be
‘weighed-up’ against the additional deduction that the existing claim methods may generate for a
taxpayer compared to the 80 cents per hour method.

© National Tax & Accountants’ Association Ltd: May – July 2021 43

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EXAMPLE 4 – Existing claim methods produce a higher claim than the

80 cents per hour method in 2021
Peter is an employee who worked from home during the 2021 income year as a result of COVID-
19, as follows:
• Peter worked at home full-time from 1 July 2020 to 29 January 2021.
• Peter worked at home part-time (i.e., two days per week) from 1 February 2021 to 26 March
2021. Peter resumed working in the office full-time for the remainder of the 2021 income year.
To facilitate working from home, Peter purchased the following items during the 2021 income year:
• A new printer costing $280 (which was to be used solely for work).
• Additional printer cartridges costing $520 (which were entirely used only to print work-related
materials while working at home).
Peter also incurred additional utility costs related to heating, lighting and the use of his equipment
for work purposes. Assume also that the cost of Peter’s internet attributable to carrying out his
work duties at home during the 2021 income year was $336, based on an estimated work use of
60% (determined by reference to an internet time usage diary kept by Peter).
Peter also kept a diary for the period he was working from home, which showed that from 1 July
2020 to 26 March 2021, Peter worked from home for a total of 1,404 hours (i.e., 140 work days x
9 hours per day from 1 July 2020 to 29 January 2021 (excluding annual leave), and 16 work days
x 9 hours per day from 1 February 2021 to 26 March 2021).
Peter is deciding whether to claim deductions for his additional running expenses using the 80
cents per hour method or the existing claim methods for the above period (assume that Peter
would otherwise use the 52 cents per hour method for utility costs, and the actual method for
other additional running expenses incurred).
Option 1 – Claiming running expenses using the 80 cents per hour method
If Peter uses this method, he is able to claim a total deduction for additional running expenses of
$1,123 (i.e., 80 cents x 1,404 hours). As a result, no separate claims can be made for any running
expenses, as this method incorporates all additional running expenses.
Option 2 – Using the existing claim methods
Using the 52 cents per hour method (for utility expenses) and the actual method (for all other
expenses), Peter can claim the following deductions for the period he is working from home in the
2021 income year (i.e., 1 July 2020 to 26 March 2021):
52 cents per hour (i.e., 52 cents x 1,404 hours) $ 730
Immediate deduction for the printer $ 280
The entire cost of the printer cartridges $ 520
Additional home internet cost $ 336
Total claim under the existing claim methods $ 1,866

Comparing the claims – Existing claim methods produce a higher claim for Peter
In this case, the existing claim methods (i.e., the 52 cents per hour method and the actual method)
produce a claim for Peter that is $743 higher when compared to the 80 cents per hour method
(i.e., $1,866 – $1,123), during the period from 1 July 2020 to 26 March 2021.
The cash flow benefit associated with this additional claim (under the existing claim methods) would
need to be ‘weighed-up’ against the additional compliance costs associated with using the existing
claim methods (e.g., keeping written evidence for expenses incurred and calculating claims for
individual expenditure items separately).

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2.2 Common questions with claiming deductions when

using a home for work or business
The following questions have often been raised by tax agents in the past 12 months in relation to
claims for home office expenses for taxpayers using their home for work or business.

Question 1 – Can different methods be used for different periods in the

2021 income year to claim running expenses?
According to the ATO, no. The ATO has advised the NTAA that, for the 2021 income year,
individual taxpayers who are looking to claim additional running expenses incurred as a result of
working from home can only use one of the three methods to claim their deduction (i.e., the 80
cents per hour method, the 52 cents per hour method (often in conjunction with the actual method)
or just the actual method), provided they satisfy the criteria and record-keeping requirements that
relate to the method being used.
In contrast, for the 2020 income year, as the 80 cents per hour method was introduced from 1
March 2020, eligible individuals were able to use the existing claim methods (i.e., the 52 cents per
hour method and/or the actual method) up until 1 March 2020, and then the 80 cents per hour
method for the period 1 March 2020 to 30 June 2020. Alternatively, eligible individuals could
choose to use the existing claim methods for the entire 2020 income year.

Question 2 – Can the 80 cents per hour method be used by multiple

people in the same household?
Based on the ATO’s original announcement (refer to the ATO Media Release of 7 April 2020 ‘New
working from home shortcut’), multiple people living and working in the same house, and who
have incurred additional (deductible) running expenses, could claim under the 80 cents per hour
method. For example, a couple living together could each individually claim running expenses they
have incurred while genuinely working from home, using this temporary (shortcut) method.
Furthermore, under the 80 cents per hour method, there is no requirement to have a separate or
dedicated area at home set aside for work purposes. However, having such an area will make it
easier to show that additional running expenses have been incurred.

TAX TIP – Multiple claims can also be made under other methods
The ATO has advised the NTAA that multiple members of the same household could also claim
additional home office running expenses under the other claim methods (i.e., the 52 cents per
hour method and the actual method), subject to the relevant requirements associated with each
method being satisfied. In particular, the ATO advised of the following:
(a) Multiple members of a household could potentially claim under the 52 cents per hour method,
but only if there is a dedicated work area at home. So, for example:
if a home include two or more dedicated work areas, then each person could potentially
claim based on the number of hours worked in their own dedicated work area; and
if people in the same household are using the same dedicated work area at different times
(e.g., they worked from home on different days), they could each potentially claim for their
hours worked in that dedicated area (e.g., home office), provided that each person has
contributed to all the expenses associated with that area.
(b) Multiple members of a household could potentially claim under the actual method, but only
where the deductions claimed represent the actual additional expenses incurred due to the
work activities of each individual. So, for example, if a couple share a dedicated work area in
their home at the same time for work purposes, the additional expense of lighting the area at
that time would be apportioned between both individuals.

© National Tax & Accountants’ Association Ltd: May – July 2021 45

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Question 3 – Does the 80 cents per hour method for claiming home
office running expenses cover mobile phone expenses?
Yes. The ATO’s 80 cents per hour method incorporates (and covers) all additional running
expenses associated with working from home for the period 1 March 2020 to 30 June 2021.

According to paragraph 26 of PCG 2020/3, additional running expenses include phone expenses
(including the decline in value of a phone handset). The NTAA has recently been advised by the
ATO that the shortcut (80 cents per hour) method is intended to cover all additional phone costs
associated with working from home, including the costs associated with using mobile phones (and
depreciation in respect of a mobile phone handset).

Question 4 – Can an employee working at home due to COVID-19 claim

a deduction for occupancy expenses?
An employee who is working from home due to COVID-19 can only claim a deduction for a portion
of occupancy expenses incurred in relation to their home (e.g., mortgage interest, rates and building
insurance) where the relevant area of their home (being used for work purposes) can be considered
to be the employee’s sole base of operations for their employment-related activities.

This would particularly require the employee to show that their employer has not provided them
with any alternative place of work (e.g., an office or accommodation) from which the employee can
carry out their work-related duties for the employer. In other words, according to the ATO, an
employee would need to show that no other work location is provided to them by their employer,
resulting in the employee having to dedicate part of their home to their employer’s business.

TAX WARNING – Employees working from home only due to COVID-19

In PCG 2020/3, the ATO clearly advises that if an individual has worked from home only due to
COVID-19, they cannot claim a deduction for occupancy expenses (e.g., mortgage interest, rates
and building insurance). In other words, according to the ATO, occupancy expenses related to a
taxpayer’s home will not become deductible merely because the taxpayer has been required to
work from home temporarily as a consequence of COVID-19. Refer to paragraph 5 of PCG 2020/3.

Question 5 – When can an employee claim occupancy expenses for a

home-based business operated in a company or trust?
Situations will arise where an individual carries on a business at home through a company or
trust (e.g., as an employee of the entity), and the individual is seeking to claim a portion of
occupancy expenses related to their home (e.g., mortgage interest, rates and building insurance).

In these circumstances, it is likely that the ATO will expect that there is a genuine, market-rate
rental contract (or similar agreement) between the business entity and the individual (as the
owner of the property), before any occupancy expenses can be claimed by the individual. In effect,
this would involve the individual renting the relevant portion of their home to the entity (e.g., the
company or trust) for use in carrying on its business under an arm’s length rental agreement
between the individual and the entity. Refer to the ATO’s fact sheet: “Income and deductions for
business” (“Deductions for a company or trust home-based business”).

Under this approach, the individual would include the rental income as assessable income and can
claim the relevant portion (i.e., the deductible portion) of occupancy expenses incurred (and not
reimbursed by the entity) against such income. It is also important to note that deductions for
occupancy expenses could be denied (or reduced) if the rent charged by the individual (to their
business entity) is below market value, based on Fletcher v FCT [1991] HCA 42 and TR 95/33.

46 © National Tax & Accountants’ Association Ltd: May – July 2021

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TAX WARNING – Claims for occupancy expenses reduce the CGT main
residence exemption on disposal of the dwelling
In these circumstances, if the individual owns the home in question (as opposed to renting it), any
CGT main residence exemption that might otherwise be available on the sale of the dwelling will
be reduced to the extent to which (and for the period over which) the dwelling was used for income-
earning purposes during the ownership period, as discussed above. Refer to S.118-190.

TAX WARNING – No deduction for reimbursed occupancy expenses

Where the entity in these circumstances pays for or reimburses occupancy expenses incurred by
the individual (who is an employee of the entity) in relation to their home, the individual is not
entitled to claim a deduction for those (reimbursed) expenses because of S.51AH of the ITAA 1936.
Section 51AH basically denies an employee the ability to claim a deduction for an expense incurred,
to the extent to which their employer has paid for the expense (e.g., by reimbursing the employee
for part or all of the expense). Refer also to paragraph 11 of TR 2020/1.
For completeness, the entity in this situation will generally be entitled to claim a deduction for
occupancy expenses reimbursed to the employee (subject to the Personal Services Income (‘PSI’)
rules, which, if applicable, would generally deny the entity a deduction for rent, mortgage interest,
rates and land tax related to the employee’s home – refer to S.86-15 and S.86-60).
On the other hand, the entity will generally be subject to FBT in respect of any such reimbursement
(i.e., as an expense payment fringe benefit). However, this would be subject to the ‘otherwise
deductible rule’ (which would effectively reduce the entity’s FBT liability to the extent to which the
employee could have otherwise claimed a ‘once-only’ deduction for the expense incurred, subject
to certain declaration and substantiation requirements). Refer to S.23 and S.24 of the FBT Act.

Note that, an employee who carries on business at home through a company or trust can arguably
claim a deduction for additional running expenses incurred, whether or not there is a genuine
rental arrangement in place between the individual and the entity carrying on business.

Question 6 – Can an employee working at home due to COVID-19 claim

the cost of tea, coffee, child care, home schooling, etc.?
No. In the ATO’s fact sheet: “Income and deductions” (“Home office expenses”), the ATO advises
that an employee working from home cannot claim a deduction for the following:
• The cost of tea, coffee and other general household items – presumably because these
expenses would be considered private in nature.
• The cost associated with educating children, such as setting them up for online learning,
teaching them at home and buying equipment (e.g., iPads and desks) – presumably because
these costs would be considered private in nature.
• The cost of childcare (e.g., childcare fees) – presumably because these costs would be
considered private in nature.
• Expenses paid for or reimbursed by an employer – because of S.51AH of the ITAA 1936.
• Depreciation for work-related items that are provided by an employer (e.g., a laptop computer
and a mobile phone).

© National Tax & Accountants’ Association Ltd: May – July 2021 47

NTAA Member #3105935 (Ravinder Chukka)

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What’s new for individuals

3. New dangers with applying CGT concessions

for homes that are partly used for business
Traditionally, where part of a taxpayer’s home was used to carry on a business, any remaining
capital gain that arose on the eventual disposal of the dwelling (i.e., after applying any partial CGT
main residence exemption) could be reduced (or disregarded) under the CGT Small Business
Concessions (‘SBCs’) in Division 152 of the ITAA 1997 where certain conditions were satisfied.
These concessions (i.e., the SBCs) comprise the 15-year exemption, the 50% active asset
reduction, the retirement exemption and the small business roll-over.

The application of the SBCs on the disposal of a home that was also used to carry on business has
partly been based on the argument that, even though a dwelling in these circumstances is used
only partly for business purposes (and in many cases, predominantly for private or non-business
purposes), the dwelling could still qualify as an active asset. This argument has been made on
the basis that, on a literal reading of the definition of ‘active asset’ in S.152-40 (refer below), there
is nothing that requires a CGT asset to be used predominantly for business purposes.

In other words, under S.152-40, a CGT asset is generally an active asset at a time if, at that time,
the asset is owned by a taxpayer and is used (or held ready for use):
• by the taxpayer in the course of carrying on business (whether alone or in partnership); or
• in the course of carrying on business (whether alone or in partnership) by a connected entity
of the taxpayer or by an affiliate.

Note that, as an exception, a CGT asset is generally not an active asset where its main use by
the taxpayer is to derive interest, an annuity, rent, royalties or foreign exchange gains (unless its
main use for deriving rent was only temporary). Refer to S.152-40(4).

TAX WARNING – CGT asset must be active asset for requisite period
Before the SBCs can apply to a taxpayer in respect of the disposal of an active asset, the asset
must be an active asset for the requisite period (under S.152-35(1)), as follows:
(a) Where the taxpayer has owned the asset for 15 years or less – the asset was an active asset
of the taxpayer for a total of at least half of the relevant ownership period.
(b) Where the taxpayer has owned the asset for more than 15 years – the asset was an active
asset of the taxpayer for a total of at least 7½ years during the relevant ownership period.

3.1 Recent decisions create uncertainty with applying the

SBCs for homes that are partly used for business
The recent Tribunal decision in Rus v FCT [2018] AATA 1854 (‘Rus’s case’), and the more recent
Federal Court decisions in FCT v Eichmann [2019] FCA 2155 and Eichmann v FCT [2020] FCAFC
155 (‘Eichmann’s case’), have placed considerable doubt on whether a taxpayer’s home that is
partly used to carry on a business can qualify as an ‘active asset’ (for the purposes of the SBCs).

In particular, although both these cases dealt with different facts, the decisions handed down by
the Tribunal in Rus’s case and by the Single Judge of the Federal Court (‘FC’) in Eichmann’s case,
broadly indicated that (amongst other things), for a CGT asset to qualify as an ‘active asset’, the
whole or predominantly the whole of the asset has to be used in the relevant business.

Although the taxpayer’s appeal of the FC’s decision in Eichmann’s case (Single Judge) to the Full
Federal Court (‘FFC’) was successful (i.e., the FFC more recently held in favour of the taxpayer,
concluding that the block of land was an active asset for the purposes of the SBCs), the FFC did
not consider the issue of whether an asset has to be used wholly or predominantly in a business
before the asset can qualify as an active asset.

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3.1.1 The background and Tribunal’s decision in Rus’s case

In this case, the taxpayer (Ms Rus) and her husband conducted a plastering and building business
through a company, broadly as follows:
(a) The administration part of the business was conducted from a dedicated office in a dwelling
that was used as the taxpayer’s main residence (which contained telephone lines, computer
equipment and filing cabinets, and was manned by two full-time employees). The dwelling
was situated on a 16-hectare block of land, of which 15 hectares was vacant and unused.
(b) The land (or property) also contained a shed which was used to store tools, plant and
equipment and three business vehicles. There were also two containers outside the shed that
contained material supplies for the business.
(c) The majority of the company’s business activities were conducted offsite, and building
supplies were delivered direct to the worksites.

The Tribunal held that the land in this case was not an active asset for the purposes of the SBCs,
essentially because only a very small part of the land (i.e., less than 10% of the total area of the
land) was used in carrying on the company’s business. On this basis, the land was not considered
to have been used in the course of carrying on the company’s business (for the purposes of
applying the definition of ‘active asset’ in S.152-40(1)(a)).

3.1.2 The background and FC decision in Eichmann’s case

In this (more recent) case, the taxpayer used a related trust (i.e., the Eichmann Family Trust) to
carry on a business of building, bricklaying and paving.
The taxpayer owned a block of land that was adjacent to their family home (in Mooloolaba QLD),
which contained two sheds, and had a 2m high block wall and a gate to secure the block. The
block of land was used in relation to the trust’s business in the following ways:
• For the storage of work tools, equipment, materials, bricks, pavers, mixers, wheelbarrows,
drums, scaffolding and iron.
• Work vehicles and trailers were parked on the property.
• In some cases, the property would be visited multiple times a day in between jobs depending
on what each job required.
• On occasions, some preparatory work was done at the property in a limited capacity.

The FC (Single Judge) ultimately held that the land in this case did not qualify as an ‘active asset’
for the purposes of applying the SBCs.

In particular, the FC held that, for an asset to be used ‘in the course of carrying on a business’,
what is necessary is for the use of the asset to have a direct functional relevance to the carrying
on of the normal day-to-day activities of the business. In this case, the use of the taxpayer’s
land for storage of the trust’s business assets and equipment had no functional relevance to the
building, bricklaying and paving activities of the trust, and was merely preparatory to undertaking
those activities in the ordinary course of business. That is, the storage itself was not an activity in
the ordinary course of the trust’s building/construction, bricklaying and paving business.

Regarding the issue of what extent of business use is required before an asset can qualify as an
‘active asset’, the FC (Single Judge) noted that, what needs to be established is that the whole,
or predominantly the whole, of the asset has to be used in the business, as follows:
“Where it is claimed that an asset had been used in the course of carrying on a business,
such that the owner is entitled to a CGT concession in relation to the gains made on its
disposal, it needs to be established that the whole, or predominantly the whole, of the
asset had been so used...” [Emphasis added]

This is basically consistent with the approach taken by the Tribunal in Rus’s case (as noted above),
which was referred to by the FC in Eichmann’s case.

© National Tax & Accountants’ Association Ltd: May – July 2021 49

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3.1.3 The recent FFC decision in Eichmann’s case fails to clarify the
SBCs position for assets not predominantly used in a business
Following an appeal by the taxpayer of the FC’s decision in Eichmann’s case to the Full Federal
Court (‘FFC’), the FFC more recently held in favour of the taxpayer, concluding that the block of
land was an active asset for the purposes of applying the SBCs.

More specifically, the FFC held that the use of the block of land to store business assets (e.g., work
tools, equipment, etc.) for a building and construction business that was carried on elsewhere by
the Eichmann Family Trust was sufficient to conclude that the land was “used… in the course of
carrying on a business” for the purposes of the definition of ‘active asset’ in S.152-40(1)(a).

In turn, this meant that the block of land was an active asset and, as such, the taxpayer was entitled
to reduce the capital gain that arose on disposal of the land under the SBCs.

In coming to this conclusion, the FFC was of the view that the definition of ‘active asset’ in S.152-
40(1)(a) does not require:
• the use of the relevant asset to take place within the day-to-day or normal course of the
carrying on of a business; and
• a relationship of direct functional relevance between the use of an asset and the carrying on
of a business (as was maintained by the ATO and the Single Judge of the FC).

TAX WARNING – SBCs are unlikely to apply to dwellings from which

home-based businesses are carried on
On the one hand, the FFC’s decision in Eichmann’s case is an important victory for taxpayers, as
it rejected the ATO’s narrow interpretation of the definition of ‘active asset’ in S.152-40. That is,
the FFC’s decision effectively rejected the ATO’s argument that the ‘use’ of an asset must be
integral to or have a direct functional relevance to the day-to-day activities of carrying on a
business, before the asset can qualify as an ‘active asset’.
However, on the other hand, the FFC did not comment on the issue of whether an asset has to be
used wholly or predominantly in a business before the asset can qualify as an active asset.
Therefore, although the FFC’s decision effectively restores the ‘status quo’ with applying the active
asset test for business taxpayers who use off-site facilities as part of their business (e.g., storage
facilities), the decision arguably does not restore the ‘status quo’ regarding the application of the
active asset test for business taxpayers who use part of their home to carry on a business.
In other words, based on the Tribunal’s decision in Rus’s case and the FC’s (Single Judge) decision
in Eichmann’s case, the SBCs are unlikely to be available where a taxpayer disposes of a home
(or dwelling) that was partly used by the taxpayer in carrying on a business (including a home that
was used to conduct part of a business).
This is because, based on these authorities, the ATO is likely to argue that a taxpayer’s home (or
dwelling) will only qualify as an ‘active asset’ (in which case, the SBCs can only be applied in
respect of any remaining capital gain on disposal of the dwelling – i.e., after applying the CGT main
residence exemption) where the dwelling is wholly or predominantly (i.e., not just partly) used in
the business.

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What’s new for individuals

NEW ATO rulings for travel expense claims

The ATO recently released a package of three documents (including two rulings) which, together,
provide guidance regarding the ATO’s latest views on the income tax deductibility (and FBT
treatment) of employee-related transport expenses (e.g., the cost of travelling by car, air, bus or
train) and employee-related accommodation and meal (and incidental) expenses. Specifically,
the ATO’s package of documents can be briefly summarised as follows:

(a) Taxation ruling (‘TR’) 2021/1, from an income tax perspective, provides guidance on the
deductibility of employee transport expenses (e.g., where an employee incurs transport
expenditure for work that is not reimbursed by their employer). The deductibility outcome of
this expenditure largely hinges on whether an employee is travelling to work or on work.
(b) Draft TR 2021/D1, from an income tax perspective, provides guidance on the deductibility of
employee accommodation and meal expenditure (e.g., where an employee travels away
from home overnight for work purposes and is not reimbursed by their employer). The
deductibility outcome of this expenditure largely hinges on whether an employee is travelling
(overnight) on work or whether they are living away from home (‘LAFH’) for work purposes.
In some cases, an employee may receive an allowance from their employer to cover their
accommodation and meal expenditure. TR 2021/D1 also provides guidance on whether such
an allowance should be classified as a ‘travel allowance’ or a ‘LAFH allowance’. This is an
important distinction, as a travel allowance is dealt with under the income tax regime, whereas
a LAFH allowance is exempt from income tax and is dealt with under the FBT regime.
(c) Draft Practical Compliance Guideline (‘PCG’) 2021/D1 accompanies the release of TR
2021/D1 and provides assistance to employers in distinguishing between a travel allowance
and a LAFH allowance. In this regard, PCG 2021/D1 sets out an ATO practical administrative
approach (i.e., effectively a ‘rule of thumb’) that can be relied upon by eligible employers to
effectively classify an employee as either travelling (overnight) on work or LAFH.

The ATO’s initial preliminary views regarding employee travel expenses were first released in June
2017 in TR 2017/D6 (which covered transport expenses as well as accommodation, meals and
incidental expenses). The ATO subsequently announced that TR 2017/D6 would be split-up and
reissued in two parts, which has since occurred, as follows:
• On 13 December 2019, TR 2017/D6 was partly withdrawn and the ATO released TR 2019/D7
to provide guidance on employee transport expenses. TR 2019/D7 was finalised as TR
2021/1 on 17 February 2021.
• On 17 February 2021, TR 2017/D6 was fully withdrawn and the ATO released TR 2021/D1, to
provide guidance on employee accommodation and meal expenses. At this time, the ATO
also released its accompanying guidelines in PCG 2021/D1.
TR 2021/1 applies both before and after the date of issue, as does TR 2021/D1 and PCG 2021/D1
(once finalised). However, the ATO has advised that, if a conflict exists between a position taken
by a taxpayer based on the ATO’s original guidance and the ATO view in their latest guidance, it
will have regard to the earlier draft rulings in income years to which an earlier draft applies.
The principles discussed in the ATO’s documents are examined under the following headings:

1. The ATO’s general deductibility principles for claiming transport

expenses (Refer to pages 52 to 60).
2. The ATO’s general deductibility principles for claiming accommodation
and meal expenses (Refer to pages 61 to 65).
3. Dealing with the deductibility of travel expenses in common travel
scenarios (Refer to pages 65 to 78).
Legislative references in this section of the notes are to the ITAA 1997, unless otherwise indicated.

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1. The ATO’s general deductibility principles for

claiming transport expenses
By way of background, an employee is able to claim a deduction for transport expenses (e.g.,
airfare costs, car expenses and taxi/Uber fares) under S.8-1 if, broadly:
• the expenses were incurred in gaining or producing their assessable income;
• the expenses are not capital, private or domestic in nature; and
• the relevant substantiation requirements are satisfied (refer to Divisions 28 and 900).

TR 2021/1 provides guidance on when an employee’s transport expenses are considered to have
been incurred in gaining or producing employment income, and also on when the exception for
expenses of a private or domestic nature applies. Note, however, this ruling does not deal with the
exception for capital expenses or the application of the substantiation requirements.

Under TR 2021/1, employee transport expenses are generally deductible where the ‘occasion’ of
these expenses is found in the employee’s employment duties. This will be the case if, having
regard to the scope of an employee’s work activities, the circumstances surrounding the transport
expenses have a sufficiently close connection to the earning of employment income. In these
circumstances the employee is said to be travelling on work (rather than travelling to work).

At paragraph 16 of TR 2021/1, the following factors support a characterisation of transport

expenses as being incurred in gaining or producing assessable income:
1. The travel fits within the duties of employment, which means that the obligation for an employee
to incur transport expenses must arise out of the employment itself and not the employee’s
personal circumstances.
2. The travel is relevant to the practical demands of carrying out the employee’s work duties or
role, which means that the transport expenses must be a necessary consequence of the
employee’s income-producing activity. The transporting of bulky equipment could be an
example of the practical demands of carrying out an employee’s work duties necessitating the
transport expenses.

In addition, the ATO advises that the following factors may also be relevant in determining whether
a transport expense is incurred by an employee in gaining or producing assessable income:
(a) The employer asks for the travel to be undertaken.
(b) The travel occurs on work time.
(c) The travel occurs when the employee is under the direction and control of the employer (i.e.,
the employee is subject to their employer’s orders or directions, whether or not those orders
or directions are exercised during the period of travel).

TAX WARNING – Important to consider both the form and substance

of the employment arrangement
The factors noted above must be considered in the context of both the form and substance of the
specific employment arrangement under consideration and, moreover, no single factor on its own
will necessarily support a conclusion that an expense is deductible.
Rather, reaching a conclusion as to the deductibility of a transport expense requires a holistic
assessment of the relationship between the employment and the expense. It should also be noted
that, the fact an employee considers an expense (e.g., a transport expense) to serve a work-related
purpose is not sufficient to establish its deductibility.

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TAX WARNING – Transport and accommodation analysed separately

Whilst the deductibility of employee transport expenses will often correlate with the deductibility of
accommodation and meal expenses in respect of a work-related trip, in some cases, a different
deductibility outcome can arise for transport expenses compared to accommodation and meal
expenses. This is because, each of these two categories of travel expenditure requires an analysis
of different factors, and also because the ‘rule of thumb’ in PCG 2021/D1 can only be applied with
respect to accommodation and meals. For this reason, the tax (or deductibility) outcomes for
transport expenses need to be analysed separately from accommodation and meal expenses.

1.1 Travel between home and a regular workplace

Based on the factors above, transport expenses incurred by an employee for ordinary travel
between home and a regular workplace are not deductible (subject to certain exceptions, noted
below). This is because transport expenses incurred in these situations are generally a prerequisite
to the earning of employment income. Moreover, transport expenses incurred by an employee in
these circumstances are dictated by the personal choice the employee makes about where to live
in relation to their regular workplace, rather than the duties of employment dictating the need to
incur the expense. In this case, an employee is travelling to work, rather than travelling on work.

The ATO advises (at paragraph 28 of TR 2021/1) that the above non-deductibility outcome with
travelling between home and a regular workplace is not altered because of any of the following:

(a) The employee’s home is very distant from their regular place of work. For example, if an
employee who lives in Brisbane with their family chooses to accept a job based wholly in
Sydney and to fly to their work in Sydney each week, the cost of transport between Sydney
and Brisbane is not deductible (i.e., these transport expenses are explained by the personal
choice the employee makes about where to live relative to where they choose to work).
(b) The employee performs work-related tasks while travelling to their regular workplace
(e.g., an employee answers emails while on a train going to work) or stops en route to fulfil
an incidental work task (e.g., a dentist collects dentures from a laboratory on their way to
work or a secretary collects newspapers or mail on their way to the office).
(c) The employee is required to travel to their regular workplace more than once a day (e.g., where
a teacher also drives to school after hours to attend parent teacher interviews).
(d) The employee is limited in their choice of travel due to the location of their home or regular
workplace (e.g., if no public transport is available), or if their regular workplace can only be
reached by a particular mode of transport (e.g., by boat).
(e) The employee receives an allowance related to their travel.
(f) The employee’s work hours begin or end during the night (e.g., a nurse who works night shift
and drives to their regular workplace because there is no public transport available).

EXAMPLE 5 – Travel between home and a regular workplace

Carly is a public servant who works in Melbourne. She lives 30 kilometres from her office and
travels between home and work by train.
Carly frequently checks her work emails at home on her work phone and occasionally chooses to
perform some work tasks before leaving for work, as well as after getting home from work. While
on the train travelling to work, Carly sometimes uses her work phone to respond to work emails
and to make work-related phone calls.
Carly’s transport expenses (i.e., train fares) in travelling between home and work in this case are
not deductible, as she is travelling to a regular workplace, which is not occasioned by her
employment duties (i.e., Carly is travelling from home to work, and she is not travelling on work).

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In contrast to the above, if the duties of employment require an employee to travel from their home
to somewhere other than their regular workplace (i.e., to an ‘alternative’ work location), such as
travel between home and a client’s premises or another office of the employer, the costs of
transport can be characterised as being incurred in the course of gaining or producing the
employee’s assessable income and are generally deductible on that basis, as discussed below.

1.1.1 When is a place of work considered to be a regular workplace?

In most cases, an employee’s regular workplace can be clearly identified, and would generally be
the usual or normal place at which they start and finish work duties with a particular employer.
However, in situations where this is not clear, identifying an employee’s regular workplace requires
an in-depth consideration of the employee’s contract of employment, the nature of the employee’s
work duties, where these duties commence and at what point in time the employee comes under
the direction and control of the employer as well as what is customary practice in the industry.

Some employees will have a regular workplace, being their normal or routine place at which they
work, but they also perform work duties at a second (or subsequent) work location. For example,
an employee with a regular workplace may:
• also perform work-related duties at one or more other work locations (e.g., where an employee
works between two workplaces concurrently); or
• perform work-related duties for a period of time solely at a different work location (e.g., when an
employee is placed on secondment to another office of the employer for a period of time).

A second or subsequent place of work would be a regular place of work if it is a normal or routine
place where the employee works, such that travelling between there and the employee’s home is
better characterised merely as part of the necessity of travelling to and from work.

It follows that an employee working at a second (or subsequent) work location is less likely to have
established that location as a regular workplace if they are travelling there on an ad-hoc basis (i.e.,
where there is no set pattern or routine in respect of their travel to that location). In this case, the
second (or subsequent) work location would likely be considered an ‘alternative’ work location.

TAX TIP – ATO’s ‘three-month rule’ for establishing when a second or

subsequent workplace becomes a regular workplace
TR 2021/1 provides a broad ‘three-month rule’ to assist in situations where it is difficult to conclude
whether a second or subsequent workplace has become a regular workplace. More specifically,
at paragraph 32 of TR 2021/1, the ATO states the following:
“In situations where it is difficult to conclude whether a second or subsequent place of work
is also a regular place of work, an actual or anticipated duration of three months or more
at the location would usually be sufficient for the location to amount to a regular place of
work.” [Emphasis added]
Under the ATO’s ‘three-month rule’, a new (second or subsequent) work location is more likely to
be an employee’s regular workplace if they actually, or anticipate to, work at that location for three
months or more. However, the ATO further advises that, in applying the ‘three-month rule’,
consideration must also be given to the following matters in paragraph 32 of TR 2021/1:
(a) The nature of employment – A duration shorter than three months is more likely to be
appropriate for an employee on a short-term contract, as opposed to a permanent employee.
(b) The frequency of attending a new work location – A new work location at which an
employee is based for three months or more may not be a regular workplace if the employee
attends that work location sufficiently infrequently.
For example, according to TR 2021/1, attending a work location once a fortnight for four
months would not usually be sufficient to establish the location as a regular workplace.

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(c) Element of choice – An element of choice on the part of an employee to travel to a new work
location is more likely to indicate that a period shorter than three months may be sufficient to
establish that location as a regular workplace.
(d) Travel on work time or travel under an employer’s direction and control – An employee
travelling to a new work location on work time, or where their travel is under the direction and
control of their employer, is less likely to have undertaken travel to a regular workplace.

Common examples of when a work location is/is not a regular workplace

The following table outlines a number of common scenarios in which employees may have multiple
work locations and indicates whether or not a particular work location is likely to be considered a
regular workplace, drawing upon examples and the principles in TR 2021/1.

Where a work location has become a regular workplace for an employee, the costs of travelling
between home and that work location are not deductible, subject to certain exceptions. However,
the cost of travelling directly between two regular workplaces can be deductible under S.8-1 (where
those workplaces are related – e.g., they relate to the same employer) or under S.25-100 (where
those workplaces are unrelated – e.g., they relate to different employers), as discussed below.

Note that the table below should be used as a general guide only, as each particular employment
arrangement must be considered on a case-by-case basis, taking into account the ‘three-month
rule’ and the additional relevant factors noted in the Tax Tip above.

Multiple work locations scenario Reference

1. An employee lives and works on the Gold Coast. The employee is required
by their employer to work from the employer’s Brisbane office for a 5-month
period, after which time they will return to work from the Gold Coast office.
Paragraphs
Classification of the Brisbane work location: This is a regular workplace. 33-38 of TR
2021/1
However, if the employee were only required to work in the Brisbane office for
a period of three months or less, it may be arguable that the Brisbane office
is not a regular workplace (but rather, an ‘alternative’ workplace).

2. An employee lives and works in Melbourne. The employee is required by their

employer to work at a second work location (e.g., an interstate work location or
from a different location in Melbourne, such as a client’s offices) once a fortnight Paragraph 32
for a period of four months. of TR 2021/1

Classification of second work location: Not a regular workplace.

3. An employee lives and works in Rockhampton. The employee is required by

their employer to fly to Brisbane and stay overnight to attend a two-day meeting
in the employer’s Brisbane office once per fortnight on an on-going basis.
Paragraph 51
Note that, in this case, there is no regular pattern as to the days the employee of TR 2021/1
spends in Brisbane.
Classification of the Brisbane work location: Not a regular workplace.

4. An employee who works for a retail company is required (under the terms of
their employment), to work 3-days a week at a store located in Suburb A and Paragraph 31
2-days a week at a store, of the same employer, located in Suburb B. of TR 2021/1
Classification of the work locations: Both are regular workplaces.

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Multiple work locations scenario Reference

5. An employee lives and works in Sydney. The employee requests a transfer to

their employer’s Melbourne office to be closer to family. The employee will
commute between Sydney and Melbourne on a weekly basis for three-months
after which time the employee will permanently relocate to Melbourne.
Classification of the Melbourne work location: This is a regular workplace. Paragraph 32
of TR 2021/1
The Melbourne work location is a regular workplace, even during the three-
month period the employee is commuting between Sydney and Melbourne.
This is because the change in the employee’s regular place of employment was
agreed upon between the employer and the employee from the outset (as a
result of a personal choice made by the employee).

6. Employee A is hired by a chain of grocery stores on a one-month employment

contract to replace Employee B who has taken one month of leave.
Under the terms of employment, Employee A has been based at a store in the
Melbourne suburb of Port Melbourne. After working at that store for two weeks,
Employee B returns from leave early and Employee A is transferred to a store
in the neighbouring Melbourne suburb of Southbank) for the remainder of their
one-month employment contract.
Classification the Southbank location: Southbank is a regular workplace. Paragraph 32
of TR 2021/1
Although Employee A is based at the Southbank store for only two weeks (i.e.,
less than three months), this store has been established as a regular workplace,
as there is a relative permanence of the employee’s work at that store in the
context of their particular employment arrangement (i.e., given that the
employee is working at this location until the end of their one-month contract).
Note that, the Port Melbourne store would also be considered Employee A’s
regular workplace for the two-week period they were working at this location.

1.1.2 Certain exceptions allow employees to claim a deduction for

the cost of transport between home and a regular workplace
It is important to be aware that there are some important exceptions to the general prohibition
against claiming a deduction for the cost of transport between home and a regular workplace.

A. Employees who work at two or more geographically distant workplaces

for the same employer
A key exception to the general prohibition involves travel between home and a regular workplace
in circumstances where an employee is required to work with some regularity for the same
employer at two or more locations that are geographically distant from each other. An example
of this type of scenario is where an employee is required to work concurrently between two
geographically distant workplaces (e.g., an employee is required to work two days a week from
their employer’s Melbourne office and three days a week from their employer’s Sydney office).
Unlike in the ordinary case of (non-deductible) home-to-work travel, in this situation, if the travel to
the more distant location is a necessary consequence of the employment duties needing to be
performed in more than one location, and the travel is not attributable to the employee's choice of
where to live, the travel to the more distant location may be deductible (note that, travel to the
local location remains non-deductible ‘home to work’ travel). In other words, the distance of a place
of work may cause the need for the travel to be part of that for which the employee is employed.

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In order for the ‘geographically distant workplaces exception’ to be relied upon, all of the following
requirements (which are set out in paragraphs 52-55 of TR 2021/1), must be satisfied:
1. An employee must be required to work with some regularity for the same employer at
two or more locations.
For example, if an employee is required to work concurrently between two or more locations,
this requirement would be satisfied. It could also be satisfied where an employee is required to
move continuously between changing workplaces (although refer to the Tax Tip below).

2. The two locations must be geographically distant from each other.

The ATO does not specify what ‘geographically distant’ means in terms of kilometres, but based
on paragraph 55 of TR 2021/1, it seems that this requirement will be satisfied where the
secondary location of work would typically require an overnight stay from home.

3. The travel to the secondary location must not be attributed to an employee's personal
choice about where to live.
For example, if an employee’s role is fundamentally based at a distant work location from where
the employee lives, but the employer permits the employee to undertake some of their work at
home or at a location closer to home, the cost of travel to that distant location would not be
regarded as being incurred in gaining or producing the employee’s assessable income. This is
because the work duties do not necessitate the travel, but the travel is instead explained by the
employee’s private circumstances, such as a choice of where to live. Refer to paragraphs 54
and 61 of TR 2021/1.

4. The travel must fit within the duties of employment and be relevant to the practical
demands of carrying out the work duties.
To satisfy this requirement, the transport costs must have been incurred in gaining or producing
the employee’s assessable income. By way of example, the ATO broadly accepts that, if an
employee is required to work concurrently between two or more geographically distant
workplaces, the travel to the more distant location is relevant to the practical demands of
carrying out the employee’s work duties and fits within the duties of employment (i.e., it is the
distance between these locations that creates the need for travel to be part of the employee’s
employment duties). Other factors that may reinforce this conclusion include whether the travel
occurs on work time and/or whether the travel occurs under the direction and control of the
employer. Refer, in particular, to paragraphs 16, 17 and 59 of TR 2021/1.
The following example is adapted from Example 7 in TR 2021/1 at paragraphs 56 to 60.

EXAMPLE 6 – The geographically distant workplaces exception

Narelle works for a tourism company and lives with her family on the north coast of NSW.
Narelle’s employer has offices in various locations around NSW. The head office where Narelle is
based, is on the north coast of NSW. Her employer has another significant office in Sydney, to
which she is required to undertake regular overnight travel to supervise staff and attend meetings.
During the income year, Narelle works a total of 26 weeks on the NSW north coast, 22 weeks in
Sydney and she is on leave for the remaining four weeks of the year. When Narelle is working in
Sydney, she stays there rather than travelling back to her home on the north coast.
The cost of transport between home and the North Coast office is non-deductible, being
ordinary home to work travel.
In contrast, although the Sydney office would likely be considered to be a regular workplace for
Narelle, the cost of transport between her home and the Sydney office is deductible, as travel
to that location is considered a consequence of her employment duties needing to be performed in
more than one geographically distant location.

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The cost of transport between Narelle’s home and the Sydney office is deductible because:
• Narelle’s travel (concurrently between work locations) is relevant to the practical demands of
carrying out her work duties and has been undertaken at her employer’s request;
• the distance between these locations creates the need for travel to be part of that for which
Narelle is employed; and
• Narelle’s travel involves overnight stays and is different to her ordinary daily trips to work.
On this basis, transport costs incurred by Narelle in travelling between her home (on the north coast
of NSW) and the Sydney office are deductible under S.8-1.

TAX TIP – Employees with changing workplaces

It is important to be aware that the ATO has (informally) acknowledged that the ‘geographically
distant workplaces exception’ can potentially apply in circumstances where an employee has
continuously changing workplaces (e.g., where a construction worker is required to complete
short-term projects and continuously moves from one site to another distant site).
The ATO has not yet provided guidance in relation to the parameters in which the exception may
apply in this context. However, based on preliminary discussions, it seems that the exception is
more likely to apply (i.e., such that the travel can be said to fit within the duties of employment),
where the employee is required to move from workplace to workplace (where one workplace is
geographically distant to the next) on a relatively frequent basis. This is because, in this case,
there is a need to travel regularly between distant workplaces. Other relevant factors to consider
in this context would include whether the travel occurs on work time and/or whether the travel
occurs under the direction and control of the employer.
It is recommended that any taxpayer seeking to claim a deduction on the basis that the
‘geographically distant workplaces exception’ applies in relation to a changing workplaces scenario,
first apply for a private binding ruling, pending further guidance from the ATO. Taxpayers in this
situation may also wish to consider if the travel may be itinerant travel, in which case, a deduction
may be available with respect to the transport costs on that basis. Refer to TR 95/34 and below.

B. Other important exceptions to claiming the cost of transport between

home and a regular workplace
Other exceptions to the general prohibition against claiming a deduction for the cost of transport
between home and a regular workplace, including the following:

(a) Certain employees who are ‘on call’ (‘on-call employees’)

For a deduction to be available for transport costs incurred by an on-call employee in respect
of travel between home and a regular workplace, the employee’s need for travel must have all
of the following characteristics:
• The employee’s duties must be construed as having substantively commenced at home
and travel to the regular workplace is required to be undertaken to complete these duties
(note that, merely being on ‘stand-by’ (to come into work) would not be sufficient).
• The undertaking of work in two locations is a necessary obligation arising from the nature
of the employee’s duties.
• The travel is not part of a normal journey to work that would have occurred anyway.
For example, this exception would apply where a highly trained computer consultant
(employee) is requested by their employer to commence work at home to try and resolve an
IT issue (using specialised IT equipment installed at home) who then travels to work to
progress issues that cannot be resolved at home. Refer to paragraphs 70 to 72 of TR 2021/1.

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(b) Employees who transport bulky and/or heavy equipment.

An employee is entitled to claim a deduction for transport costs associated with carrying bulky
and/or heavy work-related equipment between home and a regular workplace, provided they
can establish that the transportation of this equipment is a practical necessity created by the
nature of their employment. This will generally be the case where:
• the equipment being transported is essential for the performance of the employee’s work-
related duties;
• the equipment is sufficiently bulky and/or heavy such that transportation by car or other
private vehicle is the only realistic option; and
• there is no secure area provided at the employee’s regular place of work for the storage
of the equipment, or the equipment needs to be transported to a different site each day.
No deduction is allowed if the equipment is transported as a matter of convenience or personal
choice. Refer to paragraphs 79 to 81 of TR 2021/1.

(c) Employees carrying out itinerant work.

A deduction may be available for the cost of travel between home and a regular workplace
where an employee’s work is itinerant in nature. Among other things, this requires that the
employee has a ‘web’ of workplaces in their regular employment that they will travel to (i.e.,
the employee will regularly travel to, and work at, more than one workplace) before returning
to their usual place of residence. Refer to TR 95/34.

(d) Commencing or finishing work at a transit point – This exception may apply for employees
who report for work at a location other than the one in which they carry out their substantive
duties of employment (typically fly-in fly-out employees). These employees generally travel
from home to a location (known as a ‘transit point’) from which they then undertake further
travel to reach their regular workplace (e.g., a mine site). The employee’s costs of travel
between home and the transit point (e.g., an airport) are generally not deductible, as they are
a prerequisite to the earning of employment income and are private in nature.
However, transport expenses in travelling between the transit point and the employee’s regular
workplace may be deductible, provided this travel is occasioned by their employment. This
will be the case if the need for a transit point fits within what would be reasonably expected by
the duties of employment (and not by private concerns). For example, the remoteness of a
project location can provide an explanation for the travel being part of the employment. Refer
to John Holland Group Pty Ltd v Commissioner of Taxation [2015] FCAFC 82.
Furthermore, it is also relevant, but not determinative, to consider whether the employee is
substantively under the direction and control of their employer during that travel, which is
explained by the duties of employment (although, the ATO advises that direction and control
alone is not sufficient to establish the relevant connection with employment). Refer to
paragraph 63 of TR 2021/1.
There are certain factors that may indicate transport expenses relating to travel between a
transit point and a work location are not incurred in gaining or producing an employee’s
assessable income and may therefore not be deductible (e.g., where the terms of employment
do not require attendance at the transit point or where the employee does not commence to
be paid at the transit point). Refer to paragraph 69 of TR 2021/1 and the discussion below.

1.2 Travel between regular workplaces

In contrast to transport expenses incurred in travelling between home and a regular workplace,
transport expenses incurred in travelling between work locations, neither of which is the employee’s
home, are ordinarily deductible, provided that employment is the occasion for the expenses (e.g.,
the travel fits within the duties of employment and is relevant to the practical demands of carrying
out the work duties). Such travel could include travel between workplaces of the same employer,
clients of the employer and other locations where the employee carries out their employment duties
(e.g., a court of law or at a client’s work site). Refer to paragraphs 39 to 41 of TR 2021/1.

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Note that a deduction is only available under S.8-1 if the employee is carrying on the same income-
earning activity at both work locations. However, if, for example, these locations belong to different
employers, a deduction may instead be available if the conditions in S.25-100 are satisfied.
Furthermore, a deduction is not available if the need for travel arises out of personal circumstances.
An example of this is an employee who chooses to work in another work location for part of the day
for private purposes, before travelling to their normal office to work for the rest of the day.

1.3 Travel to an ‘alternative’ workplace

As noted above, if the duties of employment require that an employee travel between their home
and an alternative work location, being somewhere other than the employee’s regular workplace,
the costs of such travel can be characterised as being incurred in the course of gaining or producing
the employee’s assessable income and, therefore, are deductible, provided the travel is not private
in nature. Note that this is the case even if the employee incidentally attends to private matters at,
or on route to, either location.
By way of example, the cost of travel between home and an alternative work location would
generally be deductible in situations where an employee travels to:
• a client’s premises (whether local or interstate);
• another office of their employer, which is not a regular workplace; or
• an employer’s interstate office to attend two-day meetings once per fortnight – refer to Example
6 at paragraph 51 of TR 2021/1 and the discussion above.

EXAMPLE 7 – Travel between home and an alternative work location

Frank is a government employee who lives and works in Darwin. He is required by his employer
to attend a one-day mandatory training course.
On the day of the course, Frank travels directly from his home to the training venue and then travels
back home again at the end of the day, when the training is finished.
Frank is entitled to a deduction for the cost of his travel between home and the training venue. This
is because Frank’s duties of employment require him to commence work at a location other than
his regular workplace (an alternative work location), thus the transport cost is incurred in gaining
or producing Frank’s assessable income (in other words, he is travelling on work).
Note that the same analysis applies regardless of whether the training venue is local or interstate.

TAX WARNING – Travel to an alternative workplace which is dictated

by a personal choice is not deductible
The cost of travelling from home to an alternative workplace is not deductible if it reflects a choice
of the employee to work at a different location (e.g., for convenience).
In this situation, the travel is not explained by the duties of employment but rather by a personal
choice (e.g., a deduction would not be available if an employee arranges with their employer to
work from a particular alternative work location for a few weeks for family reasons).
Refer also to the discussion below regarding the principles of apportioning costs associated with
travel between home and an alternative workplace where the employee’s trip is partly private in
nature (e.g., the employee combines a work trip to an alternative work location with a holiday).

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2. The ATO’s general deductibility principles for

claiming accommodation and meal expenses
An employee is able to claim a deduction under S.8-1 for expenditure incurred on accommodation
and meals (and incidentals) if, broadly, all of the following requirements are satisfied:
• The expenses were incurred in gaining or producing their assessable income.
• The expenses are not capital, private or domestic in nature.
• The relevant substantiation requirements are satisfied (refer to Division 900).
Broadly, an employee must obtain and retain written evidence (and keep travel records where the
travel involves the employee being away from their ordinary residence for six or more nights in a
row). However, there are exceptions from the requirement to substantiate accommodation and
meals expenses, and the requirement to provide travel records, although these only apply when
the employee receives a travel allowance. Refer to TR 2004/6, TD 2020/5 and below.
Generally, employee expenditure relating to accommodation, meals and incidentals is private or
domestic in nature and, therefore, not deductible under S.8-1. This includes the cost-of-living
expenses, such as the cost of maintaining an employee’s usual residence and the cost of
consuming food and drink as part of an employee’s daily activities.

TAX TIP – Employees who are required to travel and stay away from
home (overnight) for work-related purposes
However, there is an important exception to this general rule. If an employee is required by their
employer to travel and stay away from their usual residence overnight for relatively short periods
of time for employment purposes, the employee will be travelling (overnight) on work. In this
case, accommodation and meal expenses will generally be deductible under S.8-1, provided the
expenditure is not private in nature. Refer to paragraph 18 of TR 2021/D1.

2.1 Key factors to consider in determining the deductibility

of accommodation and meal expenditure
There are a number of key factors that must be taken into account, or considered, in order to
determine if an employee’s expenditure on accommodation and meals is deductible (i.e., to
determine whether or not an employee is travelling (overnight) on work), as follows:
(a) The expenditure on accommodation and meals must have a sufficient connection to the
performance of employment duties.
In assessing whether this requirement is satisfied, the scope of an employee's income-
producing activities needs to be considered, taking into account any employment contract, and
the employee’s duties/tasks they need to perform (which may extend beyond what is contained
in an employment contract). Refer to paragraph 15 of TR 2021/D1.

(b) The employee must be required to sleep away from their usual residence overnight in
the course of performing their income-producing activities.
For example, if an employee who lives and works in Hobart travels to Melbourne for meetings
with clients and then returns to Hobart on the same day, any expenditure on meals is
considered to be a ‘living expense’, which is private in nature and is not deductible. Refer to
paragraph 20 of TR 2021/D1.

(c) The expenditure on accommodation and meals must not be attributable to a personal
choice made by the employee (e.g., a decision is made to stay overnight for convenience).

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If an overnight stay is considered to be a private choice (i.e., it is not dictated by the employee’s
income producing (or work) activities), the expenditure on accommodation and meals is not
deductible under S.8-1, as it would be considered not to have been incurred in gaining or
producing assessable income (and, in any event, it would be considered private in nature).
A common example of expenditure that is attributable to a personal choice is where an
employee, who lives in one location, chooses to accept employment based in another location,
as illustrated in the following example (which has been adapted from Example 2 of TR
2021/D1). Refer also to paragraphs 24 to 31 of TR 2021/D1.

EXAMPLE 8 – Travel attributable to employee’s personal choice

Michelle resides in Brisbane with her family.
Michelle decides to accept a job that is solely based in Canberra. Michelle catches a flight to
Canberra on Monday, and on Friday afternoon she returns by plane to Brisbane. On Monday to
Thursday nights, Michelle stays in a serviced apartment in Canberra.
Michelle incurs expenditure on accommodation and meals whilst she is away overnight in Canberra
(e.g., she stays in a serviced apartment and buys groceries or eats out at restaurants).
Michelle is not entitled to claim a deduction under S.8-1 for the amount she spends on
accommodation and meals whilst she is away. This is because the occasion of her outgoings is
not explained by Michelle’s employment. Rather, the need for the expenditure arises due to a
personal decision made by Michelle about where to live relative to where she chooses to work.

A further example to consider (in relation to expenditure that is attributable to a personal

choice) is where an employee is required to undertake short-term overnight travel from home
to an alternative location (e.g., travel interstate to attend a 5-day work-related conference) and
the employee decides to add a private holiday or ‘break’ onto the end of the conference (which
may be taken with or without their family). In this situation, the deductibility of the
accommodation and meal costs incurred whilst the employee is away must be reduced (or
apportioned) to reflect the private portion of the trip. Note that, there are certain apportionment
principles that must be applied in this regard, as discussed below.

(d) The employee must not be considered to be ‘living at a location’ (to which they have
travelled) away from their usual residence.
Put simply, the effect of this requirement is that, if the employee is taken to have a ‘second
usual residence’ to which they are travelling, they will be living at the location and, as such,
the accommodation and meals expenses incurred whilst away at that location would be
considered non-deductible private living expenses. Importantly this is the case even if the
occasion of the expenditure on accommodation and meals can be found in the employee’s
income-producing activities. Refer to paragraphs 37 to 41 of TR 2021/D1.

TAX WARNING – ‘Living at the location’ is also known as LAFH

In TR 2021/D1, the ATO’s use of the term ‘living at a location’ (to which an employee has
travelled) away from their usual residence is basically synonymous with the traditional expression
used by the ATO of an employee LAFH (i.e., living away from home) for work purposes.
This concept is further explained below (based on TR 2021/D1), including the factors the ATO will
take into account in assessing whether an employee is living at the location (to which they have
travelled) or LAFH (as opposed to travelling away from home (overnight) for work).
The ATO has also introduced a new ‘21/90-day rule of thumb’ (which is set out in PCG 2021/D1
and is also further explained below), that can be used in certain situations in order to classify an
employee as either travelling (overnight) on work or LAFH based on the number of days the
employee is away from home (i.e., instead of undertaking an analysis of the relevant factors).

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(e) The employee must not have relocated to the location to which they have travelled.
If the employee is taken to have relocated, they will be living at the (new) location and, as
such, the accommodation and meals expenses incurred whilst at that location would be
considered non-deductible private living expenses (even if the move to the new location is
required by their employer for work purposes).
Although the question of whether or not an employee has relocated for work purposes is a
question of fact, there are certain factors that indicate that an employee has relocated, which
are listed at paragraph 72 of TR 2021/D1 and include the following:
• The employee is at the new location for an extended length of time.
• The employee’s usual residence has been sold or rented out.
• The employee is accompanied by their family and the family’s belongings have been
transferred to the new location.
• The employee’s children attend school at the new location.
• The employee’s spouse or partner obtains employment at the new location.
• The postal address and electoral roll details are changed to the new place of residence.
• The employee (and family) establish ties to the local community (e.g., by taking up
membership at local sporting and recreational clubs at the new location).

It should also be noted that, in terms of the deductibility of accommodation and meals
expenses, the classification of an employee as LAFH or having relocated is immaterial as, in
both cases, these expenses are non-deductible private expenses.
However, it is important to correctly identify whether an employee is LAFH or has relocated in
situations where the employee has received an allowance to cover these expenses. This is
because, in this case, the treatment of an employee’s allowance for income tax and FBT
purposes (including whether FBT concessions may be available to the employer) varies
depending on the classification.

2.2 Factors that indicate when an employee is LAFH

As noted above, if an employee is considered to be LAFH (or living) at a location away from their
usual residence, their accommodation and meal expenses are private living expenses and will not
be deductible under S.8-1, even if the employee is living at that location due to their employment.

The following table summarises the factors that support a characterisation of an employee as
LAFH (living at a location away from their usual residence). The table assumes that an employee
has not relocated to the location to which they have travelled. All of the factors in the table should
be considered and no single factor is necessarily decisive. Furthermore, the weight given to each
factor will vary depending on the circumstances. Refer to paragraphs 41 to 43 of TR 2021/D1.

Factors that indicate an employee is LAFH Reference

1. There is a change in the employee’s regular place of work.

Where there is a change in the employee’s regular workplace and the employee
incurs accommodation and meal expenses to be closer to their new regular
workplace, the employee is more likely to be living at that new location away from
Paragraphs 44
their usual residence (i.e., LAFH). The concept of a regular workplace for this
to 46 of TR
purpose is the same as that discussed above for transport expenses.
2021/D1
Conversely, where the employee incurs accommodation and meal expenses to
temporarily attend and stay overnight at an alternative work location, the
employee will not be living at the location they visit and work at temporarily. In
these circumstances, the employee will be travelling (overnight) on work.

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Factors that indicate an employee is LAFH Reference

2. The length of the overall period the employee will be away from their
usual residence is considered a ‘relatively long period’.
Generally, the longer that an employee spends away from their usual residence
for work purposes, the more likely the employee will be LAFH and the less likely
the employee will be travelling (overnight) on work. Note that, the ATO also
advises that the period that an employee is away is not considered to be broken
where the employee merely takes short trips from that location, such as travelling
back to their usual residence on weekends.
However, just because an employee is away from home for an extended period
for work purposes does not necessarily mean that the employee is LAFH,
Paragraphs 47
especially where the employee’s employment requires ongoing travel to multiple
to 54 of TR
locations (i.e., in this case, the employee may not be in any location long enough
2021/D1
to be regarded as living or LAFH at a particular location).
Unfortunately, there is no set time frame for when an employee moves from
travelling (overnight) on work to LAFH, although as discussed below, the ATO
has provided a ‘21/90-day rule of thumb’ in PCG 2021/D1 that can be relied upon
in certain circumstances to assist in classifying employees in this regard.
For example, based on PCG 2021/D1, it would appear that, once an employee
has continuously spent more than 21-days away from their usual residence in the
one location for work purposes, the ATO may view the employee as LAFH at that
location unless there are relevant compelling factors that suggest otherwise (i.e.,
taking into account the other factors in this table).

3. The nature of the employee’s accommodation is such that it becomes

their usual residence.
Where an employee works away from home for a considerable period and, for
that period, the employee stays in accommodation typically used for longer-term Paragraphs 55
accommodation (e.g., a house, unit or apartment), this would generally support to 58 of TR
the view that the employee is LAFH for work purposes. 2021/D1
In contrast, the use of short-term accommodation (e.g., a hotel or motel) located
close to a temporary work location is generally an indication that the employee is
more likely to be travelling (overnight) on work rather than LAFH.

4. The employee is, or can be, accompanied by family.

Generally speaking, an employee is more likely to be LAFH (rather than travelling Paragraphs 59
(overnight) on work) where they are, or can be, accompanied by family, or visited to 60 of TR
by, family and friends. Although that is not to say that an employee who is 2021/D1
accompanied by family should always be treated as LAFH, where there are other
relevant and compelling factors that suggest otherwise.

2.2.1 The ATO’s ‘21/90-day rule of thumb’ to distinguish between an

employee who is travelling (overnight) on work or LAFH
It can be difficult to assess whether an employee is travelling (overnight) on work as opposed to
LAFH as a result of the range of factors that must be taken into account to make the assessment.
However, to assist in this regard, the ATO has introduced a ‘21/90-day rule of thumb’ which
eligible employers may use to distinguish between an employee who is travelling (overnight) on
work and LAFH (i.e., rather than undertaking an analysis of the factors above). More specifically,
in PCG 2021/D1, the ATO provides that it will accept that an employee is travelling (overnight) on
work and not LAFH at a location, where generally all of the following circumstances apply:

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1. The employer pays an allowance to the employee or pays or reimburses accommodation and
meals expenses for the employee.
2. The provision of the benefit is not part of a salary packaging arrangement and the employee
has no option to elect to receive additional remuneration in lieu of the benefit.
3. The employee is away from their normal residence for work purposes for a short period being:
• no more than 21 days at a time continuously; and
• an overall aggregate period of fewer than 90 days in the same work location in the same
FBT year.
4. The employee must return to their normal residence when their period away ends.
5. The employee does not work on a fly-in fly-out or drive-in drive-out basis.

TAX WARNING – ATO focus is on periods of short travel

The practical effect of PCG 2021/D1 is that, once an employee is continuously away for more
than 21 days at a time, they are generally taken to be LAFH at the location. However, even if the
employee is not away for more than 21 days at a time, they are still taken to be LAFH under these
guidelines, if they have travelled to the same location for 89 days or more in the one FBT year.
Note that, there is no requirement for an employer to apply the rule of thumb in PCG 2021/D1,
even if the employment arrangement satisfies all of the requirements noted in PCG 2021/D1.
However, in this case, it would be necessary to analyse and document the factors taken into
account in assessing an employee’s travel status to support the classification ultimately adopted.

3. Dealing with the deductibility of travel

expenses in common travel scenarios
The following section of the notes applies the general principles outlined above in relation to
employee transport, accommodation and meals expenditure, and applies it to the following
travel scenarios often encountered by tax agents for their employee clients:
• Employees who work concurrently at multiple offices or worksites for the same employer.
• Employee secondment arrangements (including extended work assignments).
• Employees who combine short-term work travel with a private holiday.
• Employees working on a fly-in fly-out (‘FIFO’) basis.
• Travel for employees working from home during COVID-19.
• Employees who incur COVID-19 quarantine expenses whilst travelling for work purposes.

3.1 Employees who work concurrently at multiple offices

or worksites for the same employer
A commonly encountered travel scenario is where an employee is required to work concurrently in
more than one work location for the same employer for an extended (e.g., on-going) period (refer
to the Tax Tip below as to what may constitute an extended period in this context).
For example, this would include an employee who ordinarily resides in Location A being required
by their employer to work on an on-going basis from their employer’s office in Location A from
Monday to Wednesday, and then to work for the remainder of the week at the employer’s office in
Location B. In this case, an employee would typically incur transport costs in travelling between
home and the employer’s office in Location A and Location B, and may also incur accommodation
and meal costs if an overnight stay is required at Location B (depending on the distance between
Location A and Location B).

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In terms of analysing the deductibility of these costs in this type of travel scenario, it is important to
consider if the locations in question are geographically distant from each other (i.e., if travel to
the secondary work location typically requires an overnight stay from home – refer to paragraph 55
of TR 2021/1 and above), as this factor influences the deductibility of the costs involved.

3.1.1 Concurrent workplace travel – no overnight stays are required

If an employee works concurrently, on an extended basis, at more than one regular workplace for
the same employer, where overnight travel is not required at the secondary location, no deduction
is available for the cost of transport between the employee’s home and any of these regular
workplaces. For example, where an employee who lives in Suburb A is required to work three days
a week at a store located in Suburb A and two days a week at a store of the same employer located
in Suburb B (which is an hour away), no deduction is available for the cost of transport between
the employee’s home and either of these workplaces (in Suburb A and Suburb B).
This is because the workplaces at both locations are regular workplaces of the employee and travel
to the secondary work location (i.e., in Suburb B) does not require an overnight stay. Therefore,
travel between home and either workplace is non-deductible home to work travel (i.e., the transport
expenses are not occasioned by the employee’s employment duties and are private in nature, as
they are dictated by the employee’s choice of where to live, relative to where they work).
However, if the employee travelled from one workplace to the other, that is, from one store to the
other store (to perform substantive work at both work locations on a particular day), the costs of
transport would be deductible under S.8-1 (being travel between regular workplaces).
If the employee chooses to stay overnight in Suburb B for their own convenience, the cost of doing
so, including accommodation and meal costs, would not be deductible as the occasion of the
expenses would not be explained by employment duties but explained by private considerations.

TAX TIP – Consider if the secondary workplace is a regular workplace

If a concurrent workplace arrangement is not on-going (e.g., permanent), it will be important to
consider if the length of the arrangement is extensive enough for the workplace at the secondary
location to be considered a regular workplace of the employee (such that travel between home and
that workplace is considered private, non-deductible, home to work travel).
It can be difficult to classify a workplace as regular or alternative where an employee attends the
secondary workplace on a relatively infrequent basis. However, as an example, the ATO provides,
at paragraph 32 of TR 2021/1, that an employee who is required by their employer to concurrently
work at a secondary work location once a fortnight for four months is not considered to have a
regular workplace at that secondary location.
If a determination is made that the workplace at the secondary location is not a regular workplace,
(i.e., it is an alternative workplace), then the cost of transport between home and that alternative
workplace, if undertaken for work purposes, will generally be deductible (as noted above).

The following example is adapted from Example 2 at paragraph 31 of TR 2021/1.

EXAMPLE 9 – Concurrent travel where no overnight stay is required

Aisha works for a retail company. Under the terms of her employment contract, she works from
Monday to Wednesday every week at a store located in a suburban shopping centre (‘Store A’)
and on Thursdays and Fridays at a store of the same employer in a different suburb (‘Store B’).
Are Aisha’s costs of travel between home and either store deductible?
No. This is because both stores are considered to be Aisha’s regular workplaces, as they are
routine places at which she commences work. As such, the journey from home to each store is
merely part of the ordinary necessity of Aisha getting to work and, therefore, a prerequisite to Aisha
earning her assessable income.

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Does the above outcome change if Aisha works at a different store every Thursday and
Friday on an ad-hoc basis (instead of working on those days at Store B)?
Although not free from doubt, one or more of these stores may potentially be considered alternative
workplaces (instead of regular workplaces) for Aisha, as she would not be travelling to any
particular store on a normal and routine basis and there would be an ad-hoc element to her travel.
If this is the case, transport expenses incurred by Aisha in travelling between home and the different
stores on Thursdays and Fridays (as ‘alternative workplaces’) would be deductible under S.8-1.

3.1.2 Concurrent workplace travel – overnight stays are required

If concurrent workplace travel involves two or more locations that are geographically distant from
each other (such that the secondary location would typically require an overnight stay from home),
the deductibility of associated costs differs to the scenario in which no overnight stay is required.

For example, where an employee who ordinarily lives and works in Melbourne is required by their
employer to work from their employer’s Melbourne office from Monday to Wednesday and then
from the employer’s Sydney office for the remainder of the week, the costs associated with
travelling and staying in Sydney would be dealt with as follows:

(a) Transport costs of travel between home and Sydney.

The ATO would broadly accept that, the transport costs incurred to attend the Sydney office
would be deductible on the basis that this travel would be relevant to the practical demands of
carrying out the employee’s work duties and fits within the duties of employment (even though
the Sydney office would be considered to be a regular workplace for the employee).
In other words, the ‘geographically distant workplaces exception’ applies in this case (i.e., the
employee is required to work concurrently between two or more geographically distant
workplaces) to convert otherwise non-deductible home to work travel into deductible travel.
Note that, the cost of transport between the employee’s home and the Melbourne office would
be considered to be non-deductible home to work travel (for reasons explained above).

(b) Accommodation and meals expenses associated with staying overnight in Sydney.
When dealing with a typical concurrent workplace arrangement that involves overnight travel,
expenditure on accommodation and meals will be deductible if the employee is travelling
(overnight) on work. This will be the case if the occasion of the expense is dictated by the
employee’s work activities and not by any private considerations of the employee and provided
also that the employee is not LAFH at the secondary location.
If the employee is taken to be LAFH at the location to which they are travelling (Sydney), they
will be living at the location and, therefore, the accommodation and meal expenses incurred
whilst away at that location would be considered non-deductible private living expenses.

As an observation, it is more likely that an employee will be LAFH if the concurrent workplace
arrangement is on-going (as compared to a more temporary arrangement). This is because,
the longer the arrangement, the more likely the employee will be LAFH at that location based
on the factors that characterise an employee as LAFH in TR 2021/D1 (refer above) (e.g.,
because, in this case, the employee is more likely to be away for a relatively long period and
may stay in more permanent type accommodation (e.g., a serviced apartment)).

Note that, the employer (and employee) may be able to rely on the ‘21/90-day rule of thumb’
in PCG 2021/D1 to support an argument that an employee is travelling (overnight) on work,
where the circumstances support such a conclusion.

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Broadly, this will be the case where the following circumstances apply:
• The employer provides an allowance to an employee (or pays or reimburses
accommodation and meals expenses for the employee).
• The employee does not spend 21 days or more in Sydney on any one stay-over.
• In total, the employee does not spend 90 days or more at the Sydney location over the
course of the FBT year.
Conversely, if the employee does spend 90 days or more (in total) at the Sydney location in
the one FBT year (and/or breaches the ‘21-day test’ on any one visit), this would indicate that
the employee may be LAFH in Sydney.

EXAMPLE 10 – Geographically distant workplace locations

Jack lives and works in Melbourne.
For a temporary six-month period, Jack’s employer also requires Jack to work two days a week
(i.e., on Thursday and Friday) from the employer’s Sydney office. At the end of the six-month
period, Jack will be required to work solely from the Melbourne office.
Jack travels to the Sydney office directly from home on Thursday mornings and he stays in a hotel
on Thursday nights. Jack then takes a flight back to Melbourne on Friday nights.
Note that the office in Sydney would be considered a regular workplace for Jack, as it is a workplace
at which he works on a normal and routine basis for a not insignificant period of time.
Can Jack claim a deduction for transport, accommodation and meal expenditure incurred
for the purposes of working in the Sydney office for the six-month period?
Jack’s transport, accommodation and meal expenditure would be dealt with as follows:
1. Transport costs – The cost of transport between Jack’s home and the Sydney office is
deductible because:
Jack is required to work with regularity for the same employer at two locations (the Melbourne
office and the Sydney office) that are geographically distant from each other;
Jack’s travel to Sydney is not attributed to a personal choice made by Jack; and
The travel to Sydney fits within the duties of Jack’s employment and is relevant to the
practical demands of carrying out his role due to his employer requiring him to work
concurrently at two locations that are geographically distant from each other.
Note that, the costs of transport in travelling between Jack’s home and the Melbourne office are
non- deductible (being ordinary home to work travel).
2. Accommodation and meals expenditure – In this case, Jack is travelling (overnight) on
work and, as such, this expenditure is deductible. This is because, the occasion of Jack’s
expenditure is dictated by the Jack’s work activities (i.e., he is required to travel to a
geographically distant secondary workplace on a regular basis) and not by private
considerations. Furthermore, Jack is unlikely to be considered to be LAFH due to the temporary
nature of the assignment (i.e., taking into account the overall period he will be away and that he
is staying in hotel accommodation).
Had Jack received an allowance from his employer to cover accommodation and meal costs,
PCG 2021/D1 could be relied upon to support an argument that Jack is travelling (overnight)
on work and not LAFH. Of note, Jack did not spend 21 days on more in Sydney in any one
stay (his stays were limited to two days at a time) and, in total, over the course of the FBT year,
he did not spend 90 days or more in Sydney (at most, he spent 48 days, in total, in Sydney).

The above principles are also illustrated in Example 7 of TR 2021/1 (paragraph 56) in relation to
transport and Example 2 of PCG 2021/D1 (paragraph 17) in relation to accommodation and meals.

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3.2 Employee secondment arrangements

For the purposes of this segment of the notes, a typical secondment arrangement involves an
employee who lives and works in one location (e.g., in Melbourne) being seconded to an interstate
office of their employer (e.g., in Sydney) for a fixed period (e.g., for a three-month period). Under
such an arrangement, the employee may stay in hotel accommodation or in a serviced apartment,
and they may or may not return home during the secondment period.

Based on the principles outlined by the ATO in TR 2021/1 and TR 2021/D1 (as well as discussions
between the NTAA and the ATO), travel costs incurred by an employee in these circumstances
(which have not been reimbursed or paid by the employer) are likely to be dealt with as follows:
(a) Transport costs in travelling between home (Melbourne) and Sydney.
The deductibility of the transport costs between home and the Sydney office differs depending
on whether the employee is travelling to work or travelling on work, which largely depends on
whether the Sydney office is classified as a regular workplace for the employee or an
alternative workplace. In TR 2021/1 (paragraph 32), the ATO states that, in situations where
it is difficult to conclude whether a second or subsequent workplace is also a regular place of
work, an actual or anticipated duration of three months or more at the location would usually
be sufficient for the location to amount to a regular place of work.
Based on this, if the term of a secondment is, and is anticipated to be, less than three months,
then the Sydney office would likely be regarded as an alternative workplace. The cost of
travel between home and Sydney (the alternative work location), including trips taken back
home on weekends, can be characterised as being incurred in the course of gaining or
producing the employee’s assessable income and, therefore, are deductible, provided the
travel is not private in nature. Note that, this type of travel would not typically be private, as it
can be explained by the need to work in Sydney for the secondment period and is not explained
by private considerations (where the employee chooses to live relative to where they work).
If, however, the term of a secondment is, or is anticipated to be, three months or more, then
the Sydney office would likely be regarded as a regular workplace. In this case, the travel
moves into the category of non-deductible home to work travel, as it is generally viewed more
as a prerequisite to the earning of employment income at a regular workplace.

TAX WARNING – Geographically distant secondment locations

It is important to note that the ATO does not accept that the ‘geographically distant workplaces
exception’ can apply in the context of a typical secondment arrangement. This is because, this
type of arrangement lacks the requirement to work regularly (and concurrently) between two distant
workplaces (i.e., in the typical secondment arrangement, the employee has one regular workplace
at a time, as compared, for example, to an employee who is required to work concurrently between
multiple regular workplaces, as was discussed above).

(b) Accommodation and meal expenses with staying overnight in Sydney.

When dealing with a typical secondment arrangement that involves overnight travel,
expenditure on accommodation and meals will be deductible if the employee is travelling
(overnight) on work. This will be the case if the occasion of the expense is dictated by the
employee’s work activities (i.e., they are required by their employer to travel to the secondment
location) and not by any private considerations of the employee (e.g., where the employee
requests the secondment), and provided also that the employee is not LAFH.
If the employee is taken to be LAFH at the location to which they are travelling (Sydney), they
will be living at the location and, therefore, the accommodation and meals expenses incurred
whilst away at that location would be considered non-deductible private living expenses.

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As an observation, the longer a secondment period, the more likely the employee will be LAFH,
because the factors that characterise an employee as LAFH in TR 2021/D1 (refer above) are
more likely to be present (i.e., the workplace in Sydney is more likely to be a regular workplace,
the employee may stay in more permanent type of accommodation (e.g., a serviced apartment,
as opposed to a hotel) and the employee may also bring their family with them). There is no
hard and fast rule as to how long is too long in terms of claiming deductions for accommodation
and meal costs with respect to a secondment (i.e., as a balance of factors is required to make
the assessment on whether or not the employee is LAFH at the location to which they travel).

Note that, the employer (and employee) may be able to rely on the ‘21/90-day rule of thumb’
in PCG 2021/D1 to support an argument that an employee is travelling (overnight) on work.
This will be the case where, broadly, the employer provides an allowance to an employee (or
pays or reimburses accommodation and meals expenses for the employee), the employee
does not spend 21 days on more in Sydney in any one stay-over and, in total, over the course
of the FBT year, the employee does not spend 90 days or more at the Sydney location.

Conversely, it follows that, if the employee does spend 90 days or more at the Sydney location
(and/or breaches the ‘21-day test’), this would indicate the employee may be LAFH in Sydney.

The following example is adapted from Example 5 at paragraph 61 of TR 2021/D1.

EXAMPLE 11 – Employee posted on a four-month secondment

Jane works as a senior executive for an employer based in Brisbane.
Her employer is setting up a new office in Townsville (over 1,000 km away) and assigns her to the
new office to assist in setting it up. The terms of this secondment arrangement are as follows:
• The term of the secondment is four months, from June to September. After spending four
months working in Townsville, Jane will return to her usual employment in the Brisbane office.
• During the secondment period, Jane will travel home to Brisbane each fortnight.
• Jane will live in a two-bedroom apartment close to the office in Townsville.
• The apartment in Townsville is big enough to accommodate Jane’s family, but they have
decided to remain in the family home in Brisbane.
Travel expenses incurred by Jane related to her secondment (which are not paid for or reimbursed
by her employer) would likely be dealt with as follows:
1. Transport costs – In this case, the office in Townsville would be considered a regular workplace
for Jane, as it is a workplace at which she works on a normal and routine basis for a not
insignificant period of time (i.e., four months). As such, the cost of transport between home and
the Townsville office are non-deductible, ordinary home to work travel (these costs are private).
2. Accommodation and meals expenditure whilst in Townsville – These expenses are not
deductible as Jane is not travelling (overnight) on work, rather, she is LAFH in Townsville away
from her usual residence in Brisbane. This conclusion is based on the following factors:
Jane’s regular workplace changes from the Brisbane office to the Townsville office.
The extended period of time Jane is going to be in Townsville (a period of four months).
The longer-term nature of the accommodation that she stays in while she is in Townsville.
The fact that her family could have accompanied her if they wanted to.
The same outcome would arise if the employer were to rely on PCG 2021/D1 (e.g., assuming
the employer had paid Jane an allowance to cover these expenses whilst she was away in
Townsville). Specifically, Jane would be viewed as LAFH because, even though the continuous
periods Jane is away are all less than 21 days, the overall period she is away at the one work
location (Townsville) is more than 90 days in the FBT year (i.e., she is away for an overall period
of four months or over 100 days). Refer to Example 3 at paragraph 22 of PCG 2021/D1.

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What if the facts are changed such that, rather than being posted on a four-month
secondment, Jane is posted to Townsville on a two-month secondment?
If the secondment arrangement is for two-months rather than four-months (and assuming the terms
of the arrangement otherwise stay the same), the travel costs incurred by Jane (which are not
paid for or reimbursed by her employer) would likely be dealt with as follows:
1. Transport costs – In this case, based on paragraphs 32 and 38 of TR 2021/1, it is likely the
ATO will accept that the office in Townsville would be an alternative workplace for Jane (and
not a regular workplace for Jane). As a result, the cost of transport between home and
Townsville (being an alternative workplace) during the term of the secondment arrangement
would be incurred in the course of gaining or producing Jane’s assessable income and would
therefore be deductible under S.8-1 on that basis. Refer to paragraph 50 of TR 2021/1.
2. Accommodation and meal expenditure whilst in Townsville – In this case, it is likely that
Jane would be considered to be travelling (overnight) on work and, therefore, expenditure on
accommodation and meals during the secondment period in Townsville would be deductible.
This is because, the occasion of this expenditure would be dictated by Jane’s work activities
(i.e., the requirement to undertake the secondment) and not by private considerations.
Furthermore, based on the following factors, Jane is unlikely to be considered to be LAFH:
There is no change in Jane’s regular workplace (from the Brisbane to the Townsville office).
The shorter period of time Jane is in Townsville (being an overall period of two months).
Jane’s family did not accompany her.
This conclusion is also consistent with the outcome that would arise if the employer were able
to rely on PCG 2021/D1 (i.e., assuming all eligibility requirements were met). This is because
Jane is not away from home for 21 days or more continuously (as she returns home to Brisbane
on every second weekend) and the overall period she is away in Townsville is fewer than 90
days in the FBT year (i.e., she is away for an overall period of two months or around 60 days).

3.3 Employees who combine deductible short-term work

travel with a private stay-over (such as a holiday)
If an employee’s duties of employment require that they travel from their home to an alternative
work location, being somewhere other than the employee’s regular workplace, the costs of
transport between home and that location can be characterised as being incurred in the course of
gaining or producing the employee’s assessable income and are therefore deductible on this basis.
Furthermore, as the employee will not be considered to be LAFH at the location to which they
travel in this situation, any accommodation and meal expenditure is also typically deductible.

Common examples of this type of travel include an employee being required to travel interstate to
attend a training course (e.g., a 5-day training course) or to attend a work-related conference.

In these circumstances, it is often the case that an employee will combine this type of travel with a
private activity (e.g., where an employee adds a private holiday or ‘break’ onto the end of such
a work conference or training course). Naturally, this private element of a work-related trip calls
into question the deductibility of transport, accommodation and meal expenditure incurred by the
employee, particularly if the employee is accompanied by one or more family members (e.g., a
spouse), as the costs attributable to the private element are not deductible under S.8-1.

In both TR 2021/1 (for transport costs) and TR 2021/D1 (for accommodation and meal costs), the
ATO advises that, in these circumstances, the deductibility of the travel costs must be reduced (or
apportioned) to reflect the private portion of the employee’s trip. The ATO has further advised the
NTAA that the principles outlined in TR 98/9 (being the ATO’s self-education ruling) should also be
considered in determining how travel expenses (especially transport costs, such as airfares) should
be apportioned in these circumstances.

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3.3.1 Latest ATO guidelines for apportioning travel expenses

Where an overnight short-term work-related trip (e.g., a work-related conference) incorporates a
private element, the following general apportionment guidelines should be considered (which
are largely based on TR 2021/D1 (e.g., paragraphs 77 to 83) and TR 98/9) for travel expenses:
(a) Apportioning accommodation and meal costs.
The cost of accommodation incurred by an employee that relates to the work component of
the trip is deductible to the employee under S.8-1. This is the case even if a non-employee
family member (e.g., a spouse) accompanies the employee on the trip, provided that:
• the choice of accommodation was not influenced by the fact that the employee was
accompanied by the family member; and
• the cost of the room was the same whether one or two people stayed in the room (i.e., there
was no additional cost as a result of the accompanying family member).
However, the accommodation and meal expenses associated with the private component of
the trip (e.g., a holiday) are private in nature and are not deductible. The meal costs of an
accompanying non-employee partner or spouse are also not deductible (for the entire trip).

(b) Apportioning transport costs.

The apportionment of transport expenses associated with such a trip (e.g., the cost of a flight)
can be more difficult, because this cost often relates to the entire trip and cannot be so easily
apportioned into its work-related and private components (as compared with, say,
accommodation costs which are generally charged at a daily rate).

In this regard, at paragraph 17 of TR 98/9, the ATO makes the following comment:
“If the income-earning purpose is merely incidental to the main private purpose, only
the expenses which relate directly to the former purpose are allowable. However, if the
private purpose is merely incidental to the main income-earning purpose,
apportionment is not appropriate.” [Emphasis added]

Consistent with this comment, the ATO provides the following general guidance to assist in
relation to apportioning transport costs for income tax (and FBT purposes) where an employee
undertakes work travel that incorporates a private element (e.g., a work trip includes a holiday):
• If the travel is undertaken mainly for work-related purposes and the private travel is
incidental to that work-related purpose, the trip is taken to be 100% for work purposes
(i.e., the transport costs would be 100% deductible).
• If the travel is undertaken mainly for private purposes and the work-related portion is
incidental to the private travel, the trip is taken to be 100% for private purposes (i.e., all
of the transport costs would be non-deductible).
• If travel is undertaken for equal dual purposes, being work-related and private purposes,
the trip is taken to be 50% for private and 50% work-related purposes (i.e., half the
transport costs would be deductible).
Refer also to the ATO’s 2020 ‘Tax Time Toolkit’ (e.g., for “Travel expenses what you need to
know before you go”) for further information in this regard.

Unfortunately, there is limited guidance in relation to determining the purpose of a trip. However,
based on relevant case law, it is clear that the purpose of a trip cannot simply be determined based
on the time spent on each activity (i.e., the days spent on work-related activities compared to the
days spent on private activities). In this regard, the High Court has previously acknowledged that
there can be no precise arithmetical apportionment in these circumstances, in which case,
apportionment should be made on a ‘fair and reasonable basis’. Refer to Ronpibon Tin NL v FC
of T (1949) 78 CLR 47 at 56.

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The following table sets out some relevant ATO examples and case law in this area, which may
assist in determining the purpose of a work-related trip that has a private element.

Details of travel Apportionment of transport costs

1. An employee was required by her employer The ATO takes the view the private component
to attend a five-day conference on the Gold of the trip is incidental to the work-related
Coast to obtain specialist skills in her component. On this basis, the apportionment
profession. The employee was accompanied would be as follows:
by her husband and stayed an additional two
• Work-related – 100%
nights to have some leisure time together
before flying home. • Private – 0%
Refer to the ATO’s 2020 ‘Tax Time Toolkit’.

2. An employee was in the process of booking In this case, the ATO takes the view that the cost
a five-day holiday to Sydney to see an art of the flights between home and Sydney should
exhibit, when their employer asked if they be apportioned as follows:
would like to attend a three-day work
• Work-related – 50%
conference in Sydney (which was being held
in the week following the employee’s planned • Private – 50%
holiday). The employee agreed and changed
Refer to the ATO’s 2020 ‘Tax Time Toolkit’.
travel plans accordingly.

3. An employee was holidaying in Cairns when In this case, the ATO take the view that no part
she became aware of a half-day, work- of the airfare to Cairns is an allowable deduction,
related seminar, which the employee decided as the purpose of the trip was entirely private.
to attend.
Refer to TR 98/9 (paragraph 69) and to the
ATO’s 2020 ‘Tax Time Toolkit’.

4. A dentist spent nearly six weeks overseas. The Court held that the proper method to
Five days were spent at a dental conference determine apportionment was the degree of
whilst the reminder were leisure days. predominance to be attached to each objective
(work versus leisure).
The ATO unsuccessfully sought to limit the
deduction for airfares to 5/40ths of the cost In this case, both objects were of equal weight
(based on the time spent on each activity). and, therefore, one-half of the airfare was
allowed as a deduction:
• Work-related – 50%
• Private – 50%
Refer to Case R13 84 ATC 168.

5. An employee teacher undertook an overseas The Court held that the overseas trip inevitably
self-guided, educational discovery tour. assumed (to a minor degree) a private, rather
than a work-related, character, notwithstanding
The travel directly contributed to the the dominant purpose of the trip was for work.
teacher’s professional skills and directly led On this basis, apportionment was as follows:
to their professional advancement within the
school. • Work-related – 75%
• Private – 25%
Refer Lenten v FCT [2008] AATA 281.

Although this example involved a self-education claim, it is useful in the context of apportioning airfares
for business conferences/courses as it illustrates the same principle of apportionment.

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The following example is adapted from Example 9 at paragraph 79 of TR 2021/D1.

EXAMPLE 12 – Apportioning the private component of a work trip

Connie lives and works in Sydney as an employee regional manager for a company that operates
clothing stores.
Each year, Connie is required by her employer to attend a five-day planning workshop on the Gold
Coast. The travel arrangements in relation to the course are as follows:
• Connie will be paid her usual salary for the five days she attends the course.
• Connie’s husband, Sean, will join her on the Gold Coast for the five-day period of the course
(he will play golf and enjoy time at the beach while Connie is at the course) and they will stay
for an extra two days after the course to have some leisure time together.
• Connie will pay for her return flights (and Sean’s return flights) to the Gold Coast (from Sydney).
• Connie has organised and paid for a room at the venue. The room cost is $240 a night (i.e.,
$1,680 for the seven nights). The choice of the room is not influenced by Connie’s husband
accompanying her, and there is no cost increase as a result of Sean occupying the room.
How are the travel expenses dealt with in relation to the Gold Coast trip?
Based on TR 98/9, TR 2021/D1 and other relevant ATO documents, the transport, accommodation
and meal costs associated with the Gold Coast trip would be dealt with as follows:
(a) Transport costs – From Connie’s perspective, the trip to the Gold Coast (to attend the work-
related course) is travel between home and an alternative work location. As a result, the
transport costs (e.g., airfares) associated with Connie travelling to the Gold Coast are fully
deductible under S.8-1 on the basis that they are incurred in the course of gaining or
producing her assessable income.
Note that, the deductibility of Connie’s flights is not affected by her having two extra days on
the Gold Coast, nor is it affected by Sean accompanying her on the trip. This is because the
main purpose of the trip for Connie was to attend the work-related course, and the leisure
component (i.e., the two-day holiday after the course) is merely incidental.
The cost of Sean’s airfare to and from the Gold Coast is private and is not deductible.
(b) Accommodation costs – Travel for the period of the workshop is an incident of Connie’s
employment and the expenditure she incurs on accommodation and meals is incurred in the
course of performing her income-producing activities (i.e., as noted above, Connie is travelling
to an alternative work location for work). Accordingly, Connie is travelling (overnight) on
work during that period, and the accommodation expenses she incurs for the first five nights,
being $1,200 (calculated as $240 x 5 nights), are deductible.
Note that, no apportionment is required in respect of accommodation for this period, even
though Sean also stayed in the accommodation, because the type of room and the cost of the
room were not affected by Sean accompanying Connie on the trip.
The cost of the accommodation for the two-day period after the course ended, being $480
(calculated as $240 x 2 nights), is private and is not deductible.
(c) Meal expenses – For the reasons set out at (b), above, Connie is entitled to claim a deduction
for the cost of any meals (attributable to Connie) during the five-day workshop, which means
that if she eats out with her husband, only the cost of her meal will be deductible.
Note that, all of Sean’s meal costs during the five-day workshop are private in nature and not
deductible under S.8-1.
Also, both Connie and Sean’s meals for the two-day period after the course has ended are
private in nature and not deductible.

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3.4 Employees who are working on a FIFO basis

Another common travel arrangement is one that relates to a fly-in-fly-out (‘FIFO’) worker. Broadly,
a FIFO worker flies into a regular (generally remote) workplace, works for a set number of days,
and then flies home to have a break for a set period (which is repeated on a regular and rotational
basis). This type of working arrangement is common in the mining, gas and exploration industries.

More specifically, the travel arrangements of a FIFO employee typically involve the following:
• Under the terms of employment, a FIFO employee is required to report for work at a particular
location, being a ‘transit point’ (e.g., an airport), from which further travel is needed to reach
the location at which the employee’s substantive duties are carried out (‘substantive work
location’). The substantive work location is often in a remote area (e.g., a mine site).
• A FIFO employee works on a project during their rostered-on period, which may, for example,
be for two weeks or four weeks. At the end of their rostered-on period, the employee would
travel back to the transit point (e.g., the airport) and catch a flight back to their home.
• It may be that the travel between the transit point and the work location where substantive duties
are performed, is undertaken on work time whilst the employee is being paid, and the employee
may be under the direction and control of their employer during this period of travel.

Travel costs incurred by a FIFO employee in these circumstances would be dealt with as follows:
(a) Transport costs of travel between home and the substantive work location.
The cost of transport between home and where the employee reports for work at the transit
point is not deductible, as it is a prerequisite to gaining or producing their assessable income
(i.e., this is considered to be ordinary, non-deductible, home to work travel).
However, the cost of transport between the transit point and the substantive work location
(i.e., the place where the employee carries out their substantive duties) is deductible if it can
be shown that the employment is the occasion for the employee’s expenditure (even if the
employee’s substantive work location is a regular workplace for the employee).
This will be the case where the substance of the arrangement (including any applicable award)
reveals that the need for a transit point fits within what would be reasonably expected by the
duties of employment and not by the private characteristics of the employee, such as where
they live in relation to where they report for work (e.g., the remoteness of the project location
may provide an explanation for the travel being part of the employee’s employment). Refer to
Example 9 at paragraph 68 of TR 2021/1 for an illustration of this scenario.
However, that the ATO has advised that some combination of the following factors may
indicate that transport expenses relating to travel between a transit point and an employee’s
substantive work location are not incurred in gaining or producing an employee's assessable
income and may, therefore, not be deductible:
• The terms of employment only require attendance at the actual work location (that is, the
employee does not have to consistently attend a specified transit point).
• The employee is not under the direction and control of their employer, and the employer's
workplace policies and procedures do not apply while the employee is travelling between
the transit point and their substantive work location.
• The employee is rostered on duty and paid only from the time they arrive at their substantive
work location (and not from the transit point).
• The employee is free to arrange their own travel and they can travel from, and to, a
destination of their choice before their rostered duty commences and after it ceases.
• The employee does not work for the same employer on other projects after the project at
the substantive work location has come to an end.

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(b) Accommodation and meal expenses associated with staying overnight at the
substantive work location.
Expenditure on accommodation and meals to stay at (or near) the substantive work location
is deductible if the employee is travelling (overnight) on work. This will be the case if the
occasion of the expense is dictated by the employee’s work activities and the employee is not
LAFH.
If the employee is taken to be LAFH at the location to which they are travelling, the
accommodation and meal expenses incurred whilst away at that location would be considered
non-deductible private living expenses.
As an observation, if a FIFO arrangement is on-going to the same work locations, it is more
likely that the employee will be LAFH, because the factors that characterise an employee as
LAFH in TR 2021/D1 (refer above) are more likely to be present. In particular, the workplace
is more likely to be a regular workplace, the employee may stay in more permanent type
accommodation (e.g., a serviced apartment as opposed to a hotel) and, as the arrangement
is on-going, the employee may physically be at the work location for a relatively long period.
However, when dealing with FIFO arrangements, there may also be compelling reasons that
indicate that an employee is not LAFH at the work location. In particular, the use of rudimentary
and shared accommodation and/or the employee being unable to bring their family with them
are factors that would indicate an employee is not LAFH. It will be necessary to consider, on
balance of all relevant factors, whether the employee is travelling (overnight) on work or LAFH.
Note that the ‘21/90-day rule of thumb’ in PCG 2021/D1 cannot be relied upon to classify an
employee who is working on a FIFO basis (even if the employer provides an allowance to
cover the accommodation and meal expenses). Refer to paragraph 7 of PCG 2021/D1.

EXAMPLE 13 – Employee working on a FIFO basis

Toby lives in Adelaide with his family and is employed on a FIFO basis, as an electrician, for a
mining company. The terms of Toby’s employment arrangement are as follows:
1. Toby is employed on an 18-month contract to work on a particular project for his employer.
2. The project site is located in Western Australia, around 600 kilometres north of Perth.
3. Toby’s roster is four weeks on and two weeks off. Toby is not rostered on (and is not paid) until
he starts work at the project site. He is free to organise his own transport to and from the site.
Alternatively, Toby has the option to meet at Perth airport (a transit point) and his employer will
organise transport to the work location from there (at Toby’s cost). Toby generally chooses for
his employer to organise his transport between the transit point and the work location.
4. Toby is not under his employer’s direction and control during periods of travel.
5. Under the terms of his employment agreement, Toby has the option of being provided with board
and lodging or being paid an allowance of $350 per week to cover those costs. Toby chooses
to be paid an allowance, as he prefers to stay in rented accommodation with a co-worker. The
two-bedroom unit which he shares with his co-worker is located around 10 kilometres from their
worksite (i.e., the project site). Each co-worker pays $100 per week rent for the unit.
Based on TR 2021/D1 and TR 2021/1, the transport, accommodation and meal expenses
associated with this FIFO travel arrangement would be dealt with as follows for tax purposes:
(a) Transport costs – The cost of transport between home and the work location where Toby
reports for work (i.e., the project site) is not deductible, as it is a prerequisite to gaining or
producing his assessable income (i.e., this travel is considered to be ordinary home to work
travel). Note that the travel between the Perth airport (the transit point) and Toby’s work
location (i.e., project site) is not deductible as it does not fit within what would be reasonably
expected by Toby’s duties of employment.

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The reasoning for this conclusion can be explained as follows:

The terms of employment only require attendance at the actual work location (i.e., Toby
does not have to consistently attend a specified transit point, as this is his choice to do so).
Toby is not under the direction and control of his employer whilst travelling.
Toby is rostered on duty and paid from the time he arrives on site at the work location.
Toby is free to arrange his own travel and can travel from, and to, a destination of his choice
before his rostered duty commences and after it ceases.
Toby may not work for the same employer after this project has concluded.
(b) Accommodation and meal expenditure at the work location – These expenses are likely
to be private living expenses and, on this basis, would not be deductible. This is because
Toby is likely to be considered to be LAFH at the work location (rather than travelling
(overnight) on work), for the following reasons:
Toby is travelling to a regular workplace.
Toby is travelling to the work location over a relatively long period of time.
The nature of the accommodation being used by Toby (i.e., a 2-bedroom apartment) is
more permanent type accommodation (rather than short-term accommodation).
Toby’s family could stay in the apartment he rents (should they choose to do so).
The allowance paid to Toby to cover his non-deductible additional accommodation and meal
expenses (because he is required to LAFH from his normal residence to perform duties of
employment) is dealt with under the FBT regime and may attract concessional treatment as a
LAFH allowance (i.e., the allowance is not included in Toby’s assessable income).

3.5 Employees working from home during COVID-19 who

travel into work for meetings, to pick up files, etc.
Many employees were required to work from home for a period during the COVID-19 pandemic,
with some employees still being required to do so. A question that has often arisen in this regard
is whether an employee who is required to work from home due to COVID-19 can claim a deduction
for the cost of transport to travel between home and work to attend meetings, pick up files, etc.

Where an employee has been required to work from home as a consequence of the COVID-19
pandemic, the ATO is likely to argue that the employee’s existing workplace continues to be a
regular workplace for the employee.

Therefore, on this basis, any travel between the employee’s home and their regular workplace
(e.g., to attend a meeting or to pick up client files) would likely continue to be considered by the
ATO to be non-deductible (or private) home to work travel. In other words, in this situation, an
employee would likely be viewed by the ATO as travelling to work (the cost of which is not
deductible), rather than travelling on work.

TAX TIP – Travel from home to an ‘alternative workplace’

Transport expenses incurred by an employee in travelling between home and an ‘alternative
workplace’ are generally deductible under S.8-1, where their employment duties require the travel.
Therefore, where an employee, who has been required to work from home due to the COVID-19
pandemic travels between their home and the premises of a client, a supplier or even to another
workplace of their employer (which is not a regular workplace for the employee), a deduction for
transport expenses (e.g., car expenses) would generally be available under S.8-1.

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3.6 Employees travelling for work who are (or have been)
required to quarantine due to COVID-19
Some employees travelling (overnight) for work purposes have been (or may be) required to
quarantine in a hotel as a result of government regulations imposed due to COVID-19. The
question often raised in these circumstances is whether any accommodation and meal expenses
incurred by an employee (which are not paid for or reimbursed by their employer) during a
quarantine period can be claimed as a deduction under S.8-1 where the quarantine period occurred
(or occurs) either during or after an employee’s work-related trip. Fortunately, the ATO has recently
released guidance in relation to this issue. Refer to ATO factsheet: “Quarantine expenses when
travelling on work” (QC 64188) (‘ATO’s factsheet’).

In the ATO’s factsheet, the ATO advises that an employee is generally entitled to claim a deduction
for accommodation and meal expenses incurred with respect to a period of quarantine that
occurred (or occurs) either during or after a period that the employee was (or is) travelling
(overnight) on work. In these circumstances, the ATO effectively accepts that the period of
quarantine is part of the employee’s work duties (being effectively, an extension of the
employee’s deductible work-related travel).

An example of where an employee may be travelling (overnight) on work is where the employee is
required to travel to an alternative work location (e.g., where an employee is required to quarantine
before or after a short-term secondment or visit to an interstate client). Note that, a FIFO employee
who is not travelling (overnight) on work would generally not be entitled to claim accommodation
and meal expenses incurred as a result of being required to quarantine due to COVID-19.

In some cases, apportionment may be required if the work trip was only partly work-related (e.g.,
a private break taken at the end of a work trip). Refer to the guidance on apportionment above.

EXAMPLE 14 – Employee travelling interstate required to quarantine

Mai, an employee, lives and works in Sydney.
Mai travelled (overnight) on work for a sales tour of Victoria to alternative work locations for three
weeks. On her return to Sydney, Mai was required to quarantine for two weeks in a hotel (as a
result of visiting COVID-19 hot spots in Victoria).
As the reason for Mai’s trip was (solely) to undertake her work duties, which involved her traveling
(overnight) on work, the ATO effectively accepts that the period of quarantine is an extension of
Mai’s work duties (or overnight work-related trip). As such, Mai is entitled to claim a deduction for
the costs she incurred with respect to accommodation and meals while she was in quarantine.

In contrast to the above, if an employee who is not travelling (overnight) on work is required to
hotel quarantine due to COVID-19, the associated expenses are private in nature and are not
deductible (as, in this case, these expenses are akin to ordinary private living costs). Note that
this is the case even if the employee is able to (and does) work from the quarantine location.
For example, this would include where the employee was LAFH at the location to which they
travelled, had relocated to that location or had returned from a holiday (and had to quarantine).
Refer to the discussion above to assist in determining if an employee is LAFH at a location to which
they travel (as opposed to travelling (overnight) on work). Furthermore, it may be appropriate to
apply the ‘21/90-day rule of thumb’ set out in PCG 2021/D1 to classify an employee in this regard
(e.g., where the employer had paid an allowance with respect to the accommodation and meals
costs for the period of travel, and the other eligibility requirements are met).
Furthermore, if an employee was able to quarantine at home but chose instead to quarantine in a
hotel (and incur additional expenses to do so), the ATO may argue that these costs are not
deductible on the basis that the occasion of these expenses is explained by a personal choice
made by the employee (rather than being explained by the employee’s work duties).

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Latest tax issues for landlords who are

affected by COVID-19
Many individual landlords have been affected by the financial impact of COVID-19, having been
required to deal with tenants (both residential and commercial) who are unable to pay or who wish
to vacate rented premises earlier than expected. Additionally, many landlords may have suffered
their own financial instability after having been impacted by personal or family job loss, or a drop in
business profitability due to the pandemic.

Furthermore, landlords operating within the short-term accommodation or holiday market (including
those involved in online platforms such as ‘Airbnb’ and ‘Stayz’) are still reeling from the impact of
increased vacancies and the associated revenue reduction resulting from border closures and
reduced international tourism.

In response to these pressures, State and Territory Governments have sought to provide some
relief in the form of negotiated rental reductions, and in some cases, the payment of Government
rental relief grants and associated deferrals or reductions of land tax liabilities.

To assist landlords to deal with the tax implications of these recent events, the ATO has recently
updated its guidance on the tax outcomes for circumstances where rental properties have been
affected by COVID-19 (including the recent economic uncertainty brought about by the pandemic).

This segment of the notes therefore considers some of the key tax issues for landlords affected by
COVID-19, including whether any tax concessions are available in this current climate.
These key tax issues and concessions include the following:
(a) Whether the granting of a reduced rent or rent-free tenancy period affects rental property
deductions otherwise claimable by landlords.

TAX TIP – Landlords expected to negotiate rent relief

This is particularly relevant as each State and Territory Government has introduced measures to
support and protect tenants that accrued rental arrears as a result of COVID-19.
For example, landlords may have been prohibited from increasing rent, as well as being subject to
strict restrictions regarding the eviction of tenants, depending on the relevant State or Territory in
which a landlord’s rental property is located.

(b) What impact loan deferrals and repayment ‘holidays’ have on the deductibility of relevant
interest expenses (including compound interest expenses).
(c) The income tax treatment of back payments of rent or insurance proceeds paid under a
‘loss of rent’ policy.
(d) The income tax treatment of State and Territory Government assistance (grants) to landlords,
such as rent relief grants and land tax deferrals and/or waivers.
(e) The income tax issues for short-term rental accommodation providers suffering forced
vacancies.
(f) Any tax implications associated with a landlord being unable to service their rental property
loans and a mortgagee in possession enforces, gives effect to, or maintains the security,
charge or encumbrance it holds over the property.

(g) Whether or not the instant asset write-off deduction (i.e., for depreciating assets costing
less than $150,000) or the new temporary full expensing can apply to rental property assets.
All legislative references in this segment of the notes are to the ITAA 1997, unless otherwise stated.

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1. Can a landlord claim rental deductions during

rent-free or reduced rental periods?
Where a residential or commercial landlord provides their tenant with a temporary rent-free period
or a period of reduced rent, the issue often raised is whether this will affect the ability of the
landlord to claim full tax deductions for expenses incurred in respect of their rental property.

TAX TIP – COVID-19 rent relief for commercial tenancies

The provision of rent relief became common, for example, for commercial tenancies during COVID-
19 as landlords were required to negotiate rent relief for small and medium sized enterprise (‘SME’)
tenants (i.e., broadly, business entities with a turnover of up to $50 million).
This rent relief was required to be in line with principles set out in the ‘National Cabinet Mandatory
Code of Conduct – SME Commercial Leasing Principles During COVID-19’ (‘National Code’), and
included the following:
• Landlords could not terminate leases due to non-payment of rent during the COVID-19
pandemic period (or reasonable subsequent recovery period).
• Landlords were required to offer tenants proportionate reductions in rent payable in the form
of waivers and deferrals of up to 100% of the amount ordinarily payable, on a case-by-case
basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and
a subsequent reasonable recovery period.
• Rental waivers were required to constitute at least 50% of the total reduction in rent payable
over the COVID-19 pandemic period, or a greater proportion of the total reduction in rent
payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their
ongoing obligations under the lease agreement. Such waivers had to take into account the
landlord’s financial ability to provide such additional waivers, and tenants could waive the
requirement for a 50% minimum waiver by agreement.

Traditionally, it has been accepted that where a landlord charges a tenant less than market value
rent (particularly a related party tenant), deductions may be denied or reduced (i.e., apportioned) if
it can be established that the expense is not incurred solely for the purpose of producing assessable
income. Refer to Fletcher v FCT [1991] HCA 42 (‘Fletcher’s case’) and Taxation Ruling TR 95/33.
This will be the case particularly where it can be established that there is some other purpose for
incurring the relevant expense (e.g., to provide accommodation to a relative at a moderate cost).

However, in the ATO’s COVID-19 Rental Property Factsheet (refer to “Residential rental property”
(QC 63322) on the COVID-19 section of the ATO’s website), the ATO has confirmed that it will
generally accept that landlords can continue to claim deductions for expenses in relation to property
(e.g., mortgage interest, rates, insurance, repairs and depreciation) where a landlord:
• receives less rental income as a result of their tenant being unable to pay their rent under the
lease agreement (e.g., because the tenant’s income has been affected by COVID-19) and the
landlord continues to incur normal expenses in relation to their property; and/or
• reduces their tenant’s rent to allow them to stay in the property due to COVID-19, where the
rent reduction is provided for commercial arm’s length reasons.
Refer also to the ATO’s fact sheet: “COVID-19 – frequently asked questions”, under the category
of “Individuals” and “Residential rental properties”.
Effectively, the ATO accepts that rent relief provided by a landlord to a tenant who is financially
disadvantaged by COVID-19 generally does not result in there being any ‘other’ purpose for
incurring expenses in relation to the property (i.e., other than for income-earning purposes). As a
result, in these circumstances, a landlord will generally be considered to continue to incur expenses
in relation to their property solely for the purpose of deriving assessable rental income (which
means that they will generally not need to apportion their deductions as a result of that rent relief).

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TAX WARNING – Rent relief provided to related party tenants

Generally, where a rental property is let to relatives or friends of a landlord at a commercial rate,
the landlord is treated no differently for tax purposes than any other owner in a comparable arm’s
length situation. Refer paragraph 13 of Income Taxation Ruling IT 2167.
However, if a landlord allows relatives or friends to lease a rental property for less than market
value rent, additional consideration must be given as to the extent to which the landlord is permitted
to claim deductions for rental property expenses.
In the context of providing rent relief to a related party (or non-arm’s length) tenant purportedly
been impacted by COVID-19, a landlord may be required to apportion their deductions where:
• the rent relief provided to the tenant is excessive; or
• the tenant has not been financially disadvantaged by COVID-19.
Where apportionment of deductions is required, the rental expenses are only deductible to the
extent the property is held for the purpose of deriving assessable income. From a practical
perspective, the ATO generally limits any allowable deductions to the amount of the assessable
rental income received, thereby denying the deductibility of any tax losses from the property.

2. The deductibility of interest expenses when

landlords have deferred loan repayments
In response to COVID-19, many lenders have allowed borrowers with home and investment
property loans to defer repayments for a period of time.
However, while repayments are being deferred, interest (and fees) will usually be added to the loan
balance (i.e., interest will be capitalised). As a result, it is important to recognise that, while
repayments are not being made during the relevant period (i.e., the deferral period), borrowers
continue to ‘incur’ the interest that accrues in respect of their loan during this (deferral) period. In
other words, interest will continue to be calculated and will accrue on both the unpaid principal sum
of the loan and the unpaid (i.e., capitalised) interest. The interest that accrues on the unpaid or
capitalised interest is referred to as ‘compound interest’.
In Taxation Determination TD 2008/27, the principles governing the deductibility of compound
interest are the same as those that govern the deductibility of ordinary interest (including capitalised
interest). That is, if the underlying or ordinary interest is deductible, then the compound interest
will also be deductible. Refer also to Hart v FCT [2002] FCAFC 222.
In this regard, the deductibility of interest expenses (including compound interest) under S.8-1 is
typically determined by examining the purpose of the borrowing and the use to which the borrowed
funds are put. Refer to FCT v Munro [1926] HCA 58 and Fletcher’s case.
Accordingly, interest expenses (including any compound interest) will generally be deductible to
the extent the borrowed monies are used for income producing purposes. For example, to the
extent that borrowed funds are used to purchase a rental property, the interest on the loan
(including any compound interest incurred) will generally be deductible.

3. Income tax treatment of back payments of

rent or insurance received for ‘loss of rent’
In some cases, where a landlord has provided rent relief to a tenant, the landlord may subsequently
receive a payment for their lost rental income through either:
• a back payment of rent from their tenant (i.e., following the conclusion of a rent deferral); or
• an insurance payment (i.e., in respect of a landlord’s ‘loss of income’ insurance policy held).

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The issue often raised in these situations is how such payments are dealt with for income tax
purposes (i.e., whether such payments are assessable to the recipient landlord).

The tax treatment of these payments to a landlord can be summarised as follows:

(a) Taxation treatment of back payments of rent (including rent deferrals and waivers) –
Any rent deferrals or temporary waivers offered to tenants may result in the income being
recognised in the following income year, despite the rent being due under the lease earlier.
This means that landlords who defer or temporarily waive rent owed to them, or who are unable
to collect unpaid rent, will not have to recognise the rent due as income if and until it is paid.
This means that any back payment of rent received by a landlord from a tenant that represents
rent amounts (that were previously deferred or temporarily waived) will be included in the
landlord’s assessable income in the income year in which the back payment of rent is received
by the landlord.

EXAMPLE 15 – Back payment of rent after a rent deferral period

Miranda and Hans own a residential rental property leased to Greg who is an airline pilot.
Greg has been stood down from his employment as a result of the COVID-19 pandemic and was
unable to pay his rent for May and June 2020.
Miranda and Hans agreed to provide Greg with some short term rental relief (i.e., in the form of a
two month rental deferral) so that he could find alternative employment.
Once Greg found alternative work, he paid the rent that was owing to the landlords in July 2021.
The back payment of rent in this case is assessable income to Miranda and Hans (i.e., according
to their respective shares in the rental property) in the 2021 income year.

(b) Taxation treatment of ‘loss of rent’ insurance proceeds – In the case of an insurance
payment being made to a landlord as a result of a tenant’s default, the payment is being made
to the landlord to replace lost income (i.e., loss of rent).
For income tax purposes, an amount paid to compensate for a loss generally takes on the
same character of what it is replacing. Refer to FCT v Dixon [1952] HCA 65 (‘Dixon’s case’).
On this basis, a compensation payment to a landlord that replaces lost rental income is
therefore considered income under ordinary concepts and assessable income under S.6-5.
The fact that a back payment or insurance payment may be received as a one-off lump sum
amount does not change its revenue nature. Refer to Sommer v FCT [2002] FCA 1205.

TAX WARNING – More tax may apply to large one-off payments

Where an individual landlord receives a back payment of rent or an insurance payment for loss of
rent, the payment may be made in respect of amounts that accrued in more than one income year.
In some cases, a large one-off back payment or insurance payment may result in an individual
landlord moving into a higher tax bracket, resulting in more income tax being payable by the
landlord (compared to what would have been payable if the rent was received when it was due).
Unfortunately, where a back payment or insurance payment has been received as a lump sum
amount, the income tax legislation does not allow landlords to apportion such an amount (for
assessable income purposes) over the period to which the rental income should have been
received (i.e., no ‘averaging’ provisions apply in these circumstances).
Furthermore, a landlord in this situation would not be entitled to a ‘lump sum payment in arrears
rebate’ under S.159ZRA of the ITAA 1936, as back payments of rent and insurance payments for
loss of rent are not ‘eligible income’ for the purposes of the rebate.

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4. The tax treatment of Government assistance

received by landlords
The State and Territory Governments have introduced various assistance packages to support
landlords (and tenants) experiencing hardship as a result of COVID-19.

In particular, assistance provided to landlords generally falls into one of the following two
categories:
• A rent relief grant received directly by a landlord (usually with respect to residential tenancies
in respect of eligible tenants) from the relevant State or Territory Government.
• Reductions or waivers of land tax payable by a landlord (particularly for landlords providing rent
relief to commercial tenants) or land tax payment deferrals.
The following discussion addresses the tax implications associated with a landlord receiving any
such Government assistance.

4.1 Rent relief grants received by landlords who have

provided rent reduction relief to tenants
Some Australian States have provided rent relief grants to landlords on behalf of tenants
experiencing financial hardship due to COVID-19, generally paid where rental reductions have
been provided to the tenant by their landlord, such as the following States:

(a) In Victoria, a rent relief grant of up to $3,000 was available with respect to eligible Victorian
residential tenants experiencing rental hardship due to COVID-19 up until 28 March 2021
(initially, a rent relief grant of up to $2,000 was available up until 20 August 2020).
The grant was paid directly to the tenant’s agent or landlord for tenants living in their primary
residence (i.e., a residential rental property) where they have negotiated a rent reduction
agreement with their landlord (and have lodged the agreement with Consumer Affairs Victoria).
In effect, this grant was a contribution towards the tenant’s rental payments after a rent
reduction agreement between the landlord and the tenant.
Further reference can be made to the following Victorian Government website for more details
https://www.housing.vic.gov.au/help-renting/rentrelief.

(b) In Western Australia, rent arrears assistance grants have been available to help pay
outstanding rent debt that arose before 1 December 2020 (i.e., unpaid or deferred rent, or rent
that has been waived or reduced, including under a rent relief agreement between the landlord
and their tenant).
These grants can be up to 75% of rent arrears, up to a maximum of $4,000 and are payable
directly to eligible landlords.
Further reference can be made to the following Western Australian Government website
https://www.commerce.wa.gov.au/consumer-protection/residential-rent-relief-grant-scheme.

(c) In South Australia, rental grants of up to $1,000 have been available with respect to eligible
residential tenants in each of two periods (i.e., from 30 March 2020 to 30 September 2020,
and from 1 October 2020 to 31 March 2021), where a landlord provided appropriate rent relief
(i.e., a rental reduction) to a tenant experiencing hardship due to COVID-19.
These rental grants have been payable directly to the landlord (or their agent) for a tenant’s
benefit through the reduction in rent payable to the landlord.
Further reference can be made to the following South Australian Government website for more
details: https://www.treasury.sa.gov.au/Growing-South-Australia/COVID-19/residential-rental-
grant-scheme-frequently-asked-questions.

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TAX WARNING – Rent relief grants assessable to landlord

A rental relief grant that is received by a landlord or their agent (effectively to replace rental income
that has not been received from the tenant because of a reduced or waived rental agreement with
the landlord in light of COVID-19) will be considered income according to ordinary concepts. Refer
to Dixon’s case.
On this basis, such a rental relief grant should be included in the landlord’s assessable income
under S.6-5 in the income year of receipt.

4.2 Land tax relief provided to eligible landlords

A number of States and Territories have also provided various forms of land tax relief to eligible
landlords (again, usually in recognition of rental reductions provided to their tenants), which has
generally been provided in the following two ways:
(a) Reductions or waivers of land tax otherwise payable by a landlord – For example:
• in New South Wales, a reduction of up to 50% of a 2020 land tax liability was available to
an eligible landlord who provided appropriate rental relief to a tenant, and a reduction of up
to 25% of a 2021 land tax liability is available for an eligible landlord who provides rental
relief to a tenant; and
• in Victoria, eligible landlords who have provided appropriate rental relief to their tenants
were able to have their 2020 land tax liability reduced by up to 50%. Another reduction (or
discount) of 25% is available to eligible landholders in respect of their 2021 land tax liability.
(b) Payment deferrals in respect of a land tax assessment – For example:
• in Victoria, eligible landowners were able to defer payment of their 2020 land tax liability
until 31 March 2021, with additional deferrals offered to eligible landowners with respect to
their 2021 land tax liability (and in some cases their previously deferred 2020 land tax
liability) until 30 November 2021; and
• in Queensland, 2021 land tax assessments were deferred by three months via a
Government sanctioned delay in issuing land tax assessment notices.

4.2.1 Income tax treatment of land tax reductions or waivers and

payment deferrals
Any subsequent discount (e.g., in the form of a reduction or waiver) of a landlord’s current year
land tax liability (whether paid or not) would arguably be either, treated as ordinary assessable
income of the landlord when received, or will be subject to the assessable recoupment rules in
Subdivision 20-A of the ITAA 1997. That is, a land tax discount amount would likely constitute
assessable income at the time it is granted. Refer to Taxation Ruling ‘TR’ 96/20 and S.20-20(3)
and S.20-30.

This means that a landlord’s original land tax liability would still be deductible (to the extent the
requirements in S.8-1 are satisfied) in the income year in which it is incurred, but any reduction or
waiver amount would be assessable income in the income year it is applied.

Notwithstanding the above, in the ATO’s fact sheet “Government Grants and payments during
COVID-19” (‘QC 63381), the ATO appears to take a more practical approach in two of its examples.
Importantly, these examples specifically deal with land tax reductions for the 2020 land tax
assessment that were granted or paid prior to 30 June 2020. In these examples, the ATO
concludes that the landlord has merely become entitled to a smaller allowable deduction for their
2020 land tax expense (i.e., being the net amount payable after the relevant reduction).

This perhaps reflects the fact that practically, a reduction or waiver received in the same income
year that the relevant land tax liability is incurred would achieve this net result.

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The following example has been adapted from the ATO’s Government Grants and payments during
COVID-19 fact sheet under ‘Land tax relief’ (i.e., Example 1) for seminar purposes.

EXAMPLE 16 – Land tax reduction (in the same income year)

Salma owns a small block of three commercial shops and is registered for GST. Her tenants were
significantly impacted by COVID-19 and, therefore, Salma reduced the rent for each of her tenants
by 50% for the April to June 2020 quarter, meaning her tenants were not required to pay the rent
reduction.
Salma applied to her State/Territory Government for a 50% land tax reduction for the April to June
2020 quarter. The land tax reduction was approved before June 2020.
Income tax implications
According to the ATO, as Salma received the land tax reduction, she has a smaller allowable
deduction in her 2020 tax return.
There will be no implications for the 2021 income year (unless a similar reduction is granted).
GST implications
Salma did not have to pay GST for receiving the land tax relief, as it was not a reduction in response
to a supply by her to the Government. The GST payable by Salma on the rent received for the April
to June 2020 quarter was reduced in proportion to the rent reduction she gave her tenants.

Unfortunately, the ATO’s example fails to address how its suggested approach would apply where
a landlord receives a reduction or waiver of land tax after the relevant income year the land tax
liability was incurred. Despite this, it appears at least arguable that where a landlord receives a
land tax discount after 30 June of the income year in which the land tax liability was incurred, the
original liability would remain deductible in the earlier income year, with the subsequent reduction
being assessable (i.e., either as ordinary income or as an assessable recoupment) in the later year.
Alternatively, where land tax relief is delivered in the form of a payment deferral of any applicable
land tax liability (i.e., the due date for payment has been extended), a landlord is still entitled to
claim their land tax deduction in the income year in which their land tax liability was incurred (even
though the actual payment of that liability may not occur until the following income year). In other
words, a land tax liability payment deferral does not alter the income year in which such a liability
can be claimed as a deduction. Refer to Case B5 70 ATC 24; 15 CTBR (NS) Case 67 and
confirmed in relation to payroll tax in Layala Enterprises Pty Ltd (in liq) v FCT [1998] FCA 1075 and
Taxation Determination TD 2004/20.

TAX TIP – When is a land tax liability incurred?

The timing of when a land tax liability is incurred (and therefore deductible) depends upon the
particular State or Territory land tax legislation in question.
Therefore, if a land tax liability is triggered for an owner of a property at a particular time (e.g., at
midnight on 31 December 2020 for land held in Victoria and NSW in respect of the 2021 calendar
year), it would be argued that the land tax liability is incurred at this time, even though:
• an assessment may not have yet been raised for the land tax liability; and
• the land tax liability has not yet been paid.
For example, where a 2020 land tax assessment (i.e., for the period January 2020 to December
2020) has been issued to a landlord in February 2020, which relates to the taxable value of a
property held by the landlord on 31 December 2019, the landlord’s land tax liability has been
incurred (and would be deductible) in the 2020 income year. This would still be the case, even
where payment of that liability has not been made until, for example, the 2021 income year (e.g.,
where the landlord has been granted a deferral of payment up until 31 March 2021).

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5. Issues for short-term rental accommodation

Due to COVID-19, many property owners have experienced reduced demand for their short-term
rental accommodation (e.g., Airbnb rentals), including cancellation of existing bookings. In turn,
these landlords have seen a reduction in assessable income derived from these properties, and
concerns have been raised as to whether expenses relating to the property remain deductible.

In the ATO’s COVID-19 Rental Property Factsheet (refer to “Residential rental property” (QC
63322) on the COVID-19 section of the ATO’s website, the ATO has confirmed that landlords of
short-term rental accommodation can continue to claim deductions for these properties for the
portion of the expenses that relate to income-producing use. This remains the case even where
income received from short-term rental has been significantly reduced as a result of COVID-19.

Specifically, the ATO has stated that, if a landlord’s ability to rent their property has been affected
by COVID-19 and nothing else changes, they can continue to deduct expenses based on how the
property was used in the equivalent period in earlier years. Whether a landlord can continue to
claim a deduction for expenses in the same proportion during the COVID-19 period depends on:
• how the property was used before COVID-19; and
• how the landlord planned to use the property during the COVID-19 period.

If a landlord uses their short-term rental property differently during the period it is affected by
COVID-19, the proportion of the expenses that can be claimed as deductions may be impacted.
For example, the relevant proportion may be increased/reduced due to:
• increased/reduced private use of the property by the landlord, their family or friends; or
• a decision to permanently stop renting out the property when COVID-19 restrictions end.

TAX TIP – Temporarily stopping or reducing paid advertising

Landlords are ordinarily required to show that their properties are genuinely available for rent in
order to claim deductions for any periods that a property is vacant and not rented. However, the
ATO has clarified that this factor alone will not determine the allowable proportion of deductions.
If a landlord has made a reasonable commercial decision to temporarily stop or reduce
advertising for their property during a COVID-19 lockdown, they may still be able to claim
deductions related to their property for this period. To calculate the extent of their deductions while
a property is not being actively advertised, landlords need to consider:
• the likelihood of renting a property in that locality during the lockdown;
• how the property had been used before the lockdown; and
• how the landlord plans to use the property during the lockdown.

EXAMPLE 17 – Reasonable apportionment of property expenses

Margo owns a ski chalet in regional Victoria. For 70% of the time during 1 July 2019 to 30
September 2019 (i.e., prior to the pandemic), Margo’s chalet was available for short-term rental
accommodation. For the remaining time during this period (i.e., for 30% of the time), the property
had been ‘blacked out’ for private use by Margo, and her friends and family. This is broadly
consistent with Margo’s use of the chalet during this equivalent period in earlier income years.
Unfortunately, due to COVID-19, Margo was not able to hire out her chalet, nor use it privately
between 1 July 2020 to 30 September 2020. While she temporarily stopped paid advertising for
the property during this period, she intended to hire out the chalet again once restrictions lifted. In
these circumstances, based on the ATO’s guidelines, it would generally be reasonable for Margo
to claim deductions for 70% of the expenses related to the ski chalet (e.g., mortgage interest,
council rates and land tax) incurred between 1 July 2020 and 30 September 2020.

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6. Tax issues for landlords who default on a

rental property loan
Despite the various COVID-19 concessions granted to landlords, those financially impacted by
COVID-19 have still been unable to meet their loan repayment obligations. In these circumstances,
under the terms of a rental property’s mortgage agreement, the lender (e.g., the bank) will usually
have a right to issue a default notice in relation to the loan and provide the borrower with a specified
period of time to remedy the default. If the default on the loan remains after the period in the default
notice has expired, the lender may cause the whole of the loan to be due and payable.
It then follows that the mortgagee in possession (i.e., the lender) can apply for a court order to take
possession of the property and sell it. The lender will arrange the sale of the property, with the
proceeds being applied against any costs it incurs (e.g., legal costs), and any residual being applied
against the outstanding loan balance of the loan. If the mortgagee (i.e., lender) repossesses the
rental property and sells it, the CGT consequences of the transaction need to be considered.

6.1 What are the CGT consequences of a rental property

being sold by a mortgagee in possession (e.g., bank)?
In this regard, S.106-60(2) has application if a CGT asset is legally owned by a person, but another
entity (e.g., the lender) that holds a security, charge or encumbrance over the asset enforces,
gives effect to, or maintains, the security, charge or encumbrance it holds over the asset.
Section 106-60 will apply to real property secured by mortgage, as a registered mortgage under
Torrens title legislation takes effect only as a charge and, therefore, the mortgagor (or the borrower)
retains legal ownership of the land. Refer to Halsbury’s Laws of Australia, Butterworths, 2001.
Under S.106-60(2), the CGT rules apply as if the act (e.g., the enforced sale of the property) was
done by the person who provided the security (i.e., usually the borrower). In simple terms, if the
mortgagee in possession enforces its legal rights to sell the property following the borrower’s
default on the loan, the CGT event applies in relation to the owner of the property (i.e., the
landlord), and not the mortgagee (or the lender). In relation to a sale of real property by a
mortgagee, CGT event A1 (disposal of a CGT asset) will generally apply. Refer to S.104-10.
Furthermore, S.106-60 ensures that the vesting of a rental property in a security holder or
mortgagee (e.g., a bank) for the purposes of enforcing or giving effect to the security, is ignored
for CGT purposes. This means that the security provider (i.e., usually the borrower) is still treated
as the owner of the asset for CGT purposes. It is important to ensure that the borrower is in fact
the legal owner on title, and the mortgagee is exercising its power of sale over the property that
came into existence when the borrower defaulted on the loan.

6.2 How is any income derived from a property whilst the

mortgagee (e.g., bank) is in possession treated?
If the mortgagee (e.g., the bank) obtains possession of an income producing property, it seems
that the mortgagee in possession would be a trustee as defined in S.6 of the ITAA 1936. Refer
also to the definition of ‘trustee’ in S.995-1 of the ITAA 1997, Howey v FCT (1930) 44 CLR 289 and
FCT v Everett 80 ATC 4076.
As the mortgagee in possession (e.g., the bank) derives the net rental income from the property in
a trustee capacity, it is expected that the income derived by the trustee would be income to which
no beneficiary was presently entitled. This is because, it is expected that the mortgagor (i.e., the
borrower) would not be entitled to receipt of the net rents under the terms and conditions of the
mortgage and/or under any court order issued, because the property has been repossessed by the
mortgagee (e.g., the bank). Therefore, the net rental income from the property would generally be
assessable to the trustee under S.99A of the ITAA 1936 (or even under S.99 where appropriate).
Refer also to Union Bank of London v Ingram (1888) 16 Ch D 53.

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7. Can a landlord claim new COVID-19 immediate

write-offs for rental property assets?
A common question from landlords has emerged with respect to their potential eligibility for the
current accelerated depreciation measures in the form of immediate write-offs.
These measures have been primarily introduced to assist with cash flow and economic stimulus as
a result of COVID-19, and include the following:
• The new temporary full expensing measure for eligible assets acquired after the 2020 budget
night time (i.e., after 7:30pm (legal Canberra time) on 6 October 2020) either under the
simplified SBE depreciation rules under S.328-181 of the Income Tax (Transitional Provisions)
Act 1997 (‘ITTPA’), or under the Division 40 capital allowance rules in new Subdivision 40-BB
of the ITTPA for all other taxpayers with an aggregated turnover of (generally) less than $5
billion (including SBEs not using the simplified SBE depreciation rules).
• The increased $150,000 instant asset write-off under either the simplified SBE depreciation
rules in S.328-180 of the ITTPA, or under the Division 40 capital allowance rules for medium
sized businesses that are not SBEs (i.e., businesses with aggregated turnover of $10 million
more but less than $50 million) under S.40-82.

TAX WARNING – Assets subject to a depreciating asset lease

When considering the depreciation of a rental property asset, it is important to note that an asset
subject to a ‘depreciating asset lease’ (e.g., one used in a rental property) is not eligible to be
depreciated under any of the simplified SBE depreciation rules.
This is because such assets are specifically excluded from the simplified SBE depreciation rules
by S.328-175(6).
This means that an SBE taxpayer (i.e., one with an aggregated turnover of less than $10 million)
who is using the simplified SBE depreciation rules will not be eligible to claim the following write-
offs in respect of depreciable assets used in a rental property:
• temporary full expensing under the SBE depreciation rules; or
• the $150,000 instant asset write-off under the SBE depreciation rules.
Notwithstanding the above, an SBE taxpayer may still be able to claim temporary full expensing
(but not the $150,000 instant asset write-off ) in respect of rental property depreciating assets
under the uniform capital allowance rules in Division 40 of the ITAA 1997.
However, temporary full expensing will only be available in respect of a rental property depreciating
asset for an SBE taxpayer where it is reasonable to conclude that the asset in question will be used
for the principal purpose of carrying on a business.
This means that an SBE taxpayer will only be entitled to claim temporary full expensing in respect
of a rental property depreciating asset where the taxpayer is carrying on a business of letting
properties or a rental property business (which is further discussed on pages 89 to 94). Refer to
S.40-150(3)(a) of the ITTPA.

Where an SBE landlord cannot claim temporary full expensing in respect of a rental property depreciating
asset (i.e., because of the depreciating asset lease exclusion in S.328-175(6)), they will also not be able
to claim the $150,000 instant asset write-off under S.40-82 in respect of the asset (i.e., the instant asset
write-off under Division 40). This is because this Division 40 instant asset write-off is only applicable for
businesses with an aggregated turnover of at least $10 million (and less than $500 million).

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Latest NTAA guide on when a client is

carrying on a rental property business
Recent tax changes affecting rental properties (particularly residential properties) have sparked a
significant increase in the volume of questions being raised about whether a taxpayer who is
deriving rental income from one or more properties is actually carrying on a business of renting
such properties (including a business of providing short-term (holiday) accommodation).

These tax changes have also increased the importance of making a correct determination on this
issue, and broadly include the following:
(a) The travel restriction in S.26-31 of the ITAA 1997 – This prohibits a tax deduction for travel
expenses incurred from 1 July 2017 in respect of a residential rental property (other than
where a rental property business is being carried on).
(b) The depreciation restriction in S.40-27 of the ITAA 1997 – This prohibits depreciation (or
‘decline in value’) deductions from 1 July 2017 for ‘previously used’ (or second-hand)
depreciating assets in a residential rental property that were acquired after 9 May 2017 (other
than where a rental property business is being carried on).
(c) The ‘vacant land’ restriction in S.26-102 – This prohibits a tax deduction for holding costs
(e.g., mortgage interest, council rates and land tax) in relation to land on which there is no
substantial and permanent structure that is in use or available for use (e.g., during a period
that a future rental property is being constructed), unless a business is being carried on.

In many situations where an individual is deriving rental income from one or more properties
(including income from providing short-term (holiday) accommodation), determining whether or not
a rental property business is being carried on is difficult (and not that obvious).

TAX WARNING – ATO updates its guidance for private ruling requests
The ATO has recently updated its guidance on what supporting information taxpayers and their tax
agents will need to provide when making a private binding ruling (‘PBR’) request (or lodging an
objection) regarding whether a particular landlord is carrying on a business of letting rental
properties or providing short-term accommodation (refer to ATO the ATO documents: Carrying in
a business of letting rental properties – supporting information (QC 63156), and Carrying in a
business of providing short-term accommodation – supporting information (QC 63155)).
The ATO’s updated guidelines are presumably in light of the complexity of this area of tax law, and
the increased importance and significance associated with making the correct distinction between
a landlord that is (and a landlord that is not) carrying on a rental property business.

In light of this recent development, these seminar notes will address the latest guidelines that are
available (e.g., from the ATO and the Courts) to assist tax agents in correctly identifying when a
landlord client is likely/unlikely to be carrying on a rental property business (including landlords
providing short-term holiday rentals), as well as the tax implications of such a classification.
Note that all legislative references in this segment are to the ITAA 1997, unless otherwise indicated.

1. Key factors to consider when identifying a

rental property business
As to whether a landlord who is deriving rent from one or more properties is carrying on a rental
property business will ultimately depend on the specific facts and circumstances of each case. In
Law Companion Ruling (‘LCR’) 2018/7 (dealing with the deductibility of travel expenses incurred
for residential rental properties), the ATO outlines the types of factors to consider when
determining whether a taxpayer is carrying on a business of letting residential premises.

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These factors include the following:

• The total number of residential properties that are rented out by the taxpayer.
• The average number of hours per week the taxpayer spends actively engaged in managing
their rental properties.
• The skill and expertise exercised in undertaking these activities.
• Whether professional records are kept and maintained in a business-like manner.

Furthermore, at paragraph 20 of the ATO’s LCR, the ATO makes the following comments about
the difficulty of an individual demonstrating they are carrying on a business of property investment:
“Generally, it is more difficult for an individual to demonstrate that they are carrying on a
business of property investing than it is for a company. The receipt of income by an
individual from the letting of property to a tenant, or multiple tenants, will not
typically amount to the carrying on of a business as such activities are generally
considered a form of investment rather than a business.” [Emphasis added]

This reflects similar sentiments in an earlier ATO ruling, being Income Tax Ruling (‘IT’) 2423 (which
deals with whether rental income constitutes the proceeds of a business in the context of a liability
for withholding tax). This ruling highlights that the scale of operations is an important factor to
consider when determining if a taxpayer is carrying on a business of letting property. Furthermore,
the IT goes on to say (at paragraph 5) that the scale of operations refers to the number of properties,
rather than the frequency of tenancy, as follows:
“An individual who derives income from the rent of one or two residential properties would
not normally be thought of as carrying on a business. On the other hand if rent was derived
from a number of properties or from a block of apartments, that may indicate the
existence of a business.” [Emphasis added]

Furthermore, in Taxation Ruling TR 2003/4 (which largely deals with when a boat hire arrangement
constitutes the carrying on of a business), the ATO (at paragraph 51) makes reference to the
decision in FC of T v McDonald (1987) 18 ATR 957 (which considered whether a rental property
business existed between a husband and wife), as follows:
“In McDonald the taxpayer purchased several income producing properties as joint tenants
with his wife, which were subsequently let through letting agents. Beaumont J indicated
(quoting Wertman v. Minister of National Revenue 64 DTC 5158) that for a business to
be carried on by owners of property, one would expect that they would be involved
in providing services in addition to the process of letting property (as with a boarding
house), not merely receiving payments for the tenants' occupation of the property.
[Emphasis added]

As a result, a simple, yet often determinative analysis of a client’s particular circumstances requires
a consideration of both of the following two key factors:
• The total number of rental properties owned by the taxpayer.
• The nature and level of the taxpayer’s participation in the property management.

The relevant case law and practical ATO examples in relation to these factors are discussed below.

1.1 Summary of relevant case law and ATO guidance

relating to carrying on a rental property business
The following table summarises some of the most relevant ATO guidance and judicial
considerations dealing with whether a taxpayer is carrying on a rental property business.

The table should only be used as a guide, and reference should always be made to the detailed
facts, circumstances and decision of each particular case, when making a determination as to
whether an individual is carrying on a rental property business.

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Reference Was there a rental property business?

1. In the ATO’s publication Rental Yes.

Properties 2020 (page 5), the ATO
This was demonstrated by the following:
provides an example of a couple who are
actively engaged in managing their • The significant size and scale of the rental
twenty-six rental properties (made up property activities.
of eight houses, and three apartment
• The number of hours spent on the activities
blocks with each block comprising six
(i.e., 25 hours per week each).
residential units).
• The couples’ extensive personal involvement in
the activities (e.g., interviewing prospective
tenants, collecting rents, carrying out regular
inspections, attending to repairs and
maintenance, and undertaking all financial
planning and decision making in relation to the
properties).
• The business-like manner in which the activities
are planned, organised and carried on.

2. In Self Managed Superannuation Funds

Ruling (‘SMSFR’) 2009/1, the ATO
provides the following examples of
when a rental property is considered to
be used in a rental property business (in
the context of determining whether those
premises qualify as ‘business real
property’ for superannuation purposes).

(a) Example 13 of SMSFR 2009/1 No.

A taxpayer owns two holiday flats in a Despite the elements of repetition and continuity
popular holiday destination, which are of acts and transactions involved, the ATO
managed and maintained by the concludes that the scale of the operation is such
taxpayer and her partner (including the (i.e., only two flats) that no business of letting
cleaning and repair of the flats, and properties is being carried on.
financial tasks, such as banking).

(b) Example 14 of SMSFR 2009/1 Yes.

An individual owns twenty residential The ATO concludes that the scale of the
units that are leased to long-term operation, together with the elements of repetition
residents. The individual manages and and purpose, indicate that the individual is
maintains the flats on a full-time basis, carrying on a property investment business.
living on the income generated from the
leases.

(c) Example 15 of SMSFR 2009/1 No.

An individual owns ten residential units The ATO concludes that the individual does not
leased to long term residents using the carry on a property investment business, as they
services of a rental managing agent. use an agent to manage the properties (i.e., they
are not actively involved in the management).

3. Cripps v FCT [1999] AATA 937 No.

A couple owned and rented out sixteen The Tribunal concluded that the taxpayers were
rental properties with the assistance of an passive investors and were not in the business of
external property manager. deriving rental income from rental properties.

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Reference Was there a rental property business?

This was largely because the couples’ investment

involved little, if any, active participation from
either party. The Tribunal also made it clear that,
while IT 2423 (noted above) suggests that rent
derived from a number of properties may indicate
the presence of a business, this will not, of itself,
be determinative.

4. 11 CTBR (OS) Case 24 No.

A taxpayer owned three rental properties Whilst the Board of Review acknowledged the
and, despite employing a manager and an involvement of the taxpayer in the ongoing
accountant, he collected and banked rent, management of the rental properties, it could not
attended to repairs and supervised them, conclude that the taxpayer was engaged in a
he controlled the caretaker and cleaners, business as a property owner.
and he kept keeping records.

5. 15 CTBR (OS) Case 26 No.

A taxpayer held an interest in a block of flats It would seem that the Board of Review was not
(with twenty-two units) with the general convinced that the taxpayer was sufficiently
management of the property (e.g., letting, involved in the management of the property to
rent collecting, etc.) shared between the warrant a classification of carrying on a rental
taxpayer and other owners of the property property business.
and a related management company.

6. Case G10 75 ATC 33 Yes.

A taxpayer owned two rental properties of The taxpayer could demonstrate that his
which six units were let as short-term management of the holiday flats was a seven-day
holiday accommodation. The taxpayer a week activity, and the Board of Review held that
managed and maintained the flats (with he was carrying on a business.
assistance from his wife) and provided linen
and other services (e.g., furniture, crockery
and cutlery, and laundering).

7. YPDF v FCT [2014] AATA 9 Yes.

A taxpayer and her husband owned nine The Tribunal concluded that the taxpayer was
residential rental properties. carrying on a business of letting rental properties.
In making its conclusion, the Tribunal considered
It was accepted that the taxpayer spent a lot a range of factors, such as the following:
of time in connection with the ongoing
management of the rental properties, such • The nature of the taxpayer’s activities and
as inspecting the properties, advertising for whether they had the purpose of profit-
tenants, arranging for repairs and checking making – The Tribunal was satisfied that the
accounts (even though real estate agents taxpayer had the intention to make a profit from
were engaged to manage the properties). letting rental properties, despite the fact that
she did not make a profit during the income
The ATO originally did not accept that the years in question (or indeed over a period of
taxpayer was carrying on a business of 10 years).
letting rental properties, largely because the
taxpayer worked full-time as an industrial • The complexity and magnitude of the
chemist, she did not have a business plan, taxpayer’s activities – The Tribunal was
and her rental activities had not returned a satisfied that the supervision of the agents the
profit since they commenced. taxpayer employed and her part-management
of the nine rental properties, helped in her
argument that she was in the business of
managing rental properties.

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Reference Was there a rental property business?

The Tribunal was also of the view that certain

reliance on estate agents to manage real
property does not preclude the taxpayer (or
any other taxpayer, one would suspect) from
being characterised as carrying on a business
of letting rental properties.
• An intention to engage in trade regularly,
routinely and systematically – The Tribunal
held that, in managing rental properties over a
period of years, the taxpayer exhibited an
intention to engage in the business of renting
properties regularly and routinely.

2. The classification of properties used for short-

term (holiday) rental – ATO guidelines
With the rise in the ‘gig’ economy and holiday accommodation platforms such as Airbnb, Stayz and
HomeAway, the number of taxpayers renting out their residential premises as short-term holiday
accommodation continues to increase. As a result, it is no surprise that a number of (edited and
abridged) ATO Private Binding Rulings (‘PBRs’) have recently been released considering whether
or not taxpayers providing such short-term holiday accommodation are carrying on a business.

TAX WARNINGS – PBRs should not be relied upon by taxpayers

While PBRs issued by the ATO are only binding on the specific taxpayer to whom they are issued
(and cannot be relied upon or used by other taxpayers as precedent), they do offer some useful
insight as to how ATO auditors are likely to approach a potential classification of a taxpayer’s rental
activities (i.e., as a busines or as an investor).
Ultimately, the edited PBRs recently released by the ATO on the issue of whether a taxpayer
providing short-term (holiday) accommodation (or rental) is carrying on a business (e.g., refer to
PBRs 1051786522586 and 1051711297361) apply the same analysis as discussed above (for
longer-term rentals), with a detailed consideration of the factors in Taxation Ruling TR 97/11 (i.e.,
the ATO’s ruling on whether or not a taxpayer is carrying on a business of primary production).

For example, in PBR 1051786522586, the ATO considered the relevant facts of two adult siblings
who had inherited and renovated a residential property which they (with the help of their parents)
leased on a short-term basis via the Stayz and HomeAway online platforms. The property was
advertised as a fully furnished and self-contained home with a range of amenities (e.g., linen for all
bedrooms, bathroom towels and mats, toiletries including soap and toilet paper, a hair dryer, a
blender, a coffee grinder, basic pantry items, a DVD player, computer games and board games).
The taxpayers and their parents actively managed the arrival and departure of their guests,
including preparing the property for guest arrivals (e.g., sweeping paths, watering pot plants and
filling firewood boxes), greeting guests upon arrival and preparing the property for domestic
cleaners after guest departures (e.g., stripping beds and checking for linen stains).
In concluding that the taxpayers were not carrying on a rental property business (or a business
of short-term holiday letting), the ATO considered the following relevant factors from TR 97/11:
(a) Whether the taxpayer’s activities had a significant commercial purpose or character
(which were, according to the ATO, closely linked to the total number of properties and level
of involvement of the taxpayer in the day-to-day management of the properties) – In this case,
the ATO concluded that the existence of one property and the level of return on that property
were not consistent with carrying on a business.

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(b) An intention to engage in business (and a purpose and prospect of profit) – Objectively
considering the facts, the ATO considered that the mix of losses and later (small) profits were
indicative of investment returns (i.e., not business returns), particularly considering the amount
of capital invested in the property and the estimated market value of the property.
Note that, in a previous PBR (refer to PBR 1012963811905) the ATO indicated that a
taxpayer’s involvement in a business activity should be motivated by wanting to make a tax
profit (and the taxpayer’s activities should be conducted in a way that facilitates this). As a
result, the claiming of ongoing tax losses (i.e., substantial negative gearing without a real
prospect of making such a profit) may suggest a taxpayer does not have a purpose and
prospect of profit needed to be classified as carrying on a business of renting properties.
(c) Regularity and repetition of the activity – The ATO made reference to Case G10 (referred
to in the table above) and the fact the taxpayer in that case had been engaged in activities
which were a “seven days a week job”. However, although the ATO acknowledged that the
taxpayers in the PBR undertook activities in relation to their property (e.g., cleaning, repairs
and maintenance), they were not considered as being ‘day-to-day’ activities.
(d) Whether the activities are carried on in a similar manner to that of ordinary trade in that
line of business – The ATO considered that the activities undertaken by the taxpayers were
different from those activities that are normally operated as a business in the industry (e.g., a
hotel, hostel or boarding house). That is, although the taxpayers did provide some guest
amenities as part of the short-term (holiday) rental of their property (e.g., linen, towels, basic
pantry items, etc.), no services were provided for additional charges. Furthermore, when
considered wholistically, the rental amounts merely related to the letting of the property. In
addition, the ATO’s PBR advises that, as to whether the letting of short-term accommodation
amounts to the carrying on of a business (rather than the passive receipt of income), will
depend on the level of services provided to the guests.

TAX WARNING – ATO takes a limited view with one short-term rental
Where taxpayers are engaged in providing short-term accommodation utilising just one (or a few)
residential premises, the ATO appears to consistently conclude that this is not sufficient to amount
to the carrying on of a rental business or a business of providing short-term accommodation. This
is irrespective of the fact that a taxpayer may personally provide services such as initial ‘meet and
greet’ guest contact, cleaning, linen, and the provision of basic pantry staples and household items.
Whether a Tribunal or Court would analyse such a scenario differently remains to be seen.

3. The tax implications associated with a rental

property business in the 2021 income year
The following table summarises the key tax issues for individual taxpayers carrying on a business
of letting rental properties in the 2021 income year.

Tax issue Description

1. Reporting on the Income and deductions related to a business of letting rental

2021 ‘I’ return properties should be recorded at the business income and deduction
labels of the 2021 ‘I’ return (i.e., at Item P8, page 13, and at Item
15, page 9). No amount should be reported at Item 21 (i.e., the
rental labels), page 10, of the return. Alternatively, where a business
of letting rental properties is conducted via a partnership (i.e., the
letting activities of jointly owned properties constitutes a business),
a Partnership tax return should be prepared and each partner’s
share of the net rental income/loss is reported on the ‘I’ return (e.g.,
Item 13 – ‘Partnerships and Trusts’).

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Tax issue Description

2. Prepaid expenses An individual taxpayer who is carrying on a business of letting

properties, and who qualifies as a Small Business Entity (‘SBE’), can
generally claim an immediate deduction for prepaid expenses (i.e.,
expenses that wholly or partly relate to a future income year) where:
• the prepaid expense has an eligible service period not exceeding
12 months; and
• the eligible service period ends in the income year after the one
in which the expense was incurred.
Note that this concession equally applies to individuals with prepaid
expenditure relating to a rental property that is not part of a business
of letting rental properties. Refer to the prepayment rules in
S.82KZL to S.82KZO of the ITAA 1936.

3. Travel expenses From 1 July 2017, an individual cannot claim a deduction for travel
expenses incurred in gaining or producing assessable income from
the use of residential premises as residential accommodation (e.g.,
where travel expenses relate to a residential rental property). Refer
to S.26-31.
However, this restriction does not apply (amongst other exclusions)
where the relevant travel expenses are incurred in carrying on a
business for the purpose of gaining or producing assessable
income. As a result, where a landlord is correctly classified as
carrying on a rental property business, any travel expenses relating
to the property will not be prevented from being deductible under
S.26-31. Refer to LCR 2018/7 and S.26-31(1)(b).

4. Holding costs (e.g. From 1 July 2019, otherwise deductible holding costs (e.g., interest,
interest, rates and rates and land tax) incurred in relation to holding ‘vacant land’ (e.g.,
land tax) relating to during a period that a future residential rental property is being
‘vacant land’ (e.g., constructed) are not deductible under S.26-102, unless an
while constructing exception applies.
a rental property)
One such exception is that, broadly, holding costs will continue to be
deductible (i.e., under S.8-1) to the extent that the land is used or
available for use in carrying on a business to derive assessable
income (including a rental property business). Refer to S.26-102.

5. Allocation of Where joint owners of a rental property are carrying on a business

profits/losses of letting rental properties in a partnership, net rental income is
allocated in accordance with any agreement between the parties
(e.g., a partnership agreement). In the absence of any such
agreement, net rental income should be allocated equally. In other
words, net rental income is not necessarily allocated based on the
ownership interest of the parties where they are conducting a rental
property business. Refer to TR 93/32.

6. Non-commercial A rental property business (carried on by an individual as a sole

loss (‘NCL’) rules in trader or a partner) will be subject to the NCL rules in Division 35.
Division 35 Therefore, any tax loss incurred from such an activity will not be
deductible against other assessable income (e.g., salary income)
unless certain tests are satisfied (e.g., the $20,000 assessable
income test and the $500,000 real property test).

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Tax issue Description

Generally, the NCL rules should not be problematic for a rental

property business, because such a business should inherently
satisfy one of the four NCL tests (particularly the $20,000
assessable income test and the $500,000 real property test).
However, where an individual’s adjusted taxable income for the
income year is at least $250,000, they cannot rely on passing one
of the four NCL tests in order to claim their losses.

7. Trading stock There should be no trading stock implications that arise in respect
of a business that involves the letting of properties. This is primarily
because, such a business would not normally involve holding
properties for the purposes of sale in the ordinary course of business
(i.e., trading in such properties).

8. Applying the CGT The SBCs can only apply on the disposal of a rental property where
small business the property (being the relevant CGT asset) qualifies as an active
concessions asset (i.e., an asset owned by a taxpayer and used in carrying on
(‘SBCs’) business by the taxpayer or by an entity connected with the
taxpayer). Refer to S.152-40.
However, under S.152-40(4)(e), an asset does not qualify as an
active asset where the asset is mainly used by the taxpayer to derive
rent. As a result, where a rental property is used to derive rent (as
opposed to short-term licensing fees) as part of a rental property
business, the property will not qualify as an active asset, in which
case, the SBCs cannot apply in respect of any capital gain when
the property is sold. Refer to TD 2021/2 and TD 2006/78.

9. The $300 write-off A depreciable asset acquired for a rental property, at a cost of $300
concession for or less (e.g., a ceiling fan or a curtain or blind, etc.) can generally be
small depreciable written-off in full in the year of purchase. Refer to S.40-80(2).
assets However, the $300 immediate write-off concession can only apply
in respect of an asset that is predominantly used to derive
assessable income that is not income from carrying on a business.
This means that this concession cannot apply in respect of an asset
in a residential rental property that is used in the course of carrying
on a rental property business.

10. The instant asset A depreciable asset that is subject to a depreciating asset lease
write-off (e.g., a depreciable asset used in a rental property) is not eligible to
be depreciated under the simplified SBE depreciation rules in
Subdivision 328-D (even where a rental property business is being
carried on). Refer to S.328-175(6).
Therefore, such assets are not eligible for the instant asset write-off
concession for SBEs (e.g., the $150,000 write-off) and cannot be
depreciated as part of the general SBE pool. Instead, such assets
will be depreciated under the uniform capital allowance rules in
Division 40 (e.g., as part of the temporary full expensing rules if
applicable – refer below, as part of a low value pool if applicable, or
over the effective life of an asset). Importantly, if a taxpayer carrying
on a rental property business qualifies as a medium sized entity (i.e.,
broadly, their aggregated turnover is at least $10 million), they could
still potentially access the $150,000 instant asset write-off under
S.40-82 in the 2021 income year (where applicable).

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Tax issue Description

11. Temporary full For eligible depreciating assets acquired from 7:30 pm (legal time
expensing in the ACT) on 6 October 2020 (‘2020 budget time’) and used (or
installed ready for use) for a taxable purpose by 30 June 2022,
taxpayers carrying on a rental property business and wanting to
claim depreciation deductions for assets subject to a depreciating
asset lease (i.e., depreciable assets in a rental property) may be
eligible for the new temporary full expensing concession (as part
of the uniform capital allowance rules in Division 40). If applicable,
this will provide an immediate write-off for the full cost of a
depreciable asset (irrespective of the cost) in Subdivision 40-BB of
the Income Tax (Transitional Provisions) Act 1997 (‘ITTPA’).

This is applicable for taxpayers carrying on a business with an

aggregated turnover of (generally) less than $5 billion. Furthermore,
unlike the instant asset write-off (discussed at 10. above), temporary
full expensing can be still be accessed by an SBE taxpayer (i.e., a
taxpayer with an aggregated turnover of less than $10 million), in
respect of a rental property depreciating asset.

However, temporary full expensing can only be accessed for a rental

property depreciating asset where the taxpayer is carrying on a
rental property business. Refer to S.40-150(3)(a) of the ITTPA.
Where full expensing is not applicable (e.g., the asset is acquired
prior to the 2020 budget time), consideration can be given to the
Backing Business Investment (‘BBI’) depreciation concession
under Subdivision 40-BA of the ITTPA applicable for eligible new
assets acquired by taxpayers carrying on a rental property business.

EXAMPLE 18 – Accessing the new temporary full expensing when

carrying on a rental property business
Jien purchased a $2,200 new oven for his rental property on 8 October 2020. Jien owns twelve
rental properties that he actively manages and is considered to be carrying on a rental
property business with an aggregated turnover of just over $240,000.
As he is running a business and has an aggregated turnover of less than $10 million, Jien qualifies
as an SBE taxpayer and is therefore potentially eligible to utilise the simplified SBE depreciation
rules.
However, as the new oven is subject to a depreciating asset lease (i.e., it is used in a rental
property), he will not be able to claim any depreciation under the simplified SBE regime.
Despite this, Jien can still access the new temporary full expensing measure under the Division 40
capital allowance rules, which means that he will be eligible to claim the full cost of the new oven
under Subdivision 40-BB of the ITTPA (i.e., on the basis he is carrying on a rental property
business).
Furthermore, if Jien (who is carrying on a rental property business) had acquired the new oven on
1 October 2020 (i.e., prior to the 6 October 2020 Budget time and therefore ineligible for full
expensing) he could apply the Backing Business Investment (‘BBI’) accelerated depreciation rules
in Subdivision 40-BA of the ITTPA. This would allow a depreciation deduction equal to 50% of the
oven’s cost, with the usual decline in value applying to the remaining balance of the oven’s cost.

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Individual director denied deduction for

settlement payment for insolvent trading
It has traditionally been accepted that expenses that are incurred (e.g., legal expenses) by an
individual (e.g., an employee) to defend the manner in which they carry out their employment duties
(through which they gain or produce their assessable income) are generally considered revenue in
nature and therefore deductible under S.8-1 of the ITAA 1997. Refer to FCT v Inglis 87 ATC 2037.
For example:
• legal expenses incurred by a council employee in defending the manner in which he performed
his employment duties (and to justify why he should not be dismissed) were allowed as a
deduction in FCT v Rowe 1997 [HCA] 16 (‘Rowe’s case’); and
• legal expenses incurred by a federal customs officer in defending an action which arose from
alleged improper conduct (i.e., alleged breaches of the Public Service Act 1992 (Cwth)), thereby
challenging his possible dismissal from employment and protecting his future entitlement to
receive income, were also allowed as a deduction in FCT v Day [2008] HCA 53 (‘Day’s case’).

TAX WARNING – Deductions not always available for claims arising

during the course of employment or directorship
Where the main reason for incurring similar expenses (i.e., legal expenses incurred to defend
actions brought against a taxpayer with respect to their employment or other appointments) are
essentially personal, non-income producing and/or capital in nature, no deduction will be
available under S.8-1, such as in the following examples:
• Legal expenses incurred by an individual in challenging an ASIC imposed five-year ban on his
ability to provide financial services (which had resulted in the termination of his employment)
were not deductible due to the lack of sufficient connection with the production of assessable
income, primarily because he was no longer employed. Refer to Case 9/2013 [2013] AATA 783.
• Legal expenses incurred by a company director in relation to another ASIC investigation (who
did not receive director’s fees or a share of profits) were also not deductible as they were not
related to gaining or producing assessable income. Refer to ATO ID 2003/801.
• Legal expenses incurred by a company director in defending himself against charges under the
relevant Corporations Act were held to be not deductible, as the defence was considered to
be of a private nature (as they were primarily incurred to protect his good name and reputation)
and of a capital nature (as they were incurred to restore and protect his position as director).
Refer to Case N9, 81 ATC 56.

In the recent Administrative Appeals Tribunal (‘Tribunal’) decision in Duncan and Commissioner of
Taxation (Taxation) [2020] AATA 2540 (‘Duncan’s case’), an individual director and employee was
held to be not entitled to claim a deduction for a $100,000 settlement payment he made so as to
avoid any potential litigation arising from him allowing the company to trade while insolvent.

1. The background to Duncan’s case

The key facts and circumstances in Duncan’s case can be summarised as follows:

(a) The taxpayer (Mr Duncan) was employed by various entities of the Keystone Group
(comprising Keystone Australia Holdings Pty Ltd, which was a holding company of 41
subsidiary companies including Keystone Group Holdings Pty Ltd (‘KGH’)). The Keystone
Group owned various restaurants, bars and hotels in major capital cities across Australia.

(b) On 15 April 2011 the taxpayer became a director and the secretary of KGH (i.e., when it
was incorporated), and from 2014 he was a director of all of the other subsidiary companies
of the Keystone Group.

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(c) On (or about) 15 August 2014, the taxpayer also commenced as an employee of KGH
pursuant to an Executive Employment Agreement dated 30 July 2014, which established the
terms of his position as the Chief Property and Corporate Development Officer for which his
annual salary remuneration was $250,000 less tax (superannuation inclusive), per annum.
This agreement specifically required him to retain and accept various director roles within the
group and he ultimately became the managing director of the Keystone Group.

(d) On 28 June 2016, creditors of the Keystone Group appointed external receivers and
managers of the group, and then external administrators were subsequently appointed by
resolution of the directors of each of the companies.

(e) The taxpayer and the receivers reached an agreement regarding the sale process being
undertaken by the receivers. In particular, the taxpayer agreed to provide assistance to the
receivers (in exchange for some incentive payments) who required him to stay on as an
employee of the Keystone Group and comply with his limited remaining director duties under
the Corporations Act.

(f) On 30 January 2017, the administrators issued a Report to Creditors stating in part that:
“Our view is that the Keystone Group demonstrated many indicia of insolvency from at least
31 December 2015, if not earlier…..”

(g) The report then addressed the corporations law issue of ‘insolvent trading’ and referred to the
powers of a liquidator in S.588G and 588M of the Corporations Act which provide that a
liquidator may seek to recover from the director(s) of a company any debt incurred by the
company after a time that a reasonable person would suspect that the company became
insolvent (i.e., for debts incurred between the date of insolvency and the administrator’s
appointment). It was also concluded that a liquidator (if and when appointed) would ultimately
need to investigate any potential insolvent trading claim in greater detail.

(h) The report also made it clear that if a liquidator determined that the directors allowed the
company(s) to trade insolvent, it may seek litigation funding and submit a report to ASIC
pursuant to S.533 of the Corporations Act, reporting any offences identified. Further, if the
liquidator did not pursue the matter (i.e., it was determined that it is not economic to pursue an
insolvent trading claim) then creditors may commence their own proceedings in respect of
certain voidable transactions provisions.

(i) Ultimately, the administrators recommended that each company be wound up.

(j) As a result, via a letter dated 28 April 2017, the receivers notified the taxpayer that his
employment with KGH would be terminated by reason of redundancy and his final date of
employment was 31 May 2017 (although this was subsequently amended to 19 May 2019).

(k) Creditors voted to windup the Keystone Group, and on 5 May 2017 the administrators were
appointed as liquidators.

(l) On 30 June 2017, the liquidators executed an agreement with DEM Aspirion Limited to assign
the right to sue various directors (including the taxpayer) under S.100-5 of Schedule 2 of the
Corporations Act.

(m) The taxpayer entered into a deed of release of settlement with DEM Apsirion Limited and
ultimately paid $100,000 in:
“Full and final settlement of all or (sic) legal actions against John Duncan in his role as a
director of the relevant entities in the Keystone Group of companies for trading while
insolvent”.
(n) Taxpayer’s deduction claim and arguments – The taxpayer sought to claim an income tax
deduction for the $100,000 payment for the 2017 income year under S.8-1 of the ITAA 1997.

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The taxpayer argued that it was his employment with the Keystone Group (and the requirement
of that employment for him to hold the position of director) which had caused his exposure to
the $100,000 payment (i.e., made to alleviate him of further liabilities with respect to allowing
the company to trade insolvently whilst he held directorship).
Furthermore, the taxpayer sought to rely upon the High Court decision in Day’s case in which
it was held that legal expenses incurred by a customs officer in defending himself against
charges laid for inappropriate conduct under the relevant Public Services Act and attempting
to retain his employment (and preserve his entitlement to receive assessable income) were
allowable as a deduction.
As a result, the taxpayer argued that, in the year of assessable income being gained or
produced (i.e., the 2017 income year), the $100,000 payment made in relation to likely future
litigation arising out of his role as director was “entirely connected to that assessable income”.
The taxpayer then went on to argue that the focus should include income derived in prior years.
He also argued that the:
“…fact of cessation of employment, incidentally for reasons outside of (sic) his control
(i.e., redundancy), just prior to the payment of the (Outgoing), is not a precluding fact to
the application of S.8-1.”

(o) ATO’s argument – The ATO disallowed the taxpayer’s deduction, arguing that the taxpayer’s
outgoing (i.e., $100,000 payment) was not incurred in the gaining or producing assessable
income of the taxpayer for the following two key reasons:
• As at 30 June 2017 (i.e., the date the payment was made), the taxpayer was no longer
employed by the Keystone Group (having been terminated as at 19 May 2017) and,
although he appeared to continue to act as a director, he had no ongoing entitlement to
receive assessable income from the group as a result of his directorship.
• The payment was incurred in relation to an alleged failure by the taxpayer to comply with
his former obligations (i.e., before the Administrators were appointed) as a director to
prevent insolvent trading (i.e., not in relation to gaining or producing assessable income).

Following the ATO’s disallowance of the taxpayer’s claim in a subsequent ATO objection
decision, the taxpayer applied to the Tribunal to review the ATO’s decision.

2. The Tribunal’s decision in Duncan’s case

The Tribunal concluded that the taxpayer’s $100,000 settlement payment was not deductible under
S.8-1. In making this conclusion, the Tribunal effectively considered whether:
• The settlement payment was incurred by the taxpayer in gaining or producing his assessable
income (i.e., under S.8-1(1)(a)); and
• The settlement payment was an outgoing of capital or of a capital nature (i.e., under S.8-1(2)(a)).

2.1 Whether the taxpayer’s settlement payment was

incurred in gaining or producing assessable income
The Tribunal held that while the taxpayer’s employment resulted in him taking on the responsibilities
of directorship, the $100,000 payment itself was ultimately made in discharge of a liability incurred
as director (i.e., if he had been successfully sued for allowing the company to trade insolvently).

Furthermore, from 19 May 2017 (i.e., when his employment ended), he received no further
financial benefit from his directorships of the Keystone Group and from the time of the appointment
of the liquidators (i.e., from 5 May 2017), he had no reasonable expectation of future employment
or remuneration from the group as a result of his limited ongoing directorship obligations remaining
under the Corporations Act.

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On this basis, the Tribunal concluded that the taxpayer did not incur the $100,000 payment in order
to preserve or defend his current employment (as the taxpayer had in Day’s case). Therefore, the
payment was not made to secure such employment (or temporal income producing activities from
acting as a director). This ultimately meant that, according to the Tribunal, the outgoing was
incapable of resulting in any future income for the taxpayer from the Keystone Group, either as an
employee or as a director, which was incidental to his employment. Therefore, the outgoing (or
payment) was not incurred in gaining or producing his assessable income.

2.2 Whether the taxpayer’s settlement payment was

capital or of a capital nature
The Tribunal also held that, in any event, the outgoing was of a capital nature and therefore, not
deductible under S.8-1 (refer to S.8-1(2)(a)).

In considering the nature of the outgoing, the Tribunal considered the three matters requiring
attention as outlined in Sun Newspapers Ltd v FCT [1938] HCA 73, which were:
• the character of the advantage sought;
• the manner in which the outgoing is to be used, relied upon, or enjoyed; and
• the means adopted to obtain it (i.e., a one-off payment often indicative of a capital payment).

While the taxpayer submitted that the character of the advantage sought was inexorably tied to
the fact that (the sum) was paid by reason of his employment (which required him to be a director)
and arising from his day-to-day income-earning activities, the Tribunal held that the true advantage
sought was to avoid litigation in which the taxpayer would be accused of being a director of a
company or companies which traded while insolvent. In other words, the payment was made to
protect and preserve his reputation as a director of a company and his capacity to earn income
as such in the future. In concluding the payment was therefore capital, the Tribunal referred to
FCT v Sydney Refractive Surgery Centre [2008] FCAFC 190 which held that business reputation
is akin to a capital asset, as injury to it would impair future income-earning capacity.

The Tribunal also held that the manner in which the taxpayer would rely on the advantage gained
by the $100,000 payment was the preservation of his reputation and (future) earning capacity,
with the lasting nature of such an advantage being a relevant factor. Finally, the Tribunal noted
that the means adopted to secure this advantage was a one-off payment, which is indicative of the
payment being capital in nature.

TAX WARNING – Conclusion and implications of Duncan’s case

Ultimately, the $100,000 payment to settle any future potential claims made against the individual
director for insolvent trading was held to be non-deductible due to the lack of nexus it had with his
income-earning activities (i.e., in gaining or producing assessable income).
The advantage sought by the expenditure was unrelated to both his ongoing employment (which
had ended prior to the expense being incurred) and ability to earn income as a director due to the
limitations placed on his director duties following the relevant companies being placed under
external administration.
The Tribunal held that the outgoing was incapable of resulting in any future assessable income,
and even if it was, it was of a capital nature on the basis it was made to protect and preserve his
reputation and opportunities to take on future similar director roles.
As a result, the Tribunal’s decision in Duncan’s case effectively confirms that expenditure that is
primarily incurred to protect (or preserve) a taxpayer’s good name and reputation are unlikely to be
deductible under S.8-1.

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New residency developments for outbound

and inbound individuals
Determining an individual’s tax residency status has become one of the more difficult income tax-
related areas to advise upon in recent times, as evidenced by the continual stream of taxpayer
disputes with the ATO, including many tax residency cases that progress through the ATO’s
objection system, which then often progress to the Court system.

The determination of an individual’s tax residency is crucial when determining what income (e.g.,
an individual’s salary and wages income) is subject to tax in Australia as well as which marginal
tax rates apply to an individual taxpayer (depending on their residency status). In particular,
resident individuals are generally subject to Australian tax on their ‘world-wide’ income (with access
to the general $18,200 tax-free threshold), whereas non-resident individuals are generally only
taxed in Australia on any Australian sourced income (from the first dollar of taxable income – i.e.,
a 32.5% marginal tax rate applies for taxable incomes of up to $120,000 in the 2021 income year).

TAX WARNING – ATO’s passenger movements data matching program

The ATO has recently announced that it will be obtaining data from the Department of Home Affairs
(‘Home Affairs’) on passenger movements (both incoming and outgoing passengers) during the
2017 to 2023 income years, presumably as part of the ATO’s existing visa data matching program.
The data collected will allow the ATO to identify and address taxation risks, including the following:
• To identify individual taxpayers who incorrectly claim Australian tax residency status for financial
gain (e.g., to access the general $18,200 tax-free threshold).
• To ensure that individuals were correctly entitled to COVID-19 JobKeeper payments.
• To facilitate the Working Holiday Maker (‘WHM’) taxation regime, under which WHMs are
subject to tax at separate rates in respect of their WHM taxable income sourced in Australia.

These seminar notes will address a number of recent individual residency-related developments
affecting both individuals leaving Australia (e.g., to work overseas) and individuals from overseas
coming to Australia (e.g., to work in Australia).

All legislative references in this segment of the notes are to the ITAA 1936, unless otherwise stated.

1. An overview to determining an individual’s tax

residency status – the residency tests
An individual’s tax residency status is the basis for determining their obligation to pay income tax
in Australia. Broadly, an individual may be liable to pay tax for an income year if the individual:
• is an Australian resident for tax purposes;
• became an Australian resident during the income year; or
• is a foreign resident for tax purposes and derived assessable Australian-sourced income.
An individual’s tax residency status is determined according to the definition of ‘resident’ in S.6(1),
based on the facts and circumstances of each case. Broadly, under this definition, an individual
will be considered to be a tax resident of Australia if they satisfy one of the following tests:
(a) The ordinary concepts test (i.e., the resides test) – This is the primary test for establishing
tax residency. If a person “resides” in Australia according to ordinary concepts, then they are
considered a resident for tax purposes and the other tests do not apply. Refer to TR 98/17.

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The ‘ordinary concepts test’ is used for determining the tax residency status of both inbound
individuals (i.e., whether an individual that comes to Australia has become a resident) and
outbound individuals (i.e., whether a resident who leaves Australia ceases to be a resident).
(b) The domicile test – This test is used for determining if a resident who leaves Australia
continues to be (or ceases to be) a resident for tax purposes. Broadly, under this test, a person
will be a tax resident if their domicile is in Australia unless their permanent place of abode
is outside Australia. Refer to IT 2650.
(c) The 183-day test – This test has traditionally been used to determine the residency status of
individuals who come to Australia (although as discussed below, this has recently been
challenged). Under this test, a person who is physically present in Australia for over half the
income year (i.e., 183 days) either continuously or intermittently is deemed to be a tax
resident, unless their usual place of abode is outside Australia and they have no intention of
taking up residence in Australia.
(d) The Commonwealth superannuation fund test – Broadly, this test applies to treat a
Commonwealth Government employee who leaves Australia as still being a resident for tax
purposes if they are a member of a prescribed Government superannuation fund.

TAX TIP – Consider the terms of any Double Tax Agreement (‘DTA’)
Even after an individual tax residency conclusion is made (based on the above mentioned
residency tests) relevant Double Tax Agreements (‘DTAs’) may contain ‘tie-breaker rules’ that
identify which country has the primary taxing rights in respect of certain income derived by
individuals that are a tax residents of multiple countries (i.e., at the same time).
Indeed, as discussed further below, in Pike’s case the taxpayer was able to avoid Australian
taxation on their foreign sourced salary income as a result of the Thai DTA, despite the fact he was
found to be an Australian tax resident under the ordinary concepts test for the relevant years.

1.1 Flow-chart for determining individual tax residency

The following flow-chart outlines the basic approach to determining an individual’s tax residency.

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2. Recent Court decision highlights how DTAs

affect tax residency and the tax outcomes
Recently, the Full Federal Court in FCT v Pike [2020] FCAFC 158 (‘Pike’s case’) considered the
ordinary concepts test and the domicile test for the purpose of determining the tax residency
status of a Zimbabwean national whose family remained located in (Brisbane) Australia, while he
personally worked and spent the majority of his time living abroad for employment purposes.

2.1 The background to Pike’s case

The relevant facts and circumstances in Pike’s case can be summarised as follows:
(a) The taxpayer (Mr Pike) was born in Zimbabwe in 1972, but due to the country’s poor economic
conditions, he and his long standing de facto partner (Ms Thornicroft) and their two children
moved to Brisbane in March 2005.
(b) Prior to the move, the taxpayer had developed a career in the African tobacco industry.
(c) The family’s move to Australia was primarily made as a result of Ms Thornicroft’s offer of
appointment in the Brisbane office of Ernst & Young, being the same firm she worked for in
Harare, Zimbabwe. Ms Thornicroft was granted a subclass 457 visa due to her Australian
employment contract, while the taxpayer and their two sons were granted visas to accompany
her to live in Australia during the currency of her work visa.
(d) The taxpayer and Ms Thornicroft rented an apartment in Brisbane as their family residence.
(e) Upon establishing this new family home in Brisbane, the taxpayer initially returned to
Zimbabwe to serve out his employment contract, sell some assets and arrange for the
transportation of their furniture to Australia. The family retained ownership of the previous
family home in Harare, Zimbabwe.
(f) The taxpayer returned to Australia in September 2005 where he was unsuccessful in finding
appropriate employment (largely as a result of a decline in the Tobacco industry in Australia,
an industry in which the taxpayer had expertise).
(g) In March 2006, the taxpayer accepted employment based in Thailand where his previous
skills and experience in the Tobacco industry could be utilised.
(h) The taxpayer continued to be based in Thailand for work over the subsequent eight years
(i.e., 2006 to 2014) where he occupied a succession of rental properties in Chiang Mai,
Thailand, which were furnished to his taste and suitable to accommodate his family when they
visited. He also formed close friendships and actively patronised a number of local sports
clubs, obtained and drove a company car (based on his Zimbabwean driver’s licence) and
opened a local bank account into which his Thai salary was paid.
(i) The taxpayer regularly visited his family in Brisbane (who also moved between various rental
properties during the same period) and financially supported them. Indeed, he was the primary
breadwinner of the family from 2011 after his wife resigned from her job as a result of injury.
He also financially supported remaining extended family in Zimbabwe.
(j) In 2009, the taxpayer and his sons were granted Australian permanent resident visas before
Ms Thornicroft and their sons became Australian Citizens in 2010.
(k) In 2010, the taxpayer sold the Harare home in Zimbabwe and purchased vacant land in
Queensland with the intention to build a family home. In late 2013 the land was sold at a loss.
(l) In 2014, the taxpayer also became an Australian citizen (after having made an original
application in April 2013), obtained an Australian passport and enrolled to vote. This was
motivated, it was accepted, by the increased and unwanted scrutiny of his Zimbabwean
passport received on his international travels for work.

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(m) For employment purposes, in 2014, the taxpayer moved from being based in Thailand to being
based in Tanzania, before moving employment to the United Arab Emirates (‘UAE’) in 2016.
(n) During his time in Thailand, the taxpayer lodged taxation returns with that country’s revenue
department, only lodging a return in Australia declaring a capital loss in 2013 upon the sale of
the vacant land.
(o) ATO’s assessments for 2009 to 2016 – In June 2017, the ATO issued the taxpayer with
assessments for the 2009 to 2016 income years inclusive on the premise that he was an
Australian tax resident in each of those years.
(p) During the relevant income years, the minimum time spent in Australia by the taxpayer during
one income year was 32 days (i.e., in the 2015 income year) and the maximum in one income
year was 155 days (i.e., in the 2009 income year).
(q) Taxpayer’s argument – The taxpayer had taken the view that, during the relevant income
years, he was not an Australian tax resident, but rather submitting that he was a resident of
Thailand, Tanzania or the UAE (as the case may be), as he was only ever returning to Australia
to see his family (i.e., as a visitor).
The taxpayer objected against the assessments issued by the Commissioner, and the
taxpayer subsequently appealed the Commissioner’s objection decision to the Federal Court.

2.2 The Federal Court’s decision in Pike’s case

There were two primary issues that were considered by the Federal Court (single judge or primary
judge) in Pike v FC of T [2019] FCA 2185, as follows:
1. Whether the taxpayer was an Australian tax resident under S.6(1).
2. The effect of Article 4 (i.e., the tie-breaker provision) of the DTA between Australia and
Thailand (‘the Thai DTA’), for the period the taxpayer was based in Thailand. Refer to the
Agreement between Australia and the Kingdom of Thailand for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.
Ultimately, the tie-breaker provision in the Thai DTA (i.e., Article 4) would become a critical element
to the outcome of the ATO’s audit into Mr Pikes tax affairs, particularly in light of the fact the ATO
conceded that the taxpayer was a resident of Thailand from 2006 to 2014 (i.e., he was potentially
a dual resident for tax purposes).

2.2.1 Whether the taxpayer was an Australian resident under the

‘ordinary concepts test’ and the ‘domicile test’
Having determined that the 183-day test and the superannuation fund test were not relevant to Mr
Pike’s individual facts, the Federal Court Judge went on to consider the taxpayer’s Australian tax
residency in light of the:
• ordinary concepts test (i.e., whether the taxpayer ‘resided’ in Australia within the ordinary
meaning of that expression); and
• domicile test (i.e., whether the taxpayer had an Australian domicile, and if so, whether he had
established a permanent place of abode outside of Australia).

A. The ordinary concepts test as considered by the Federal Court

The Federal Court held the taxpayer was a resident of Australia (for tax purposes) according to
the ordinary meaning of that word, irrespective of the fact that it was accepted he was also a
resident of Thailand, and then successively a resident of Tanzania and then Dubai in the UAE.

More specifically, it was found that Mr Pike’s foreign residence status was in addition to his
Australian tax residential status. Indeed, it was specifically concluded that an individual could be
a resident of more than one country according to each country’s tax residency rules.

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The factors supporting the taxpayer’s Australian residency classification included the following:
1. The taxpayer’s demonstrated intention or preference to reside with his family while:
“the exigencies of business might require that they reside in two places, the one where
work is available; the other where their family is located, dividing their time as best they can
between the two.”
This meant that:

“…. when Mr Pike returned to Australia, he was not .. returning as a visitor to Australia.
Rather, he returned as husband (de facto) and father to resume living – residing – with his
wife and children at the family home. It was not just their family home; it was his also.”
[Emphasis added]
The taxpayer’s specific experience and skill set in the Tobacco industry meant that his earning
potential could only be realised by him living and working abroad, despite his ongoing devotion
to his family in Australia. This was demonstrated by the evidence disclosing a pattern of the
taxpayer living and working abroad and also returning to Australia to live with his family as often
and for as long as possible.
2. The taxpayer’s and his partner’s succession of residential rental properties in Australia as family
homes were not transient in nature and it was found they had made such accommodation their
home. Indeed, whilst the Federal Court noted the couple had purchased a vacant block of land
with the intention of constructing a family home, the judgement explicitly stated that the taxpayer
did not need to own a home in Australia to be a resident here.
3. The Federal Court did not place too much weight on the manner in which the taxpayer had
completed his incoming and outgoing migration passenger cards. This was primarily because
such responses need to be understood in the context of the overall circumstances relating to a
given individual, particularly as such cards make no reference to what circumstances a person
might be regarded as a resident (i.e., particularly a tax resident).
4. The taxpayer’s subsequent obtainment of Australian citizenship (and an Australian passport)
was far from determinative according to the Federal Court, primarily because the definition of a
resident in S.6(1) of the ITAA 1936 does not include a nationality test. However, viewed in
conjunction with the fact that Australia continued to be the location of the family home and that
his de facto wife and sons had also obtained Australian citizenship, such actions were consistent
with a conclusion as to the taxpayer’s Australian (tax) residence.
The Federal Court also went onto consider the domicile test, noting that, having satisfied itself that
Mr Pike was a resident of Australia according to the ordinary meaning of the term, this would have
no bearing on Mr Pike’s Australian tax residency which had been established under the ordinary
concepts test (i.e., it was not necessary to consider the domicile test).

B. The ‘domicile test’ as considered by the Federal Court

Obviously, the taxpayer’s domicile of origin was Zimbabwe. However, the ATO submitted that
the taxpayer had acquired a domicile of choice in Australia in 2005 and retained it. The taxpayer
argued his domicile of choice was initially Thailand, and subsequently Tanzania and then the UAE.

Interestingly, the Federal Court reiterated that, whilst it is possible for a taxpayer to have more than
one residence, a person may only ever have one domicile at a time. Effectively, at least
according to S.10 of the Domicile Act 1982:
“The intention that a person must have in order to acquire a domicile of choice in a country
is the intention to make his or her home indefinitely in that country.”

The Federal Court held that the taxpayer had become domiciled in Australia, but only from April
2014, being the point in time the taxpayer successfully obtained his Australian citizenship. This
was because, at least according to the primary judge, it was only then that there was a requisite
intention by Mr Pike to make Australia his home indefinitely.

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2.2.2 Consideration of the Thai DTA tie-breaker provision

In cases of dual residency, Article 4 of the Thai DTA provides a series of tie-breaker tests to
determine whether an individual is deemed a resident of Australia or Thailand (for the purposes of
allocating taxing rights between the countries under the DTA). More specifically, under the tie-
breaker tests in Article 4, where an individual is resident of both Australian and Thailand, the tax
residency status of the person will solely be:
(a) the country in which a permanent home is available to the person;
(b) the country in which a person has a habitual abode (if a permanent home is available to the
person in both countries (or in neither of them)); or
(c) the country in which the person’s personal and economic relations are closer (if the person
has a habitual abode in both countries (or neither of them)).

Furthermore, for the purpose of paragraph (c) above, an individual’s citizenship or nationality of
one of the countries shall be a factor in determining the degree of the person’s personal and
economic relations with that particular country.
Ultimately, the Federal Court held that Mr Pike’s personal and economic relations were closer
to Thailand rather than Australia between 2009 and 2014, meaning that he was deemed to be
tax resident of Thailand and his salary payments were not taxable in Australia (i.e., under Article
15 – Dependent personal services, the ATO had no taxing rights over this salary income).
The taxpayer’s personal and economic relations became the deciding factor in this case after
the Federal Court considered the taxpayer’s facts and made the following two conclusions:
1. The taxpayer, had no permanent home (i.e., in either Australia or Thailand), as he and his
family in Australia rented homes for the purpose of retaining the flexibility of relatively short-term
residential tenancies which suited both Mr Pike and his de facto partner Ms Thornicroft.
Despite this conclusion, the Federal Court judge nevertheless emphasised that this does not
necessarily mean that a rented home can never be a permanent home. Indeed, the ATO, in its
Decision Impact Statement on Pike’s case (below) confirmed its agreeance with this statement.
2. The taxpayer had a habitual abode in each country (i.e., in both Thailand and Australia) as he
had two aspects of his life, namely his work life in Thailand and his family life in Australia. On
this point, the Federal Court judgement pointed to the fact that such a conclusion accords with
the understanding evidence in the OECD commentary which states that:
“… “habitual abode” [is] a notion that refers to the frequency, duration and regularity of stays
that are part of the settled routine of an individual’s life and are therefore more than
transient….. it is possible for an individual to have an habitual abode in the two States,
which would be the case if the individual was customarily or usually present in each
State during the relevant period, regardless of the fact that he has spent mor says in
one State than in the other.” [Emphasis added]
On the evidence, the Federal Court identified that the taxpayer had personal relations in both
Thailand (i.e., he had formed friendships and was actively engaged in various sporting and
social activities) and Australia (i.e., his immediate family with whom he was close). Despite this,
the Court held that the taxpayer’s economic relations were overwhelmingly closer to Thailand.
This was because, it was the salary income derived from his Thai employment which supported
his life and lifestyle in Thailand, as well as supporting his family in Australia. This conclusion
was made despite the fact that between 2010 and 2013, Mr Pike owned a capital asset (i.e., the
block of land) in Brisbane upon which he intended to build a family home for his partner and
sons.
Furthermore, while the taxpayer’s nationality could be considered, in the overall circumstances
of this case, the Federal Court held that Mr Pike’s obtainment of Australian citizenship towards
the end of the period in question (i.e., in April 2014) had “little weight in supporting a conclusion
that the degree of Mr Pike’s personal and economic relations was closer to Australia”.

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In conclusion, as a direct result of the Thai DTA tie-breaker tests in Article 4, the taxpayer was
deemed to not be an Australian tax resident for the relevant income years he worked in Thailand.
As a result, his Thai salary was not subject to Australian taxation under Article 15.

2.3 The Full Federal Court’s decision in Pike’s case

The ATO appealed to the Full Federal Court with respect to the findings of the primary judge that:
• the Thai DTA deemed the taxpayer to be a resident solely of Thailand for the 2009 to 2014
income years; and
• the taxpayer did not satisfy the domicile test until April 2014.

On cross-appeal, the taxpayer mainly challenged the Federal Court’s findings that:
• he was a resident of Australia under the ordinary concepts test;
• he was a resident of Australia under to the domicile test from April 2014; and
• he had a habitual abode in both Thailand and Australia (arguing he only had one habitual abode
in Thailand).

2.3.1 Determining residency status under the ‘ordinary concepts test’

and the ‘domicile test’
Firstly, the Full Federal Court judgement considered the ‘ordinary concepts test’ and the ‘domicile
test’ in the review of the primary judgement relating to Mr Pike’s tax residency.

A. The ordinary concepts test as considered by the Full Federal Court

With respect to the Federal Court’s conclusion that the taxpayer was an Australian tax resident
according to the ordinary concepts test, the taxpayer challenged the primary judge’s focus on his
status as a de facto husband and father to two boys living in Australia and the conclusion that when
he returned to Australia he resumed living with them in the “family home” (i.e., as described by the
taxpayer himself when referring to the rental accommodation his family occupied).

The Full Federal Court rejected this part of the taxpayer’s appeal, quoting Harding v FCT [2019]
FCAFC 29, in which the majority had previously agreed that:
“…save in the most exceptional circumstances, the existence of a house in Australia
maintained by a taxpayer who is working overseas, and the maintenance of a family
in that house, has great significance in determining the taxpayer’s residency in that it
demonstrates a continuity of association with Australia and an intention to treat that
place as “home”.” [Emphasis added]
In light of the facts of this case, the Full Federal Court agreed that, a conclusion that the taxpayer
did not return to his family home in Australia as a visitor was “plainly open on the evidence”. As a
result, the court of appeal confirmed the view the taxpayer was an Australian tax resident
according to the ordinary concepts test.

B. The ‘domicile test’ as considered by the Full Federal Court

The primary judge of the Federal Court had determined that the taxpayer was domiciled in Australia
from April 2014 (i.e., when he became an Australian citizen). The Commissioner contended the
primary judge ought to have found that Mr Pike was a resident under the domicile test in all relevant
income years (i.e., in the 2009 to 2014 income years, inclusive).
The taxpayer cross-appealed, contending that the primary judge erred in finding that he was a
resident under the domicile test at all. The Full Federal Court, having determined the taxpayer was
an Australian tax resident under the ordinary concepts test, found it unnecessary to deal with the
domicile test.

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2.3.2 Consideration of the Thai DTA tie-breaker provision

The parties were not in dispute that Mr Pike was a tax resident of Thailand, ultimately meaning
that the Thai DTA and its tie-breaker provisions in Article 4 were relevant. The primary judge had
found that the taxpayer had no permanent home in either country and a habitual abode in both
Australia and Thailand (resulting in personal and economic relations being the deciding factor).

In the end, as the primary judge had found that the taxpayer’s personal and economic relations
were closer to Thailand, Thailand had sole taxation rights with respect to his Thai-based
employment income under Article 15 of the Thai DTA.

A. Taxpayer’s appeal in relation to their habitual abode

The taxpayer challenged the primary judge’s finding that he had a habitual abode in both Thailand
and Australia, instead contending that he only had one (i.e., in Thailand) based on the fact he spent
the majority of his days within that country. The Full Federal Court dismissed this appeal, finding
that there is no warrant “for imputing that the habitual abode of a person is the place where the
individual has spent more days”.

TAX TIP – ATO’s Decision Impact Statement (‘DIS’) on Pike’s case

Following the decision in Pike’s case, the ATO issued a DIS, which outlines the Commissioner’s
views on the decision. In particular, the ATO’s DIS advises that the Commissioner agreed with the
findings of the primary judge and the Full Federal Court that the taxpayer had a habitual abode in
both Thailand and Australia.
More specifically, with reference to the relevant Organisation for Economic Co-operation and
Development (‘OECD’) commentary, the ATO made it clear that it considers that determining
whether a person has a habitual abode requires “ascertaining the frequency, duration and regularity
of stays that are part of the settled routine of the individual's life”. More importantly, the
Commissioner confirmed his view (in agreeance with the judicial decisions) that a person's habitual
abode cannot be determined just by time spent in each country.

B. ATO’s appeal in relation to personal and economic relations being closer

The ATO also challenged the primary judge’s finding that Mr Pike’s personal and economic
relations were closer to Thailand in the relevant years, instead, arguing that they were in fact closer
to Australia and should take precedence.
With respect to determining if an individual’s personal and economic relations are closer, the Full
Federal Court rejected the notion that greater weight should be placed on personal factors over
economic factors, In this regard, the Full Federal Court held that this test required a determination
as to whether a taxpayer’s personal and economic relations, viewed as a whole, support ties closer
to one country over the other country.
As a result, the Full Federal Court concluded that the primary judge had adequately looked at Mr
Pike’s circumstances and engaged in an appropriate balancing of the significance of those personal
and economic considerations in concluding they were closer to Thailand, rather than Australia.

TAX TIP – ATO’s Decision Impact Statement (‘DIS’) on Pike’s case

In applying the personal and economic relations aspect of the tie-breaker provision, the ATO’s DIS
notes the OECD commentary provides that “…considerations based on the personal acts of the
individual must receive special attention…”.
Furthermore, the Commissioner’s view taken in the DIS is that the factors of more significance to
a particular taxpayer have greater weight where personal and economic factors lay with both
countries. Nevertheless, the Commissioner accepted the Full Federal Court’s decision to not
overturn the decision of the primary judge.

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2.4 The implications of Pike’s case – NTAA comment

The Full Federal Court’s decision in Pike’s case, in so far as the ‘ordinary concepts test’ for
residency is concerned, broadly illustrates that the ATO and the Courts are more inclined to classify
an individual who has left Australia to work overseas as an Australian tax resident, where they
continue to have significant family ‘ties’ (and other ties) to Australia (e.g., a spouse and children
who are living in the family home in Australia with whom the taxpayer is close).
This broad approach is consistent with the outcome of numerous Tribunal decisions that have
considered the residence status of an individual leaving Australia to work overseas, with significant
family ‘ties’ (and other ties) to Australia. Refer to Joachim v FCT [2002] AATA 610, Iyengar v FCT
[2011] AATA 856, Hughes v FCT [2015] AATA 1007 and Landy v FCT [2016] AATA 754.

TAX WARNING – Extent of family (and other) ‘ties’ to Australia

considered more recently in Joubert v FCT
This broad approach was also confirmed in the more recent Tribunal decision in Joubert v FCT
[2020] AATA 2645 (‘Joubert’s case’).
In this case, the taxpayer (Mr Joubert) moved to Australia (Perth) from South Africa in 2010 with
his wife and two sons, to work in the mining industry. Following a decline in the mining industry
and a 10-month period of unemployment, the taxpayer accepted a position in Singapore with a
large shipping company as Operations Director In July 2014. He moved to Singapore shortly after
and lived in a small rented studio apartment for around five years. In the meantime, the taxpayer’s
family remained in Perth (where his two sons attended school) and lived in various rental properties.
The taxpayer’s position required him to be based in Singapore and to travel extensively to visit the
company’s offices in Tokyo, Vancouver and Melbourne. The taxpayer returned to Australia 25
times in the 2015 income year (being the year in question), visiting his family each time. He was
present in Australia for 141 days, of which 98 days were spent in Perth and 43 in Melbourne for
work. In the same income year (i.e., November 2014), the taxpayer was granted Australian
citizenship. He also had bank accounts in both countries but had no substantial assets in either.
The Tribunal concluded that the taxpayer in this case was an Australian tax resident for the 2015
income year under the ordinary concepts test for residency, based on the totality of his
circumstances. In particular, this conclusion was largely based on the following facts:
• The taxpayer became an Australian citizen in November 2014.
• The taxpayer had a good relationship with his wife and sons.
• Mr Joubert would frequently visit his family in Australia where possible, including between
business trips to Melbourne.
• The taxpayer had no substantial assets in Singapore, nor in Australia.
• The family’s home in Perth (in whatever premises) was the place the signified the taxpayer’s
enduring continuity of association with Australia to which he returned regularly and frequently.

Where an individual who leaves Australia to work overseas is classified as an Australian tax
resident under Australia’s tax residency tests (e.g., the ordinary concepts test), any income earned
overseas (e.g., salary or wages income) will generally be assessable to the individual and subject
to tax in Australia under S.6-5.

2.4.1 Overseas salary income may not be taxed in Australia under

the terms of any DTA with the overseas (host) country
Despite this general tax outcome, the Court’s decision in Pike’s case also illustrated that an
individual’s overseas salary income may not be taxed in Australia under the terms of any DTA with
the overseas (host) country where the individual is a dual resident. This is what ultimately saved
Mr Pike from paying tax in Australia on the salary income he derived from his Thai employment.

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On this basis, the Court’s decision in Pike’s case is also an important reminder that where an
individual in these circumstances is also considered to be a resident of the overseas (host) country
based on that country’s domestic tax laws (i.e., the individual is a dual resident), consideration
must be given to the terms of any DTA with the host country.

This is because, as noted above, the DTA will contain special ‘tie breaker’ rules that will classify an
individual who is a dual resident (i.e., a resident of Australia and the host country) as a resident of
either Australia or the host country (but not both) for the purposes of determining how the
individual’s income (including employment income) will be taxed by each country under the DTA.

TAX TIP – Salary income under DTA may only be taxed in host country
In respect of employment income, many DTAs specify that employment income is only taxed in
the country of residence, unless the employment is exercised in another country (and certain
requirements are satisfied). Therefore, where the ‘tie breaker’ rules of a particular DTA deem an
individual (who is otherwise a dual resident) to be a resident of the country in which they are
working, their employment income will generally only be subject to tax in that country.
For example, this was the outcome for the taxpayer in Pike’s case. That is, Mr Pike was considered
to be a resident only of Thailand (for the purposes of the Thai DTA), in which case, the salary
income he derived in Thailand was not subject to tax in Australia under Article 15 of the Thai DTA.
Furthermore, where an individual working in the United Kingdom (‘UK’) is both an Australian and a
UK resident, and the ‘tie-breaker’ rules of the DTA between Australia and the UK deem the
individual to be a resident of the UK only (for the purposes of the UK DTA), any employment income
derived in the UK will not be subject to tax in Australia (refer to Article 14 of the UK DTA).

3. Recent decisions scrutinise the application of

the 183-day test for residency
Under the 183-day test for determining Australian tax residency, an individual will be a resident if
they have actually been in Australia, continuously or intermittently, for more than one-half of the
year of income (i.e., more than 183 days), unless the Commissioner is satisfied the person’s usual
place of abode is outside Australia and that they do not intend to take up residence in Australia.

A usual place of abode is the abode customarily or commonly used by a person when physically
present in a country. It need not be fixed, but must exhibit the attributes of a place of residence or
a place to live, as opposed to overnight, weekly or monthly accommodation of a traveller.
Furthermore, in its DIS on the recent case of Harding v FCT [2019] FCAFC 29, the ATO states that
it intends to review Taxation Ruling IT 2650 to reflect the view of the Full Federal Court that the
term “place of abode” refers not only to a dwelling, but can also refer to a country.

More recently, the 183-day test has been the subject of further consideration by two recent Tribunal
decisions. In particular, these decisions effectively considered whether:
• a taxpayer who satisfied the 183-day test was automatically an Australian tax resident for the
entire income year; and
• the 183-day test is limited in its application to inbound taxpayers (e.g., a foreign resident
coming to Australia for work) or whether it could also apply to outbound taxpayers. (e.g., an
individual leaving Australia to work overseas).

3.1 The 183-day test and full-year residency

The issue of part-year residency under the 183-day test was recently challenged by the taxpayer
in Addy v FCT [2019] FCA 1768 (‘Addy’s case’). In this case, the taxpayer was a United Kingdom
(‘UK’) citizen who came to Australia on a working holiday visa on 20 August 2015. She primarily
lived in the one residence for the bulk of her stay, before leaving Australia on 1 May 2017 to return
to her family home in the UK.

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The ATO treated the taxpayer as an Australian tax resident up until her departure on 1 May
2017 under the ordinary concepts test and the 183-day test. On this basis, although the Working
Holiday Maker (‘WHM’) tax rates applied to her Australian WHM taxable income from 1 January
2017, the tax-free threshold could apply to taxable income she derived before 1 January 2017.

The taxpayer argued that, as she had satisfied the 183-day test for qualifying as an Australian
resident, she should be treated as an Australian resident for the entire 2017 income year. As the
taxpayer also argued that the WHM tax rates should not apply to her situation (based on the non-
discriminatory clause of Article 25 of the UK DTA), the tax-free threshold should apply for the entire
2017 income year (and not just in respect of taxable income derived before 1 January 2017).

Both the Federal Court (and the Full Federal Court upon appeal by the ATO) held that the
taxpayer’s argument that she was an Australian tax resident for the entire income year on the basis
of satisfying the 183-day test had no merit (i.e., the taxpayer was only an Australian tax resident
up until the date of her departure on 1 May 2017, resulting in only a part-year tax-free threshold
being available to her). In other words, satisfying the 183-day test does not automatically mean
that a taxpayer is an Australian tax resident for the entire income year. This view was also agreed
to by the Federal Court in Stockton v FCT [2019] FCA 1679.

3.2 The 183-day test and outbound taxpayers

Although the legislation does not expressly restrict the operation of the 183-day test to a particular
class of cases, it has been traditionally accepted that this test is only relevant to visitors and
migrants (i.e., inbound taxpayers). Refer to Taxation Ruling TR 98/17 (at paragraphs 35 to 36) and
Case S19 85 ATC 225. In support of this view, it is generally argued the words “does not intend to
take up residence in Australia” do not seem to have relevance for persons other than visitors and
migrants coming to Australia.

Indeed, this was the position recently taken by the taxpayer in Arjunam v FCT [2020] AATA 4024.
In this case, the taxpayer was an Australian citizen who spent a good proportion of the 2016 income
year working overseas (i.e., from August 2015 to March 2016), resulting in him being in Australia
for 187 days (which included an 8-day visit in December 2015 to attend his son’s wedding). The
taxpayer argued that he should not be treated as an Australian tax resident based on the 183-day
test, as this test did not apply to him on the basis that this test only applies to those people entering
Australia (and he was leaving Australia).

Interestingly, in its conclusions, the Tribunal held that it was appropriate to consider the 183-day
test in determining whether the taxpayer was an Australian tax resident, primarily because:
“The ITAA 1936 does not make reference to the application only being to those persons
entering Australia or who only enter with the intention of being a visitor.”
As a result, it remains to be seen if this test will now be used for inbound taxpayers (as well as
outbound taxpayers) in future ATO audits and Tribunal/Court decisions.

4. ATO guidance on tax residency issues arising

from COVID-19 travel bans
In the wake of the COVID-19 pandemic, many countries (including Australia) temporarily closed
their borders and drastically reduced or banned international travel to help stop the spread of the
virus. Unfortunately, this has left many individuals who were temporarily away from home for work
or other reasons (e.g., on holidays, studying, etc.) unable to return to their home country.

From a tax perspective, the Australian COVID-19 travel restrictions have raised questions for some
taxpayers about their individual tax residency status, as well as the source of their employment
income (where applicable). In light of such concerns, the ATO has issued guidance on these (and
other residency-related issues) that may arise due to COVID-19 international travel restrictions.

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4.1 Residency and source of income issues for individuals

stranded in or out of Australia
Many individuals (particularly employees) are not living or working in their normal jurisdiction due
to international travel restrictions imposed in light of COVID-19.
To assist taxpayers (and tax practitioners), the ATO has issued guidance on the tax implications
for Australian resident employees who are (or were) stranded working overseas for an extended
period due to the travel restrictions, and for foreign resident employees stranded in Australia. This
guidance is summarised below, based on the information that is contained in the ATO’s factsheet
‘Residency and source of income (QC 63323)’.

4.1.1 Tax implications for resident individuals

Many Australian tax residents who were temporarily overseas (e.g., on holidays or engaged in
short-term employment contracts) found themselves stranded and unable to return home for an
extended period due to COVID-19 restrictions on international travel.
Alternatively, individuals who were employed in foreign service returned to Australia earlier than
planned due to the pandemic.
A. Australians who are temporarily overseas because of COVID-19
Due to the ongoing capping of numbers for returning Australians as a result of the global pandemic,
many individuals who had previously left Australia to go overseas are still experiencing delays in
returning home due to issues with flights and lack of quarantine facilities in Australia.
In order to meet their living costs while stranded overseas, some of these individuals have been
working remotely for their Australian employers or working for a foreign employer, thereby raising
questions about their Australian tax obligations with regards to income derived during this period.
Importantly, the ATO has confirmed that there is no change to the Australian tax obligations of an
individual who usually lives and works in Australia but is temporarily overseas due to COVID-19
and has remained an Australian tax resident. That is, as a tax resident, these individuals continue
to be assessable on their worldwide income and may be entitled to claim a tax offset for any foreign
income tax paid in accordance with the rules in Division 770 of the ITAA 1997.

B. Australians returning early from certain (exempt) foreign service

Broadly, S.23AG of the ITAA 1936 provides an income tax exemption for employment income
derived by residents working overseas for at least 91 continuous days, where the earnings are
attributable to certain employment activities (e.g., foreign aid work or the Defence Force).
In light of the COVID-19 pandemic, the ATO has confirmed that it will apply a relatively
straightforward application of the law, simply advising that if a resident returned to Australia from
foreign service due to COVID-19 without having completed at least 91 days of continuous foreign
service (taking into account absences that do not break foreign service), their foreign earnings will
not be exempt from tax.
Broadly, a period of absence from foreign service will not break the continuity of an individual’s
foreign service if it does not exceed one-sixth of their total period of foreign service (up to that time)
or if it is a temporary absence that still counts as foreign service (e.g., a work-related trip, paid
recreational leave or absence due to illness). However, the ATO has clarified that where a resident
has returned from foreign service due to COVID-19 and started working in Australia, this is not a
temporary absence that counts as foreign service (i.e., it will break their period of foreign service
where this exceeds one-sixth of their total period of foreign service).

4.1.2 Tax implications for foreign residents in Australia

Individuals who usually live and work overseas (i.e., generally classified as foreign tax residents)
and who are stranded in Australia due to COVID-19 travel bans may be either be working remotely
for their foreign employer or working for another employer while in Australia.

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A. Foreign residents stranded in Australia

The first issue that arises for an individual who is otherwise a foreign resident for tax purposes is
whether their tax residency changes as a result of being in Australia (i.e., whether they have
become a tax resident). If so, this would potentially expose their worldwide income to taxation in
Australia under S.6-5.

TAX TIP – Change of tax residency of individuals stranded in Australia

The ATO has advised that a foreign resident will not become a tax resident by virtue of being in
Australia temporarily for some weeks or months due to COVID-19, if the individual usually lives
overseas permanently and intends to return there as soon as they are able to.
Despite this, if the individual ends up staying in Australia for a lengthy period or if they do not plan
to return to their country of residency when they are able to do so (i.e., when travel restrictions are
eased), they may need to review their tax residency status.

B. Foreign residents deriving employment income in Australia

Furthermore, assuming a foreign resident who is stranded in Australia due to COVID-19 has not
become an Australian resident for tax purposes, an additional question that arises is whether any
employment-related income they earn while in Australia is subject to tax in Australia.
As foreign (and temporary) residents are usually only taxable on their Australian-sourced income,
the tax treatment of employment-related income derived while temporarily in Australia depends on
the source of income (i.e., Australian or foreign) and whether a DTA applies to exempt such
income from Australian taxation.

TAX TIP – ATO makes distinction between income related to paid

leave and salary or wages income
The ATO’s views on the source of employment-related income derived by a foreign resident while
temporarily in Australia due to COVID-19 makes the distinction between whether the individual is
deriving income while on paid leave or earning salary or wages income from continuing foreign
employment (i.e., while working remotely in Australia for a foreign employer).

According to the ATO, if a foreign resident has been deriving income while in Australia from paid
leave from their foreign employment (e.g., annual leave), the income does not have an Australian
source and, therefore, is not assessable to the individual in Australia.

In contrast, the source of salary or wages income that is derived from working remotely in
Australia (i.e., from continuous foreign employment) is somewhat more complicated. In this case,
the source of employment income depends on the particular facts. Usually, the place where the
employment is exercised is a very significant factor when deciding the source of the income. The
ATO’s view is that COVID-19 has created a special set of circumstances that must be taken into
account when considering the source of the employment income earned by a foreign resident who
usually works overseas but instead performs that employment working remotely in Australia.

The ATO’s approach to determining the source of employment in these circumstances depends on
whether the remote working arrangement is short-term (i.e., three months or less), as follows:
(a) Working in Australia for three months or less – If the remote working arrangement is short-
term (i.e., three months or less), the ATO accepts that the income derived from that
employment does not have an Australian source and is not taxable in Australia.
(b) Working in Australia for more than three months – For working arrangements extending
beyond three months, the ATO will examine the individual’s situation to determine if a foreign
resident’s employment is ‘connected to’ Australia.

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If it is determined that an individual’s employment is ‘connected to’ Australia, the income

from that employment will have an Australian source and will be taxable in Australia, subject
to any DTA that exists with the individual’s home country (refer below).

In determining whether a foreign resident’s employment is ‘connected to’ Australia (for

working assignments that extend beyond three months), the ATO’s fact sheet advises
that the following factors would need to be considered:
• Whether the terms and conditions of the individual’s employment contract has changed.
• Whether the nature of the individual’s job has changed.
• Whether the individual has started working for an Australian entity that is affiliated with
their employer.
• Whether the economic impact or result of the individual’s work has shifted to Australia.
• Whether the individual’s ‘economic employer’ (i.e., broadly, the entity for which the
individual is providing services) is in Australia.
• Whether the individual performs work with Australian clients.
• Whether the individual’s performance of their work is wholly or to a significant degree
dependent on the individual being physically present in Australia to complete it.
• Whether Australia has become the individual’s permanent place of work.
• Whether the individual’s intention towards Australia has changed.

TAX TIP – Income derived from remote work arrangements of more

than three months can still be foreign sourced income
The ATO also advises that, in limited situations, where employment income is derived by a foreign
resident individual under a remote working arrangement that is longer than three months, the
source of the income can remain foreign-sourced. This may be the case where:
• the only thing that has changed about the individual’s employment is that they are now doing
the work from Australia as a result of COVID-19;
• there are no other connections to Australia; and
• the individual intends to leave Australia as soon as they are able to do so.

The following examples have been adapted from the ATO’s fact sheet for seminar purposes,
and illustrate the application of the above ATO guidelines when determining the source of a
foreign resident’s income derived while working in Australia remotely in light of COVID-19.

EXAMPLE 19 – Employment income becomes Australian-sourced

Daisy has been an IT professional residing overseas for some years, servicing software
applications for her employer.
On 1 March 2020, Daisy returned to Australia temporarily due to COVID-19, continuing to work
exclusively for her foreign employer from Australia for as long as she is able.
Nothing else about her job changed until 1 May 2020 when, due to a shortage of work with her
foreign employer, Daisy began similar work for a related Australian entity. For this job, Daisy was
assigned work by, and reported to, an Australian manager.
The employment income Daisy earned between 1 March 2020 and 30 April 2020 is foreign-
sourced, as it is not ‘connected to’ Australia. However, the employment income she earns from
1 May 2020 is Australian-sourced income due to the change in her employment circumstances
(and is therefore assessable in Australia under S.6-5, subject to any DTA – refer below).

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EXAMPLE 20 – Employment income remains foreign-sourced

Margo is a graphic designer residing overseas (in the UK), undertaking graphic design work for a
foreign employer relating to foreign clients.
On 1 February 2020, Margo came to Australia to visit relatives. However, due to COVID-19, she
remained in Australia but intends to return overseas as soon as it is safe to do so.
Margo’s employer agreed to temporarily allow her to work from Australia performing the same role.
The only thing that changed about Margo's employment is that she is temporarily performing the
work in Australia until she is able to leave.
In these circumstances, the employment income that Margo has earned from when she came to
Australia (i.e., from 1 February 2020) continues to be foreign-sourced income. Therefore,
assuming that she is still a foreign resident, the income is not subject to tax in Australia.

TAX TIP – Any DTAs must be considered before Australian tax is

applied on Australian sourced income of foreign residents
Where a foreign resident derives Australian sourced employment income while working remotely
in Australia, which is prima facie assessable (and subject to Australian tax) under S.6-5,
consideration needs to be given as to whether a DTA (i.e., Double Tax Agreement) exists between
Australia and the foreign resident’s home country.
Where Australia has a DTA with the foreign resident’s home country, the terms of the DTA should
be carefully reviewed to determine who has taxing rights over the foreign resident’s employment
income derived while working in Australia.
As previously noted, many of Australia’s DTAs provide that employment income is only taxed in
the country of residence, unless the employment is exercised in another country (and certain
specific requirements are satisfied – refer below).
More specifically, many of Australia’s DTAs provide that employment income derived by a foreign
resident while working in Australia cannot be taxed in Australia (i.e., it can only be taxed in the
foreign resident’s home country) where:
• the individual is not present in Australia for more than 183 days in total in either an income year
or a 12-month period (depending on the applicable DTA); and
• the individual’s salary and wages are paid to them by, or on behalf of, an employer that is not
an Australian resident; and
• the salary and wages are not deductible against the profits of an Australian permanent
establishment of the individual’s employer.

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Tribunal scrutinises an employee’s claim

for a ‘work horse’ vehicle – Bell’s case
In Bell v FCT [2020] AATA 3194 (‘Bell’s case’), an employee construction worker largely claimed
deductions for motor vehicle expenses associated with a utility vehicle which had a designed
carrying capacity of at least one tonne and which was used for various work purposes, such as for:
• transporting heavy/bulky tools between home and work;
• collecting/returning heavy plant from/to plant hire businesses while travelling between home and
work;
• collecting supplies from hardware stores while travelling between home and work; and
• travel between the taxpayer’s regular workplace (i.e., construction site) and other work-related
places (e.g., other construction sites, the employer’s head office and hardware stores).

The Tribunal concluded that the taxpayer was not entitled to claim a deduction for his motor vehicle
expenses under S.8-1, given that his travel between home and work was not deductible travel and,
in any event, the taxpayer could not provide sufficient evidence to verify the work use of his vehicle.
However, the taxpayer was allowed to claim the maximum amount allowed under the cents per km
method (i.e., 5,000 business kilometres x 66 cents), even though his vehicle was not a ‘car’ (and
otherwise not eligible for the cents per km method), presumably because it was acknowledged that
there was some work-related use of the taxpayer’s motor vehicle.

1. The background to Bell’s case

The facts and circumstances regarding Bell’s case (which is also based on evidence provided at
the Tribunal hearing) can be summarised as follows:

(a) During the 2016 income year (the relevant year in question), the taxpayer (Mr Bell) lived
around 100 kms out of Melbourne (in western regional Victoria) and worked as a construction
worker predominantly on the one construction site in an eastern suburb of Melbourne.

(b) Taxpayer’s work responsibilities – The taxpayer’s work responsibilities included:

• working as the Site Foreman’s assistant (i.e., he would report daily to the Site Foreman,
who allocated his work tasks); and
• working as a construction site Fire Warden, a First Aid Warden and an OH&S Supervisor.

(c) For the 2016 income year, the taxpayer claimed a number of work-related expenses of just
over $27,388 in total. These largely comprised a claim for motor vehicle expenses of
$24,865.73, related to a utility motor vehicle that was used for work purposes during the year.
These seminar notes will only focus on the taxpayer’s motor vehicle expense claim, as this
was the main claim in dispute before the Tribunal.

The taxpayer’s motor vehicle expense claim – one tonne utility (‘ute’)

(d) Taxpayer’s vehicle – The taxpayer owned and maintained a ute that had a load carrying
capacity of at least one tonne (i.e., the taxpayer’s motor vehicle was not a ‘car’ for the
purposes of claiming car expenses under Division 28 of the ITAA 1997).

(e) The use of the taxpayer’s ute for work purposes – The taxpayer used his ute for the
following purposes, many of which occurred while he travelled between home and work:
• To transport heavy/bulky tools between his home and his workplace.
• To travel to hardware stores to collect materials and consumables for the construction site,
and to collect tools for construction site workers, whilst travelling between home and work.

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• To travel to plant hire suppliers to collect and return hired plant and equipment, whilst
travelling between home and work.
• To travel to fuel stations to purchase diesel fuel for construction site equipment, whilst
travelling between home and work.
• To travel to the employer’s head office in Port Melbourne to collect stationery and other
supplies, which was predominantly done while travelling between home and work.
• To travel (less often) between construction sites and to take injured workers to hospital for
medical attention.

(f) The taxpayer’s contentions regarding specific work use of his ute – There were two key
contentions made by the taxpayer regarding the use his vehicle for work purposes, as follows:
• In relation to the use of his vehicle to transport heavy/bulky tools between home and
work, the taxpayer perceived that there was a need to carry tools of trade with him when
travelling between home and work because of security needs (i.e., a lack of security at
work) and that he would be responsible for replacing any tools that were lost or stolen.
• In relation to the use of his vehicle to attend to collections and deliveries between home
and work (i.e., from hardware stores and plant hire suppliers), the taxpayer believed that it
was a requirement for these collections and deliveries to be carried out while travelling
between home and work in order to achieve operational efficiency at the construction site.
That is, carrying out these functions where possible while travelling between home and
work would have been more efficient (i.e., it would have saved time) as opposed to carrying
out these functions during working hours after arriving at work (i.e., the construction site).

(g) Taxpayer’s travel allowance – The taxpayer was paid an allowance of $15,221 for the 2016
income year. The allowance was a set daily rate and was not responsive to, and did not vary
with, the amount of travel undertaken. The allowance was approximately one hour’s pay per
day and was paid under an Enterprise Bargaining Agreement.

(h) Verification of taxpayer’s motor vehicle expense claim – The taxpayer’s motor vehicle
claim of $24,865.73 for the 2016 income year was based on an 80% employment-related use.
It appeared that the taxpayer produced a diary to verify the vehicle’s work-related use, but it
was found that such a diary was not maintained in the way that a travel log or travel diary
should be maintained in order for it to be a reliable record of the taxpayer’s employment-related
travel. In particular, according to the taxpayer, the diary was a ‘shemozzle’. Furthermore, the
diary contained errors and it was manifestly a retrospective reconstruction of what the taxpayer
could remember of his past work travel.
(i) ATO adjustment of taxpayer’s motor vehicle expense claim – Although the ATO had
accepted that the taxpayer’s motor vehicle was used for employment-related purposes, it did
not accept that the vehicle was used to the extent claimed by the taxpayer.
In the end, the ATO reduced the taxpayer’s claim for the 2016 income year from $24,865.73
to $3,300 (which was the maximum amount allowed under the cents per km method for the
2016 income year, being 5,000 business kms x 66 cents per km).

2. The Tribunal’s decision in Bell’s case

In relation to the taxpayer’s motor vehicle expense claim, the Tribunal acknowledged that the
taxpayer’s motor vehicle was not a ‘car’ (within the meaning of S.995-1 of the ITAA 1997), resulting
in the car expense claim rules in Division 28 of the ITAA 1997 not applying in this case.

On this basis, the Tribunal was required to consider whether the taxpayer’s motor vehicle expenses
were deductible under S.8-1 on an ‘actual basis’ (i.e., to the extent the taxpayer’s ute was used
for income-earning activities). This essentially involved the Tribunal considering the following:

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• Whether the taxpayer’s travel between home and work was deductible (non-private) travel.
This essentially involved having to consider whether the taxpayer was required to carry bulky
and/or heavy tools, equipment, goods, etc., between home and work, such that his travel was
sufficiently employment-related (i.e., the travel could be attributed to having to carry heavy/bulky
tools, equipment, goods, etc., rather than to transport the taxpayer between home and work).

TAX TIP – Travel between the construction site and other work places
held to be employment-related (or deductible) travel
In relation to the taxpayer’s travel between the construction site and other work-related
places, such as other construction sites, hardware stores, the employer’s head office in Port
Melbourne or the hospitals to which the taxpayer drove injured workers, the Tribunal made it clear
that this was employment-related travel and deductible under S.8-1.
However, in relation to this travel, the taxpayer could not sufficiently establish the proportion of the
total travel in his vehicle for the income year that related to these activities (as discussed below).

• Whether the taxpayer had established a proportion of employment-related use of his

vehicle which would give rise to a deduction greater than the $3,300 deduction already allowed
by the Commissioner under the cents per km method.
This essentially involved having to consider whether the taxpayer had maintained sufficient
records (e.g., a diary) to verify the extent to which the taxpayer’s vehicle was used for
employment-related purposes (for the purposes of a claim under S.8-1).

2.1 Whether the taxpayer’s travel between home and work

was employment-related (or deductible) travel
The Tribunal held that the taxpayer’s travel between home and work while transporting heavy/bulky
tools, and the taxpayer’s travel between home and the various collection and delivery points (i.e.,
hardware stores, plant hire suppliers, fuel stations and the employer’s head office in Port
Melbourne), was not an incident of his employment such that to render such travel as employment-
related travel. As a result, this travel was not deductible travel under S.8-1.

The Tribunal’s conclusion was based on the following reasoning:

(a) Overall, although the tools and some of the other goods and supplies transported by the
taxpayer in his vehicle would have qualified as physically bulky or heavy goods, the evidence
supported the conclusion that such travel was essentially private travel between home and
work, even though it was a more efficient way to carry out these tasks (i.e., carrying out these
tasks between home and work meant less time away from the construction site).
In other words, based on the evidence, the travel between home and work was undertaken to
transport the taxpayer rather than to transport bulky or heavy tools, goods or supplies. That
is, such travel could be better characterised as being for the taxpayer’s personal convenience
or preference as opposed to an operational need of his employment circumstances.

(b) In relation to the transportation of heavy/bulky tools between home and work, the Tribunal
held that there was no need for the vast majority of the 2016 income year to carry bulky tools
between the taxpayer’s home and the construction site because adequate arrangements were
in place to store those tools securely at the construction site. In particular:
• security facilities were available and effective at the construction site for most of the income
year, and there were no difficulties experienced in relation to the tools kept there; and
• the Site Foreman provided evidence that the taxpayer’s employer would meet the cost of
replacing stolen tools of trade unless the employee had been derelict in his duty (and a
theft from a secured facility would not be regarded as dereliction in duty).

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(c) In relation to the use of the taxpayer’s vehicle to attend to collections and deliveries
between home and the various collection and delivery points or non-construction site
locations (e.g., hardware stores, plant hire suppliers, fuel suppliers and the employer’s head
office in Port Melbourne), the Site Foreman provided the following evidence:
• It was not a requirement of the taxpayer’s employment that these tasks were to be
undertaken whilst travelling between home and work – rather, the employer and the
taxpayer had arranged (for convenience) that, when there was not an urgent requirement
for an item to be collected or delivered during the day, the collection or delivery would be
attended to when the taxpayer was travelling between home and the construction site.
• The taxpayer’s travel arrangements were more a personal convenience factor, which can
be expected in a situation where an employee lives a lengthy distance from a workplace
(such as the taxpayer in this case living 100 kms west of Melbourne and working primarily
on a construction site located in the eastern suburbs of Melbourne).

TAX WARNING – Performing collection and delivery tasks while

travelling between home and work
The Tribunal also made specific mention of the character of travel associated with performing
collections and deliveries while travelling between home and work.
In this regard, the Tribunal noted the following:
(a) A person whose duties require the collection of work supplies and materials does not
transform the travel between home and the place of collection of those items (i.e., it does not
convert the trip into a deductible trip) simply by collecting those items on the way to work.
(b) Similarly, such a person does not transform travel (i.e., the travel is not converted into a
deductible trip) from a place of collection of work supplies and materials to home, and the
travel from home to work the following day, merely by collecting those items on the way home
and then taking those items to work on the following day.
In these circumstances, according to the Tribunal, the fundamental nature of the travel from the
point of collection to the employee’s home, or from the employee’s home to the place of collection,
is travel between home and a workplace. Unless the bulky equipment travel exception applies, the
character of the travel between the place of collection and place of home and vice versa is not
altered (i.e., such travel generally remains non-deductible travel).

(d) The fact that the taxpayer had received an allowance did not, of itself, alter the conclusion
that the taxpayer’s travel between home and work was non-deductible travel.

2.2 Whether the taxpayer had established a proportion of

employment-related use of his motor vehicle
The Tribunal held that the taxpayer’s diary for the 2016 income year could not be accepted as a
sufficient (or as an adequate) record of employment-related use of his vehicle.

In particular, it was quite apparent that the taxpayer’s diary was not maintained in the way that a
travel log or travel diary should be maintained (i.e., as a contemporaneous record of travel that was
undertaken by the taxpayer), as follows:
• The taxpayer’s diary could not be accepted as a record of employment-related travel when it
recorded travel between home and his workplace, or travel between home and the place of
collection of rental equipment and/or supplies, etc., as employment-related travel.
• The taxpayer’s diary was also inaccurate containing evident errors.
• Even in relation to the taxpayer’s employment-related travel (i.e., trips between his workplace
and locations for collection or delivery of work-related goods and supplies), his diary was not a
sufficiently accurate record of the employment-related kilometres travelled in his vehicle.

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TAX TIP – Tribunal allows claim under cents per km method

Despite the fact that the taxpayer’s diary did not sufficiently or adequately verify the taxpayer’s
claimed proportion of the vehicle’s work-related use (and despite the fact that the taxpayer’s vehicle
was not a car for the purposes of Division 28), the Tribunal agreed with the Commissioner’s
approach to allow the taxpayer a deduction for the maximum amount allowable under the cents per
km method (i.e., based on a maximum of 5,000 business kilometres).
Although there was no explanation provided for allowing a claim under the cents per km method,
this may have been a practical way to acknowledge that the taxpayer’s vehicle was used for certain
work-related purposes (i.e., to travel between the construction site and other work-related places,
such as other construction sites, hardware stores, the employer’s head office in Port Melbourne or
the hospitals to which the taxpayer drove injured workers).

3. NTAA comment – Implications of the Tribunal’s

decision in Bell’s case
There are a number of key implications that arise from the decision in Bell’s case, which can be
summarised as follows:

1. Travel involving the transportation of bulky/heavy tools between home and work –
Consistent with the ATO’s traditional approach and previous Tribunal decisions, the Tribunal’s
decision in Bell’s case confirms that a taxpayer’s travel between home and work involving the
transportation of heavy and/or bulky work tools will not be deductible where reasonably secure
storage facilities are provided at the employee’s workplace for the storage of their tools.
This is because, one of the requirements before such travel can be deductible is that an
employee would need to demonstrate that the transportation of heavy and/or bulky tools to and
from their regular workplace is a practical necessity, because there is no reasonably secure
storage provided at the workplace for the safe storage of such tools. Refer to paragraphs 79
to 81 of TR 2021/1, FCT v Vogt (1975) 5 ATR 274 and Brandon v FCT [2010] AATA 530.

2. Travel involving the collection (and delivery) of work goods, supplies, equipment, etc.,
between home and work – Broadly speaking, the Tribunal’s decision in Bell’s case also
illustrates that an employee’s travel between home and work will not necessarily be deductible
merely because an employee’s work duties involve the collection (and delivery) of work supplies,
materials, equipment, etc., while travelling between home and work.
This is somewhat consistent with the ATO’s general approach in relation to such travel. In
particular, at paragraph 28 of TR 2021/1, the ATO advises that the general principle that travel
between home and work is non-deductible is not altered merely because an employee stops
en route to their regular workplace to fulfil an incidental work task (e.g., where a dentist collects
dentures from a dental laboratory on their way to the surgery).
Furthermore, at paragraph 34 of Miscellaneous Taxation Ruling (‘MT’) 2027, the ATO broadly
advises that where an employee undertakes a work-related task while travelling between home
and work, this will be accepted as work-related travel where all the following conditions are met:
(a) The employee has a regular place of employment/work to which he or she normally travels.
(b) In the performance of their duties as an employee, travel is undertaken to an alternative
destination which is not itself a regular place of work or employment.
(c) The journey or trip is undertaken to a location at which the employee performs substantial
employment duties.

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TAX WARNING – Performing incidental work tasks while travelling

between home and work
In relation to the requirement at (c) above, the ATO advises that travel to an employee’s place of
work or employment would not be accepted as work-related travel where the employee merely
performs incidental tasks enroute, such as collecting newspapers or mail.
Similarly, for example, according to the ATO, the fact that a dentist may call in at a dental laboratory
to collect dentures, etc., enroute to the surgery at which they are employed would not result in the
trip being accepted as work-related travel.

Note that, the ATO also advises that the principles noted above (i.e., in relation to paragraph 34
of MT 2027) equally apply where an employee leaves work in the afternoon to make a business
call and then travels from there to home, rather than returning to the office or their workplace.

3. Substantiation/evidentiary requirements for claims in relation to vehicles that are not

cars (e.g., utes with a designed carrying capacity of one tonne or more) – The Tribunal’s
decision in Bell’s case also illustrates the importance of being able to adequately verify the work-
related (or business) use of a motor vehicle that does not qualify as a ‘car’.

This is because, even though there is no requirement to substantiate the work-related use of a
motor vehicle that is not a ‘car’ under the normal substantiation rules for ‘work expenses’ (and
‘car expenses’ under the log book method), an employee may still be required by the ATO
(in the course of an audit) to reasonably:
• verify the extent to which their vehicle was used for income-earning purposes; and
• substantiate their motor vehicle expenses being claimed (even though the work-related
or business use of their vehicle is quite high).

Based on information on the ATO’s website and feedback received by the NTAA regarding ATO
audits of motor vehicle expenses, an individual in these circumstances may be required to
provide the following records to verify their claim, in the course of an ATO review or audit:
(a) Records to verify the vehicle has been used for income-earning purposes – These
records can include the following:
• Details of employment duties (where appropriate), including the requirement to travel
on work (e.g., travel to an alternate workplace or involving transporting heavy and/or
bulky equipment.
• A letter from the employee’s employer (where appropriate), advising why the employee
was required to use their vehicle in the course of carrying out their employment duties.
(b) Records to substantiate a deduction for motor vehicle expenses – These records can
include the following:
• Where the individual owns or leases the vehicle – purchase or lease documents for
the motor vehicle, and a motor vehicle registration certificate or papers for the period
claims are being made for motor vehicle expenses.
• Details of how the claim was calculated.
• Where the individual has used the vehicle both for work-related and private or domestic
purposes, a reasonable basis for apportioning expenses, such as a logbook or
diary, in conjunction with odometer records.
• Receipts and/or other reasonable evidence, such as a bank statement and/or a credit
card statement, in order to verify expenses incurred. Refer also to PS LA 2005/7.

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TAX WARNING – Dangers with claiming a 100% work/business use for

a ‘work-horse’ vehicle
One of the biggest misconceptions associated with claiming motor vehicle expenses that relate to
a vehicle that is not a ‘car’ (e.g., a ute with a designed carrying capacity of at least one tonne) is
that, because of the inherent nature of such a vehicle (being a ‘work-horse’ vehicle), it is often
assumed that such a vehicle is used 100% for work-related or business purposes.
As a result, based on recent audit adjustments, the ATO is likely to particularly focus on those
claims which are based on a 100% work-use of a vehicle other than a car, where:
(a) the employee does not have access to any other vehicle after hours, which may indicate that
their vehicle is also being used for private purposes; and/or
(b) the employee’s travel between home and work is not deductible – for example:
the employee does not transport heavy/bulky equipment between home and work, or the
employee carries such equipment but does not satisfy the deductibility criteria (e.g., refer
to TR 2021/1); and
the employee’s travel is not inherently itinerant in nature. Refer also to TR 95/34.

4. Default claims under the cents per km method – The ATO’s approach in reducing the
taxpayer’s motor vehicle expense claim in Bell’s case to the maximum amount allowed under
the cents per km method (which was also supported by the Tribunal) is, prima facie, a
concessional approach. This is essentially because of the following reasons:
• The cents per km method is only available in respect of car expense claims under Division
28 of the ITAA (and not in respect of motor vehicle expense claims for vehicles that do not
qualify as cars) – refer to S.28-12, S.900-70(3) and TD 97/19.
• The NTAA understands (and has previously been advised) that the ATO has traditionally not
allowed an alternative claim under the cents per km method in those situations where a
motor vehicle expense claim related to a vehicle that is not a ‘car’ cannot be adequately
verified (or substantiated) in the course of an ATO audit.

Although there was no explanation provided for this approach, one possible explanation is that
this approach attempts to acknowledge a reasonable claim for certain actual work-related use
of the taxpayer’s motor vehicle (i.e., to travel between the construction site and other work-
related places, such as other construction sites, hardware stores, the employer’s head office in
Port Melbourne or the hospitals to which the taxpayer drove injured workers).

TAX WARNING – ATO could continue to deny the use of cents per km
claims for vehicles that are not cars
Although the application of the cents per km method in Bell’s case provides some hope for
taxpayers who cannot adequately or sufficiently verify a motor vehicle expense claim in respect of
a vehicle that is not a car (e.g., a one tonne ute), the NTAA believes that taxpayers in these
situations still face a significant risk of their claims being reduced to nil.
As a result, best practice is for taxpayers making these types of claims to maintain adequate and
accurate diary/log book type records (in conjunction with odometer records) which can be used as
the basis for apportioning motor vehicle expenses incurred (i.e., to establish the extent to which the
relevant vehicle was used for work-related purposes).

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Tribunal scrutinises an employee’s claims

for work expenses – Lambourne’s case
In Lambourne v FCT [2020] AATA 4562 (‘Lambourne’s case’), an employee who worked in the
Navy claimed a deduction for various work-related expenses. It was the taxpayer’s claims for
clothing expenses (which mainly related to a uniform) and other work-related expenses (which
largely comprised gym/fitness equipment used on a ship) that were in dispute before the Tribunal.

The Tribunal concluded that the taxpayer was not entitled to claim a deduction for the clothing
expenses in dispute, because he could not adequately identify the nature of each item of clothing
he had purchased (i.e., he could not provide evidence as to what his purchases related to).

The taxpayer was also not entitled to claim the other work expenses in dispute, largely because:
• there was no employment requirement for the taxpayer to incur the relevant expenses (i.e., to
purchase and supply the relevant items, including gym/fitness equipment); and
• these expenses were more akin to the taxpayer providing a benefit to the Navy and his fellow
sailors, rather than being incurred in the course of producing his assessable income.

1. The background to Lambourne’s case

The facts and circumstances regarding Lambourne’s case (which is also based on evidence
provided at the Tribunal hearing) can be summarised as follows:

1. Taxpayer’s employment with the Australian Defence Force (Navy) – The taxpayer was
employed by the Australian Defence Force as an Electronics Technician within the Navy.
His duties included (but were not limited to) the maintenance of various electronic and
mechanical systems, GPS and related navigational sensors, communications systems, and the
ship’s hotel services. The taxpayer was also a Military Fitness Leader.

2. Taxpayer’s work-related expense claims in 2017 – The taxpayer, through his tax agent,
lodged his income tax return for the 2017 income year in July 2017, claiming deductions for
various work-related expenses, including car expenses (at Item D1), travel expenses (at Item
D2), clothing expenses (at Item D3) and other work-related expenses (at Item D5).

3. ATO audit’s taxpayers 2017 return – In February 2018, the taxpayer was advised by the ATO
that his income tax return for the 2017 income year was being audited, as his total work-related
expenses claim was higher than expected compared to similar taxpayers. The items
subject to the audit were in relation to claims at Items D1, D3 and D5 (totalling $10,795).
These seminar notes will only focus on the taxpayer’s clothing expenses claim (at Item D3)
and his other work-related expenses claim (at Item D5), as these were the only claims that
were in dispute before the Tribunal (refer below).

The taxpayer’s clothing expense claim (at Item D3)

4. Taxpayer’s claim – The taxpayer claimed work-related clothing expenses at Item D3 of his
return, with the amount in dispute (before the Tribunal) being $1,449.
According to the taxpayer, this claim related to items of clothing that formed part of his Navy
uniform or that were in line with the relevant uniform instructions. These included:
• grey shirts, which were worn to carry out his duties as an Electronics Technician;
• blue and black socks, which were worn as part of the uniform requirements for a Military
Fitness Leader;
• collared shirts, which were worn at mess functions as part of the dress requirements for
such functions in civilian attire;

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• hats and caps; and

• boots, which were suitable for orthotics that he had to wear.

5. Substantiation of taxpayer’s clothing expenses claim – The taxpayer produced a customer

transaction report from Glendinnings Menswear Pty Ltd (Glendinnings) in Cairns, which was
the store from which his clothing items were purchased.
Glendinnings specialised in naval maritime uniforms and other (general or non-naval) quality
menswear (e.g., branded sports caps, surf-wear, sunglasses backpacks and shoes).
The Glendinnings report contained a number of transactions for the period 1 July 2016 to 29
June 2017. Although these transactions had amounts attached to them, many of them were
simply described as ‘Invoice’ and no further details were provided in relation to these items.
That is, the taxpayer could not provide details in relation to the individual invoice amounts, nor
could he provide details (with any certainty) of what items were purchased. Overall, the taxpayer
could not reconstruct what each particular invoice amount may have related to.
In a Statutory Declaration, the taxpayer stated that:
• he did not store details of invoices for purchased clothing because he had purchased his
items on account and therefore believed that it would always be possible to get details of
these invoices if required by the ATO (but this was no longer possible once the store had
shut down and went into liquidation); and
• he did not recall purchasing any items from Glendinnings which were not related to naval
uniforms and distinctively naval in nature.

6. Taxpayer’s arguments – The taxpayer argued that his clothing expenditure at Glendinnings
was essentially work-related and therefore deductible, largely based on the following:
• Glendinnings was a specialist store, specialised in naval uniforms that conformed with Navy
regulations (which indicated the taxpayer’s purchases were work-related).
• After being provided with a full uniform upon joining the Navy, the taxpayer was required to
subsequently replace (and purchase) certain uniform items themselves, including grey shirts,
socks, hats, caps and boots.
• Although the taxpayer could not satisfy the requirement to provide written evidence under
S.900-15 and S.900-115, the Commissioner’s discretion under S.900-195 should apply.
This essentially allows the Commissioner to disregard the specific written evidence
requirement in relation to a work expense, if the nature and quality of a taxpayer’s evidence
satisfies the Commissioner that the taxpayer has incurred the relevant expense and is
entitled to claim a deduction for the expense.

7. ATO’s decision and arguments – The ATO disallowed most of the taxpayer’s claim for clothing
expenses following the ATO’s audit, and imposed a 25% shortfall penalty. The taxpayer’s
subsequent objection to the ATO’s audit decision was also rejected by the ATO.
This was essentially because the taxpayer could not identify (from the Glendinnings report or
from other documentary or oral evidence) what items the expenditure in the report related to
(e.g., grey shirts or boots). As a result, the taxpayer could not identify a particular loss or
outgoing that was incurred, for the purposes of S.8-1.

The taxpayer’s other work-related expenses claim (at Item D5)

8. Taxpayer’s claim and arguments – The taxpayer claimed other work-related expenses at
Item D5, which, according to the taxpayer were necessarily incurred in carrying out his duties.
Based on the taxpayer’s evidence, this claim was largely made up of the following items (which
were purchased online, mostly through eBay):
(a) Auto Switch Box Splitter and a HDMI Splitter Hub – The taxpayer purchased a Box
Splitter and a Splitter hub for the entertainment system on the HMAS Larrakia (‘the ship’).

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These items were purchased at the discretion of the taxpayer as part of carrying out his
role as a Leading Seaman Electronics Technician (rather than at the direction of the Navy),
as he felt that these were necessary to upgrade the ship’s existing (outdated) entertainment
system in order to improve the quality of presentations and briefs on board the ship.
The taxpayer had discussed the purchase (and reimbursement) of these items with the
appropriate officer, but no reimbursement took place due to budgetary issues, resulting in
the taxpayer deciding to purchase the equipment and to claim it as a tax deduction.

(b) Fitness/gym equipment for the ship (HMAS Larrakia) – The taxpayer purchased
fitness/gym equipment for the ship at his discretion (or decision), which made up the bulk
of his claim for other work-related expenses at Item D5. This equipment was purchased
because, according to the taxpayer:
• he was the only Military Fitness Leader on the ship and had the responsibility of
organising fitness sessions for crew members to improve their fitness;
• the crew was finding it difficult to use the existing fitness/gym equipment on board (i.e.,
the ship did not have quality fitness equipment); and
• the equipment would be utilised to train and ensure that people maintained their fitness,
strength and a level of sanity whilst at sea.
Overall, the taxpayer decided that the fitness equipment was needed to properly fulfil his
role as a Military Fitness Leader. He had discussed the purchase (and reimbursement) of
this equipment with the appropriate officer, but due to budget restraints the taxpayer was
not reimbursed and decided to purchase the equipment and claim it as a tax deduction.

(c) Laptop computer/tablet – The taxpayer claimed depreciation in respect of a tablet/laptop

that he purchased. According to the taxpayer, the tablet/laptop was needed for work and
was used to store books and engineering works.

(d) Polarised sunglasses – The taxpayer purchased polarised sunglasses, which were used
when spending time at sea as a watchperson on the bridge, even though the taxpayer could
have used the ship’s polarised sunglasses (which were available for this role only).
According to the taxpayer, polarised sunglasses were necessary in carrying out the
taxpayer’s watch duties properly. In particular, they would cut through the glare to enable
the taxpayer to identify men overboard (and to allow the taxpayer to give good, clear
direction on their location) and also for spotting targets and foreign objects in the water.

9. Substantiation of taxpayer’s other work-related expenses claim – The taxpayer produced

a document that pieced together the online purchase order details for the items that formed part
of his other work-related expense claim at Item D5. For each item, this document showed:
• a description of the item;
• who sold the item (i.e., the supplier’s email address, but not their ABN or address);
• the order date and the order detail for the item.
The taxpayer effectively argued that, although the substantiation requirements were not
perfectly satisfied, the document produced by the taxpayer provided the basic information
required by the legislation in order to achieve substantiation.

10. Employer’s evidence – In the course of verifying the taxpayer’s other work-related expense
claims (at Item D5) as part of the ATO’s audit, the ATO sought further information from the
taxpayer’s employer (i.e., the Department of Defence). This included information relating to
items claimed by the taxpayer (particularly the gym/fitness equipment on board the ship).
In this regard, Lieutenant NR McGuire had provided the following evidence on behalf of the
Department of Defence:
(a) In the normal course of events, the taxpayer would not have to expend significant funds
on ‘other expenses’ (as an Electronics Technician and a Fitness Leader for the Navy).

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(b) All equipment/tools would normally be provided by the ADF, but in the unusual event that
equipment/tools were required to be purchased by an employee, they would be
reimbursed their cost(s) (if approved).
(c) There was a gym onboard the ship and all gym equipment was provided by the ADF
through several different supply lines. There was no requirement for the taxpayer to
purchase gym/fitness equipment in order to carry out his role of a Fitness Leader.
(d) There were computers available on board the ship, which were also available after hours.
A laptop/tablet was not required for the taxpayer’s role.

11. ATO’s decision and arguments – The ATO disallowed most of the taxpayer’s claim for other
work-related expenses following the ATO’s audit, and imposed a 25% shortfall penalty. The
taxpayer’s subsequent objection to the ATO’s audit decision was also rejected by the ATO.
This was essentially because of the following reasons (which was largely based on Lieutenant
NR McGuire’s evidence noted above):
(a) The box splitter, splitter hub and gym/fitness equipment were not required in order
for the taxpayer to carry out his role as an Electronics Technician and/or as a Fitness
Leader for the Navy. Furthermore, the taxpayer sought reimbursement for these items,
but was not reimbursed by his employer. This suggested that the taxpayer was exercising
his own discretion (when purchasing these items) for the benefit of the Navy (i.e., for the
advantage of crew members) and not for the derivation of his own assessable income.
In any event, in relation to the gym/fitness equipment, the ATO argued that this
expenditure would not be deductible, given that gym fees and other fitness expenses are
generally private in nature (even if they are required to enable an employee to maintain a
level of fitness in their employment). Refer to paragraphs 111 to 119A of TR 95/17.
(b) The tablet purchased by the taxpayer was also not a requirement for the taxpayer to
carry out his duties.
(c) The polarised lenses were purchased by the taxpayer to cut through the glare and allow
the taxpayer to see clearer while carrying out bridge watching exercises. There was no
evidence provided by the taxpayer that the sunglasses were required in order to protect
the taxpayer from the harmful effects of his working environment (e.g., being exposed to
the sun whilst performing his duties), as was the situation for the taxpayer in Morris & Ors
v FCT [2002] 50 ATR 104 (‘the Morris case’). Refer also to TR 2003/16.
(d) There was insufficient documentary evidence to show that the taxpayer had incurred
any outgoing in relation to their online purchases. The document produced by the
taxpayer merely showed details of online purchase orders and was a cut and paste of
such details from the internet. Therefore, the document does not satisfy the substantiation
rules, nor is it sufficient for the Commissioner’s discretion in S.900-195 to be applied
(which allows the Commissioner to disregard the specific written evidence requirement).
According to the ATO, what would be expected with such online purchases (in order to
show that an actual outgoing has been incurred) would be to see a bank statement
(showing the relevant outgoing(s)), an electronic receipt and/or an acknowledgement of
a particular order, but in this case there was nothing.

2. The Tribunal’s decision in Lambourne’s case

The Tribunal held that the onus was on the taxpayer to establish or prove that the ATO’s audit
adjustments regarding his clothing expenses claim and other work-related expenses claim (which
were reflected in the amended assessment issued by the ATO for the 2017 income year) were
incorrect. This means that the taxpayer was required to prove that he was entitled to claim a
deduction for the disputed clothing expenses and other work-related expenses under S.8-1.

In the end, as explained in more detail below, the Tribunal held that the taxpayer failed to prove
that the ATO’s audit adjustments (as well as the 25% shortfall penalty) were incorrect.

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2.1 The Tribunal’s decision in relation to the taxpayer’s

clothing expense claim
The Tribunal held that the taxpayer failed to prove that he was entitled to claim a deduction under
S.8-1 for his work-related clothing expenses claimed at Item D3 of his 2017 individual return.

This conclusion was essentially based on the following reasoning:

(a) The Tribunal acknowledged that the taxpayer had purchased items of clothing that appeared
to be work-related, such that the items purchased:
• formed part of his Navy uniform;
• were in line with the relevant uniform instructions; or
• were used while performing his duties.
(b) The Tribunal also accepted that the taxpayer made purchases from Glendinnings, which were
invoiced and that he paid his account.
(c) However, the taxpayer could not provide any evidence as to what those purchases related to.
That is, the taxpayer could not provide details in relation to the individual invoice amounts
provided in the Glendinnings Report, nor could he (with any certainty) provide details of what
items were purchased or their relevant cost.
(d) On this basis, the Tribunal could not identify whether a loss or outgoing was incurred in gaining
or producing the taxpayer’s assessable income for the purposes of S.8-1. In effect, the
Tribunal simply did not know what the amounts claimed by the taxpayer at Item D3 (i.e., for
work-related clothing expenses) were actually for.

As a result of this conclusion, it was not necessary for the Tribunal to consider the substantiation
of the taxpayer’s work-related clothing expenses claim under Division 900 of the ITAA 1997.

2.2 The Tribunal’s decision in relation to the taxpayer’s

other work-related expenses claim
The Tribunal held that the taxpayer failed to prove that he was entitled to claim a deduction under
S.8-1 for the other work-related expenses (in dispute) claimed at Item D5 of his 2017 return.

The Tribunal’s conclusion in relation to each item in dispute can be summarised as follows:
(a) The box splitter, splitter hub and gym/fitness equipment – Based on the evidence provided
(especially by Lieutenant NR McGuire on behalf of the employer), the Tribunal was not
satisfied that a sufficient nexus existed between the taxpayer’s purchase of the box splitter,
splitter hub and gym/fitness equipment and the taxpayer’s assessable income under S.8-1.
This was essentially based on the following reasons:
• The evidence provided by Lieutenant NR McGuire made it clear that, in the normal course
of events, the taxpayer would not have to expend significant funds on ‘other expenses’, as
all the tools should normally be provided by the ADF (i.e., the employer).
• Lieutenant NR McGuire also indicated that there was no requirement for the taxpayer to
purchase gym/fitness equipment in order to carry out his role as a Military Fitness Leader.
• The taxpayer would have continued to be paid in relation to his duties even if he had not
purchased and supplied these items.
• Although these items may have assisted the taxpayer to better perform his duties, he was
provided with the equipment he needed in order to perform his duties.
• The taxpayer’s expenditure in relation to these items was more akin to providing a benefit
to the Navy and his fellow sailors rather than being incurred in the course of producing
his assessable income, based on Staker v FCT [2007] AATA 1442 (‘Staker’s case’).

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In Staker’s case, the taxpayer was employed as a fitness instructor and sought to claim a
deduction for amounts spent on client and staff gifts. The Tribunal concluded that these
expenses were not incurred in the course of the employee earning their assessable
income. This was essentially because the employee was not operating a business as a
self-employed person and the expenditure was not incidental and relevant to the derivation
of the employee’s assessable income – it was not enough that the expenditure may have
increased goodwill towards Ms Staker from clients and staff.
(b) Laptop/tablet – The Tribunal was not satisfied that the tablet computer was incurred in the
course of gaining or producing the taxpayer’s assessable income for the purposes of S.8-1.
In particular, according to the Tribunal, there was little evidence in relation to how the purchase
of the tablet was productive of the taxpayer’s assessable income.
This was essentially because the tablet was not required for the taxpayer to perform his role,
based on the evidence of Lieutenant NR McGuire, even though the taxpayer had argued that
the tablet was necessary to store books and other things (e.g., engineering works) to which
he required access.
(c) Polarised sunglasses – The Tribunal was not satisfied that the taxpayer’s expenditure in
relation to the polarised sunglasses was incurred in the course of earning the taxpayer’s
assessable income for the purposes of S.8-1.
This conclusion was essentially based on the following:
• Although the Tribunal appreciated the beneficial nature of wearing polarised sunglasses
when carrying out the taxpayer’s watch duties when out at sea (i.e., they allowed him to
see things in the water much clearer), the equipment required by the taxpayer was provided
by the Navy (including polarised glasses).
• The decision in the Morris case – presumably because the sunglasses were not required
in order to protect the taxpayer from the harmful effects of his working environment (e.g.,
being exposed to the sun whilst performing his duties).

Although it was not necessary for the Tribunal to consider, the Tribunal also held that the taxpayer
had failed to satisfy the substantiation requirements in Division 900 of the ITAA 1997 in relation
to his other work-related expense claim at Item D5 (as well as his clothing claim at Item D3).

2.3 NTAA comment – Implications of Tribunal’s decision in

Lambourne’s case
There are a number of key implications that arise from the decision in Lambourne’s case, which
can be summarised as follows:

1. Relevance of employer requirements for employees to incur work-related expenses – The

Tribunal’s decision seems to indicate that a work-related expense incurred by an employee will
not be deductible unless the employer requires the employee to incur the relevant expense.
This is because, in relation to certain items (e.g., the box splitter, splitter hub and gym/fitness
equipment), the Tribunal agreed with the ATO’s argument that, even though the taxpayer may
have used the items in the course of carrying out his work duties, they were not a requirement
for him to perform his duties. In particular, the Tribunal held that the taxpayer would have
continued to be paid by his employer even if he had not purchased and supplied these items.
This approach is concerning for the following two reasons:
(a) There is nothing in S.8-1 that requires that, before expenditure incurred by an employee can
be deductible, there must be a requirement by the employer for the expenditure to be
incurred. Furthermore, the Full High Court in Ronpibon Tin NL v FC of T (1949) 8 ATD 431;
(1949) 78 CLR 4 established the principal that:
“it is not for the Court or the Commissioner to say how much a taxpayer ought to
spend in obtaining his income, but only how much he has spent”.

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“….it is both sufficient and necessary that the occasion of the loss or outgoing should
be found in whatever is productive of the assessable income or, if none be produced,
would be expected to produce assessable income.” [Emphasis added]
(b) The approach of the ATO and the Tribunal appears contrary to the ATO’s own recent tax
ruling on work-related expense deductions, being TR 2020/1.
That is, at paragraph 27 of TR 2020/1, the ATO advises that an employer’s requirements
(or otherwise) regarding an employee-incurred expense does not determine the
deductibility of the expense, as follows:
“In these circumstances, the employer's requirements do not determine the question
of deductibility. This question is always to be answered by reference to the statutory
test which involves an objective determination of the connection between the expense
and the employee’s income-earning activities.” [Emphasis added]

In other words, whether a work expense is deductible to an employee under S.8-1 can only
be determined by reference to the general deductibility principles, which require that:
• the expense has been incurred by the employee;
• the expense has been incurred in the course of earning the employee’s assessable
income (i.e., there must be a sufficient connection or nexus between the expense and
the process by which the employee derives their salary and wages income), and the
expense is not capital, private or domestic, in nature; and
• the substantiation requirements in Division 900 of the ITAA 1997 have been satisfied.

TAX TIP – ATO clarifies its position regarding employer requirements

for employees incurring work-related expenses
Following the Tribunal’s decision in Lambourne’s case, concerns have been raised that the
Tribunal’s decision appears to have introduced a new deductibility principle, under which an
entitlement to claim a deduction for a work-related expense is dependent upon whether:
• an employer directs (or requires) an employee to incur the relevant expense; and/or
• an employee will continue to get paid if they do not incur the relevant expenditure.
In other words, concerns have been raised that the arguments put forward by the ATO and the
Tribunal were inconsistent with established case law and the ATO’s own guidelines in TR 2020/1.
It was recently reported that these concerns had been raised with the ATO through the National
Tax Liaison Group (‘NTLG’). The ATO subsequently advised that the Commissioner’s view of
the application of S.8-1 has not changed, as follows:
(a) The Tribunal’s comments in Lambourne’s case were not intended to introduce a
necessity requirement into S.8-1, but rather, they were made in response to arguments put
for the taxpayer and in light of the specific facts and circumstances of the case.
(b) The ATO’s view in TR 2020/1 has not changed in that, although employer requirements can
be relevant, they do not determine deductibility. In particular, consistent with paragraphs 26
to 35 of TR 2020/1:
work-related expenses that have a sufficient connection (or nexus) with an employee’s
assessable income can be deductible under S.8-1 even though they are discretionary (i.e.,
they have been incurred by the employee without any requirement, encouragement or
support from their employer); and
work-related expenses that do not have a sufficient connection (or nexus) with an employee’s
assessable income do not become deductible under S.8-1 simply because those expenses
are encouraged or required by the employer.

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Despite the ATO clarifying its position that an employer’s requirement (or otherwise) for an
employee to incur a work-related expense does not determine deductibility, the NTAA expects that
the ATO will continue to contact employers (as part of its reviews and audits of work-related
expenses) in order to verify the validity of these claims. This includes contacting employers to
determine whether there was any requirement for a particular work expense to be incurred.
In these situations, where the ATO denies an employee’s work expense claim simply on the basis
that their employer confirmed that there was no need or requirement to incur the relevant expense
(without considering whether the expense had a sufficient nexus with the employee’s assessable
income), employees should generally challenge any such audit adjustments by referring to TR
2020/1 (i.e., the ATO’s own work-related expenses ruling).

2. Deductibility of discretionary expenditure incurred by employees which benefit other

employees, clients, suppliers, etc. – The Tribunal’s decision also indicates that employees
who incur discretionary expenditure for the benefit of other employees (or even for the benefit
of clients, contractors and suppliers), will generally be denied a tax deduction for this
expenditure on the basis that this expenditure would generally not have a sufficient connection
(or nexus) with the employee’s own assessable (or employment) income.

In particular, in relation to the purchase of the box splitter, splitter hub and the gym/fitness
equipment for the ship, the Tribunal held that the taxpayer’s expenditure on these items was
more akin to providing a benefit to the Navy and his fellow sailors, rather than being incurred in
the course of producing the taxpayer’s own assessible income.

This conclusion was largely based on the decision in Staker’s case (i.e., Staker v FCT [2007]
AATA 1442), where an employee fitness instructor (who was paid wages based on the number
of clients she dealt with) claimed a deduction for amounts spent on client and staff gifts. In
denying the employee’s claim, the Tribunal made the following comments:
“Ms Staker was an employee; she was not operating a business as a self-employed
person. Whilst the expenditure may have been incurred in connection with her
employment it was not incidental and relevant to the derivation of her income. It is
not enough that the expenditure may have increased goodwill towards Ms Staker from
clients and staff; it must be incurred in the course of gaining or producing the assessable
income.” [Emphasis added]

The above approach regarding the non-deductibility of discretionary expenditure incurred by an

employee that benefits other employees, clients, suppliers, etc., also appears consistent with
the ATO’s traditional approach to this type of expenditure. In other words, not only did the ATO
argue this non-deductibility approach in Lambourne’s case, but the ATO has also taken a similar
approach in various public rulings, such as the following:
(a) In TR 95/14 (which deals with employee teachers), the ATO addresses, amongst other
things, the deductibility of student-related expenses incurred by a teacher, such as:
• supplying items for a student’s own needs (e.g., books and uniforms);
• buying gifts for students (e.g., Christmas gifts);
• buying food and drink for special occasions (e.g., student birthdays); and
• replacing money lost by students (e.g., money for transport fares and lunch).
The ATO takes the view that, while an employee teacher may feel a moral, personal or
social obligation to outlay these types of expenses, there is no connection between a
student-related expense and the gaining or producing of a teacher’s assessable income,
for the purposes of S.8-1. Furthermore, according to the ATO, these expenses are
considered to be private in nature.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

(b) In TR 98/6 (which deals with real estate industry employees), the ATO addresses,
amongst other things, the deductibility of certain discretionary expenditure incurred by a
real estate industry employee, such as:
• advertising expenses (e.g., letterbox drops and signage);
• gifts and/or greeting cards for clients or potential clients; and
• referral expenses (i.e., rewards to a person for referring a client or potential client).
The ATO takes the view that these types of expenses can be deductible to employees who
are entitled to earn a commission. However, at the same time, the ATO does acknowledge
that the deductibility outcome for employees who are remunerated by way of a fixed
salary/retainer (with or without commission) is uncertain (particularly with respect to the
payment and deductibility of wages) and could be worthy of a test case under the ATO’s
Test Case Program for Law Clarification. Refer to paragraphs 38 to 43, 115 to 117, 183 to
184 and 210 to 215, of TR 98/6.
However, reference should also be made to the Tribunal decisions in Wells v FCT [2000]
AATA 920 (‘Well’s case’) and Frisch v FCT [2008] AATA 462 (‘Frisch’s case’). The taxpayer
in Well’s case was a business development manager (earning a retainer plus commission),
and the taxpayer in Frisch’s case was a physically disabled law clerk earning a salary. Both
taxpayers were entitled to claim a deduction for payments (e.g., wages) made to other
persons who were employed to assist the taxpayers to carry out their work duties (e.g., In
Well’s case, the taxpayer’s wife assisted the taxpayer with completing loan applications).

(c) In TD 2016/14, the ATO advises that, where a taxpayer is carrying on a business, and the
taxpayer provides a gift to a current or future client that is characterised as being made for
the purpose of producing future assessable income, the expenditure incurred on the gift will
generally be deductible under S.8-1 (if it is not capital or private in nature).

TAX WARNING – Entertainment gifts to clients, etc., not deductible

However, where a gift provided to a current or future client constitutes the provision of
entertainment, the cost of such gifts is generally not deductible under S.8-1 because of S.32-5. In
TD 94/55, the ATO advises that gifts (or items of property) that are generally considered to be
entertainment include movie tickets, theatre tickets, holiday travel (e.g., airfares) and holiday
accommodation. In contrast, gifts that are generally not considered to be entertainment include a
food hamper, a bottle of wine or champagne, a TV and a computer.

3. Satisfying the substantiation requirements in Division 900 of the ITAA 1997 – The
Tribunal’s decision in Lambourne’s case also illustrates the importance of satisfying the strict
substantiation requirements in Division 900.

Although the substantiation rules were not required to be considered by the Tribunal (given that
the taxpayer’s expenditure did not satisfy the requirements in S.8-1), for completeness, the
Tribunal held that it was not satisfied that the taxpayer had satisfied the substantiation rules for
both his clothing expenses claim and his other work-related expenses claim. This was based
on the evidence provided by the taxpayer, namely, the:
• Glendinnings customer transaction report for his clothing expenses claim (which could not
actually identify specific items of clothing, but merely ‘Invoice’ amounts); and
• summary of the taxpayer’s online purchase orders for his other work-related expenses claim
(which failed to provide certain details in relation to the purchased items – i.e., it was merely
a ‘cut and paste’ of online purchase orders).

Furthermore, based on this evidence, the Tribunal held that it would have been inappropriate
for the Commissioner’s discretion in S.900-195 to be exercised (i.e., which allows the
Commissioner to disregard the specific written evidence requirement if the nature and quality of
a taxpayer’s evidence satisfies the Commissioner that the taxpayer has incurred the relevant
expense and is entitled to claim a deduction for the expense).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

Changes to the contribution rules apply

from 1 July 2020
In the 2019 Federal Budget, the Government announced that it would introduce three key changes
to the superannuation contribution rules to provide greater flexibility for individuals aged 65 or more
in making voluntary (concessional and non-concessional) contributions from 1 July 2020.

Two of these changes have already been introduced by the Government (refer to Superannuation
Legislation Amendment (2020 Measures No.1) Regulations 2020) and involve the following:
• Increasing the age criteria before the ‘work test’ (i.e., gainful employment test) must be
satisfied for a fund to be able to accept voluntary contributions in respect of an individual.
• Increasing the age criteria before a fund is no longer able to accept contributions made in
respect of a spouse, which then also extends the eligibility criteria for being able to claim the
spouse contribution tax offset under Subdivision 290-D of the ITAA 1997.

The third change that was announced involves increasing the age criteria for accessing the ‘bring
forward’ rule for non-concessional contributions (‘NCCs’). This change is contained in a Bill that
was still before Parliament at the time of writing (refer to Treasury Laws Amendment (More Flexible
Superannuation) Bill 2020), and is intended to apply to NCCs from 1 July 2020.

All legislative references in this segment of the notes are to the Superannuation Industry
(Supervision) Regulations 1994 (‘SIS Regs’), unless otherwise stated.

1. Increasing the age criteria when applying the

‘work test’ for voluntary contributions
Broadly, a superannuation fund (including an SMSF) can only accept contributions in respect of a
fund member (whether from an employer, the member themselves, or from any other person) in
accordance with the rules outlined in Part 7 of the SIS Regulations (more specifically, SIS Reg 7.04
– referred to as the ‘contribution acceptance rules’).

In particular, under the contribution acceptance rules before 1 July 2020, it was a requirement that
the ‘work test’ be satisfied by a member who was looking to make voluntary contributions if aged
65 or more (but under the age of 75) at the time of the contribution (unless a new ‘work test’
exemption applied from 1 July 2019). For these purposes, voluntary contributions comprise:
• member contributions (e.g., personal contributions); and
• non-mandated employer contributions (e.g., salary sacrificed contributions).

Voluntary contributions do not include downsizer contributions, which means that downsizer
contributions are not subject to the ‘work test’. An eligible individual can make a downsizer
contribution (of up to $300,000) following the disposal of an eligible dwelling where the individual
is aged 65 or more and certain conditions are satisfied. Refer to S.292-102 of the ITAA 1997.

Note that, once a member reaches age 75, a fund can only accept mandated employer
contributions and downsizer contributions in respect of the member (or any other contribution that
is received by the fund within 28 days after the end of the month in which the member turned 75).

TAX TIP – Increase in age criteria for ‘work test’ from 1 July 2020
From 1 July 2020, recent amendments to SIS Reg 7.04 have resulted in an increase in the age
criteria from age 65 to age 67 before the ‘work test’ is required to be satisfied in respect of voluntary
contributions. That is, from 1 July 2020, the ‘work test’ is only required to be satisfied for voluntary
contributions made in respect of a member who is aged 67 or more at the time of the contribution.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

1.1 When does an individual satisfy the ‘work test’?

An individual who is required to satisfy the ‘work test’ in respect of a voluntary contribution will
satisfy the ‘work test’ where they were gainfully employed on at least a part-time basis during
the income year in which the contribution is made (but before the contribution is made).

This means that the individual must have been ‘gainfully employed’ for at least 40 hours in a
period of not more than 30 consecutive days in that income year. Refer to SIS Reg 7.01(3).

For these purposes, the term ‘gainfully employed’ is defined under SIS Reg 1.03(1) to mean
“employed or self-employed for gain or reward in any business, trade, profession, vocation,
calling, occupation or employment”. [Emphasis added]

TAX WARNING – Passive income and volunteer workers

The inclusion of the terms ‘gain’ and ‘reward’ in the definition of ‘gainfully employed’ basically limit
a gainful employment arrangement to one that involves remuneration in return for personal services
(e.g., salary and wages, business income, bonuses and commissions).
As such, an individual who merely earns passive income (e.g., rent, interest or dividends) would
generally not be considered to be ‘gainfully employed’. Furthermore, ‘volunteer workers’ would
also generally not be considered to be ‘gainfully employed’ on the basis that they are not
remunerated (e.g., by way of salary or wage) for their services.

1.1.1 The ‘work test’ exemption for eligible individuals

In an attempt to enable recent retirees to boost their superannuation savings, an exemption from
the ‘work test’ was introduced from 1 July 2019 to allow voluntary contributions to be made in
respect of a fund member (who is otherwise required to satisfy the ‘work test’), in the first income
year in which they do not meet the ‘work test’. Refer to SIS Reg 7.04(1A).

Specifically, under the ‘work test’ exemption, voluntary contributions may be accepted by a fund in
an income year in respect of a member who is otherwise required to satisfy the ‘work test’ in that
year, where all of the following conditions are satisfied:
(a) Work test was met in the previous income year – The member satisfied the work test in the
previous income year (i.e., the exemption only applies to allow voluntary contributions to be
made in the income year after the year a member last met the work test).
For example, if a member last met the work test in the 2020 income year, the exemption can
only be applied in the 2021 income year (and not in the 2022 income year).
(b) Total Superannuation Balance (‘TSB’) must be less than $300,000 – The member’s TSB
must have been less than $300,000 on 30 June of the previous income year (e.g., for the work
test exemption to apply in the 2021 income year in respect of a particular member, the
member’s TSB must have been less than $300,000 on 30 June 2020).
(c) The work test exemption has not previously been applied – Once the exemption has been
relied on for making voluntary contributions in respect of a member in an income year, it
cannot be relied upon again in respect of future year contributions for the member.

2. Increasing the age criteria for being able to

make spouse contributions
‘Spouse contributions’ are contributions that are made by an individual for the benefit of their
spouse (which includes a de-facto spouse). These contributions are generally not deductible to
the individual and, therefore, do not form part of the receiving fund’s assessable income under
S.295-165 of the ITAA 1997. An exception to this may be where the contribution is made by the
individual in their capacity as an employer of the spouse who is an employee.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

Prior to 1 July 2020, ‘spouse contributions’ could only be made to (or accepted by) a
superannuation fund where the spouse was under 70 years of age. The ‘work test’ also had to
be satisfied in respect of contributions made for the benefit of a spouse who was at least age 65.

TAX TIP – Older spouses eligible for contributions from 1 July 2020
From 1 July 2020, the contribution acceptance rules for spouse contributions have been extended
to allow contributions to be made for a spouse up until 28 days after the end of the month in
which the spouse turns 75 years of age. Furthermore, spouse contributions also get the benefit
of the age increase in relation to the ‘work test’, which means that a spouse is only required to meet
the ‘work test’ in respect of spouse contributions where they are 67 years of age or more.

2.1 Claiming the spouse contributions tax offset from 1

July 2020 at Item T3
What this change also means is that the spouse contributions tax offset (under S.290-230 and
S.290-235 of the ITAA 1997) will have broader application, as it will now be available (i.e., from 1
July 2020) in respect of contributions made for an eligible spouse who is up to 75 years of age.
Specifically, an individual taxpayer making spouse contributions in an income year (e.g., in the
2021 income year) may be eligible to claim a non-refundable tax offset of up to $540 where
certain conditions are satisfied, including the following:
(a) The taxpayer and their spouse were Australian residents when the contribution was made.
(b) The contribution was made to a complying superannuation fund or RSA by 28 days after the
end of the month in which the spouse turned 75 years of age.
(c) The contribution is not deductible under S.290-60 of the ITAA 1997 (i.e., for an employer
contribution).
(d) The total of the spouse’s assessable income (disregarding any assessable First Home Super
Saver (‘FHSS’) released amount for the year), reportable fringe benefits total (‘RFBT’) and
reportable employer superannuation contributions (‘RESCs’) for the income year was less
than $40,000.
(e) The spouse has not exceeded their NCCs cap for the income year.
(f) The spouse’s total superannuation balance was less than the general transfer balance cap
(currently $1.6 million) immediately before the start of the income year.

TAX TIP – Calculating and claiming the spouse contributions tax

offset at Item T3
The spouse contributions tax offset for an income year is equal to 18% of the lesser of the following:
• $3,000, reduced by $1 for each dollar that the sum of the spouse’s income for this purpose (i.e.,
under (d) above) exceeds $37,000; and
• the total amount of spouse contributions in that income year.
As a result, the maximum tax offset available is $540 (being 18% x $3,000) and no tax offset is
available once the spouse’s income for this purpose (i.e., under (d) above) exceeds $40,000.
For the 2021 income year, the spouse contributions tax offset is claimed by an eligible individual at
Item T3 (page 11) of the 2021 ‘I’ return, as follows:
• The amount of spouse contributions made by the individual during the income year must be
reported at the ‘Contributions paid’ box at Item T3.
• The amount of the tax offset must be reported at label ‘A’ of Item T3.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

3. Expanding access to the ‘bring forward’ rule

for NCCs from 1 July 2020
Generally, an individual’s NCCs cap for an income year (e.g., the 2021 income year) is currently
$100,000 where the individual’s total superannuation balance (‘TSB’) on 30 June of the previous
income year was less than the general transfer balance cap (which is currently $1.6 million).
Otherwise, the individual’s applicable NCCs cap for the income year is nil.
Furthermore, traditionally, individuals under the age of 65 who satisfied certain conditions could
access the ‘bring forward rule’ for NCCs, allowing them to make three years’ worth of their annual
NCCs cap in the one income year without breaching their cap. More specifically, being able to
trigger the ‘bring forward rule’ for NCCs in recent years has allowed eligible individuals to make
NCCs of up to $300,000 in the one income year (i.e., three times the $100,000 annual NCCs cap)
without breaching their cap. Refer to S.292-85(3) of the ITAA 1997.

TAX TIP – Proposed age increase for accessing the ‘bring forward rule’
from age 65 to age 67
The Government is proposing to expand access to the ‘bring forward rule’ for NCCs by increasing
the age up to which an eligible individual can trigger the ‘bring forward rule’ from age 65 to age
67, for NCCs made from 1 July 2020. Refer to the Treasury Laws Amendment (More Flexible
Superannuation) Bill 2020, which was still before Parliament at the time of writing.

3.1 When can an individual access the ‘bring forward rule’

for NCCs in 2021 under the proposed change?
If the proposed change (i.e., the increase in the age criteria) becomes law, an individual will be
able to trigger the ‘bring forward rule’ for NCCs from 1 July 2020 (e.g., in the 2021 income year)
where all of the following conditions in S.292-85(3) are met:
(a) The individual is under 67 years of age at any time during the 2021 income year.
(b) The individual’s NCCs for the 2021 income year exceed the annual NCCs cap of $100,000.
(c) The bring forward rule was not triggered in either the 2019 or 2020 income years.
(d) The individual’s TSB (i.e., total superannuaton balance) on 30 June 2020 was less than the
$1.6 million general transfer balance cap.
Broadly, an individual’s TSB at a particular point in time (e.g., on 30 June) is equal to the value
of all the individual’s superannuation interests that are in accumulation phase (including
transition to retirement income streams) and retirement phase, reduced by any structured
settlement contributions. Refer to S.307-230 of the ITAA 1997 and LCR 2016/12.
(e) The difference between the $1.6 million general transfer balance cap (for the 2021 income
year) and the individual’s TSB on 30 June 2020 exceeds the annual NCCs cap of $100,000
(for the 2021 income year). What this means is that the individual’s TSB on 30 June 2020
must have been less than $1.5 million.

Where the bring forward rule is triggered by an eligible individual in the 2021 income year, their
‘bring forward’ NCCs cap amount for this income year depends on the difference between the $1.6
million general transfer balance cap and the individual’s TSB on 30 June 2020, as follows:
• Where the individual’s TSB on 30 June 2020 was less than $1.4 million, their NCCs cap is
$300,000 in the 2021 income year (resulting in a 3-year bring forward period).
• Where the individual’s TSB on 30 June 2020 was $1.4 million to less than $1.5 million, their
NCCs cap is $200,000 in the 2021 income year (resulting in a 2-year bring forward period).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

Based on the above, the following table sets out the maximum NCCs cap for the 2021 income
year for an eligible individual (including an eligible individual who triggers the ‘bring forward rule’ in
the 2021 income year), based on the individual’s TSB on 30 June 2020.

Individual’s TSB on Maximum NCCs Bring forward

30 June 2020 cap for 2021 period
Less than $1.4 million $300,000 3 years
$1.4 million to less than $1.5 million $200,000 2 years
$1.5 million to less than $1.6 million $100,000 Annual NCCs cap applies
$1.6 million or more Nil N/A

Where an individual triggers the ‘bring forward rule’ in the 2021 income year and does not fully
utilise their bring forward NCCs cap in that year, the individual can only make further NCCs in the
2022 income year (i.e., to the extent of the unused portion of their bring forward NCC cap) if their
TSB on 30 June 2021 is less than the general transfer balance cap for the 2022 income year (i.e.,
less than $1.7 million as a result of the expected indexation of the cap – refer below).

TAX TIP – Transfer balance cap and contribution caps set to increase
from 1 July 2021 due to indexation
Following sufficient increases in the Consumer Price Index (‘CPI’), the following caps are set to
increase from 1 July 2021 (i.e., from the 2022 income year):
• The general transfer balance cap is set to increase from $1.6 million to $1.7 million.
• The annual concessional contributions cap is set to increase from $25,000 to $27,500.
• The annual NCCs cap is set to increase from $100,000 to $110,000, resulting in a NCCs cap
under the ‘bring forward’ rule of either $220,000 or $330,000 (where eligible).
This will provide eligible individuals with greater access to a NCCs cap from the 2022 income
year, basically as follows:
(a) An annual $110,000 NCCs cap will be available (for the 2022 income year) to individuals with
a TSB of less than $1.7 million on 30 June 2021.
(b) A $220,000 NCCs cap under the ‘bring forward rule’ will be available (for the 2022 income
year) to eligible individuals with a TSB of $1.48 million to less than $1.59 million on 30 June
2021.
(c) A $330,000 NCCs cap under the ‘bring forward rule’ will be available (for the 2022 income
year) to eligible individuals with a TSB of less than $1.48 million on 30 June 2021.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
What’s new for individuals

Notes
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...........................................................................................................................................................

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

THE ATO’S 2021 AUDIT

WARNING AREAS FOR INDIVIDUALS

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Notes
...........................................................................................................................................................

...........................................................................................................................................................

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

The ATO’s 2021 audit warning areas for

individuals
For the 2021 income year, the ATO will continue to expand its audit coverage of individual
taxpayers (including through the use of more sophisticated data matching techniques), as it
attempts to identify incorrect tax deductions claimed by individuals (especially work-related
expense claims) and other instances of non-compliance with the income tax rules.

Based on discussions with the ATO, incorrect claims identified in recent years and discussions with
tax agents, these seminar notes will address certain ATO compliance developments and areas that
are likely to receive greater attention from the ATO. These include the following:
(a) Data matching activities – The ATO’s data matching activities have recently been expanded
and improved. In particular, new data matching programs have been introduced as a means
of ensuring the integrity of Government stimulus and support measures that have been
implemented to support individuals during the COVID-19 pandemic (e.g., the JobKeeper
payment scheme and the early access to superannuation under the new COVID-19
compassionate ground of release).
(b) Work-related expense claims – When claiming work-related expenses on behalf of individual
clients for the 2021 income year, tax agents should be particularly mindful of:
• the recent Administrative Appeals Tribunal (‘the Tribunal’) decision in S & T Income Tax
Aid Specialists Pty Ltd and Tax Practitioners Board [2021] AATA 161, in which the Tribunal
confirmed the TPB’s decision to terminate a tax agent’s registration on the grounds of
claiming work-related expenses on behalf of clients incompetently; and
• the ATO’s increasing audit focus on claims for clothing expenses and laundry expenses,
and common errors with car expense claims under the log book method.
(c) Interest deductions in relation to rental properties – The ATO has recently identified a high
error rate regarding interest deductions claimed in relation to rental properties. As these claims
have also traditionally accounted for a large proportion of rental property claims each year, it
is expected that the ATO will heavily scrutinise these claims for the 2021 income year.
(d) Claims for personal superannuation contributions – In light of the introduction of the new
COVID-19 condition of release for accessing superannuation entitlements, new compliance
issues have emerged for the ATO in respect of claims for personal super contributions for the
2020 and 2021 income years.
Following on from the above, these seminar notes will address the 2021 key compliance
developments, problems and ATO audit targets for individuals, under the following categories:
1. Latest developments affecting data matching (Refer to pages 142 to 147).
2. The latest assault on work-related expense claims for individual
taxpayers (Refer to pages 148 to 168).
3. Interest deductions for rental properties in the ATO’s firing line – high risk
claims! (Refer to pages 168 to 171).
4. ATO targets super withdrawals under the new temporary COVID-19 early
release scheme (Refer to pages 172 to 174).
5. Claims for personal super contributions in the ATO’s firing line in light of
COVID-19 (Refer to pages 175 to 179).
Note that all section references in this segment are to the ITAA 1997 unless otherwise stated.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

1. Latest developments affecting data matching

Traditionally, the ATO’s data matching activities have involved the ATO collecting information from
third parties (e.g., banks, share registries, employers, merchants and government departments)
and comparing this information against information disclosed on individual tax returns.
This has enabled the ATO to identify individuals who:
• are not lodging tax returns;
• fail to declare income (e.g., salary and wages income, interest income, dividend income and
Government benefits); and
• are claiming incorrect tax deductions, tax offsets and other benefits.
In recent years, the ATO’s data matching capabilities have been significantly expanded and
improved to make it easier for the ATO to identify taxpayers who may not be complying with other
tax obligations, such as CGT obligations, FBT obligations and GST obligations.
Furthermore, additional data matching programs have been introduced to ensure that Government
benefits and allowances (e.g., Centrelink benefits) are only being paid to those individuals who are
genuinely eligible to receive such benefits.

TAX WARNING – New data matching programs in light of COVID-19

More recently, new data matching programs have been introduced as a means of ensuring the
integrity of Government stimulus and support measures that have been implemented to support
individuals during the COVID-19 pandemic, such as the JobKeeper payment scheme and the
early access to superannuation under the new COVID-19 compassionate ground of release.

1.1 The latest (key) data matching programs

In light of recent developments affecting the ATO’s and the Government’s data matching activities,
the following table summarises some of the more recent data matching programs.

Data-matching
Description
program

The Government recently introduced a new data matching program

JobKeeper Payment between Services Australia (e.g., Centrelink) and the ATO in relation to
scheme data the JobKeeper Payment scheme. The broad purpose of this program
matching program u is to identify individuals who have been registered for both the
JobKeeper Payment scheme and social security payments (e.g.,
Jobseeker Payment), in order to assess the risk of any overpayments.
Under the JobKeeper Payment scheme, an eligible employer received
a wage subsidy through the tax system (e.g., at the rate of $1,500 per
fortnight up until 28 September 2020) in respect of each eligible
employee nominated under the sheme.
Many eligible employees nominated under the JobKeeper Payment
scheme (and receiving salary income under this scheme) may have
also lodged claims for social security income support with Services
Australia (e.g., as a result of being stood down or their working hours
being reduced due to COVID-19). This may have also included access
to the Coronavirus Supplement (being an additional payment of $550
per fortnight) and/or the two separate $750 economic support
payments, as part of the Government’s COVID-19 stimulus package
introduced on 23 March 2020.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Data-matching
Description
program

Where an eligible employee nominated under the JobKeeper scheme

has also received income support through Services Australia, any
salary income paid to the employee (via the JobKeeper Payment) has
been required to be declared as income to Services Australia, as this
could affect the employee’s entitlement to such income support.
Under the JobKeeper Payment scheme data matching program, the
ATO is providing Services Australia with a data file containing a list of
eligible employees who have been nominated by an eligible employer
claiming JobKeeper payment in respect of those employees. This
includes details of an employee’s name, TFN and date of birth.
Upon receipt of this data file, Services Australia is attempting to
identify those employees who have:
• received salary income (under the JobKeeper Payment scheme) –
i.e., those employees who are registered as eligible employees
under the JobKeeper Payment scheme; and
• received income support (e.g., Jobseeker) through Services
Australia (e.g., Centrelink).
This will allow Services Australia to determine the risk of these
identified employees not having correctly declared their employment
information and income to Services Australia in respect of their
entitlement to income support (e.g., Jobseeker), and to therefore
maintain the integrity of social security payment programs.
Key objectives of the data matching program
In particular, the key objectives of this data matching program are to:
• identify employees who may be registered for both the JobKeeper
program and social security payments;
• remind individuals to report their income (e.g., salary income) when
they are in receipt of a social security payment;
• identify social security recipients who may need extra support to
correctly declare their income, to help prevent them getting an
overpayment;
• make sure that payments are only made to individuals who are
qualified to receive them and they are paid at the correct rate;
• detect instances where an individual has not met reporting
obligations under the relevant social security laws; and
• detect fraudulent activity, including where an employee may not
have received correct payments under the JobKeeper scheme.
What action to expect from Services Australia under this program
Where an individual is identified as being at risk of not having correctly
declared their income to Services Australia, they may be contacted in
any of the following ways:
• By SMS or letter, to remind them that they may need to update their
circumstances if they are receiving income from their employer,
including through the JobKeeper program.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Data-matching
Description
program

• By way of a telephone call to have a conversation about their

employment circumstances and to provide an education message.
• By way of a written statutory notice, which requires the individual to
provide certain information to Services Australia within a
reasonable timeframe.
In certain circumstances, Services Australia may attempt to verify
information with a third party, such as an employer, in order to help
assess an individual’s income support payments, which may result in
identifying an overpayment to the individual.
Where required (and appropriate), Services Australia may undertake
administrative action, which could include the reduction, suspension
or cancellation of income support payments or benefits, and may also
include actions to recover overpaid payments or benefits.

The COVID-19 economic response support data matching program

COVID-19 economic was introduced in June 2020 and has been more recently extended,
response support data in order to facilitate and support certain temporary measures that were
matching program introduced to help the economy withstand and recover from the impact
of COVID-19. These measures include:
• JobKeeper payments;
• early access to superannuation entitlements under the
temporary COVID-19 compassionate ground of release;
• temporary cash flow boosts for eligible employers; and
• JobMaker Hiring Credit payments to eligible employers of
additional young job seekers who are 16 to 35 years of age.
The broad purpose of this data matching program is to enable the ATO
to obtain data from Services Australia (e.g., Centrelink) and State and
Territory correctional facility regulators, to help the ATO confirm
eligibility for the above measures. In particular, the program will allow
the ATO to identify incorrect or misleading information included in:
• applications to obtain JobKeeper payments, JobMaker Hiring
Credit payments or temporary early access to superannuation; and
• accessing the cash flow boost.
For example, the ATO is using income support (or benefit) payments
data from Services Australia (e.g., Centrelink) to determine whether:
• individuals who applied for the early release of their superannuation
under the COVID-19 early release scheme on the basis of receiving
an eligible Government benefit like JobSeeker payment (which was
one of the eligibility conditions), actually received the benefit; and
• an eligible employee for which an employer is receiving JobMaker
Hiring Credit payments, had received a relevant income support
payment (e.g., JobSeeker or Parenting payments) broadly for at
least four weeks out of the 12 weeks immediately prior to the
commencement of the individual’s employment with the employer
(within the period 7 October 2020 to 6 October 2021), which is an
eligibility condition before an employer is eligible to receive
JobMaker Hiring Credits.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Data-matching
Description
program

The ride-sourcing data matching program is an existing data matching

Ride-sourcing data program, which was recently extended to the 2022 income year and
matching program which was prompted by the rapid rise in the provision (or use) of ride-
sourcing (e.g., Uber) services in Australia.
Under the ATO’s ride-sourcing data matching protocol, the ATO has
been requesting certain information from ride-sourcing facilitators
(e.g., Uber) about ride-sourcing providers (i.e., drivers), such as:
• vehicle registration details of all ride-sourcing drivers that are
registered with a ride-sourcing facilitator (e.g., Uber); and
• details of payments made to ride-sourcing drivers by ride-sourcing
facilitators and/or the ride-sourcing facilitators’ financial institutions.
This data is matched against the ATO’s records (including information
disclosed in tax returns) to identify drivers who may not be meeting
their income tax, GST, lodgment and/or payment obligations.
An overview of the key income tax and GST obligations for ride-
sourcing (e.g., Uber) drivers
(a) Carrying on a business – Ride-sourcing (e.g., Uber) drivers are
generally considered to be carrying on a business of providing
ride-sourcing services. Therefore, ride-sourcing drivers are
generally treated as independent contractors and are required to
obtain an ABN and lodge a tax return. Refer to the ATO’s fact
sheet “The sharing economy and tax”.
(b) Assessable ride-sourcing receipts – Amounts received by a
ride-sourcing (e.g., Uber) driver (from providing ride-sourcing
services), such as fares, tips and bonuses are assessable income
(i.e., from the carrying on of a business) under S.6-5.
Generally, it is the gross fare that is assessable to a driver
(excluding any GST payable), even where a ride-sourcing
facilitator (e.g., Uber) collects payment from a passenger for a
particular trip (as agent for the driver) and then pays the driver a
net amount (i.e., after deducting any fees and/or commission).
(c) Claiming deductions – A ride-sourcing (e.g., Uber) driver is
generally entitled to claim deductions for expenses they incur, to
the extent to which they relate to their assessable income from
providing ride-sourcing services. These deductions can include:
• commissions withheld by the ride-sourcing facilitator;
• car expenses (e.g., under the log book method);
• road and bridge tolls related to ride-sourcing trips; and
• depreciation (or decline in value) deductions, including an
immediate write-off (or instant write-off) for eligible assets.
(d) Registering for GST – As the ATO considers ride-sourcing to be
‘taxi travel’ for GST purposes, all ride-sourcing drivers need to be
registered for GST purposes (from the date they intend to, or
started to, provide ride-sourcing services), irrespective of how
much they earn (i.e., irrespective of their annual turnover).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Data-matching
Description
program

This is because, the general GST turnover threshold of $75,000,

which does not apply to taxi drivers, also does not apply to ride-
sourcing drivers. Refer also to the Federal Court decision in Uber
B.V. v FC of T [2017] FCA 110.
(e) Calculating GST payable on a ride-sourcing trip – A ride-
sourcing (e.g., Uber) driver is normally liable to pay (i.e., remit)
GST equal to 1/11th of the full (or gross) fare charged to (or
collected from) the passenger by the ride-sourcing facilitator (e.g.,
Uber), not just the net amount received by the driver after the
facilitator has deducted any fees and/or commission.
(f) Claiming GST input tax credits (‘ITCs’) – A GST-registered
ride-sourcing (e.g., Uber) driver can generally claim a GST ITC
for any GST included in the price of an acquisition (or an expense
they incur), to the extent it is for a creditable purpose (i.e., to the
extent it relates to their ride-sourcing enterprise). Refer to
Division 11 of the GST Act.
In relation to claiming GST ITCs for car expenses, the ATO
provides a number of methods in GSTB 2006/1 for determining
a car’s creditable use, which are largely linked back to the
methods used to claim car expenses for income tax purposes,
such as the set rate method (for up to 5,000 business kilometres)
and the log book method.

The motor vehicle data matching program is an existing data matching

Motor vehicle program, which was recently extended to the 2022 income year.
registrations data Under this program, the ATO is collecting motor vehicle registration
matching program data (i.e., new registrations and registration transfers) from State and
Territory motor vehicle registration authorities, where the purchase
price or market value of a motor vehicle is more than $10,000.
The data collected by the ATO includes the date of the transaction,
the sale price or market value of the vehicle, the vehicle’s garaged
address and details of the type of vehicle registered.
This data will be matched by the ATO against taxpayer records (e.g.,
tax returns) in order to identify taxpayers who may not be complying
with their tax obligations, such as the following taxpayers:
• Taxpayers purchasing motor vehicles (especially luxury cars) for
values that are not commensurate with the income they have
reported in their tax returns (e.g., where a taxpayer’s reported
income does not explain their ability to purchase a luxury car).
• Taxpayers buying and selling motor vehicles who may not be
meeting their obligations to register and lodge returns (including
activity statements), and who may therefore not be reporting their
income and entitlement to both deductions and GST ITCs.
• Taxpayers purchasing motor vehicles in entities (e.g., companies
and trusts) where those vehicles are being used for private
purposes, without any FBT or income tax (e.g., Division 7A)
consequences being recognised by the entity.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Data-matching
Description
program

The online selling data matching program is an existing data matching

Online selling data program, which was recently extended to the 2023 income year.
matching program Under this program, the ATO is obtaining selling data from eBay
Australia and New Zealand Pty Ltd and from Amazon Commercial
Services Pty Ltd relating to registered online sellers who sold goods
and services to the value of $12,000 or more in the relevant year.
Data obtained will be electronically matched with certain ATO data
held for that taxpayer (e.g., any sales income reported on the
taxpayer’s income tax return) to identify non-compliance with taxation
obligations. This includes identifying:
• any undeclared income in tax returns and business activity
statements (‘BASs’) from such online selling activities;
• failure to comply with ABN and GST registration obligations when
online sellers transition from ‘hobby’ status to being ‘in business’;
and
• failure to meet registration, reporting, payment or lodgment
obligations.
The potential dangers for online selling activities generating
sales of $12,000 or more per year
It appears that the ATO’s initial criteria for identifying online sellers
who may not be complying with their taxation obligations is the
existence of a sales value of $12,000 or more in an income year.
In particular, online sellers with an turnover of at least $12,000 may be
considered to be carrying on a business from selling goods and/or
services online (rather than their activities constituting a mere hobby).
However, a taxpayer’s ‘turnover’ has traditionally not been one of a
number of factors to consider in determining whether the taxpayer is
carrying on a business. Refer to TR 97/11.
In the ATO’s fact sheet: “Online selling – hobby or business”, the ATO
lists certain other factors that should be considered in making this
determination for a taxpayer in a given situation, such as whether the:
• taxpayer has paid for an online selling presence (i.e., the online
presence looks like a shop, has a brand name and/or other signs
indicating the existence of a business);
• taxpayer’s main intention is to make a profit from online selling;
• taxpayer’s selling activities are repetitive; and
• taxpayer manages their online selling activities as a business (e.g.,
the activities are well organised, the taxpayer advertises their
online space and the taxpayer maintains records of transactions).

u Refer to the 2020 and 2021 data matching protocols between the ATO and Services Australia, at
www.servicesaustralia.gov.au.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

2. The latest assault on work-related expense

claims for individual taxpayers
In an attempt to measure the potential ‘blow-out’ in tax deductions claimed by individual taxpayers
(particularly work-related expense claims, such as claims for car, travel, self-education and clothing
expenses), in recent years, the ATO has been estimating and releasing the (income) tax gap for
individuals not in business. This taxpayer group basically comprises those individuals who earn
income from salary or wages, investments, superannuation or Government assistance payments.

This tax gap measures the difference between the amount of income tax actually collected by the
ATO from this taxpayer group, compared to what it would have collected if this group was fully
compliant with the tax law. For example, the ATO’s latest estimate for this tax gap (in net terms)
was $8.3 billion (or 5.6%) for the 2018 income year, which means that the ATO had collected an
estimated $8.3 billion less in income tax from this taxpayer group in the 2018 income year,
compared to what it would have collected if this group was fully compliant with the tax law.

TAX WARNING – Individuals not in business tax gap identifies major

concerns with work-related expense claims
The ATO has consistently identified that incorrect claims for work-related expenses has been
a major contributor to the tax gap for individuals not in business. These include the following:
(a) Claims for ‘standard deductions’ under a substantiation exception, such as:
work expense claims not exceeding $300;
laundry expense claims not exceeding $150; and
car expense claims under the ‘cents per km’ method.
(b) Claims for expenses actually paid or reimbursed by an employer.
(c) Claims that could not be substantiated or correctly apportioned.

In light of the ATO’s recent tax gap analysis results for individuals not in business, these seminar
notes will address the latest developments and some of the likely key audit targets associated with
work-related expense claims for the 2021 income year (i.e., on the 2021 ‘I’ return).

2.1 Tax Practitioners Board (‘TPB’) increases its assault on

tax agents claiming excessive work expenses
In recent years, following the ATO’s tax gap analysis and the ATO’s increased compliance activity
regarding work-related expense claims, there has been an increase in the number of cases referred
to the TPB from the ATO, as follows:
• In 2018-19, the ATO referred 196 cases to the TPB, compared to 120 cases in 2017-18,
representing a 63% increase in the number of cases referred to the TPB.
• In 2019-20, the ATO referred 245 cases to the TPB, which represented a 25% increase
compared to the 196 cases referred to the TPB in the previous year.

Refer to the TPB’s Annual Reports 2018-19 and 2019-20, available at www.tpb.gov.au.

It is expected that the number of cases referred to the TPB will escalate in the coming years, in
light of the TPB’s recent announcement (in October 2019) that the TPB will vigorously target 2,000
tax agents who have been identified by the ATO as being of the highest risk regarding work-related
expense claims involving a total overclaimed work-related expense amount of at least $1 billion.

To address this issue, the TPB has strengthened its collaboration with co-regulators, particularly
its collaboration with the ATO through data sharing.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

TAX WARNING – Increasing the TPB’s sanction powers

As part of a recent Government initiated review of the TPB (to assess the effectiveness of the TPB
in regulating tax agents), it was recommended (amongst many other things) that the TPBs sanction
powers be increased to allow the TPB to take more effective action against egregious tax agents.
This included a recommendation that certain new sanctions be introduced into the Tax Agents
Services Act 2009, which could be applied to both registered and unregistered tax agents, such as
infringement notices, enforceable undertakings, quality assurance audits and interim suspensions.
In the Government’s recent response to the recommendations put forward by the review, the
Government acknowledged that the review identified a gap between existing low-level sanctions
and higher level sanctions. The Government also advised that it would further consult with
stakeholders on the appropriateness of providing new sanction powers to the TPB.

In reviewing tax agent cases referred to the TPB, the TPB’s key regulatory role is to ensure that
registered tax agents comply with the Code of Professional Conduct (‘the Code’) under Part 3
(Division 30) of the Tax Agent Services Act 2009 (‘TASA’), which regulates a tax agent’s personal
and professional conduct. In particular, a registered tax agent must ensure the following:
(a) A registered tax agent must ensure that a tax agent service they provide (or that is provided
on their behalf) is provided competently. This includes ensuring that sufficient enquiries are
made about a client’s affairs to be reasonably satisfied that the documents (e.g., income tax
returns) prepared and lodged on behalf of a client are correct. Refer to S.30-10(7) of the TASA.
(b) A registered tax agent must ensure they take reasonable care in ascertaining a client’s state
of affairs to the extent that ascertaining those state of affairs is relevant to any statement being
made (e.g., a deduction being claimed) on behalf of the client. Refer to S.30-10(9) of the TASA.
(c) A registered tax agent must ensure they take reasonable care so that taxation laws are
applied correctly to the circumstances in relation to which advice is being provided to a client.
Refer to S.30-10(10) of the TASA.
Where a tax agent is found to have breached the Code, under the TASA, the TPB can currently:
• issue the tax agent with a written caution or an order;
• suspend the tax agent’s registration for a pre-determined period; or
• terminate the tax agent’s registration.

2.2 Tribunal reviews the TPB’s decision to terminate a tax

agent’s registration on the grounds of incompetency
In the recent Administrative Appeals Tribunal (‘the Tribunal’) decision in S & T Income Tax Aid
Specialists Pty Ltd and Tax Practitioners Board [2021] AATA 161 (‘the S & T case’), the Tribunal
was required to review the TPB’s decision to terminate a tax agent’s registration on the grounds of
providing tax agent services (i.e., lodging income tax returns and claiming work-related expenses
on behalf of clients) incompetently (resulting in a breach of S.30-10(7) of the TASA).

2.2.1 The background and circumstances regarding the S & T case

The relevant facts and circumstances regarding the S & T case can be summarised as follows:

(a) Mr McGuid was a registered tax agent for over 40 years, providing tax agent services through
S & T Income Tax Aid Specialists Pty Ltd (‘S & T’) for most of this time.

(b) ATO’s audit of S & T clients for the 2016 income year – The ATO conducted an audit of
the work-related expense claims for eight of S & T’s clients for the 2016 income year. These
clients included a crane operator and rigger, an engineer manager and school rowing coach,
a police officer, a solicitor, a truck driver and earth mover, and a personal assistant.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

The original work-related expense claim amounts for each of these clients for the 2016 income
year ranged from $7,857 to $18,826, with the total amount claimed for all clients being
$104,903. These claims included claims for work-related car expenses at Item D1, work-
related clothing and laundry expenses at Item D3, and claims for other work-related
expenses at Item D5 (e.g., mobile phone expenses, overtime meals and stationery).
All eight audited clients had most of their work-related expense claims reduced and/or
disallowed by the ATO, resulting in amended assessments being issued to each client. The
ATO also imposed penalties (presumably shortfall penalties) on six of the audited clients.

(c) ATO lodges complaint to TPB about S & T – Following the ATO’s audit, the ATO lodged a
complaint with the TPB (presumably about the tax agent services provided by Mr McGuid
through S & T) in relation to each of the audited clients.
(d) TPB’s review concludes that S & T had breached the competency requirement of the
Code and terminates S & T’s registration – Following a review of the TPB, the TPB found
that S & T had failed to ensure that a tax agent service that it provided or that was provided
on its behalf to each of the eight audited clients was provided competently. Broadly, this was
on the basis that income tax returns were prepared and lodged on behalf of the eight audited
clients for the 2016 income year, without taking adequate steps to ensure that those returns
contained accurate information that was supported by appropriate substantiation.
On this basis, the TPB found that S & T had failed to comply with S.30-10(7) of the TASA
(which requires registered tax agents to ensure that a tax agent service they provide (or that
is provided on their behalf) is provided competently). As a result, the TPB terminated S & T’s
registration as a tax agent, effective from 26 August 2019.
S & T then subsequently sought a review of the TPB’s decision from the Administrative
Appeals Tribunal (‘the Tribunal’).

The background to Mr McGuid’s approach to claiming work expenses

The bulk of the transcript from the Tribunal’s decision in the S & T case is devoted to a review of
the specific work-related expense claims made for each of the eight audited clients, including the
basis on which those claims were made based on evidence provided at the Tribunal hearing.

The following is a summary of Mr McGuid’s approach to claiming (including the basis on which
claims were made for) certain work-related expenses in the S & T case.

1. Claims for certain work-related car expenses (at Item D1) – For many of the audited clients,
Mr McGuid claimed deductions for work-related car expenses at Item D1 of their 2016 income
tax return, particularly in the following two circumstances:
(a) Car expense claims were made without any evidence or verification from the
employer – For some of the audited clients (i.e., for Taxpayer 1 – crane operator and
rigger, and for Taxpayer 5 – police investigator), Mr McGuid claimed car expense
deductions without the client providing evidence (e.g., a letter from their employer) of being
required to use their own vehicle for work-related purposes. On this basis, the ATO had
reduced these car expense claims to $0, following the ATO’s audit.
In these cases, based on the evidence before the Tribunal, Mr McGuid was actually aware,
at the time of preparing the 2016 income tax return for these clients, that no evidence had
been provided by the client to verify their car expense claim (e.g., a letter from their
employer, a position description or a written direction from their employer, advising that the
client was required to travel for work purposes or in the course of their employment).
Furthermore, in relation to the car expense claim for Taxpayer 1, Mr McGuid had provided
evidence that a competent tax agent would have advised the client before the lodgment of
their tax return, that without sufficient evidence, it was likely the ATO would deny the client’s
claim for work-related car expenses. Despite this, there was no contemporaneous
evidence (e.g., a file note), to record that Mr McGuid advised Taxpayer 1 that he needed
objective evidence (e.g., a letter from his employer) to verify his claim for car expenses.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

(b) Car expense claims under the cents per km method without a record (e.g., a diary)
of work-related trips – For other audited clients (i.e., for Taxpayer 6 – warehouse
assistant and storeman, and for Taxpayer 8 – personal assistant), Mr McGuid claimed car
expense deductions under the cents per km method, without the client having kept a record
of work-related trips undertaken by their car.
For example, in relation to the car expense claim for Taxpayer 6, the client advised Mr
McGuid that he did not have a log book, but had travelled between 100 and 120 kilometres
per week (presumably between two employer branch offices, although this was not entirely
clear). Mr McGuid advised the client to keep a log book, but did not advise the client that
he should keep some record (e.g., a diary) recording work-related trips in order to be able
to show the ATO how he worked out his business kilometres.

2. Claims for clothing expenses (at Item D3) – For many of the audited clients, Mr McGuid
claimed deductions for clothing expenses at Item D3 of their 2016 income tax return.
In particular, clothing expense claims were made for certain taxpayers for what was essentially
conventional clothing (which is private in nature and not deductible under S.8-1), without there
being any evidence of Mr McGuid seeking further clarification from a client about the nature of
specific items of clothing at the time of preparing their 2016 income tax return.
In some of these cases, claims were made for certain items of clothing for an amount that was
less than the expenditure incurred (i.e., claims were made on a discount basis) to reflect the
fact that the claim was questionable and unlikely to be accepted by the ATO, as follows:
(a) For Taxpayer 2 (who was an engineer manager and a school rowing coach), the taxpayer’s
clothing expense claim included a claim of $120 for a pair of Asics shoes (costing $199) for
his coaching job, which were claimed to be protective in nature.
On the one hand, at the Tribunal hearing, Mr McGuid accepted that a competent tax agent
should have advised Taxpayer 2 that his running shoes were not protective in nature, but
were conventional in nature and, therefore not deductible. But on the other hand, Mr
McGuid maintained that the Asics shoes were not running shoes and were protective in
nature on the basis that Taxpayer 2 was a rowing coach and the shoes were worn to prevent
him from slipping into the water while carrying out his coaching duties.
Mr McGuid also explained that he only claimed $120 for the Asics shoes (and not $199).
When he was asked to further clarify this position (i.e., a claim for an amount that is lower
than the actual expense incurred), his explanation indicated that it was a safer practice to
claim a lower amount for an expense that could be denied by the ATO.
When Mr McGuid was questioned about the practice of discounting the amount of a
deduction for an expense (that was truly not deductible), he initially indicated that if the
client agrees with this approach, then its fine, and that if there’s an ATO adjustment for the
claim at a later time, the impact will be lighter on the client, as follows:
“Well if he agrees, its ok. A layer of protection. If they’re confused by the tax
department, at least its – he won’t lose 199, he’ll be losing 120 so it’s lighter on
him.” [Emphasis added]
At the same time, Mr McGuid also accepted that, for an item of conventional clothing which
is not deductible, it is not the proper thing (or practice) for a registered tax agent to discount
the amount of the claim and submit a lower claim instead.
(b) For Taxpayer 4 (who was a solicitor), the taxpayer’s clothing expense claim included a
claim for three suits that were purchased by the taxpayer at a cost of $500 each (or $1,500
in total), and which were only worn by the taxpayer to court and to visit clients in prison.
The amount claimed as a tax deduction was $750, being 50% of the total amount incurred
by the taxpayer to purchase the suits (i.e., $1,500). In making this discounted claim, based
on the evidence before the Tribunal, Mr McGuid had advised the taxpayer of the following:

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

“Just to be safe as the ATO can be difficult in allowing deductions for ordinary
clothes even though you are telling me you only wore them for court and seeing clients
in prison, I will only claim 50%, which is $750.” [Emphasis added]
When Mr McGuid was further questioned about the practice of discounting the amount of a
deduction (in this case, by 50%) for an expense that was truly not deductible, he responded
in the following way about his client (Taxpayer 4):
“But I told her and she agreed. She said that the deduction of 50% was for safety
reasons because I was not convinced 100 per cent but there’s a big probability that
could be legit... I was 50 per cent certain.” [Emphasis added]

3. Work-related laundry expenses claims based on a standard rate of $1 per load – For many
of the audited clients (i.e., for Taxpayers 1, 2, 5, 6 and 8), Mr McGuid claimed a deduction for
laundry expenses of $288, without receipts.
It appears that, based on the evidence before the Tribunal (particularly in relation to the claim
for Taxpayer 1), these laundry expense claims were based on the following:
(a) Standard calculation of laundry expense claim – It appears that each client’s laundry
expense claim was calculated in the same way, by reference to 6 washes per week @ $1
per wash (based on the Commissioner’s estimate) x 48 weeks.
Mr McGuid had advised (in relation to the claim for Taxpayer 1) that, where a taxpayer did
not have written evidence of laundry expenses, his usual approach was to make a claim
of $1 per load (to cover washing, drying and ironing), based on the estimated number of
loads for the year. According to Mr McGuid, this was consistent with the ‘Commissioner’s
estimate’ of $1 per load (which was ‘stuck’ in his mind), although, at the time of preparing
the 2016 tax return, Mr McGuid was not aware of the ATO’s ruling TR 98/5 (which sets out
the Commissioner’s guidelines in claiming laundry expenses).
In actual fact, Mr McGuid had advised (in relation to the claim for Taxpayer 1) that, based
on his experience, he had calculated a conservative laundry expense claim of $1 per
day to cover electricity, laundry powder and water expenses (presumably, without regard
to the types of clothes being washed).
(b) Lack of evidence regarding the frequency of washes and type of clothing washed –
Based on the claims for Taxpayer 1 and Taxpayer 2, it appears that there was no evidence
to suggest that Mr McGuid had questioned his clients about:
• the number of times that the client had washed their clothing during the year; and
• the type of clothes (i.e., work-related, private or both) that were included in each wash.
Furthermore, in relation to the laundry expense claim for Taxpayer 1, there was no
evidence to suggest that Taxpayer 1 kept details of the number of washes that were done
during the year and what type of clothes were included in each wash.

TAX WARNING – Tax agent’s approach inconsistent with the ATO’s

guidelines for laundry expense claims
Mr McGuid’s approach to calculating laundry expense claims for each of the affected taxpayers (or
clients) appears inconsistent with the ATO’s guidelines in TR 98/5, as follows:
(a) The ATO’s approach to allowing a laundry expense claim to be calculated at the rate of $1 per
load of washing applies where only work clothing is included in each wash.
Where both work clothing and private clothing are included in the same wash, the ATO’s
guidelines allow a claim to be calculated at the rate of $0.50 per load of washing.
Mr McGuid appeared to have simply claimed a deduction for laundry expenses for each of the
relevant clients at the rate of $1 per load of washing, without regard as to what type of clothing
was being washed during the year.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

(b) The ATO’s administrative approach to claiming laundry expenses at the rate of $1 per load
and/or at the rate of $0.50 per load (i.e., to cover washing, drying and ironing, but not dry
cleaning) can only be applied where a taxpayer does not keep written evidence for a laundry
expense claim. Under the substantiation concession for laundry expense claims in S.900-140,
written evidence is not required for laundry expense claims of up to $150.
As Mr McGuid claimed laundry expenses of $288 for each of the clients, these claims were
required to be substantiated by providing written evidence. In this regard, in relation to the
claim for Taxpayer 1, Mr McGuid had acknowledged during the Tribunal hearing that:
a competent tax agent in his position should have advised Taxpayer 1 that he should not
be claiming more than $150 for laundry expenses in the absence of written evidence; and
he should not have lodged the claim without seeing written evidence from Taxpayer 1 to
support the higher amount claimed of $288.
Furthermore, although written evidence is not required under the substantiation exception in S.900-
40 for laundry expenses of up to $150, an employee is still required to keep details (e.g., by way
of diary records) of the number of washes done during the year and the types of clothes included
in each wash (i.e., whether they comprised only work-related clothing, private clothing or both).

4. Other work-related expense claims at Item D5 without receipts – For many of the audited
clients, Mr McGuid claimed deductions for other work-related expenses at Item D5 of their 2016
income tax returns, without sufficient documentary (or written) evidence being provided in
order to verify many of these claims, for example, as follows:
(a) In relation to other work-related expense claims for Taxpayer 2 (who was an engineer
manager and school rowing coach), comprising a work bag, coaching fees, overtime meals
and stationery, although the taxpayer had advised that he had some receipts to support his
expenses, he advised that no receipts were shown to Mr McGuid to substantiate these
claims. Furthermore, no receipts were produced during the Tribunal hearing as evidence.
Regarding a claim for stationery of $336, although Mr McGuid advised that the taxpayer
did not have receipts for this claim, Mr McGuid still made a claim based on an average of
$1 per day. That is, Mr McGuid reasonably believed that the taxpayer would have to spend
money on stationery as part of his job, so he applied a daily amount of $1 (which he believed
was reasonable), as follows:
“I have logical reason to believe that his job, he have to spend some money on
stationary so I went the lowest that can be which is a dollar a day. So if I have
sinned I’m sorry”. [Emphasis added]
Mr McGuid ultimately accepted that it was wrong, at the time, to claim a deduction for
stationary without receipts.
(b) In relation to stationery and informant refreshment expenses for Taxpayer 5 (who was a
police investigator), the taxpayer did not have receipts for these expenses, so Mr McGuid
“took an estimate” (presumably, when making these claims).
(c) In relation to other work-related expense claims for Taxpayer 6 (who was a warehouse
assistant and storeman), comprising overtime meals, mobile phone expenses, tools,
stationery and internet expenses, there was no evidence that Mr McGuid had copies of
receipts or bank statements to verify the amounts claimed.
Furtheremore, no receipts were produced during the Tribunal hearing as evidence.
(d) In relation to other work-related expense claims for Taxpayer 7 (who was a truck driver and
earth mover), comprising mobile phone expenses and stationery, there was no evidence
that the taxpayer had provided receipts to Mr McGuid to verify the amounts claimed.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

2.2.2 The Tribunal’s decision in the S & T case

Following S & T referring the TPB’s decision to terminate its tax agent registration to the Tribunal
(i.e., the Administrative Appeals Tribunal), the Tribunal was required to consider:
• whether S & T failed to comply with S.30-10(7) of the Code (i.e., whether it failed to render tax
agent services competently regarding the eight clients for the 2016 income year); and
• if so, what sanction ought to be imposed under the Act (i.e., whether the termination of S & T’s
tax agent registration was an appropriate sanction).

A. Whether S & T failed to render tax agent services competently regarding

the eight clients for the 2016 income year
The Tribunal concluded that the conduct of S & T (through Mr McGuide) in respect of the
preparation and lodgment of the 2016 income tax returns for the eight taxpayers demonstrates that
S & T failed to ensure that a tax agent service it provided, or that was provided on its behalf, was
provided competently. Broadly, this was essentially because:
• S & T repeatedly claimed work-related expense deductions without first obtaining or satisfying
itself that there was appropriate evidence to support the claims;
• S & T failed to properly ascertain (through its own enquiries) and failed to obtain sufficient
evidence to support the required nexus between the expenses claimed and earning of a client’s
assessable income; and
• S & T incorrectly applied the relevant tax law with respect to several of the clients.

More specifically, the reasoning behind the Tribunal’s conclusion was further explained as follows:
(a) Insufficient documentary evidence obtained – For a significant number of the work-related
expense deductions claimed for the eight clients, Mr McGuid did not obtain documentary
evidence sufficient to substantiate the expenses claimed, nor did he have sufficient evidence
to support the required nexus between the expense and a client’s income-earning duties.
It appears in the evidence at the hearing that Mr McGuid “believed” the verbal claims of his
clients (e.g., that receipts were kept, albeit not for all claims) and often estimated expenses
when receipts were not available. Furthermore, even on occasions when Mr McGuid was not
convinced that an expense was deductible, he would claim it anyway, often with some small
reduction “for protection” (e.g., in relation to claims for conventional clothing) – as he was of
the mind that if the client was happy to take the risk, then he would claim the deduction.

(b) Signing of client substantiation declarations not sufficient – In the course of meeting with
each of the eight clients for the purposes of preparing their 2016 income tax returns, Mr
McGuid presented each client with certain documents (containing substantiation and record-
keeping declarations), which were allegedly discussed and then signed by each client in Mr
McGuid’s presence. These included the following:
• S & T’s standard Engagement Agreement Individual Income Tax Return which included
the following statement about record-keeping:
“The client acknowledges responsibility for maintaining records as required under
Income Tax Law and the Self-Assessment Rules.”
• S & T’s standard 2016 Client Substantiation Declaration, which included the following
substantiation declarations:
“C. I confirm that I have all receipts and documentation including logbooks, diaries and
other records necessary to substantiate the above claims and I will make them
available if required to the Tax Office, and
D. That you have clarified what written evidence (including car/travel records) will be
required during an audit and penalties, (including prosecution) that may be applied if
incorrect claims are identified in an audit situation; and...”

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Mr McGuid also provided each client with a letter (referred to as a “prior client letter”) before
meeting with them for the purposes of preparing their 2016 income tax return, which advised
of the details required from each client (e.g., in relation to income). This letter also advised of
the documentation requirements for deductions by stating, for example, the following:
“...let’s talk about tax changes – not scary if you kept the invoices and receipts of
every dollar you want to claim then, more refund, no invoice = no claim...log book
must be on hand to show how many kilometres for business you travelled…., any other
expenses you think of, get the invoices and will talk about it and teach you which is
and which one is not ….” [Emphasis added]

Despite the eight clients receiving and signing the above declarations and agreement letter,
and despite the “prior client letter” specifying the documentation required for deduction claims,
the Tribunal was of the view that this did not absolve Mr McGuid and S & T from their
obligations in providing tax agent services competently. In other words, Mr McGuid was still
required to satisfy himself that the claims for deductions were appropriate and
substantiated. As a registered tax agent, this was the service his clients paid him to provide.

(c) Insufficient enquiries of taxpayers – The evidence showed that Mr McGuid often failed to
make sufficient enquiries of the clients in order to substantiate the work-related deductions
claimed. His affidavit evidence for each client detailed a basic record of an interview that he
had for the purposes of preparing each 2016 tax return for the eight clients, but the evidence
did not show that Mr McGuid sought further clarification and detail when necessary.
(d) Flawed understanding of relevant taxation law and ATO requirements – Based on the
evidence before the Tribunal, Mr McGuid had a flawed understanding of relevant taxation law
and ATO requirements regarding work-related expense deductions, and he incorrectly applied
the relevant tax law to client circumstances.
Mr McGuid was also unfamiliar and/or unaware of key Taxation Rulings and Law
Administration Practice Statements published by the ATO pertaining to the making and
substantiation of work-related expense claims made by the eight taxpayers, namely, PS LA
2001/6, PS LA 2005/7, TR 98/5, TR 95/13, TR 2004/6 and TR 97/12.

In effect, overall, S & T (through Mr McGuid) had prepared and lodged income tax returns for the
2016 income year on behalf of each of the eight clients, without taking adequate steps to ensure
that the returns contained accurate information that was supported by appropriate substantiation.

B. Whether the termination of S & T’s registration was an appropriate

sanction for breaching the Code
The Tribunal concluded that S & T’s tax agent’s registration should not be reinstated, as this
would impose an unacceptable risk to the Australian community.

This conclusion was essentially based on the following reasoning:

(a) Although Mr McGuid had implemented new measures within S & T in relation to the way
deductions are claimed (which incorporate the principles and requirements set out in relevant
ATO rulings and practice statements), the Tribunal was “very concerned” that, should S & T’s
registration be reinstated, there would be a real risk of future non-compliance.
This is because, according to the Tribunal, S & T and Mr McGuid lacked contrition and failed
to appreciate the significance of S & T’s non-compliance or to demonstrate true insight regard
its conduct. In particular:
• Mr McGuid continued to maintain that the claimed deductions for each taxpayer should “not
have been reduced” or “never have been disallowed”; and
• at the hearing, Mr McGuid was often defensive and surprised when challenged about some
of the deductions he claimed on behalf of the eight clients, and his concessions were often
made reluctantly and after being taken to the relevant ATO rulings and practice statements.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

(b) The requisite relationship of mutual trust between S & T and the ATO had been severely
undermined by Mr McGuid’s pattern of irrational, unreasonable, abusive and hectoring
correspondence with those with whom he disagreed, including ATO officers and the Board
with whom S & T, through Mr McGuid, corresponded.
In particular, Mr McGuid sent several letters to the ATO which were unprofessional and
irrational. For example, in one such letter, Mr McGuid had made the following statements:
“Regarding our latest round of audit, (so far it has been a blasted 15-20 years of
nightmare) as if the ATO have nothing to do but kill, kill, kill, however we always
welcome you, and assist you as much and as fast as we could.
I am very disappointed at your unfair, unreasonable, savage, cruel and negative attitude...
We lost our confidence to deal and trust ATO. You are nice, but golly no common
sense nor logic.” [Emphasis added]

2.2.3 NTAA comment – Implications of the Tribunal’s decision

The Tribunal’s decision in the S & T case clearly highlights that a registered tax agent is required
to take appropriate steps (e.g., by making reasonable enquiries) to ensure they are satisfied that
a particular work-related expense to be claimed for an employee client satisfies all aspects of the
general deductibility requirements in S.8-1. This involves ensuring that the expense:
• has been incurred by the employee and not reimbursed by their employer;
• has the sufficient nexus or connection with the employee’s employment activities and is not
private or capital in nature; and
• satisfies the substantiation requirements (e.g., the written evidence rules in Division 900).

TAX WARNING – Claims that are based on verbal client statements

and/or signed client declarations
The Tribunal’s decision in the S & T case also effectively highlighted that appropriate steps for the
above purpose (i.e., in being satisfied that a work-related expense satisfies the general deductibility
criteria) should not just be limited to accepting or relying on:
• verbal statements made by clients at face value; and/or
• signed client engagement letters and/or deductibility/substantiation declarations.
In other words, accepting or relying on verbal client statements and/or signed client declarations,
on its own (or of itself), would generally not absolve a tax agent from their obligations in providing
tax agent services competently and taking reasonable care. Certainly, such an approach is unlikely
to be accepted as taking appropriate steps to ensure that a work-related expense claim satisfies
the general deductibility criteria in S.8-1.
This is not only based on the Tribunal’s decision in the S & T case, but also on the TPB’s own
competency and reasonable care guidelines. For example, refer to the TPB Explanatory Paper
TPB (EP) 01/2010 and to the TPB Information Sheet TPB (I) 17/2013.

What are appropriate steps for a tax agent to take in verifying the validity
of a client’s work-related expense claim?
Based on the TPB’s own guidelines (e.g., refer to TPB Information Sheet TPB (I) 17/2013) and to
the Tribunal’s decision in the S & T case to a lesser degree, taking appropriate steps to verify the
validity of a client’s work-related expense claims would generally involve the following:
(a) Asking client initial questions – A tax agent should initially ask a client appropriate questions
in seeking information about a particular work-related expense in order to determine the
validity and/or the quantity of the claim. Appropriate questions would include the following:

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

• Did you spend the money yourself for the expense and did your employer reimburse you
(or will reimburse you) for the expense?
• How does this expense relate to (or assist you in performing) your work duties in the course
of earning your salary income?
• Was there any private component associated with the expense?
• Do you have a record to prove the expense? If so, what is the nature of your record and
what details does it include? If not, why not and do you have a bank statement or other
document to verify the expense?

(b) Discussing with clients the relevant deductibility and substantiation requirements – A
tax agent should also advise clients about the general deductibility and substantiation
requirements for work-related expense claims (e.g., at the time of preparation of the client’s
income tax return), as well as how these requirements apply to a client’s specific claim (e.g.,
advice on the specific log book requirements for a car expense claim, where appropriate).

(c) Assessing whether to make further enquiries about a particular claim – The TPB’s
reasonable care guidelines advise that, where information provided by a client seems credible
and a tax agent has no basis to doubt the information supplied, the tax agent may discharge
their responsibility by accepting the information without further checking. In this case,
according to the TPB, a tax agent is not just accepting what the client tells them or gives them
at face value, but rather, the tax agent is exercising their professional judgment based on, for
example, the nature of the client and making a decision that further checking is not required.
On the other hand, if the information supplied by a client does not seem credible or appears
to be inconsistent with a previous pattern of claim or statement, a tax agent would need to
make further enquiries to satisfy themselves as to the completeness and/or accuracy of the
client’s information, having regard to the terms of the engagement with the client. This would
involve asking further questions regarding the client’s claim and/or to examine any
records related to the claim (e.g., receipts, time usage diaries, car log books, etc.).
Note that, the decision in the S & T case also highlighted the importance of a tax agent appropriately
documenting (e.g., by way of file notes and working papers) all client enquiries, discussions and
advice regarding specific claims for work-related expenses on a client’s file.

TAX TIP – Examining or reviewing work-related expense records

The TPB’s reasonable care guidelines in TPB Information Sheet TPB (I) 17/2013 make it clear that
a registered tax agent is not required to audit, examine or review a client’s books, records or other
source documents, to independently verify the accuracy of information supplied by clients.
However, as indicated above, where a tax agent has reason to question the accuracy of a client’s
statement or information regarding a work-expense claim (including whether the client can satisfy,
for example, the substantiation requirements for their claim), the tax agent would need to make
further enquiries (including reviewing or examining a client’s records) to satisfy themselves of the
accuracy (or otherwise) of the client’s statement and/or information.
In this regard, if a tax agent becomes aware that a client cannot satisfy the relevant substantiation
requirements for a particular work-related expense incurred by the client, it is generally
recommended that the tax agent should refrain from making the claim on behalf of the client.
In the S & T case, in making its conclusion, the Tribunal made reference to the fact that Mr McGuid
did not obtain documentary evidence sufficient to substantiate many of the work-related expenses
claimed, and he merely relied on the verbal claims of his clients.
Although this could be viewed as the Tribunal imposing a requirement upon registered tax agents
to obtain (and review or examine) a client’s documentary evidence for a work-related expense, the
NTAA believes that such a requirement (or expectation) would be more appropriate where the
credibility of a client’s claim is brought into question (based on the TPB’s guidelines noted above).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

2.3 ATO targets clothing and laundry expense claims

An employee may be able to claim a deduction under S.8-1 for the cost of buying, renting and
repairing certain clothing, such as work-related uniforms and occupation specific or protective
clothing, at Item D3 – Work-related clothing, laundry and dry-cleaning expenses of the ‘I’
return. Furthermore, a deduction may also be available at Item D3 of the ‘I’ return for the cost of
washing/cleaning (including dry cleaning), drying and ironing, deductible work-related clothing.

In the ATO’s fact sheet: “ATO to iron out false laundry claims”, the ATO advises that it will be
targeting false work-related clothing and laundry expense claims, after having identified that around
six million individual taxpayers collectively claimed nearly $1.5 billion in such deductions for the
2018 income year. The ATO’s concerns in this regard, partly relate to the number of individuals
making such claims, as per the following statement by Assistant Commissioner, Karen Foat:
“…although many Australians can claim clothing and laundry expenses, it’s unlikely that
half of all taxpayers are required to wear uniforms, protective clothing or occupation-
specific clothing to earn their income.” [Emphasis added]

TAX WARNING – Using sophisticated data analytics to identify higher

risk clothing and laundry claims
The ATO has advised that it is constantly improving its sophisticated data analytics, in order to
identify unusual work-related expense claims (including claims for clothing and laundry expenses),
by comparing a particular taxpayer’s claims against claims made by other taxpayers in similar
occupations and with a similar salary and wages income range. In particular, according to the ATO:
“Our data analytics will flag claims that are significantly above the average in occupations
that regularly claim for laundry, like chefs and security guards. It will also flag claims made
by people in occupations that usually don’t claim, like office workers.”

2.3.1 Identifying what is deductible work-related clothing

In relation to claims for the cost of buying, renting and repairing clothing, the ATO is particularly
concerned about the number of individual taxpayers who are claiming deductions for conventional
clothing, despite the fact that such expenditure is not deductible (other than in extremely limited
circumstances – e.g., refer to FC of T v Edwards [1994] FCA 244 and TR 94/22).

TAX WARNING – Employees required to wear clothing of a certain

colour or from the latest fashion line
In particular, the ATO has indicated that claims are being incorrectly made by employees who are
required by their employer to wear normal clothing which is of a certain colour or from the latest
fashion clothing line. This can typically occur for an employee who, for example:
• works in a clothing store and is required to purchase and wear store brand clothing (e.g., from
the latest fashion line) while at work; or
• works as a waiter and is required to purchase and wear black trousers and black shoes, and a
white shirt, while at work.

Generally speaking, a deduction can only be claimed under S.8-1 for the cost of purchasing, renting
and repairing at item of clothing worn at work, where the item of clothing falls within one of the four
categories of clothing summarised in the table below, namely, where the item qualifies as:
• a compulsory work uniform;
• a non-compulsory work uniform;
• protective clothing; and
• occupation specific clothing that is not conventional in nature.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Compulsory work uniform

Deductibility criteria Generally deductible where:

• the uniform is prescribed by the employer in an expressed policy that
makes it a requirement for employees to wear that uniform at work;
• the employer’s policy should stipulate the characteristics of the colour,
style and type of clothing and accessories that are a distinctive part of
the compulsory uniform;
• the uniform distinctively identifies an employee as working for a
particular employer (or organisation), or it identifies the products or
services provided by the employer;
• it is not available to be worn by the general public; and
• the wearing of the uniform is strictly and consistently enforced.

Refer to TR 97/12, TR 96/16 and TD 1999/62.

Common tips/traps Shoes, socks, stockings and belts can be included as part of a deductible
uniform where:
• they are an integral part of a distinctive compulsory uniform or
corporate wardrobe; and
• the employer’s express uniform guidelines stipulate the characteristics
of the shoes, socks, stockings, etc., (e.g., their colour, style, type, etc.,)
that qualify them as being a distinctive part of the compulsory uniform.
Single items of compulsory clothing, as opposed to a complete uniform
(e.g., a service station employee who wears a green monogrammed shirt
with the employer’s logo or emblem on it) can also qualify for deductibility
where similar conditions to those noted above (for a uniform) are satisfied.

Common examples • Police uniforms

• Defence force uniforms
• Airline pilot uniforms
• Corporate wardrobes
• Single clothing items (e.g., a green monogrammed shirt with the
employer’s logo or emblem on it).

Non-compulsory work uniform

Deductibility criteria Expenditure incurred in respect of a non-compulsory uniform is only

deductible to an employee if the full uniform design (e.g., its colouring,
construction, pattern, shape and a company logo/identifier) has been
registered with AusIndustry. Refer to Division 34 of the ITAA 1997.
An application by an employer to register a non-compulsory uniform must
be made to the Textile, Clothing and Footwear Corporatewear Register,
C/- AusIndustry, at www.business.gov.au/Grants-and-Programs/Textile-
Clothing-and-Footwear-Corporatewear-Register. The design of a non-
compulsory uniform will not be approved for registration unless the
design meets the criteria set out in the Approved Occupational Clothing
Guidelines, such as the following:
• The uniform must be a complete outfit (e.g., a dress, shirt and trousers,
shorts, and/or skirt).

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NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Non-compulsory uniform cont…..

• A company identifier (i.e. a discrete logo/name/initials that complies

with certain requirements) must be on all items in the uniform,
including accessories.
• The uniform must be appropriate for the duties of the employee.

Common tips/traps • Clothing which can be registered includes accessories, such as belts,
ties, scarves and hats. However, shoes, socks, stockings and
underwear cannot be registered as part of a non-compulsory uniform.
• Employees must confirm with their employer that the uniform is on the
register before they make a claim under this category.
• Single items of non-compulsory clothing (other than fully body
garments, such as dresses) cannot be registered as a non-compulsory
uniform and, therefore, cannot be deductible under Division 34.

Occupation specific clothing

Deductibility criteria Occupation specific clothing comprises clothing that distinctively identifies
an individual as belonging to a particular profession, trade, vocation,
occupation or calling, and which is:
• not conventional in nature; and
• specific to only one occupation (i.e., the clothing should allow the
public to easily identify and recognise a specific occupation).

Common tips/traps Clothing that could be worn in a number of occupations is not occupation
specific clothing and, therefore, is not deductible under this category.
This includes, for example, a white lab coat which may be worn by several
types of workers (e.g., a lab technician and a pharmacist). However, a
white lab coat may be deductible as protective clothing (refer below).

Common examples • A chef’s checked pants, white jacket and hat.

• An identifiable nurse’s uniform.
• A cleric’s ceremonial robes.
• A barrister’s robes.

Protective clothing

Deductibility criteria To qualify as protective clothing, an item of clothing must:

• have protective qualities;
• be worn principally to protect against the risk of injury, illness, death
and/or damage to other clothing (amongst other things), where such
risk is not merely remote or negligible, resulting from carrying out
income-earning activities; and
• reasonably be expected to be used in the employee’s circumstances.
Refer to TR 97/12.

Common tips/traps • Protective clothing can include distinctive clothing that protects
conventional clothes, such as heavy duty overalls, smocks, aprons,
and lab coats worn by medical staff and laboratory technicians.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Protective clothing cont…..

• Protective clothing can include items that protect an individual from the
harmful effects of the natural environment, provided that the item is a
practical necessity to enable the taxpayer to carry out their work duties
without personal danger (e.g., sun hats).
• Protective clothing does not normally include conventional clothing
that has durability characteristics, such as jeans and drill trousers.

Common examples • Protective gloves.

• Fire resistant clothing.
• Waterproof jacket, woollen jumper and thick socks while working in an
alpine area.
• Non-slip shoes and steel-capped boots.
• Safety coloured shirts and jackets (e.g., Hi-vis).
• Safety glasses and hard hats.

A non-compulsory uniform is a uniform (i.e., one or more items of clothing (including accessories)) which,
when considered as a set, distinctively identifies an employee as working for a particular employer, the
wearing of which is not strictly and consistently enforced by the employer. Refer to S.34-15.
When determining whether clothing is occupation specific, any aspect of the clothing that identifies the
employer, or the employer’s associate, must be ignored. This is because, it is the clothing itself that must
allow an observer to clearly identify a taxpayer’s occupation (not the identity of the employer). However,
the existence of employer identifiers will be relevant in determining whether the clothing is a non-
compulsory uniform.
The ATO’s individual tax return instructions direct that any claims for deductible safety glasses and hard
hats (and protective items other than protective clothing) be claimed at Item D5 – Other work-related
expenses, rather than Item D3.

TAX WARNING – Claims for COVID-19 protective items

In light of the COVID-19 pandemic, many tax agents have been questioning when employees are
able to claim deductions for protective items, such as gloves, face masks and shields, and sanitiser.
In the ATO’s fact sheet: “COVID-19 frequently asked questions – Individuals”, the ATO advises
that an individual can claim a deduction for the work-related portion of protective items where:
• they have incurred the relevant expense (and have not been reimbursed by their employer);
• they are exposed to the risk of illness or injury in the course of carrying out their income-earning
activities, and the risk is not remote or negligible;
• the protective item is of a kind that provides protection from that risk and would reasonably be
expected to be used in the individual’s circumstances; and
• the item is used in the course of carrying out the individual’s income-earning activities.
Broadly, the ATO advises that, if an employee’s work duties require them to have physical contact
or be in close proximity with customers or clients while performing their duties, or they are involved
in cleaning premises, a deduction can generally be claimed on expenditure incurred for protective
items (e.g., gloves, face masks and shields, and hand sanitiser).
According to the ATO, these types of claims would generally be available to employees in the
medical industry (e.g., doctors, nurses, dentists and allied health workers), the cleaning
industry, the airline industry (e.g., airline cabin crew), the hairdressing and beautician
industry, and the retail, café and restaurant industries.
Note that, no deduction is available to the extent a protective item is used for private purposes.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

2.3.2 Correctly claiming laundry expenses for deductible clothing

In relation to claims for laundry expenses, the ATO is concerned that many individuals are claiming
laundry expenses related to non-deductible clothing, such as conventional clothing that an
employer may require an employee to wear to work (as noted above).

Furthermore, the ATO is particularly concerned that many claims are being made under the
substantiation exception for laundry expenses that do not exceed $150, regardless of whether or
not an individual has incurred the relevant expenditure. The ATO has also identified that many
claims are being made for laundry expenses of an amount equal to exactly $150.

Given the ATO’s increased audit focus on laundry expense claims, the following general
guidelines should be considered when applying the $150 substantiation exception:
(a) Under the substantiation exception for laundry expenses, an employee is able to claim up to
$150 of laundry expenses incurred without obtaining written evidence. Refer to S.900-40. A
‘laundry expense’ is an expense related to the washing, drying and ironing (but not dry
cleaning) of deductible clothing (e.g., a compulsory uniform and protective clothing).
(b) The $150 substantiation exception for laundry expenses applies irrespective of whether the
general $300 substantiation exception for work expenses applies. In other words, the $150
substantiation exception for laundry expenses applies even if the general $300 substantiation
exception for work expenses does not apply. In this case, an employee is generally required
to substantiate their work expenses (except laundry expenses) by providing written evidence.
(c) Where an employee’s claim for laundry expenses exceeds $150, but their total claim for work
expenses (including laundry expenses, but excluding motor vehicle expenses, travel
allowance expenses and overtime meal allowance expenses) is $300 or less, written evidence
is not required for the laundry expenses and the other work expenses.
(d) In TR 98/5, where written evidence is not required for laundry expenses, the ATO will allow
claims to be made on the following basis (which covers washing, drying and ironing):
• $1.00 per load – where only work clothing is being washed.
• $0.50 per load – where both work and private clothing is being washed.

TAX WARNING – Employees still required to show the basis of a claim

The substantiation exception for laundry expenses does not extinguish the requirement for an
employee to demonstrate (if requested by the ATO) that the amount claimed satisfies the general
deductibility principles in S.8-1 (e.g., it was incurred in gaining or producing assessable income).
As a result, employees who claim laundry expenses of up to $150 under the substantiation
exception will be required to keep details (e.g., by way of diary records) of:
• the number of washes done during the year; and
• the types of clothes included in each wash (i.e., whether they comprised only work-related
clothing, private clothing or both).
Refer to the precedent ‘Laundry worksheet’, which is available on the NTAA’s 2021 Day 1 Tax
Schools software (under ‘Deductions’ and ‘Item D3 – Work-related clothing’).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

2.4 ATO targets common errors with car expense claims

under the log book method
The log book method for claiming car expenses deductions under Division 28 (i.e., SS.28-90 to
S.28-155) is often used for cars that have a relatively high business use percentage, such as cars
used by employee sales representatives and sales managers, marketing managers, IT consultants,
real estate agents/consultants and individuals carrying on business (i.e., sole traders).

The specific rules for claiming car expense deductions under the log book method in Division 28
broadly deal with the following:
(a) Calculating a car expense claim under the log book method – An individual’s car expense
claim for an income year is calculated by applying the car’s business use percentage for the
year (which is based on a reasonable estimate, taking into account all relevant matters
including a valid log book) to each deductible car expense (including the car’s depreciation
amount) for the year. Refer to Subdivision 28-F (e.g., S.28-90).
(b) The requirement to keep a valid log book – This includes the requirement to:
• prepare (or keep) a new valid log book generally every five income years for at least a 12-
week continuous period; and
• to record certain specific information in the log book, such as certain information about
each business journey or trip (e.g., a description of each trip and the car’s odometer
readings at the start and end of each trip), the date the log book period begins and ends,
and the car’s odometer readings at the start and end of the log book period. Refer to
Subdivision 28-G (e.g., S.28-125).
(c) The requirement to keep odometer records – Odometer records are required to be kept for
the period during the income year in which the car was held by the individual, recording certain
information (e.g., the car’s odometer readings at the start and end of the period). Refer to
Subdivision 28-H (e.g., S.28-140).

TAX WARNING – Common errors often identified with car expense

claims under the log book method
It has been identified that a large proportion of car expense claims (including log books) reviewed
by the ATO in recent years contain errors, resulting in incorrect claims being made under this
method. Two of the most common errors often identified relate to:
• incomplete and/or inaccurate log books; and
• incorrect calculations (or estimates) of a car’s business use percentage.

2.4.1 Car expense claims based on incomplete/inaccurate log books

Many car expense claims are often based on an incomplete and/or inaccurate log books. In this
regard, some of the errors identified in relation to a log book include the following:
(a) The recording of inappropriate/insufficient descriptions of business journeys – For a
log book to qualify as a valid log book, the log book must record (amongst other things – refer
below) the following information about each work-related or business journey undertaken
during the log book period (at the end of each journey or as soon as possible afterwards):
• The day the journey began and ended.
• The car’s odometer readings at the start and end of each journey.
• The number of kilometres travelled on each journey.
• Why the journey was made (i.e., an appropriate description of the purpose of a journey).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Note that, if two or more consecutive business journeys are made in the car on the same day,
they can both be recorded as a single journey.
Refer to S.28-125(1), (2) and (3).

TAX WARNING – Insufficient descriptions of business journeys

It is often the case that inappropriate or insufficient descriptions of business journeys are recorded
in log books. For example, in some cases, a work-related or business journey is recorded as
“Business trip”, “Client trip” or even “Customer/Client visit”.
The ATO has traditionally advised that an entry for a journey that merely indicates it is a business
trip (e.g., “Business trip” or “Client trip”) is not sufficient to identify the journey as a business
journey under the log book method. According to the ATO, a more appropriate way to describe
the journey would be: “Client visit, Essendon” or “Two customer calls, Melbourne CBD”.
Similarly, in Masters v FC of T [2017] AATA 1042, the relevant log book examined did not specify
any visits to clients but contained numerous entries that were described as: “trip to city” (which
was not sufficient to describe why each journey was made). The Tribunal held that, in order to
satisfy the log book requirement of recording why a journey was made (for a particular business
trip), it was necessary to describe the purpose of the visit or journey.
In contrast, in Reid v FC of T [2019] AATA 4624, the relevant log book contained entries described
as “customer visit”. According to the Tribunal, this was sufficient to classify each trip as a
business journey, given the taxpayer’s role as a channel manager. The ATO was of the view that
these entries were not sufficiently descriptive of business journeys undertaken.
Despite the Tribunal’s approach in Reid’s case regarding what constituted a sufficient description
of a business journey, it is recommended (as a more prudent approach) that taxpayers should
continue to provide a more prescriptive description of a journey (or business trip) when
completing a log book in respect of a car expense claim, primarily to avoid an issue at audit.

Apart from details of each business journey (or trip) having to be reported in a log book under
S.28-125(2) (as noted above), the following (other) information must also be recorded (in
English) in a log book under S.28-125(4) (for the log book to qualify as a valid log book):
• The date the log book period (e.g., the 12-week period) begins and ends.
• The odometer readings at the start and the end of the log book period – this is in addition
to separate odometer records being required to be kept for the car for the period it was held
by the individual during the income year (e.g., the car’s odometer readings at the start and
the end of the period during the year the car was held must also be recorded separately).
• The total kilometres the car travelled during the period.
• The total kilometres the car travelled for income producing purposes (this must also be
shown for each journey, as noted above); and
• the total kilometres travelled for income producing purposes expressed as a percentage of
the total kilometres travelled (i.e., the business use percentage).

TAX TIP – ATO example of what to record in a valid log book

The following example of what is required to be recorded in a valid log book has been adapted
from the example contained in the ATO’s publication: “Car expenses – What’s under the bonnet?”
Although a valid log book is required to be kept for a continuous period of at least 12 weeks (which
can also overlap two income years), the following example assumes a log book period of two days
for simplicity and illustrative purposes.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Make: Honda Model: CRV Engine capacity: 2L Registration number: ABC 123
Odometer at start of log book period: 10,200km Odometer at end of log book period: 10,280km
Journey start Initial Journey end Ending Reason for Total
date odometer date odometer journey kilometres
reading reading travelled
1/09/2020 10,200 km 1/09/2020 10,220 km Private – travel 20 km
to office
1/09/2020 10,220 km 1/09/2020 10,250 km Business – 30 km
travel to and from
offsite client
meeting
1/09/2020 10,250 km 1/09/2020 10,270 km Private – travel 20 km
from office to
home
2/09/2020 10,270 km 2/09/2020 10,280 km Private – take 10 km
kids to school

Despite the ATO’s example log book in this publication including a record of private journeys, there is no
obligation under S.28-125 to specifically record private trips (i.e., those not travelled in the course of
producing the taxpayer’s assessable income).

(b) The recording of business journeys (or trips) on days that an employee is not working
(e.g., the employee is on annual leave or sick leave) – It has been identified that in some log
books, a business journey (or trip) was recorded on a day when the employee was not working,
as evidenced by employer records (e.g., an employer’s records may have shown that the
employee on such a day was on annual leave or sick leave).

(c) Log book entries for business journeys (or trips) not being made after the end of the
journey (or as soon as possible afterwards) – It is often identified that inconsistent log book
entries can indicate that the entries were not made at the end of each business trip or as soon
as possible afterwards. These inconsistencies include:
• the same car odometer reading for the start or end of a trip being used on different dates;
• some dates for business trips being duplicated (or repeated) in a log book; and
• inconsistencies between the day of the week and the date recorded in a log book.

2.4.2 Incorrectly calculating the business use percentage

An individual taxpayer’s car expense claim under the log book method for an income year is
calculated by applying the car’s business use percentage for the year to each deductible car
expense (including the car’s depreciation amount) for the year. Refer to S.28-90(1) and (2).

A car’s business use percentage is calculated by dividing the number of business kilometres
travelled by the car (during the period in the income year the car was held by the taxpayer) by the
total number of kilometres travelled by the car for that period. Refer to S.28-90(3).

A car’s business kilometres are calculated by making a reasonable estimate, taking into account
all relevant matters including the following:
• Any log books, odometer records or any other records.
• Any variations in the pattern of use of the car – e.g., because of holidays, sick leave, extended
leave, a change in employment duties or jobs and peak periods; and
• any changes in the number of cars used in the course of producing assessable income.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

A taxpayer must record (in writing) their estimate of business kilometres and their business use
percentage prior to lodging their income tax return (subject to the Commissioner’s discretion to
allow further time). Refer to S.28-100(4).

TAX WARNING – Applying business use percentage in existing log

book without regard to changes in the use of a car
It is often identified that individuals claiming car expense deductions under the log book method
simply apply the business use percentage established in an existing (valid) log book (to deductible
car expenses), without making a reasonable estimate of the business kilometres for a particular
car (including without regard to any changes in the pattern of use of the car).
This is a particularly common audit trap for car expense claims in income years after the year in
which a valid log book was first kept for a particular car (e.g., in the four income years after the year
in which a log book was first kept for a car).
Such an approach would not typically result in an overclaiming of car expense deductions if a
taxpayer’s typical pattern of usage of their car is consistent with that of the period (e.g., the 12-
week period) during which they kept their log book. However, if there is a downward variation in
the use of a taxpayer’s car for work purposes in income years after the year in which a log book for
that car is first kept, simply applying the (higher) business use percentage established in the
existing log book will result in an overclaiming of car expense deductions.
Therefore, where there has been any variation in the pattern of use of a taxpayer’s car after the
period during which the log book for that vehicle was first kept, it is important that taxpayers
consider whether the business use percentage established in that existing log book (i.e., for the log
book period, which should be a minimum 12-week continuous period) is still accurate.

EXAMPLE 1 – Changes in the pattern of use of a car

Greg works as an employee IT consultant for a company in Sydney. He uses his own car for work
purposes (e.g., to visit clients) and receives a car allowance from his employer for this purpose.
In the 2020 income year, Greg kept a valid log book for a 12-week continuous period (i.e., during
the period from July 2019 to September 2019), which recorded all of Greg’s work-related travel
(i.e., business journeys) during this period (‘the log book period’) and the car’s odometer readings
at the start and end of the log book period. Based on this information:
• Greg’s car travelled a total of 6,000 business kilometres (and a total of 8,000 kilometres)
during the log book period; and
• Greg’s log book showed a business use percentage of 75% for the log book period (i.e., 6,000
business kilometres / 8,000 total kilometres).
This outcome for the log book period was representative of Greg’s work and private travel for the
remainder of the 2020 income year. In actual fact, the odometer readings for Greg’s car at the
beginning and end of the 2020 income year (i.e., on 1 July 2019 and on 30 June 2020) showed
that Greg’s car travelled a total of around 32,000 kilometres (i.e., 4 quarters x 8,000 kilometres), of
which 24,000 were business kilometres (i.e., 4 quarters x 6,000 business kilometres).
Greg takes eight weeks long service leave in September and October 2020
In the 2021 income year (i.e., the year after the log book year) Greg takes eight weeks long service
leave during September and October 2020, and takes a ‘road trip’ to Darwin using his own car.
Based on his car’s opening and closing odometer readings for the 2021 income year, assume that
Greg’s car ends up travelling a total of around 38,000 kilometres for the income year. As this is
just under a 19% increase in the total kilometres the car travelled in the 2020 income year, Greg
should consider whether there has been a change in the pattern of use of his car (for private and
work purposes) before claiming any deduction for car expenses incurred in the 2021 income year.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

In this case, the ATO would expect that most of the additional kilometres Greg’s car travelled in the
2021 income year would be attributed to private travel (i.e., Greg’s private trip to Darwin), assuming
that there was basically no change in the pattern of use of Greg’s car (for private and work
purposes) for the remaining periods in the 2021 income year that Greg was actually working (i.e.,
July to August 2020, and November 2020 to June 2021).
Furthermore, it would be expected that Greg’s car would have travelled fewer business kilometres
as a result of Greg being on leave for eight weeks (i.e., the business kilometres that Greg’s car
would have otherwise travelled during this eight-week period has not occurred).
On this basis, it would be incorrect for Greg to simply calculate his car expense claim for the
2021 income year based on the existing log book’s business use percentage of 75%. In other
words, Greg would need to make a reasonable estimate of the car’s business kilometres (and,
therefore, business use percentage) for the 2021 income year, taking into account the car’s existing
log book, the car’s odometer readings for the year and the change in the pattern of use of his car
in the 2021 income year (compared to the 2020 income year) as a result of the eight-weeks leave.
Greg’s reasonable estimate should result in a business use percentage for the 2021 income year
that is lower than the 75% business use percentage established by his valid log book and used to
claim car expense deductions for the 2020 income year.

2.4.3 Is a taxpayer required to keep a new log book for an updated

representative period during COVID-19?
The COVID-19 pandemic has had an impact on the driving patterns of many employees around
the country. In particular, many employees who would ordinarily travel to personally visit clients,
customers, suppliers, etc., have been undertaking less work-related travel during the pandemic
(i.e., travelling fewer business kilometres), and have been increasingly liaising and communicating
with clients, customers, suppliers, etc., remotely (e.g., through Zoom and Microsoft Teams).

The increasing practice of conducting meetings with clients, customers, suppliers, etc., remotely,
has been partly attributable to COVID-19 lockdowns and partly attributable to more employees
working from home on a part-time basis during non-lockdown periods.

Where an employee usually claims car expenses deductions under the log book method in respect
of a car they use for work purposes, and the employee’s driving patterns have changed as a result
of COVID-19 (e.g., the employee has been travelling fewer business kilometres), the issue often
raised is whether the employee is required to keep a new log book which reflects the change
in the pattern of use of their car work purposes.

In the ATO’s fact sheet: “COVID-19 frequently asked questions”, the ATO advises that an individual
is not required to keep a new log book for the period in which their travel has been affected by
COVID-19, as long as they account for any variation in the use of the car when working out
their business kilometres and business use percentage at the end of the relevant income year.

TAX WARNING – Making a reasonable estimate of business use

In other words, when working out a car’s business kilometres (and business use percentage) for
an income year during COVID-19 (e.g., during the 2021 income year), a taxpayer is required to
make a reasonable estimate, taking into account:
• any log book (including an existing valid log book kept in any of the previous four income years);
• odometer records kept for the car during the income year (i.e., reflecting the opening and
closing odometer readings for the car for the year); and
• any change in the pattern of use of the car (e.g., the car was used to travel fewer business
kilometres) due to COVID-19.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

The ATO’s fact sheet also advises that, in relation to any period(s) in which an individual’s work-
related (or business) travel using their own car has been affected by COVID-19, the individual may
keep a new log book if they think that it will provide a more accurate indication of the business
kilometres travelled in their car. However, if an individual’s overall work (or business) usage of
their car has not changed, but they are merely using their car less frequently overall, their odometer
readings should reflect this and they will not need to keep another log book for their car.

EXAMPLE 2 – Changes in the pattern of use of a car due to COVID-19

Melissa is an employee who uses her own car for work-related purposes (e.g., to visit clients) and
receives a car allowance from her employer for this purpose.
Melissa has been claiming car expense deductions in relation to her car under the log book method.
The most recent log book that Melissa first kept for her car was in the 2019 income year, which
showed that the car’s business use percentage for the year was 70%. This was representative of
Melissa’s work-related travel while working for the same employer.
Since the COVID-19 pandemic first arose, Melissa’s work patterns have changed. In particular, for
a 3-month period from July to September 2020, Melissa worked from home full-time (due to COVID-
19) and managed her contact with clients via Zoom meetings, rather than visiting clients personally.
For the remainder of the 2021 income year, Melissa worked in the office full-time and continued to
visit client premises to the same extent as in previous years.
Melissa kept odometer readings for her car as follows:
• Melissa kept odometer readings at the start and end of the 2021 income year (as she is required
to do so under the log book rules – refer to S.28-140), which showed that her car travelled a
total of 30,000 kilometres for the 2021 income year.
• Melissa also kept odometer readings for her car during the period that she was working from
home full-time, which showed that her car travelled 3,000 kilometres during this period (all of
which were private kilometres, as there was no travel for work purposes – e.g., to visit clients).
On this basis, 27,000 kilometres were travelled by Melissa’s car in the remainder of the 2021
income year (i.e., from October 2020 to June 2021) while Melissa was working back at the office.
Based on Melissa’s existing logbook, which was reflective of her use of the car during the remainder
of the 2021 income year (i.e., from October 2020 to June 2021), Melissa reasonably estimates that
70% (or 18,900) of these total kilometres were business kilometres (i.e., 27,000 kilometres x 70%).
On this basis, Melissa determines that the business use percentage of the car for the 2021
income year was 63% (i.e., 18,900 business kilometres / 30,000 total kilometres).

3. Interest deductions for rental properties in the

ATO’s firing line – high risk claims!
The ATO’s recent tax gap analysis for individuals not in business revealed that other areas of
concern regarding individual tax deductions (i.e., apart from incorrect claims for work-related
expenses) included high rates of incorrect claims for interest expenses related to rental properties.

The ATO has also identified a high error rate regarding rental property claims (including claims for
interest deductions) based on recent ATO audits conducted for rental properties. For example, in
a sample of 300 rental property audits conducted by the ATO, an error rate of almost 90% was
identified, thereby prompting the ATO to double the number of in-depth rental property audits.

As part of the ATO’s increasing rental property audits for the 2021 income year, it is expected that
the ATO will pay closer attention (and will heavily scrutinise) claims for interest deductions, given
that these claims are considered ‘high risk’ claims on the basis that they have traditionally
accounted for a large proportion of rental property claims each year.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

3.1 Interest deductions checklist for landlords

The following checklist summarises the general guidelines that need to be considered when
claiming interest deductions in relation to a rental property. The checklist deals with a range of
common situations in which interest deductions may be available in respect of a rental property.

Interest deduction guidelines for rental properties

1. Acquiring a pre-existing rental property – Interest expenses incurred in respect of a loan

are generally deductible to the extent that a loan was used to acquire a pre-existing rental
property. Where any part of the loan was used for private purposes (e.g., to buy a family
car), interest expenses incurred on this portion of the loan are not deductible.
Generally, interest expenses are deductible during periods that a property is either genuinely
available for rent (e.g., the property is listed with a real estate agent for rent) or actually rented
to tenants. Refer to S.8-1 and TR 95/25.

TAX TIP – Claiming interest between contract date and settlement date
Interest expenses incurred between the contract date and the settlement date for the
acquisition of a property can also be deductible (i.e., in respect of moneys borrowed to pay
part or all of the deposit), provided there is no room for doubt that the property being
purchased is to be used for income-earning purposes (e.g., as a rental property). Refer to
Steele v FCT [1999] HCA 7 (‘Steele’s case’), Ormiston v FC of T [2005] AATA 978
(‘Ormiston’s case’) and TR 2004/4.

2. Constructing a rental property – Interest expenses incurred from 1 July 2019 in respect of
a loan used to build a rental property (i.e., to purchase the land and/or to fund the construction
costs) are not deductible during the construction period because of the new ‘vacant land’
rules in S.26-102. In this case, interest deductions can generally only be claimed from
the following times, according to whether the premises are residential or commercial:
(a) For a residential property – Interest expenses can only be claimed from the time that:
• approval has been granted to occupy the completed property; and
• the property is either leased, hired or licenced (e.g., the property is actually rented)
or available for lease, hire or licence (e.g., the property is genuinely available for rent).
(b) For a commercial property – Interest expenses can only be claimed in relation to the
construction of a commercial property (for rent) from the time that an eligible substantial
and permanent structure (e.g., a building) is “in use or available for use” on the land.
As to when a commercial property would be considered “available for use” is not
entirely clear. Although the NTAA has sought further clarification on this issue from the
ATO, preliminary discussions with the ATO have indicated that the term “available for
use” would require that premises are at least capable of being occupied (which would
normally require an occupancy certificate or similar approval from the local council).

3. Acquiring a rental property ‘off the plan’ – Interest expenses incurred from 1 July 2019 in
respect of a loan used to acquire a property ‘off the plan’ are not deductible during the
period the property is being constructed because of the new ‘vacant land’ rules in S.26-
102. In this case, interest deductions can generally only be claimed based on the guidelines
noted above (i.e., at 2., above) for residential and commercial properties being constructed.

4. Preparing a pre-existing property for rental after acquisition – Interest expenses incurred
during a period that a pre-existing property is being prepared for rental after it was purchased
(e.g., to undertake repairs) can be deductible, provided there is no room for doubt that the
property is to be used for rental. Refer to Steele’s case, Ormiston’s case and TR 2004/4.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Interest deduction guidelines for rental properties

5. Taking a rental property off the market for repairs, renovations, etc. – Traditionally,
interest expense deductions have generally been available for periods that an existing rental
property is taken off the market for maintenance, repairs and/or improvements (including in
between tenancies), provided that there was a genuine intention the property would be used
for income-earning purposes (e.g., for rental purposes) as soon as the work was completed.
This was based on the principles in Steele’s case, Ormiston’s case and TR 2004/4.
However, the deductibility of interest in these situations from 1 July 2019 may be somewhat
uncertain (and restricted) under the ‘vacant land ‘rules in S.26-102 , for example, as follows:
(a) Based on discussions with the ATO, where a rental property was originally constructed
or substantially renovated by a landlord, and those premises are then taken off the
market for a period of time in between tenancies for maintenance, repairs and/or
improvements, interest deductions may be denied under S.26-102 during this period.
(b) In contrast, where, for example, a rental property was originally purchased by a landlord
(i.e., without being constructed and/or substantially renovated), and the property is now
taken off the market for a period of time in between tenancies, for repairs and/or
maintenance, interest deductions should not be denied under S.26-102.
The NTAA has sought further clarification from the ATO regarding interest deductibility in
these circumstances (in light of the ‘vacant land’ rules in S.26-102).

6. Using a former home for rental – Where a taxpayer moves out of an existing dwelling that
was used as their home (i.e., for private purposes), interest expenses that continue to be
incurred in respect of the outstanding balance of any loan that was used in relation to the
property (e.g., to originally acquire the property) are generally deductible while the property
is genuinely available for rent and/or actually rented to tenants.

7. Using borrowed moneys for rental property-related purposes – Interest expenses are
generally deductible under S.8-1 in respect of borrowed moneys used for any of the following
purposes in relation to a rental property (subject to the ‘vacant land’ rules in S.26-102):
• For repairs and/or renovations to the property.
• To purchase depreciable assets for the property.
• To pay for deductible rental property expenses.

8. Mixed purpose loan related to a rental property – A mixed purpose loan will typically arise
where a landlord has originally borrowed money to acquire a rental property, but the balance
of the loan subsequently fluctuates as a result of regular deposits into the loan (e.g., of salary
income) and regular withdrawals used for private purposes (e.g., to pay for living expenses).
In these circumstances, interest expenses cannot be claimed in full and must be apportioned
so that any deduction claimed only relates to the income producing portion of the loan. Refer
to TR 2000/2 regarding how interest deductions may be apportioned in these circumstances.

TAX TIP – How to avoid apportionment issues for mixed purpose loans
Landlords with a mixed purpose loan in respect of a rental property could potentially avoid
apportionment issues for interest deductions by refinancing their loan (where appropriate)
using either separate loans or sub-accounts. Refer to paragraphs 46 and 47 of TR 2000/2.
In this case, one loan (or sub-account) would be used to refinance the income producing
portion of the original (mixed purpose) loan (resulting in interest expenses being fully
deductible), and the other loan (or sub-account) would be used to refinance the private
portion of the original loan (resulting in interest expenses not being deductible).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Interest deduction guidelines for rental properties

9. Split/linked loans and similar arrangements – Interest deductions in relation to a linked or

split loan (or a similar arrangement) are generally limited to the interest amount that would
have been charged under a normal principal and interest loan (i.e., no deduction is available
in respect of compound interest, which is interest that accrues on capitalised interest). Refer
to FCT v Hart & Anor [2004] HCA 26, TR 98/22 and TD 2012/1.

10. Joint loan related to a jointly owned rental property – Interest expenses incurred on a
joint loan used to purchase a jointly owned rental property are basically claimed according
to the legal ownership interests of each owner (e.g., on a 50/50 basis). Refer to TR 93/32.

11. Joint loan related to a single owned rental property – Interest on a joint loan used to
buy a rental property solely in the name of one of the parties to the loan may be deductible
in full in the name of the owner of the property, especially where it is a requirement of the
financial institution (e.g., a bank) that the loan be in joint names.

12. Penalty interest on the early repayment of a loan – Penalty interest incurred on the early
repayment of a rental property loan can be deductible under either S.8-1 (e.g., where there
is no discharge of a mortgage and the underlying rental property continues to be held) or
under S.25-30 (i.e., where there has been a discharge of a mortgage, which may or may
not have involved the disposal of the underlying rental property). Refer to TR 2019/2.

13. Deposit bond/bank guarantee fees – No deduction can be claimed for deposit bond/bank
guarantee fees related to the purchase of a rental property. Refer to former ATO ID
2003/113 and the ATO’s Guide to Rental Properties 2020.

14. Loan shortfall after the sale of a rental property – Interest incurred in respect of a loan
shortfall amount after a rental property is sold can be deductible where certain requirements
are satisfied (e.g., the net sale proceeds from the sale of the property should be fully applied
towards the repayment of the loan). Refer to TR 2004/4.

15. Borrowing expenses – Borrowing expenses (e.g., loan establishment fees, legal fees,
stamp duty, valuation and survey fees) are generally only deductible over a period of five
years. Refer to S.25-25.

Based on TR 2004/4, Steele’s case and Ormiston’s case, interest expenses will only be deductible in
these circumstances where certain requirements are satisfied. In particular:
• the interest expenses are incurred with one objective, being to gain or produce assessable income
(i.e., there is no room for doubt that the property is to be used for income-earning purposes);
• there is no suggestion that the property is to be used for private or domestic purposes;
• the interest expenses are incurred over a period which is considered reasonable in the circumstances
(i.e., the period over which the interest expenses are incurred must not be so long that the necessary
connection between the expenses and the rental income is lost); and
• continuing efforts are undertaken in pursuit of the taxpayer’s income producing purpose.

Broadly, the vacant land rules in S.26-102 deny a deduction for holding costs (e.g., mortgage interest,
rates and insurance) that are incurred in relation to land on which there is no substantial and permanent
structure that is in use or available for use.

The ATO is proposing to clarify a range of matters in relation to the deductibility restrictions for expenses
associated with holding vacant land (i.e., the ‘vacant land’ rules) in S.26-102, by way of a Law Companion
Ruling (‘LCR’). The NTAA hopes that many of the issues raised with the ATO in relation to the ‘vacant
land’ rules will be addressed in the ATO’s proposed LCR.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

4. ATO targets super withdrawals under the new

temporary COVID-19 early release scheme
In March 2020, the Government introduced a new temporary condition of release, which allowed
eligible individuals adversely (financially) affected by the economic impacts of COVID-19 to access
their super entitlements on compassionate grounds up until 31 December 2020 (referred to as the
new ‘COVID-19 condition of release’). Refer to Item 107A of Schedule 1 to the SIS Regulations
(‘SIS Regs’), as well as SIS Regs 6.19B and 6.17D.

Under the COVID-19 condition of release, an eligible individual (other than a temporary resident)
was permitted to make up to two super withdrawals (of up to $10,000 each), broadly as follows:
(a) An eligible individual could only make one application to the ATO (i.e., on ATO online services
through MyGov) in the 2020 income year (i.e., from 20 April 2020 to 30 June 2020) to withdraw
a tax-free lump sum benefit from one or more funds, totalling up to $10,000.
(b) An eligible individual could only make one application to the ATO in the 2021 income year
(i.e., from 1 July 2020 to 31 December 2020), to withdraw a tax-free lump sum benefit from
one or more funds, totalling up to $10,000.
Note that, different COVID-19 early release rules applied in respect of temporary residents
(e.g., the holder of a student visa or a Subclass 457 (Temporary Work (Skilled)) visa) up until
30 June 2020 only. In this case, temporary residents could only access one lump sum benefit
(of up to $10,000) under the COVID-19 condition of release where certain requirements were
satisfied. Refer to SIS Regs 6.19B(1B) and (1C).

TAX WARNING – ATO targets the COVID-19 condition of release

According to figures published by the Australian Prudential Regulation Authority (‘APRA’), up until
31 January 2021, nearly five million applications had been lodged for the early release of super
entitlements under the COVID-19 condition of release, resulting in around $36.4 billion being
withdrawn from superannuation. As a result, the ATO has advised that it has been significantly
increasing its efforts to identify individuals who may have illegally (including fraudulently) accessed
their preserved super entitlements under the new COVID-19 condition of release.

4.1 Who was eligible to access their super under the

temporary COVID-19 condition of release?
Up until 31 December 2020, an individual who was a citizen and permanent resident of Australia
(or New Zealand) was able to access their preserved super entitlements (in the form of a lump
sum benefit) under the new COVID-19 condition of release where they satisfied at least one of
the following conditions (as outlined in SIS Reg 6.19B(1A)):
(a) The individual had become unemployed.
(b) The individual was eligible to receive any of the following under the Social Security Act 1991:
• JobSeeker payment;
• Parenting payment; or
• Special benefit.
(c) The individual was eligible to receive youth allowance under the Social Security Act
1991 (other than on the basis they were undertaking full-time study or they were a new
apprentice).
(d) The individual was eligible to receive farm household allowance.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

(e) On or after 1 January 2020, the individual was made redundant or their working hours were
reduced by 20% or more (including to zero).
(f) For an individual who was a sole trader, on or after 1 January 2020, the individual’s business
was suspended or suffered a reduction in turnover of 20% or more.

TAX WARNING – Identifying a reduction in working hours or turnover

The requirements about reductions in a person’s working hours or in their turnover (as a sole trader)
were required to be determined by reference to changes that had occurred since 1 January 2020.
This required a comparison of a person’s working hours or turnover (as relevant) at the time they
made the application, relative to their usual hours or turnover prior to 1 January 2020.

4.2 ATO data matching seeks to identify incorrect use of

the NEW COVID-19 condition of release
Given the number of withdrawal applications lodged with the ATO (including the amount of
withdrawals involved) under the COVID-19 condition of release (as noted above), the ATO has
been significantly increasing its efforts to identify individuals who may have illegally accessed their
preserved super entitlements under the COVID-19 condition of release.

In this regard, the ATO is using a variety of data matching sources to determine whether claims
were made incorrectly, such as the following:
(a) Single touch payroll (‘STP’) – Through STP, the ATO has real time information about whether
people are employed and how much they are being paid.
For example, for an individual who has applied for the early release of super under the COVID-
19 condition of release on the basis that they had become unemployed at the time of applying,
STP data can be used to identify whether salary and wage payments were still being made to
the individual (or whether they had ceased to be made) at the time of applying.

(b) Income tax returns – Income declared on an individual’s tax return can be used to determine
whether they could qualify for early access to super under the COVID-19 condition of release.
For example, for a sole trader who has applied for the early release of super on the basis of a
reduction in turnover of at least 20%, business income declared on the sole trader’s 2020 tax
return can be compared against business income declared on their 2019 tax return in order to
prima facie identify whether such a 20% reduction in turnover may have occurred.
Alternatively, for an individual who has applied for the early release of super under the COVID-
19 condition of release on the basis of receiving a relevant Government payment (e.g.,
Jobseeker payment), the individual’s tax return could be checked in order to identify whether
they have declared any such Government payment (e.g., at Item 5 of the 2020 ‘I’ return).

(d) Third party data from agencies such as Services Australia and Home Affairs – As part of
the ATO’s COVID-19 economic response support data matching program, the ATO is
collecting information from Services Australia about Government payments/benefits made to
individuals who have applied for the early release of super on the basis of receiving a relevant
Government payment (e.g., JobSeeker payment, Parenting payment or Special benefit).
This information is used by the ATO to identify whether these individuals had actually received
such Government payments or benefits and, therefore, whether these individuals have illegally
accessed their preserved superannuation entitlements as part of the temporary COVID-19
early release scheme.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

TAX WARNING – Behaviours that will attract ATO attention

The types of behaviours that will attract the ATO’s attention include the following:
• Applying for early release of super under COVID-19 when there was no change to an
individual’s salary or wage income or employment information (e.g., working hours).
For example, this could involve a part-time employee (who continued to work part-time during
COVID-19) applying for the early release of super under COVID-19 on the misunderstanding
that the COVID-19 early release of super measure applies to employees not working full-time.
• Artificially arranging a taxpayer’s affairs to meet the eligibility criteria.
• Making false statements or fraudulent attempts to meet the eligibility criteria for accessing
the new COVID-19 condition of release.
For example, this could involve an employee having arranged for their employer to deposit their
salary or wages into a different bank account, so that the bank statement for the employee’s
account into which their salary has traditionally been paid could show that the employee was no
longer earning salary or wages (which would indicate that they were unemployed).

4.2.1 What evidence will the ATO expect to see to confirm eligibility
for the COVID-19 early release measure?
Whilst individuals are not required to provide evidence that they have satisfied the eligibility criteria
for the new COVID-19 condition of release at the time of applying (i.e., in the application process),
the ATO has advised that individuals should keep records and documents to confirm their eligibility.
Records which the ATO may request to confirm an individual’s eligibility include the following:
• Payslips, letters, emails and/or rosters from an employer (e.g., to illustrate a reduction in hours
worked by an employee).
• Bank statements.
• Business cash flow and turnover records for a sole trader.
• Website or other public notice confirming that a particular business has closed.
• Documents confirming eligibility for relevant Government allowances and benefits (e.g.,
JobSeeker payment or Parenting payment).
• A separation certificate.

TAX WARNING – Consequences of not being able to verify eligibility

for the NEW COVID-19 condition of release
According to the ATO, where an individual is unable to provide sufficient evidence to verify (when
requested) that they have satisfied the eligibility criteria for applying the new COVID-19 condition
of release, the ATO may revoke the determination that was issued in respect of their application.
Where the ATO’s determination is revoked, the lump sum benefit amount(s) incorrectly withdrawn
will be assessable to the individual and taxed at their marginal rates under S.304-10 of ITAA 1997.
Furthermore, if an individual had provided false or misleading information when applying for the
new COVID-19 condition of release, they could face penalties for each false and misleading
statement (under Division 284 of Schedule 1 to the Taxation Administration Act 1953) of up to:
• $12,600 for applications made before 1 July 2020 (i.e., 60 penalty units x $210); and
• $13,320 for applications made on or after 1 July 2020 (i.e., 60 penalty units x $222).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

5. Claims for personal super contributions in the

ATO’s firing line in light of COVID-19
An individual can currently claim a deduction under S.290-150 to S.290-180 for personal (i.e., after-
tax) superannuation contributions (‘personal contributions’) made to a complying superannuation
fund (including an SMSF) during an income year where the following conditions are satisfied:
1. Age limit – The contribution is made no later than 28 days after the end of the month in which
the individual turned 75 years of age (note that, a ‘work test’ must generally be satisfied before
a fund can accept personal contributions in respect of an individual aged 67 or more).
2. Minors – If the individual was under the age of 18 at the end of the income year, they must have
derived income for the year as an employee or from carrying on a business.
3. Downsizer contributions – The contribution must not be a ‘downsizer contribution’ under
S.292-102 (i.e., a personal contribution that is a ‘downsizer contribution’ cannot be claimed as
a tax deduction).
4. Notice of intent (‘deduction notice’) requirements – The following two basic deduction notice
requirements must be satisfied (refer to S.290-170):
(a) The individual has given a valid written notice in the approved form (i.e., a deduction notice)
to the trustee(s) of the receiving fund (within the relevant time frame – refer below), advising
the trustee(s) of the amount of personal contributions made during the income year for
which they intend to claim a tax deduction.
Refer to the ATO’s approved deduction notice on the ATO’s website: “Notice of intent to
claim or vary a deduction for personal super contributions” (which can be accessed through
the NTAA’s 2021 Day 1 Tax Schools software, under ‘Deductions’ and ‘Item D12’).

TAX WARNING – Time limits apply for providing deduction notice

Generally, a deduction notice must be given to the fund trustee(s) by the earlier of:
• the end of the day on which the individual’s tax return is lodged for the income year in which the
contribution was made; and
• the end of the following income year (i.e., 30 June).
Where a deduction notice for a personal contribution is not lodged on time, no deduction will be
available for the contribution even where a deduction notice is subsequently provided to the fund.
This is because a deduction notice in respect of a personal contribution must be provided within
the above prescribed time limits before a taxpayer can qualify for a deduction under S.290-170.

(b) The trustee(s) has provided the individual with a written acknowledgment of their notice.

TAX TIP – No time limits apply for a written acknowledgment

In some cases, a taxpayer who is looking to claim a deduction for a personal contribution made to
their fund during an income year may not receive a written acknowledgment (of their deduction
notice) from their fund by the time their tax return is lodged for that year.
In this situation, a taxpayer cannot claim a deduction for their personal contribution when they
lodge their tax return, as the deduction notice requirements in S.290-170 would not have been
satisfied. As a result, the issue often raised in this situation is whether a taxpayer can request an
amended assessment (to include their deduction for their personal contribution) upon the receipt
of a written acknowledgment from their fund at a later time.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

As there are no time limits prescribed within S.290-170 within which a written acknowledgment of
a taxpayer’s deduction notice must be received from their fund, a taxpayer who receives a written
acknowledgment after lodging their tax return for the relevant income year can generally request
that their assessment for that year be amended (within time limits) to include their deduction.
In contrast, where a deduction notice for a personal contribution made during an income year is
lodged after the due date (e.g., after the lodgment of the relevant tax return for that year), a taxpayer
is not able to request an amended assessment for that year in order to make a claim. This is
because in this case, there is a time limit prescribed by S.290-170(1) regarding the lodgment of a
deduction notice for a personal contribution with the receiving fund. Therefore, if that time limit is
not satisfied, no deduction will be available for the contribution at all (as noted above).

5.1 The ATO’s traditional audit focus on claims for personal

contributions – the ‘deduction notice’ requirements
In recent years, the ATO’s compliance activities in relation to claims for personal (i.e., after-tax)
superannuation contributions (‘personal contributions’) have largely focused on improving the
integrity of the ‘deduction notice’ requirements associated with claiming these deductions. This
has largely involved the ATO increasing its tax return disclosure requirements (i.e., at Item D12
of the ‘I’ return) and its data matching and verification activities, in relation to these claims.

The reason for the ATO’s increased audit focus on the ‘deduction notice’ requirements in S.290-
170 can be explained by reference to the following:
(a) Traditionally, many individuals have been claiming a deduction for personal contributions on
the ‘I’ return, without providing the trustee(s) of their fund with a ‘notice of intent’ to claim a
deduction (‘deduction notice’). In these situations, a tax deduction was still being claimed on
the ‘I’ return, but the contributions were being treated in the fund as non-concessional
contributions (and not subject to tax at the general rate of 15%).
(b) Since the removal of the 10% test for claiming deductions for personal contributions from 1
July 2017, there has been a significant increase in the number of individuals (especially
employees) making personal contributions and claiming a deduction for these contributions.
The 10% test prevented most employees from being able to claim personal contributions
before 1 July 2017, because this test broadly required an employee’s employment-related
income to be less than 10% of their total assessable income before a claim could be made.
(c) In light of the above, the Government and the ATO have become increasingly concerned about
the risk of more individuals not complying with the ‘deduction notice’ requirements when
claiming deductions for personal contributions at Item D12 of the ‘I’ return. As a result, over
the last two years, the ATO has increased its tax return disclosure requirements, as well as
its data matching and verification activities, to improve the integrity of the ‘notice of intent’
requirements and claims for personal contributions.

5.2 New ATO compliance issues emerge with claims for

personal contributions in light of COVID-19
In light of COVID-19 and the introduction of the new COVID-19 condition of release for accessing
superannuation entitlements (discussed above), there are two further ATO compliance issues that
have emerged in relation to claims for personal contributions. These will particularly affect claims
for personal contributions in the 2020 and 2021 income years, and relate to personal contributions
made in the following situations:
• A personal contribution is made to a fund (including an SMSF) which is subsequently followed
by a COVID-19 super withdrawal from that fund in the same income year.
• A personal contribution is made to a fund after having made a COVID-19 super withdrawal from
that fund.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

5.2.1 Personal contribution made to a fund which is subsequently

followed by a COVID-19 super withdrawal in the same year
Situations will arise where an individual has made a personal contribution to their superannuation
fund during an income year (e.g., the 2021 income year) for which they intend to claim a deduction,
and the individual also makes a withdrawal from their fund later in the same income year after
satisfying an eligible condition of release (e.g., the new COVID-19 condition of release).

In the ATO’s 2020 Individual Tax Return Instructions for Item D12, the ATO states that a deduction
may be available for a personal contribution made to a complying superannuation fund if:
“…at the time you gave the notice, the superannuation fund or RSA provider still held
the contributions in respect of which you gave the notice; this requirement may not be
met if, for example, you withdrew those contributions under the COVID-19 - Early
release of superannuation scheme before giving the notice…” [Emphasis added]

More specifically, under S.290-170(2)(c)(ii), a deduction notice provided to a superannuation fund

in respect of a personal contribution will not be a valid notice (and a deduction will not be
available) if it is provided at a time when the fund no longer holds the relevant contribution.

This will typically arise where an individual has made a personal contribution during an income year
and before the deduction notice for the contribution is provided to the fund, the individual either:
• withdraws the contribution (e.g., as part of a lump sum benefit payment made to the individual
upon satisfying an eligible condition of release, such as the individual satisfying the new COVID-
19 condition of release or the individual ‘retiring’); or
• rolls over all or part of their entitlements (including the contribution made) from the fund (e.g.,
where an individual’s entitlements, including current year contributions, are rolled over from an
industry fund to a newly established SMSF).

Therefore, if an individual intends to claim a tax deduction for the entire amount of a personal
contribution in these circumstances, their deduction notice must be provided to the fund
trustee(s) before the time their benefits (including the contribution) are withdrawn or rolled-
over from the fund (this is an exception to the general timing rule noted above for lodging a
deduction notice). If the deduction notice is not provided to the fund by this time, a deduction
cannot be claimed for the entire amount of the personal contribution made during the income year.

TAX TIP – Partial deductions may be available for partial withdrawals

Where a deduction notice is not provided for the entire contribution (before the individual’s benefits
are withdrawn or rolled over from the fund), and only part of the individual’s benefits have been
withdrawn or rolled over, a valid notice can still be given (e.g., by the time of lodgment of the
relevant tax return) for part of the contribution made.
In this case, the amount in respect of which a valid deduction notice can be provided will be limited
to the amount of the contribution that remains in the fund that represents the tax-free component.
This is calculated by reference to the tax-free component of the individual’s superannuation interest
just after the withdrawal or roll-over (‘remaining tax-free component’), as a proportion of the tax-
free component of that interest just before the withdrawal or roll-over (‘initial tax-free component’).
Refer to paragraphs 71 and 271 to 275 of TR 2010/1.
This can be further illustrated in the following example.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

EXAMPLE 3 – Benefits partly withdrawn from fund as lump sum

On 10 December 2020, Ben withdrew a tax-free lump sum benefit from his industry fund of $10,000
under the new temporary COVID-19 early release scheme, on the basis of having being made
redundant by his employer in October 2020.
Just before the lump sum withdrawal, Ben’s interest in his fund was valued at $500,000, which
included a tax-free component of $100,000 (representing 20% of his interest) and a taxable
component of $400,000 (representing 80% of his interest).
The tax-free component included a $10,000 personal contribution made by Ben in July 2020
(which was treated by the fund as a non-concessional contribution at this time), for which no
deduction notice had been provided to the fund by the time of Ben’s lump sum withdrawal under
the COVID-19 early release scheme.
After the lump sum withdrawal, Ben’s remaining entitlements in the fund were $490,000 (i.e.,
$500,000 – $10,000 lump sum), which comprised a tax-free component of $98,000 (i.e., 20% x
$490,000) and a taxable component of $392,000 (i.e., 80% x $490,000).
Can Ben claim a tax deduction for his $10,000 personal contribution if he provides a
deduction notice for this amount by the time he lodges his 2021 tax return?
No.
Ben’s deduction notice would not be a valid notice in respect of the $10,000 contribution. As a
result, Ben would not be entitled to claim a full tax deduction for the $10,000 contribution.
This is because, in order to claim a deduction for the entire $10,000 contribution, Ben’s deduction
notice must have been lodged with the fund trustee(s) by 10 December 2020 (i.e., by the time of
his COVID-19 lump sum withdrawal).
However, Ben can provide a valid deduction notice by the time he lodges his 2021 tax return (or
by 30 June 2022, whichever is earlier), for the portion of his $10,000 contribution that remained in
the fund after the payment of his lump sum benefit. This portion is calculated as follows:

$98,000 (remaining tax-free component)

= $ 10,000 (contribution) x
$100,000 (initial tax-free component)
= $ 9,800

This will entitle Ben to claim a $9,800 tax deduction in respect of his personal contribution,
assuming he satisfies all other conditions for deductibility.
What is the real danger or trap for Ben when providing a deduction notice to his fund?
Based on the above, the real danger for Ben is that, if Ben simply gives his fund a deduction
notice specifying his intention to claim a deduction for the entire contribution of $10,000 by the
time he lodges his 2021 tax return (or by 30 June 2022, whichever is the earliest), this will be
considered to be an invalid notice for the purposes of S.290-170.
As a result, Ben will not be entitled to claim any tax deduction for his contribution, as the time
period within which he is required to provide a valid deduction notice would have already expired.

5.2.2 Personal contribution made to a fund after making a COVID-19

super withdrawal from the fund
Following the introduction of the new temporary COVID-19 condition of release, some financial
commentators have suggested combining this new condition of release with a ‘withdrawal and
recontribution’ strategy involving personal (deductible) contributions, to access tax savings.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

This essentially involves the following:

• An eligible individual makes a permitted tax-free lump sum withdrawal of their superannuation
entitlements (of up to $10,000) under the new COVID-19 condition of release.
• The individual then recontributes part or all of their lump sum withdrawal back into their fund as
a personal (deductible) contribution (i.e., a concessional contribution), assuming all the relevant
conditions for claiming a deduction are satisfied (e.g., the ‘deduction notice’ requirements).

ATO’s approach to the ‘withdrawal and recontribution’ strategy involving the

new temporary COVID-19 condition of release
The ATO has recently expressed concerns with taxpayers who have entered into a ‘withdrawal and
recontribution’ strategy that involves making a lump sum superannuation withdrawal under the
COVID-19 condition of release and then recontributing this amount back into their fund as a
concessional contribution (i.e., as a personal deductible contribution).

More specifically, the ATO’s concerns about this strategy are clearly expressed in the its fact sheet:
‘COVID-19 early release of super – integrity and compliance’, as follows:
“To be eligible to withdraw an amount under the COVID-19 early release of super, the
money released must be to assist you to deal with the adverse economic effects of COVID-
19. If you withdraw an amount for the main purpose of recontributing the released
amount as a personal super contribution to claim a tax deduction, you may no longer
be eligible and be subject to tax consequences.” [Emphasis added]

Furthermore, the ATO has advised that schemes under the COVID-19 early release of super that
attract the ATO’s attention include withdrawing and recontributing super to claim a tax deduction.
In other words, this strategy is likely to attract the operation of the of the general anti-avoidance
provision of Part IVA of the ITAA 1936, as the ATO is likely to argue that the main purpose of such
a strategy is to obtain a tax benefit (e.g., being the deduction for the personal contribution that is
made to the relevant fund from the tax-free lump sum withdrawal). Where Part IVA is applied by
the ATO, the Commissioner is likely to cancel the relevant tax benefit associated with the strategy
(e.g., the deduction for the personal superannuation contribution).

TAX TIP – Situations where Part IVA could be less of a risk

The application of Part IVA to the ‘withdrawal and recontribution’ strategy involving recontributing
a lump sum benefit withdrawal under the COVID-19 condition of release back into a fund as a
concessional (or deductible) contribution may be less of a risk where there are genuine non-tax
reasons behind this course of action.
For example, this may be the case in the following two situations:
(a) There is a greater time delay between the lump sum withdrawal and any recontribution
– e.g., the longer the time delay between these two events, the less likely that Part IVA may
be a risk to a taxpayer. This could occur where the lump sum withdrawal under the COVID-
19 condition of release is recontributed into a fund in the income year following the one in
which the lump sum withdrawal was made.
(b) A taxpayer’s circumstances have changed, such as where a taxpayer’s financial position
has change following a COVID-19 lump sum withdrawal. This could occur where, for example,
a taxpayer has become re-employed (after losing their job) or where a taxpayer has received
an unexpected financial windfall (e.g., a gift from a family member).
Ultimately, the viability of this argument will rely upon an individual being able to demonstrate
that they genuinely withdrew an amount from superannuation due to the adverse financial
effects of COVID-19, rather than with the express intention of obtaining a tax benefit (i.e., by
recontributing this amount as a deductible or concessional contribution).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
The ATO’s 2021 Audit Warning Areas for Individuals

Notes
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NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

A TAX-EFFECTIVE GUIDE FOR

EMPLOYEES WHO LOSE THEIR JOB

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

Notes
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NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

A tax-effective guide for employees who

lose their job
The COVID-19 pandemic has had a significant impact on the number of Australians losing their
jobs in the past 12 months. For example, in June 2020, it was reported that, according to the
Australian Bureau of Statistics (‘ABS’), just under 600,000 people had lost their jobs in April 2020,
which was mainly because of the restrictions introduced (particularly COVID-19 lockdowns) to
protect Australians from the pandemic. Furthermore, by July 2020, Australia’s unemployment rate
peaked at 7.5% (which is the highest it has been in over 20 years).

It has also previously been reported that some of the industries hardest hit by the pandemic (i.e.,
experiencing the greatest job losses) include the airline sector (e.g., Qantas and Virgin Australia),
the travel industry (e.g., Flight Centre), the retail trade sector (e.g., Myer, David Jones, Target
and Harris Scarfe), the finance industry, the media sector (e.g., the ABC), arts and recreation,
and the hospitality industry.

As a result of the increased job losses in Australia in the past 12 months, it is expected that tax
practitioners will be dealing with more employees who have lost their job in the 2020 and 2021
income years. Furthermore, although recent ABS data reveals an economic and employment
recovery (e.g., a drop in Australia’s unemployment rate), more job losses are expected to eventuate
following the end of the Government’s JobKeeper program on 28 March 2021.

TAX WARNING – Common tax issues for employee that loses their job
On this basis, it is important for tax practitioners to be aware of a number of common tax issues
that are often raised when an employee loses their job, including the following:
• Dealing with the concessional taxing rules for employment termination payments, including
the correct application of the $180,000 whole-of-income cap and the standard ETP cap, which
can give rise to unexpected tax liabilities for many employees receiving such payments.
• The deductibility of legal expenses incurred by an employee, which relate to disputes that arise
on the termination of employment, as well as the tax treatment of any award or reimbursement
received by an employee in respect of their legal expenses.
• Claiming self-education expenses that are incurred both before and after the termination of an
employee’s employment.
• The benefits associated with transferring an existing novated leased car to a new employer,
for an employee who loses their job and obtains new employment.

These seminar notes will address each of the above issues that are often raised when an employee
loses their job under the following broad categories:

1. Taxing tips and traps for employees receiving employment termination

payments (‘ETPs’) (Refer to pages 184 to 190).
2. Dealing with legal expenses that relate to disputes on termination of
employment (Refer to pages 191 to 193).
3. Identifying when self-education expenses can be claimed for employees
who lose their job (Refer to pages 194 to 196).
4. Transferring an existing novated leased car to a new employer – after-tax
savings! (Refer to pages 197 to 200).

Note that, all legislative references in this segment of the notes are to the ITAA 1997 unless
otherwise stated.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

1. Taxing tips and traps for employees receiving

employment termination payments (‘ETPs’)
An employee whose employment is terminated (whether voluntarily or involuntarily) may receive
an employment termination payment (or an ETP) from their employer. An ETP can arise during
an employee’s lifetime (i.e., a life benefit ETP) or upon an employee’s death (i.e., a death benefit
ETP). The discussion in this segment of the seminar notes will focus only on life benefit ETPs.

A payment that qualifies as a life benefit ETP is generally eligible for concessional tax treatment in
the hands of the receiving employee under Division 82, broadly as follows:
(a) The tax-free component of a life benefit ETP (i.e., so much of the ETP that comprises the
invalidity segment and/or relates to pre-July 1983 employment) is tax-free to the employee.
(b) The taxable component of a life benefit ETP (i.e., the ETP less the tax-free component) is
included in an employee’s assessable income, but a tax offset (‘ETP tax offset’) may be
available to limit the tax rate that applies to this component. In particular, the ETP tax offset
will generally limit the tax rate that applies to the taxable component of the ETP up to either
of the following cap amounts (depending on the type of ETP – refer below):
• The $180,000 whole-of-income cap (as reduced by non-ETP taxable income); or
• The standard ETP cap (i.e., $210,000 for 2019-20 and $215,000 for 2020-21).
So much of the taxable component of a life benefit ETP that exceeds the relevant cap amount
will be taxed at the top marginal tax rate plus Medicare levy (i.e., currently 47%).

TAX WARNING – Concessional ETP taxing rules made complex by the

whole-of-income cap and the standard ETP cap
Although the whole-of-income cap for life benefit ETPs has been in existence since 1 July 2012,
there still appears to be confusion around the correct application of this cap and how it interacts
with the standard ETP cap (e.g., $215,000 for the 2021 income year).
This has resulted in reporting errors by employers (e.g., when providing details of an employee’s
ETP through STP, such as the taxable component of the ETP and the appropriate code to
indicate which cap applies in respect of the taxable component), as well as reporting errors on the
employee’s tax return (e.g., at Item 4 – Employment termination payments (ETP)). Ultimately,
these errors have resulted in life benefit ETPs being taxed incorrectly.
Furthermore, the whole-of-income cap can create an additional unexpected tax liability upon the
lodgment of a tax return for an employee who receives an ETP in an income year (e.g., in the 2021
income year) in which the employee also has other income (e.g., salary or wages from other
employment, interest income, dividend income and net capital gains).

1.1 Identifying when a payment is a life benefit ETP

A life benefit ETP is defined in S.82-130(2) as a payment that satisfies the following conditions
(which are outlined in S.82-130(1)(a)(i), (b) and (c)):
(a) The payment is made in consequence of the termination of employment, such as:
• a gratuity or golden handshake;
• a payment in lieu of notice, or for unused rostered days off or unused sick leave;
• a payment for wrongful dismissal;
• an invalidity payment for permanent disability; and
• a bona fide redundancy payment or an early retirement scheme payment (except for the
tax-free portion of these payments – refer below).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

(b) The payment is received within 12 months of the employee’s termination, subject to certain
exceptions (e.g., where the Commissioner has exercised his discretion to waive the 12-month
rule, and for genuine redundancy and early retirement scheme payments).

(c) The payment is not specifically excluded from being an ETP under S.82-135. Examples of
payments that are specifically excluded as being ETPs include:
• unused annual leave and long service leave payments; and
• the tax-free portion of a genuine redundancy or early retirement scheme payment (i.e.,
$10,989 + $5,496 for each year of completed service – for the 2021 income year).

1.2 Applying the concessional tax rules for life benefit ETPs
As noted above, the tax-free component of a life benefit ETP (i.e., any amount related to the
invalidity segment and/or pre-July 1983 employment) is tax-free to the recipient employee,
irrespective of the type of ETP. Refer to S.82-10(1).

In contrast, the taxable component of a life benefit ETP (i.e., the ETP less the tax-free component)
is included in an employee’s assessable income, but an ETP tax offset may be available to limit
the tax rate that applies to this component (refer to S.82-10(2) to (8)). In particular, the ETP tax
offset will generally limit the tax rate that applies to the taxable component of the ETP that does
not exceed the relevant cap amount. Practically, the relevant cap that applies will either be the:
• $180,000 whole-of-income cap (as reduced by non-ETP taxable income); or
• standard ETP cap of $215,000 for the 2021 income year.

1.2.1 Relevant cap that applies to taxable component depends on

the type of life benefit ETP – excluded and non-excluded ETPs
As to which of the relevant caps applies to a life benefit ETP depends on the type of ETP (or the
circumstances in which the ETP was paid to an employee), as follows:
(a) Excluded ETPs – Where the ETP is an excluded ETP, the taxable component will only be
subject to the standard ETP cap of $215,000 for the 2021 income year. In this case, the ETP
is excluded from the whole-of-income cap rules, which means that the taxable component will
be concessionally taxed to the extent it does not exceed $215,000 for the 2021 income year.

TAX TIP – Identifying what qualifies as an excluded ETP

An excluded ETP is an ETP that is any of the following (refer to S.82-10(6)):
• A genuine redundancy payment (i.e., the taxable portion of such a payment, as the tax-free
portion is not an ETP as noted above) or a payment that would be a genuine redundancy
payment but for the existing pension age restriction or retirement restriction.
• An early retirement scheme payment (i.e., the taxable portion of such a payment, as the tax-
free portion is not an ETP as noted above).
• An ETP that contains an invalidity segment (which forms part of the tax-free component).
• An ETP that is paid to the employee in connection with a genuine employment-related dispute
related to personal injury, unfair dismissal, harassment or discrimination.

(b) Non-excluded ETPs – Where the ETP is not an excluded ETP (i.e., the ETP is a non-excluded
ETP, such as a golden handshake or a payment in lieu of notice), the taxable component will
be subject to the whole-of-income cap rules. In this case, the taxable component of the ETP
will be concessionally taxed to the extent to which it does not exceed the lesser of the:
• whole-of-income cap of $180,000 (as reduced by non-ETP taxable income); and
• standard ETP cap of $215,000 for the 2021 income year.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

1.2.2 Life benefit ETP taxing table for 2021 – Taxable component
The following table summarises the maximum rate of tax (including Medicare levy) that applies to
the taxable component of an ETP received in the 2021 income year, which will depend on the:
• type of ETP (i.e., an excluded ETP or a non-excluded ETP); and
• age of the recipient employee at the end of the income year in which the ETP is received (i.e.,
whether or not the employee has reached their preservation age).

Taxable component of life benefit ETP

Type of ETP Age of Amount subject to tax Max tax

employee rate

Excluded ETP Under • Up to ETP cap of $215,000 32%

preservation
Genuine redundancy age • Amount above ETP cap 47%
payment, early
retirement scheme At or above
payment, ETP with • Up to ETP cap of $215,000 17%
preservation
invalidity segment, etc. • Amount above ETP cap 47%
age

Non-excluded ETP Under • Up to the lesser of ETP cap ($215,000)

32%
preservation and whole-of-income cap ($180,000 less
Golden handshake, age non-ETP taxable income)
gratuity payment,
payment in lieu of • Amount above applicable cap 47%
notice or for unused
rostered days off, etc. At or above • Up to the lesser of ETP cap ($215,000)
17%
preservation and whole-of-income cap ($180,000 less
age non-ETP taxable income)
• Amount above applicable cap 47%

The maximum tax rates specified include the 2% Medicare levy.

An employee’s preservation age commences at age 55 (for employees born before 1 July 1960) and
progressively increases to age 60 (for employees born on or after 1 July 1964). Employees reaching the
age of 58 during the 2021 income year (i.e., employees born from 1 July 1962 to 30 June 1963) would
have reached their preservation age for these purposes.

1.2.3 Reducing the $180,000 whole-of-income cap by an employee’s

non-ETP taxable income – for non-excluded ETPs
Where an employee’s ETP is subject to the whole-of-income cap (i.e., for a non-excluded ETP),
the amount of the taxable component that is concessionally taxed is broadly limited to the lesser of
the $180,000 whole-of-income cap and the standard ETP cap (e.g., $215,000 for 2020-21).

Furthermore, the $180,000 whole-of-income cap must be reduced by the recipient employee’s
taxable income for the income year in which their ETP is received, other than the taxable
component of their ETP and the taxable component of any other ETP received later in the same
income year (referred to as the employee’s non-ETP taxable income).

What this means is that, where an employee has non-ETP taxable income (e.g., salary or wages
income, interest income and dividend income) in the income year in which they receive a non-
excluded ETP, the whole-of-income cap will generally end up being lower than the standard ETP
cap. As a result, in this case, the amount of the taxable component that is concessionally taxed
will be limited to the amount that does not exceed the whole-of-income cap (i.e., $180,000 as
reduced by the employee’s non-ETP taxable income).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

Therefore, the greater an employee’s non-ETP taxable income in the income year in which they
receive a non-excluded life benefit ETP, this will result in a lower whole-of-income cap and a greater
tax payable amount in relation to the ETP. This is because, any amount of the taxable component
of an ETP above the whole-of-income cap will be taxed at 47% (including Medicare levy).

EXAMPLE 1 – Applying the whole-of-income cap and the ETP cap

Bill’s employment was terminated in April 2021 (at the age of 52) and he received a non-excluded
ETP of $100,000 that solely comprised the taxable component. Bill will also have non-ETP taxable
income of $140,000 (largely comprising salary income) for the 2021 income year.
Assume that Bill has not received any other ETPs whether in the 2021 or in an earlier income year.
Under the taxing rules for ETPs, Bill’s ETP must be included in his assessable income for the 2021
income year. However, Bill will be entitled to an ETP tax offset to reduce the amount of tax that
would otherwise be payable in respect of his ETP.
As Bill’s ETP is a non-excluded ETP, Bill’s ETP tax offset will only apply to so much of his $100,000
ETP that does not exceed the lesser of Bill’s:
• whole-of-income cap of $40,000 (i.e., $180,000 less $140,000 non-ETP taxable income); and
• standard ETP cap of $215,000.
What is the maximum tax payable on Bill’s $100,000 ETP for the 2021 income year?
Based on the above, Bill’s ETP tax offset can only apply to $40,000 of Bill’s ETP, which means that
the balance of his ETP (i.e., $60,000) will be taxed at the top marginal rate, as follows:
• $40,000 x 32% maximum (including Medicare levy) $ 12,800
• $60,000 x 47% (including Medicare levy) $ 28,200
Total tax payable on ETP $ 41,000

What if Bill’s $100,000 ETP represented a payment for wrongful dismissal?

In this case, Bill’s ETP would be an excluded ETP, which means that the payment would not be
subject to the whole-of-income cap.
Instead, the payment would be subject to the $215,000 standard ETP cap. This means that the
entire payment would be taxed at a maximum rate of 32%, including Medicare levy (as Bill has
not reached his preservation age), resulting in a total tax payable by Bill in respect of the ETP of
$32,000 (i.e., 32% x $100,000).

The unexpected additional tax liability trap under the whole-of-income cap
when an employee’s tax return is lodged after year-end
Where an employer pays a non-excluded ETP to an employee (e.g., a golden handshake or a
payment in lieu of notice) that is subject to the $180,000 whole-of-income cap, the employer’s
PAYG withholding obligation in respect of the taxable component of the ETP will take into account
a whole-of-income cap that is generally only reduced by the total salary or wages paid to the
employee by the employer during the year (prior to termination). This is because the employer will
generally not be aware of an employee’s other (non-ETP) income for the year (e.g., salary or wages
income from other employment, interest income, dividend income and net capital gains).

In other words, what an employer will normally do in this situation is to reduce the employee’s
whole-of-income cap by the total amount of salary or wages income paid to the employee during
the income year (i.e., up to the date of termination). The employer will then withhold PAYG tax
from the taxable component at the concessional rate (i.e., at 17% or 32%) to the extent to which
the taxable component does not exceed the employee’s reduced whole-of-income cap (assuming
that this is lower than the employee’s standard ETP cap for the income year).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

However, where the employee has other (non-ETP) taxable income during the income year in
which they receive their ETP (e.g., salary or wages income earned from other employment, interest
income, dividend income or net capital gains), this will cause a further reduction to the employee’s
whole-of-income cap for the income year. As a result, this will create an additional tax liability in
relation to the employee’s ETP once the employee’s tax return is lodged for the income year.

EXAMPLE 2 – Additional tax for non-excluded ETP after year-end

Jill (aged 42) worked as an employee architect for an employer (‘first employer’) before resigning
from her job in November 2020 to work for a second employer on a higher salary.
Jill earned salary income from her first employer during the 2021 income year (i.e., up until
November 2020) of $80,000, and received a non-excluded ETP of $40,000 upon her resignation
(which was solely made up of the taxable component).
In determining how much PAYG tax to withhold from the $40,000 ETP, the first employer calculated
Jill’s whole-of-income cap as being $100,000 (i.e., $180,000 – $80,000 salary income). Assuming
that this is lower than Jill’s standard ETP cap, Jill’s employer withheld PAYG tax from the entire
payment at the concessional tax rate of 32% (as her ETP was less than her whole-of-income cap),
resulting in a PAYG withholding amount of $12,800. Refer to the ATO’s document ‘Schedule 11
– Tax table for employment termination payments’ (QC 63806).
If Jill earns salary income of $120,000 from her second employer for the remainder of the
2021 income year, how does this affect the tax payable on her ETP?
Assuming Jill has no deductions for the 2021 income year, Jill’s $180,000 whole-of-income cap
must be reduced by her total non-ETP taxable income derived for the 2021 income year, being
$200,000 (i.e., $80,000 salary income from first employer + $120,000 salary income from second
employer). On this basis, Jill’s whole-of-income cap for the 2021 income year is reduced to $0.
As a result, none of Jill’s ETP is taxed at the concessional tax rate of 32%, which means that her
entire ETP will be taxed by the ATO at the top marginal tax rate of 47% (including Medicare levy),
resulting in a total tax payable in relation to the ETP of $18,800 (i.e., 47% x $40,000).
On this basis, when Jill’s income tax return for the 2021 income year is lodged with the ATO, it is
expected that Jill’s notice of assessment will include an additional tax payable amount in respect
of her ETP of $6,000 (i.e., $18,800 – $12,800).

Maximising the whole-of-income cap for employees whose employment is

terminated towards year-end
Situations will arise where an employee’s employment is expected to be terminated towards the
end of an income year (e.g., in June 2021) whether voluntarily or involuntarily, and the employee
is expecting to receive a non-excluded ETP (e.g., a golden handshake or a payment in lieu of
notice) which has a taxable component that will be subject to the whole-of-income cap.
In these situations, receiving a non-excluded ETP in the income year in which the employee’s non-
ETP taxable income (e.g., salary or wages income and/or investment income) is lowest will
generally maximise access to the whole-of-income cap and potentially reduce the tax payable in
respect of the taxable component of the ETP. This is because the taxable component of an ETP
is included in the recipient employee’s assessable income (and an ETP tax offset entitlement would
be available) in the income year in which the payment is made to or received by the employee.
For example, an employee who is to be paid a non-excluded ETP upon their anticipated retirement
in May 2021, and who is expecting a lower taxable income in subsequent income years (e.g., by
way of a tax-free superannuation pension), could find it more beneficial to receive their ETP in the
following income year (e.g., in July 2021), where appropriate. In this case, receiving the ETP in
the following income year could result in a lower reduction to the employee’s whole-of-income cap
(i.e., because of a lower non-ETP taxable income compared to the previous income year), thereby
increasing the amount of the taxable component that is concessionally taxed (e.g., at the rate of
17%, including Medicare levy, where the employee has reached their preservation age).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

1.2.4 Reducing the standard ETP cap (e.g., $215,000 for 2020-21) for
ETPs previously received by an employee
When applying the standard ETP cap (i.e., $215,000 for the 2021 income year), whether alone
(i.e., for an excluded ETP) or in conjunction with the whole-of-income cap (for a non-excluded ETP),
the ETP cap may need to be reduced by any ETPs previously received by the employee (whether
in the same income year or an earlier income year). Refer to S.82-10(4)(a) and (b).

More specifically, as to whether and how the standard ETP cap is reduced for any ETPs previously
received by the employee will depend on whether the ETP cap is being applied to an excluded
ETP (e.g., a bona fide redundancy or early retirement scheme payment) or to a non-excluded
ETP (e.g., a golden handshake or a payment in lieu of notice), basically as follows:
(a) Where the ETP cap is being applied to an excluded ETP – the ETP cap (e.g., $215,000 for
the 2021 income year) must be reduced only by the greater of any excluded ETPs received:
• earlier in the same income year in respect of a different termination of employment; or
• in respect of the same termination of employment (whether in the same or in an earlier
income year).
(b) Where the ETP cap is being applied to a non-excluded ETP – the ETP cap (e.g., $215,000
for the 2021 income year) must be reduced by the greater of any ETPs received (i.e., both
excluded and non-excluded ETPs):
• earlier in the same income year in respect of a different termination of employment; or
• in respect of the same termination of employment (whether in the same or in an earlier
income year).

TAX TIP – ETPs that include excluded and non-excluded components

Where a single ETP includes both an excluded payment part and a non-excluded payment part,
the excluded payment is deemed to be received first for the purposes of calculating how much of
the payment is eligible for the ETP tax offset. Refer to S.82-10(7).

1.3 Reporting a life benefit ETP on the 2021 ‘I’ return

A life benefit ETP that is received by an employee during the 2021 income year is reported at Item
4 – Employment termination payments (ETP) (page 2) of the 2021 ‘I’ return.

The information required to be reported for an employee’s ETP at Item 4 of the 2021 ‘I’ return will
generally be available on the employee’s STP income statement for the ETP (or on the
employee’s PAYG payment summary for the ETP, for an employer not reporting through STP).

When completing Item 4 of the 2021 ‘I’ return in relation to a life benefit ETP received by an
employee in the 2021 income year, the following key reporting guidelines should be considered,
which are based on the ATO’s draft 2021 ‘I’ return instructions at the time of writing:
(a) Reporting taxable component of ETP – The taxable component of the ETP received by the
employee must be reported at label I – Taxable component.
This amount will be included in the employee’s assessable income for the income year and
may be eligible for an ETP tax offset to limit the tax rate that applies to this component. An
ETP tax offset will only be available to the extent to which the taxable component does not
exceed the relevant cap amount (i.e., the whole-of-income cap or the standard ETP cap).

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

(b) Reporting total tax withheld – The total tax withheld by the employer from the employee’s
ETP must be reported to the left of label I.

(c) Reporting the relevant code – The relevant code for the ETP must be reported in the CODE
box to the right of label I. This code identifies the type of ETP received by the employee (e.g.,
whether an excluded or non-excluded ETP), so that the ATO can determine which cap applies
to the taxable component (i.e., whether the whole-of-income cap or the standard ETP cap) for
the purposes of calculating any ETP tax offset entitlement and the tax payable on the ETP.
In this regard, one of the following codes must be reported in the CODE box for the ETP:
• Code R – Where the ETP is an excluded ETP (e.g., a genuine redundancy payment, an
early retirement scheme payment or compensation for personal injury, unfair dismissal
and/or discrimination). In this case, the taxable component will only be subject to the
standard ETP cap (i.e., $215,000 for the 2021 income year).
• Code O – Where the ETP is a non-excluded ETP (e.g., a golden handshake, a payment
in lieu of notice or a payment for unused rostered days off). In this case, the taxable
component will be subject to the lesser of the whole-of-income cap and the ETP cap.
• Code S – Where the ETP is an excluded ETP and the employee also received another
ETP (whether an excluded or non-excluded ETP) in respect of the same termination of
employment in an earlier income year. In this case, the standard ETP cap that applies to
the taxable component of the current year’s excluded ETP is reduced by the earlier ETP (if
it is an excluded ETP).
• Code P – Where the employee’s ETP is a non-excluded ETP and the employee also
received another ETP (whether an excluded or non-excluded ETP) in respect of the same
termination of employment in an earlier year. In this case, when determining the lesser of
the whole-of-income cap and the standard ETP cap (which is to be applied to the taxable
component), the standard ETP cap is reduced by the earlier ETP.

TAX WARNING – Using the correct payment ‘code’ affects the tax
outcome of a life benefit ETP
Using the correct code for a life benefit ETP can be crucial to achieving the correct tax outcome
for an employee in respect of their ETP, basically as follows:
(a) From an employer’s perspective, the relevant code that is used by the employer in their
payroll software (which corresponds with the above codes reported at Item 4 of the ‘I’ return)
effectively determines the PAYG withholding amount in respect of the taxable component.
In particular, the PAYG withholding amount will depend on whether the whole-of-
income cap or the standard ETP cap applies, which is determined by reference to the code
used to identify the type of ETP (e.g., an excluded or non-excluded ETP).
(b) The relevant code reported at Item 4 of the employee’s ‘I’ return will allow the ATO to
determine which cap applies to the taxable component (i.e., whether the whole-of-income cap
or the standard ETP cap) for the purposes of calculating any ETP tax offset entitlement and,
therefore, the maximum tax that is payable in respect of the ETP.
As a result, to ensure that the correct tax outcome is achieved for a life benefit ETP, an employee
should be checking (in conjunction with their tax agent) the accuracy of the information on their
STP income statement (or PAYG payment summary, where appropriate) in respect of their ETP,
before their income tax return (and Item 4 in particular) is completed and lodged with the ATO.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

2. Dealing with legal expenses that relate to

disputes on termination of employment
Where an employee’s employment is terminated, disputes may arise with their employer that relate
to the termination of employment. These disputes will generally involve the employee seeking:
• to enforce or recover unpaid entitlements on termination (e.g., a golden handshake, a payment
in lieu of notice, unpaid salary and wages income and unused leave entitlements);
• compensation on the grounds of wrongful/unlawful dismissal; and/or
• compensation for breach of contract.
In these circumstances, employees will usually incur legal expenses associated with pursuing any
such claims against their employer. Furthermore, where an employee’s claim is successful (i.e.,
as a result of a court order or a settlement between the parties), the employee may be awarded or
reimbursed their legal costs. In this regard, the following two issues are often raised:
• Whether an employee can claim a deduction for their legal costs under S.8-1.
• How an amount received by an employee in respect of their legal costs (e.g., as a
reimbursement) is treated for income tax purposes.

2.1 Deductibility of legal expenses related to a dispute on

termination of employment
The deductibility of legal expenses under S.8-1 that relate to a dispute arising on termination of
employment will depend on the character or nature of the advantage sought by the employee (i.e.,
whether of a revenue or of a capital nature) by taking any action against their employer. In this
regard, the following table summarises when legal expenses incurred by an employee are likely to
be deductible/non-deductible in these circumstances.

Nature of claim Deductibility of legal expenses

1. Claims that relate To the extent that an employee’s claim against their employer relates to
to ETPs compensation in the nature of an ETP (e.g., a golden handshake or
damages related to wrongful dismissal), legal expenses incurred would
generally be capital in nature and not deductible under S.8-1.
This is because the payment of an ETP itself is a capital payment, even
though part or all of the ETP may be included in the recipient employee’s
assessable income under Division 82 and subject to special taxing rules
(discussed above). Refer to ATO ID 2001/667, TR 2012/8 (particularly
paragraphs 38 to 45) and TD 93/29.

2. Claims that relate To the extent that legal expenses incurred by an employee relate to a
to payments in dispute about the employee’s entitlement to a payment in lieu of notice,
lieu of notice of a deduction could be available based on the Federal Court decision in
termination Romanin v FCT [2008] FCA 1532 (‘Romanin’s case’), even though such
a payment is normally an ETP.
In Romanin’s case, the employee was entitled to a deduction for legal
expenses incurred in order to recover a payment in lieu of a
termination notice period of 12 months, to which the employee was
entitled under an employment agreement. This is because the purpose
of the employee’s claim was to enforce an entitlement to ‘income’ (and
not to enforce an entitlement to compensation or damages) that was
contractually owed to the employee.

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Nature of claim Deductibility of legal expenses

Specifically, the Federal Court held that the employee’s payment was:
• for a lump sum in lieu of 12 months income (less other income earned
during the 12 months after termination of employment);
• described in the orders as ‘remuneration’ and was calculated by
reference to the taxpayer’s entitlement to ‘income’;
• set-off against other income actually earned by the employee during
the 12 months following the termination; and
• a contractual entitlement to salary income the employee would have
received if he had been given 12 months notice.
Following the Federal Court’s decision in Romanin’s case, the ATO
issued a Decision Impact Statement (‘DIS’) in which the ATO appears
to have reluctantly accepted the decision on the basis that the
employee’s legal expenses were incurred in enforcing his contractual
entitlement to ‘income’ (i.e., an entitlement to salary he would have
received if he had been given 12 months notice).
The ATO’s DIS also advises that an employee may be paid an amount
in lieu of notice of termination in many ways, and the deductibility of legal
expenses incurred in obtaining such a payment will depend upon the
particular circumstances of each case.
This suggests that employees making claims for legal expenses in these
situations should be mindful that the ATO is likely to analyse their
circumstances (e.g., in the course of an ATO audit) to ensure that they
are in line with the circumstances in Romanin’s case.

3. Claims that relate To the extent that an employee’s claim against their employer relates to
to unused annual recovering any unused annual leave and/or unused long service
leave and/or long leave entitlements on termination, legal expenses incurred are generally
service leave deductible under S.8-1. This is because payments of unused
annual/long service leave are considered ordinary income, even though
they are paid as a lump sum on termination and taxed as statutory
income. Refer to Subdivisions 83-A and 83-B, and to ATO ID 2002/391.

4. Claims that relate To the extent that an employee’s claim against their employer relates to
to unpaid salary enforcing a contractual entitlement that relates to a right of income (e.g.,
or wages income recovering unpaid salary or wages income), legal expenses incurred by
(or similar income) the employee are deductible under S.8-1. Refer also to TD 93/29.

2.1.1 Apportioning legal expenses related to payments comprising

both revenue and capital amounts
Where legal expenses are incurred in relation to a payment that comprises both revenue and capital
amounts (e.g., a wrongful dismissal claim may also involve the recovery of unpaid salary or wages),
the legal expenses must be apportioned on a fair and reasonable basis. Based on TD 93/29, a
fair and reasonable apportionment could involve the following:
• Where the legal invoice is itemised – A reasonable basis of apportionment could be the time
spent in relation to the revenue claim relative to the capital claim.
• Where the legal invoice is not itemised – An apportionment based on a reasonable costing
of the work performed by the solicitor related to the revenue component of the claim could be a
reasonable basis of apportionment. Where this is not possible, an apportionment based on the
monetary value of the revenue claim relative to the capital claim could be reasonable.

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A tax-effective guide for employees who lose their job

2.2 Tax treatment of an amount received by an employee

in respect of legal expenses
Where an employee’s claim against their employer is successful and the employee is awarded or
reimbursed their legal costs (e.g., as a result of a court order or an out-of-court settlement
between the parties), TR 2012/8 sets out the ATO’s views on how such an amount received by the
employee is dealt with. In particular, TR 2012/8 addresses whether the amount received is:
• an ETP (and, therefore, assessable in the hands of the employee);
• an assessable recoupment to the employee under Subdivision 20-A; or
• subject to FBT to the employer (for any payment or reimbursement made by the employer).

The following table summarises the ATO’s views in relation to each of the above issues.

Issue Tax treatment

1. Whether amount To the extent that the amount received by an employee is capable of
received for legal being identified as relating specifically to the reimbursement of legal
fees is an ETP costs incurred by the employee, the amount is not an ETP, nor forms
part of an ETP. Refer to paragraph 4 of TR 2012/8.
As an exception, where an employee receives a single, undissected
award or settlement payment where the component of the payment that
relates to legal costs has not been (and cannot be) identified, the entire
payment is generally treated as an ETP (and taxed under the rules for
ETPs in Division 82). Refer to paragraphs 6 and 55 to 57 of TR 2012/8.
However, where the parties expressly agree (e.g., in a settlement
agreement) or impliedly agree (e.g., implied from the terms of a
settlement agreement) that a certain portion of the entire payment relates
to legal costs, this portion related to legal expenses will not be an ETP,
nor form part of an ETP. Refer to paragraph 58 of TR 2012/8.

2. Whether amount An amount received by an employee in respect of legal expenses

received for legal incurred by the employee (whether via a Court order or a settlement
fees is taxed as between the parties) will generally be an assessable recoupment (i.e.,
an assessable assessable to the employee) under Subdivision 20-A, to the extent it
recoupment relates to deductible legal expenses (i.e., legal expenses that were
deductible). Refer to paragraphs 53 and 54 of TR 2012/8.
To the extent to which legal fees were not deductible to an employee,
any amount received as an award or reimbursement of their legal fees
will not be an assessable recoupment under Subdivision 20-A.

3. Whether amount An employer reimbursement of legal costs incurred by an employee in a

received from an dispute concerning termination of employment will generally not be
employer in subject to FBT. Refer to paragraphs 59 to 62 of TR 2012/8.
respect of legal
fees is subject This is effectively because, according to the ATO, an employer
to FBT reimbursement of legal costs in these circumstances will generally not
have a sufficient or material connection to the employee’s former
employment (i.e., the reimbursement would generally not be ‘in respect
of the employment of the employee’).

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A tax-effective guide for employees who lose their job

3. Identifying when self-education expenses can

be claimed for employees who lose their job
Claims for self-education expenses have traditionally been scrutinised by the ATO as part of its
annual work-related expenses audit program, often resulting in audit adjustments and penalties
being imposed on employees. These claims will continue to be scrutinised in light of the ATO’s
recent tax gap results for individuals not in business, which have identified that incorrect work-
related expense claims have been a major contributor to this tax gap.
When an employee’s employment is terminated (whether voluntarily or involuntarily), another issue
that is often raised is whether deductions can be claimed for self-education expenses that are
incurred by the employee before and/or after the termination of their employment.

3.1 Claiming self-education expenses incurred before

termination of an employee’s employment
Many employees whose employment is terminated may have been (and may continue to be)
involved in a particular course of study for which self-education expenses (e.g., course fees) had
been incurred by the employee prior to their employment being terminated.

In these circumstances, a deduction would arguably still be available under S.8-1 for self-
education expenses incurred before termination of employment provided that, at the time the
relevant expenditure was incurred, the employee’s intention was to undertake a subject that is part
of a course of study which had the relevant connection with their employment activities at that time.

Based on TR 98/9, this requirement will generally be satisfied where the relevant course:
• enables the employee to become more proficient (i.e., to maintain or improve the skills they
require) in carrying out their current income-earning activities (e.g., refer to FCT v Finn (1961)
106 CLR 60 and Studdert v FCT 91 ATC 2007); and/or
• objectively leads to, or is likely to lead to, an increase in the employee’s income from their current
income-earning activities (e.g., the activity would assist a taxpayer in being promoted). Note that
a deduction can still be available even if an increase in income or a promotion does not
eventuate. Refer to FCT v Hatchett 71 ATC 4184 and Studdert v FCT 91 ATC 2007.

It would be argued that, in this case, the fact that the employee’s employment is subsequently
terminated should not alter the fact that when the expenditure was incurred, the relevant
connection existed between the expenditure and the employee’s work-related activities.

TAX TIP – ATO allows self-education claim for course later cancelled
The above approach appears to be further supported by the ATO in ID 2005/69, where the ATO
allowed an employee a tax deduction under S.8-1 for course fees incurred in relation to a course
of study for which the employee’s enrolment was subsequently cancelled.
In ID 2005/69, the taxpayer enrolled to study a subject that formed part of a course of study that
was directly related to the taxpayer’s work duties. The taxpayer paid their fees for the relevant
subject, but later cancelled their enrolment before commencing the course. The fees were not
refunded to the taxpayer, as their enrolment was cancelled late.
The ATO allowed the taxpayer a deduction for their course fees under S.8-1 because the taxpayer’s
intention at the time of incurring the fees was to undertake a subject that was part of a course which
had a sufficient connection with their income-earning activities.

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A tax-effective guide for employees who lose their job

EXAMPLE 3 – Self-education expenses incurred before termination

Peter is an accountant who has been working with his employer for five years.
Peter began a Masters of Taxation course at a university on a part-time basis in February 2021,
and paid his first semester fee of $11,000 in March 2021. The course would enable Peter to
increase his knowledge about taxation matters and to become more proficient in carrying out his
work duties, which involved tax consulting services and the preparation of tax returns.
In May 2021, Peter was retrenched from his current position as an employee accountant.
Can Peter claim a tax deduction for his first semester fee of $11,000?
It would be argued that the $11,000 expense is deductible to Peter on the basis that, at the time it
was incurred (i.e., in March 2021), the course of study had the relevant nexus with Peter’s income-
earning activities. The fact that Peter’s employment is terminated soon after incurring the $11,000
course fee should not alter the fact that when the expenditure was incurred, the relevant connection
existed between the expenditure and Peter’s employment activities.

3.2 Claiming self-education expenses incurred after

termination of an employee’s employment
An employee who is enrolled in a course of study at the time they lose their job may incur self-
education expenses (e.g., course fees) after termination of their employment, where the course of
study itself had the necessary connection with the taxpayer’s previous work-related activities.

In these circumstances, the issue often raised is whether a deduction can still be claimed for self-
education expenses incurred under S.8-1, even though the employee is no longer employed in
the position to which the particular course of study relates.

3.2.1 Self-education expenses incurred during a period that the

employee remains unemployed
Where self-education expenses are incurred by an employee in these circumstances during a
period that the employee remains unemployed, it is likely the ATO will argue that no deduction
will be available for those self-education expenses.

This is because, the ATO has previously indicated that self-education expenditure is not deductible
under S.8-1 where:
• the expenditure is incurred during a ‘break’ in employment – refer to the ATO’s comments at
paragraph 52 of TR 98/9 in relation to the decision in FC of T v Kropp 76 ATC 4184; and
• the taxpayer was not in employment (i.e., the taxpayer was unemployed) either at the time the
expenditure was incurred or during the income year in which the expenditure was incurred –
refer to the ATO’s first argument in FCT v MI Roberts 92 ATC 4787 (‘MI Roberts case’).

In these situations, the ATO has indicated that the relevant expenditure is incurred at a point “too
soon” to be regarded as being incurred in gaining or producing assessable income, or the taxpayer
is not acting within the scope of their employment at the time the expenditure is incurred.

Furthermore, any employee argument that the self-education expenses in these circumstances can
be sufficiently connected with a future income-earning activity will not succeed. This is because,
based on TR 98/9, a deduction for self-education expenses will not be allowable if the relevant
self-education activity being undertaken (e.g., a course of study) is designed to enable an employee
to obtain new employment or to open up a new income-earning activity. This is further supported
by the decisions in the MI Roberts case and FCT v Klan 85 ATC 4060. Refer also to FCT v
Maddalena 71 ATC 4161, which established the general principle that no deduction is allowed if
expenditure is designed to enable a taxpayer to get (or obtain new) employment.

NTAA Member #3105935 (Ravinder Chukka)

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A tax-effective guide for employees who lose their job

The Tribunal’s recent decision in Khan v FCT denies a deduction for self-
education expenses incurred by employee after losing their job
In the recent Administrative Appeals Tribunal (‘the Tribunal’) decision in Khan v FCT [2021] AATA
367 (‘Khan’s case’), the employee was an aircraft maintenance technician with Emirates, who was
dismissed from employment on 1 September 2016 on disciplinary grounds.

Following an unfair dismissal claim, on 4 November 2016, the parties signed a Release Agreement
under which it was agreed that the employee was taken to have resigned from employment and
was to receive a $42,500 lump sum termination payment (of which $12,000 was for damages).

Soon after the employee was initially dismissed from employment (i.e., between 5 September and
5 November 2016), the employee incurred self-education expenditure of $21,067 to undertake
courses in the United Kingdom, Poland and in Brisbane, in order to become qualified to perform
maintenance on certain additional types of aircraft. Following completion of these training courses,
he obtained employment with Etihad Airways as an aircraft maintenance engineer in Abu Dhabi.

The Tribunal held that the employee was not entitled to claim a deduction for his self-education
expenses (i.e., course fees, airfares and accommodation) on the basis that there was an insufficient
connection between the expenses incurred and the employee’s income-earning activities.
The Tribunal’s conclusion was essentially based on the following key reasons:
(a) The expenses were not incurred in the course of earning employment income from the
employee’s existing employment with Emirates. At the time the relevant expenses were
incurred, the evidence supports the conclusion that the employee’s employment relationship
with Emirates, if not already terminated, was in the process of coming to an end.
(b) In any event, at the time the relevant expenses were incurred, there was no prospect that the
employee’s employment relationship would continue with Emirates in a way that would enable
him to benefit from those courses in his existing employment.

TAX TIP – Government proposes new tax deduction for self-education

expenses related to future employment
In the October 2020 Federal Budget, the Government announced that it would undertake a
consultation process on the introduction of a new tax deduction, which would allow an individual to
claim education and training expenses they incur, which do not have a sufficient connection with
their current income-earning activities (e.g., where the expenses relate to future employment).
This proposal broadly recognises that, with the changing nature of work and the labour market,
more Australians no longer expect a job for life and may have multiple careers over their life,
requiring an upgrading of skills to support future employment and careers.
Following this announcement, the Government released a discussion paper seeking feedback on
certain aspects of this proposed new tax deduction for education and training expenses that are
not related to an individual’s current income-earning activities. This proposal is currently still being
considered by the Government.

3.2.2 Self-education expenses incurred after new employment

Where an employee who has lost their job obtains new employment, any self-education expenses
incurred during the period they are employed should be deductible under S.8-1, provided the
course of study has the relevant connection with the employee’s new job (e.g., the course enables
the employee to become more proficient in carrying out their new work duties and/or it would assist
the employee in being promoted at their new workplace).

This can include self-education expenses related to an existing course of study that had the
necessary connection with the employee’s previous work-related activities or even a course of
study that is commenced after obtaining new employment.

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NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

4. Transferring an existing novated leased car to

a new employer – after-tax savings!
Salary packaging a car through an employer has become one of the most popular salary packaging
arrangements amongst employees, resulting in after-tax savings for employees.

Furthermore, most cars that are salary packaged through an employer are salary packaged under
a novated lease arrangement. This is largely because of the flexibility such an arrangement offers
both an employer and an employee, whilst allowing the employee to enjoy all the after-tax savings
associated with salary packaging a car.

A novated lease arrangement is basically a lease arrangement under which an employee leases
a vehicle from an arm’s length financier, with the employee then ‘novating’ (or transferring) some
of their obligations under the lease to their employer for the term of the lease. Under a typical
novated lease (i.e., commonly referred to as a ‘split full novation’), the lease rights and obligations
under the lease are normally split between the employer and the employee as follows:
(a) The employer normally accepts the responsibility to make all the lease payments whilst the
employee remains employed with them.
(b) The employee becomes liable to meet any lease shortfall that may result at the end of the
lease (e.g., where the vehicle is sold by the finance company for an amount that is less than
the residual amount or payout figure under the lease).

TAX TIP – Tax consequences for employee and employer

In TR 1999/15, the ATO confirms that in the typical novated lease arrangement outlined above (i.e.,
a split full novation), the following key tax consequences generally arise:
• The employer is entitled to a tax deduction for lease payments made in respect of the car.
• Car fringe benefits arise under the FBT legislation where the car is provided for the private use
of the employee or an associate of the employee.
Further, the employee cannot claim a tax deduction for car expenses incurred during the period
the car is provided to the employee by their employer. Refer to S.51AF of the ITAA 1936.

Where an employee who salary packages a car under a novated lease loses their job, the novation
agreement with the existing employer will normally come to an end, and the rights and obligations
under the lease will normally revert to the employee (including the obligation to continue to make
lease payments under the lease). In these circumstances, the employee may decide to either:
• continue to lease the vehicle in their own name (by making lease payments under the lease); or
• effectively hand back the vehicle to the finance company and terminate the lease.

4.1 The benefits of transferring an existing leased vehicle

to a new employer under a new novation agreement
Where an employee who salary packages a car under a novated lease loses their job, and the
employee continues to lease the car (by making lease payments under the existing lease) and finds
new employment, after-tax savings can be achieved for the employee by arranging their existing
lease car to be transferred to their new employer (e.g., by way of a new novation agreement).

The key reason why such a transfer can generate after-tax savings for an employee is because of
the way that the taxable value of car fringe benefits that arise in relation to the car is calculated (for
FBT purposes) under the Statutory Formula method. This method has traditionally been the most
popular method used for calculating an employer’s FBT liability in relation to a car that is provided
to an employee, especially for cars that are used mainly or wholly for private purposes.

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A tax-effective guide for employees who lose their job

Any FBT payable in relation to a particular car provided to an employee (as well as any other costs
associated with providing the car to the employee – e.g., the GST-exclusive amount of lease
payments and other car expenses paid by the employer in relation to the car) are normally recouped
by the employer by way of a reduction in the employee’s gross (or pre-tax) salary income.

The amount by which the employee’s gross (or pre-tax) salary is reduced under a salary packaging
arrangement is often referred to as the employee’s ‘salary sacrifice amount’.

4.1.1 Calculating the taxable value of a car under the Statutory

Formula method
The taxable value of car fringe benefits that relate to a particular car under the Statutory Formula
method for an FBT year is generally determined in accordance with the following formula (in S.9 of
the FBT Act):

Base Days in the FBT year that car Recipient’s

Taxable value = 20% x x –
value fringe benefits were provided payment
Total days in the FBT year

Note that, the 20% rate applies for the 2021 FBT year where the car commenced to be provided under an
agreement entered into after 7.30pm on 10 May 2011.

Broadly, the taxable value of car fringe benefits that relate to a car under the Statutory Formula
method is calculated by applying the 20% fixed statutory percentage to the base value of the
car, and then reducing this amount by any recipient’s payment (e.g., the sum any direct after-tax
contributions made by the employee to their employer and any unreimbursed car expenses
incurred and paid by the employee, in respect of the car).

The base value of a car under a novated lease is the leased car value of the car (at the earliest
time the car was held by the employer or their associate), calculated as follows:
• If the employer began leasing the car at or about the same time it was purchased by the lessor
(e.g., the finance company) – the leased car value is equal to the cost price of the car to the
lessor (i.e., the lessor’s purchase price, including GST, dealer and delivery costs, luxury car tax
and the cost of any non-business accessories fitted to the car at the time of purchase).
• If the lessor had acquired the car at some other time – the leased car value is basically equal
to the market value of the car at the commencement of the lease.

TAX TIP – Base value of a leased car is reduced to the car’s market
value when transferred to a new employer
Where an employee commences working for a new employer (not being an associate of the former
employer), and transfers an existing novated leased car to their new employer (e.g., by way of a
new novation agreement), the base value of the car to the new employer will be the car’s market
value at the time of transfer (and not the car’s original cost price).
Therefore, by transferring an existing novated leased car to a new employer, the base value of the
car can be significantly reduced for the new employer, resulting in a lower taxable value and,
therefore, a lower FBT payable amount for the employer. In turn, this can further increase the
after-tax savings associated with the employee salary packaging a car.
The increased after-tax savings (for an employee) associated with transferring an existing novated
leased car to a new employer (e.g., under a new novation agreement) can be illustrated by
reference to the example outlined below.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

EXAMPLE 4 – Employee saves $2,138 by transferring existing car

Henry is an employee earning an annual salary of $140,000.
Henry ceased working for his existing employer on 31 March 2021 and commenced working with
a new employer on 1 April 2021.
Henry was salary packaging a car through his former employer with a base value of $48,000 under
a novated lease arrangement. It is assumed that:
• the annual lease charges in respect of Henry’s leased vehicle are $9,900 (including $900 GST);
• other (annual) car expenses in relation to the vehicle are $4,400 (including $400 GST) and
$500 (GST-free); and
• Henry has been making annual after-tax contributions directly to his employer to reduce the
taxable value of car benefits related to the car down to $0.
Henry arranged with his new employer to salary package the same car under a new novated lease
agreement from 1 April 2021 based on the same assumptions noted above. The market value of
Henry’s vehicle at this time was $24,000.
By transferring his leased car to the new employer in this way, Henry is able to generate an
additional increase in his net disposable (or after-tax) income of $2,138, compared to the increase
in net disposable (or after-tax) income achieved by Henry when salary packaging the car through
his old employer.
This is illustrated by the following analysis, which is based on the assumption that no Medicare
levy surcharge applies.

Calculating the salary sacrifice amount

Old employer New employer

Step 1: GST-exclusive car expenses
Lease payments $ 9,900 $ 9,900
Plus: Other car expenses (i.e., $4,400 + $500) + $ 4,900 + $ 4,900
Less: GST input tax credits (i.e., $900 + $400) – $ 1,300 – $ 1,300
GST-exclusive car expenses (Step 1) $ 13,500 $ 13,500

Step 2: FBT payable on car benefit

Base value of car $ 48,000 $ 24,000
x Statutory fraction x 20% x 20%
Gross taxable value $ 9,600 $ 4,800
Less: Employee contribution – $ 9,600 – $ 4,800
Taxable value/FBT payable (Step 2) $ 0 $ 0

Step 3: GST on employee contributions

Employee contribution $ 9,600 $ 4,800
GST rate x 1/11th x 1/11th
GST payable on employee contribution (Step 3) $ 872 $ 436

Step 4: After-tax employee contribution $ 9,600 $ 4,800

Salary sacrifice amount (Steps 1 + 2 + 3 – 4) $ 4,772 $ 9,136

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NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

Comparison of packaged and non-packaged

No packaging by employee (after-tax dollars) Old employer New employer
Salary $ 140,000 $ 140,000
Less: Tax and Medicare levy – $ 39,667 – $ 39,667
Salary after tax and Medicare levy $ 100,333 $ 100,333
Less: GST-inclusive car expenses ($9,900 + $4,900) – $ 14,800 – $ 14,800
Net disposable (after-tax) income $ 85,533 $ 85,533

Salary packaging the car benefit (pre-tax dollars)

Salary $ 140,000 $ 140,000
Less: Salary sacrifice (refer above) – $ 4,772 – $ 9,136
Salary after sacrifice amount $ 135,228 $ 130,864
Less: Tax and Medicare levy – $ 37,806 – $ 36,104
Income after sacrifice and tax $ 97,422 $ 94,760
Less: After-tax employee contribution (refer above) – $ 9,600 – $ 4,800
Net disposable (after-tax) income $ 87,822 $ 89,960

Increase in net disposable (after-tax) income by salary packaging car

with new employer (i.e., $89,960 – $85,533) $ 4,427
Less: Increase in net disposable (after-tax) income by salary packaging
car with old employer (i.e., $87,822 – $85,533) – $ 2,289
Overall increase by salary packaging car with new employer $ 2,138

Employees earning up to $180,000 per annum (i.e., paying tax at a marginal tax rate of between 0%
and 39%, including 2% Medicare levy – based on the 2021 income year’s rates) will generally find it
beneficial (or tax-effective) to make a direct (after-tax) contribution to their employer to reduce any
taxable value of car fringe benefits in relation to a car down to $0. This is because an employee in
these circumstances would be making an after-tax contribution from income (i.e., salary income)
which would otherwise be taxed to the employee at between 0% and 39%, in order to reduce the
employer’s FBT payable at 47% (based on the 2021 FBT year’s rate).
For the purposes of this example, the marginal tax rates for the 2021 income year have been used.

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

Notes
..........................................................................................................................................................

..........................................................................................................................................................

NTAA Member #3105935 (Ravinder Chukka)

NTAA Member #3105935 (Ravinder Chukka)
A tax-effective guide for employees who lose their job

Notes
...........................................................................................................................................................

...........................................................................................................................................................

NTAA Member #3105935 (Ravinder Chukka)

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