Record-keeping for work-related expenses
The ATO has issued a reminder to collect the retain appropriate records for work-related expenses this financial year – the primary area for the ATO. Records can be kept on paper, an electronic copy or a clear photo of an original record. Electronic records must be backed up daily. It’s crucial to note that bank statements are not a sufficient level of evidence on their own to substantiate work-related expenses. Taxpayers need to maintain records for 5 years from the lodgment date of the tax return.
- Working from home expenses
If an individual uses the fixed rate method, they must have a record of the exact number of hours worked from home for the full financial year and one record for any additional running expenses incurred that the fixed rate includes. This can be recorded through a spreadsheet, timesheets, diary or rosters and needs to be recorded contemporaneously. If you use the actual cost method, you must keep records for any additional running expenses incurred and record of depreciating assets you bought, and how these are used for your work-related use. The records also must show the time worked from home for the years.
- Car expenses
If an individual can claim deductions for car expenses and apply the logbook method, they must maintain the logbook that reflects their actual work-related trips for a continuous time period of at least 12 weeks that represents travel throughout the year. Each logbook is valid for up to 5 income years and may change in circumstances. The logbook must include:
- The destination and purpose of each trip
- Odometer readings at the start and end of each trip
- Total kilometers travelled over the specified period
- Odometer readings at the beginning and end of the logbook period
- Odometer readings at the start and end of the income year covered by the logbook
Taxpayers also must maintain receipts for their car expenses. If the individual applies the cents per kilometre method they don’t need to maintain receipts of actual expenses incurred, but there is a need to maintain a record of how the work-related kilometres have been calculated for the year. This could be done by using the ATO myDeductions tool or diary.
Non-resident withholding tax obligations
The ATO focuses on withholding tax obligations on payments to non-residents for interest, royalties, or dividends. If withholding tax obligations apply, taxpayers must register with the ATO for PAYG withholding and must file a PAYG annual report or an annual investment income report. When evaluating withholding obligations, it’s essential to determine whether the client is a small, medium, or large withholder, as well as to identify any relevant tax treaties or withholding tax exemptions.
Australian residents who need to pay withholding tax on royalties or interest can’t claim a deduction for these expenses until the ideal withholding amount has been paid to the ATO. Various alerts have been issued by the ATO that are aimed at arrangements dealing with withholding tax, including:
- Taxpayer Alert TA 2018/4: Deductions for accruals and strategies for deferring or avoiding withholding tax.
- Taxpayer Alert TA 2020/3: Schemes, including the use of offshore entities, aimed at evading interest withholding tax.
- Taxpayer Alert TA 2022/2: Tactics involving treaty shopping to secure lower withholding tax rates.
Self-review guides for GST treatment of food and health products
Two self-review checklists have been issued by the ATO to help with checking the GST classification of supplies related to food and health products. While the use of the guides is not compulsory, the checklists offer a practical approach for customers to self-review the GST classification of their supplies and to check the processes and controls that are in place.
For small to medium businesses, the ATO recommends assessing GST processes and controls annually. This should be adjusted based on the size and frequency of product turnover or changes, as well as any errors in GST classification. Small business food retailers with a turnover below $2 million may be eligible to use simplified accounting methods for GST purposes.
Updated thin capitalisation guidance
The ATO has updated its website guidance to show the changes that apply to the thin capitalisation regime for the income years starting on or after 1 July 2023. Under the changes made by the Treasury Laws Amendment Act 2024, three new earnings-based tests were implemented:
- Fixed ratio test – limits net debt deductions to 30% of earnings before interest, taxes, depreciation, and amortisation (EBITDA)
- Group ratio test – allows debt deductions up to the same portion of tax EBITDA as the worldwide group’s net third-party interest expense as a share of earnings
- Third-party debt test – limits debt deductions to qualifying external third-party debt.
The amendments also offer a new integrity provision that will apply to debt creation schemes from income years starting on 1 July 2024. The updated guidance offers detailed guidance on new rules and may be a valuable resource for clients who have interest and other debt deductions of above $2 million in an income year and must work through the thin capitalisation rules to determine whether any debt deductions will be rejected.
Debt deduction creation rules for private businesses
The ATO has issued guidance on how the new debt deduction creation rules apply to privately owned groups and private businesses, including Division 7A loans. The entities in privately owned groups are not exempt from debt deduction creation rules, even if the loans are placed under complying Division 7A loan agreements.
Various exemptions that apply for thin capitalisation rules don’t apply to the debt deduction creation rules, such as the 90% Australian assets threshold exemption. Therefore, the DDCR can apply to domestically owned private groups that run businesses overseas. Basically, where the conditions are satisfied, the rules can disallow debt deductions for related party arrangements.
This includes debt deductions even where the arrangement is completely domestic and interest paid or payable under complying with Division 7A loans where the loan has been used to fund certain related party arrangements. The DDCR applies to arrangements entered before 1 July 2024 where the debt deductions continue to emerge from the historical arrangements. However, there are some exceptions to the rules. First, the DDCR must not apply if the group has less than $2 million of debt deductions in an income year. The rules should not apply to groups that run in Australia and don’t have any foreign owners.