This tax season, the ATO has identified four areas where individuals are making mistakes. With tax season quickly approaching, the Australian Taxation Office (ATO) has outlined its four areas of focus for the coming year.

  1. Record-Keeping
  2. Work-Related Expenses
  3. Rental Property Income and Deductions
  4. Capital Gains from Property, Crypto Assets, and Shares

When seeking tax deductions, there are three “golden guidelines” to follow:

  • You must not have been compensated for the money you spent.
  • If the spending is for both work-related (income-producing) and personal usage, you can only claim the portion that is relevant to how you make money, and
  • You must keep track of it.

1. Record Keeping

101 of working with the ATO is that if you cannot prove it, you cannot claim it. The ATO will invalidate deductions for unjustified or excessive expenses if you are audited. Even if the expense is less than the $300 substantiation level ($150 for laundry), the ATO may inquire as to how you arrived at that figure. For example, how did you come up with $300 in work-related expenses (that is, file a claim up to the substantiation threshold) and not something else?

You must keep a report of the following mentioned records in addition to the obvious records of salary, wages, government payments, allowances, and pensions and annuities.

  • Managed or interest funds

  • Expense records for any claimed deductions, including a record of how the expense relates to how you earn your money. That is, the cost must be connected to your source of income. If you want to claim the expense of RAT tests, for example, you must be able to show that the RAT test was required in order for you to work. It will be more difficult to claim the expense of the test if you worked from home and were not compelled to leave the house.
  • If you bought a house, inherited a house, or sold an asset, such as shares or units in a trust, rental properties, or vacation homes (including cryptocurrency) are all included in assets.

You must preserve your records for a period of five years. These might be digital reproductions of the records as long as the originals are clear and legible. Keep a backup of your digital records.

Tax invoices, diary entries, receipts, or anything else that indicates you incurred the expense and how it relates to how you make your money are all acceptable records.

2. Work-Related Expenses

To be eligible for a deduction, you must have paid for the item yourself and not been reimbursed by your employer or business, and the item must be directly relevant to your job.

What Expenses are Related to Work?

All losses and outgoings can be deducted “to the extent that they are incurred in producing or gaining assessable income, except where the outgoings are of a private, capital, or domestic nature, or relate to the production of exempt income,” according to the IRS. That is, there must be a connection between the expenses you claim and how you make money.

Everything appears to be straightforward until you begin to use this rule. Consider the case of an actor. She needs to go to auditions in order to get the acting job. She wants to be reimbursed for the expense of her hair and make-up for the audition. However, she is unable to claim her expenses because she is not earning money at the time of the audition.

The expense must be tied to how you generate money now, not how you could earn money in the future. Upskilling has the same problem. If you go to an investing seminar with the goal of increasing your investment portfolio, the seminar is not deductible as a self-education cost unless it is related to managing your current investment portfolio, not a future one. Alternatively, a nurse’s helper who attends university will become a nurse. Because a nursing degree is not required to perform the duties of a nurse’s aide, the university degree and related expenses are not deductible.

The second point of contention is what can be claimed as compensation for work. The item is unlikely to be deducted if it is “conventional.” For example, even if your company requires you to wear it and you only wear it at work, you cannot claim traditional apparel (including footwear) as a work-related expense. Clothing must be protective, occupation-specific, such as a chef’s chequered pants, a mandatory uniform, or a registered non-compulsory uniform, in order to be deducted.

Work Related or Private?

Another point of contention is when expenses are incurred for business objectives but then used for personal purposes. It is common to have access to the internet or mobile phone services. Many people believe that because the expense had to be incurred for work, it does not matter if it is used for personal reasons. If you use the service for anything other than work on a regular basis, the expense must be apportioned and only the job-related percentage claimed as a deduction. And, certainly, during an audit, the ATO examines consumption.

This regulation will be put to the test with claims for COVID-19 tests. COVID-19 exams will be deductible beginning July 1, 2021, if the objective was to evaluate whether you could attend or continue working. If you worked from home and did not intend to go to work, or if the test was utilised for personal reasons, you would not be eligible for a tax deduction (for example to test the kids before school).

Claiming Work from Home Expenses

Working from home expenditures were claimed by one in every three Australians last financial year. Now that the pandemic has passed, the ATO will concentrate on the claims that have been made. If you claimed work-from-home expenditures last year but returned to the office this year, your work-from-home claim should be reduced. The ATO will be on the lookout for inconsistencies.

If you want to claim your expenses, you can do so in one of three ways:

  • The simpler 80 cents per hour short-cut approach devised by the ATO — From March 1, 2020, through June 30, 2022, you can claim 80 cents for every hour you worked from home. You will need proof of hours worked, such as a timesheet or a diary. You cannot claim particular goods such as office furniture or a computer separately because the rate covers all of your expenses.
  • 52 cents per hour fixed rate approach — If you have set up a home office but are not conducting business from it, this rule applies. You can claim 52 cents per hour, which will cover your home’s operating costs. You can claim your phone, internet, and equipment depreciation separately.
  • Actual expenses method – You can deduct the real costs you incur (and reduce the claim by any personal use and use by other family members). To employ this strategy, you will need to make sure you have kept track of things like receipts.

The ATO is looking into the last approach, the actual method, because those who utilise it tend to make a lot more claims on their tax return. The following expenses are not eligible:

  • Expenses connected to a child’s education, such as online learning classes or computers
  • Personal expenses, such as tea, coffee, and toilet paper
  • Claiming substantial expenses in advance (rather than depreciating assets)
  • Occupancy expenditures, such as rent, property insurance, mortgage interest, and land taxes and rates, which employees working from home cannot often claim (especially by those who are working from home solely due to a lockdown).

3. Rental Property Income and Deductions

Occupancy expenditures, such as rent, property insurance, mortgage interest,  and land taxes and rates, which employees working from home cannot often claim (especially by those who are working from home solely due to a lockdown).

Unless you are classed as a temporary resident for tax purposes, you must recognise the rental income you received in your tax return if your rental property is located outside of Australia and you are an Australian resident for tax purposes. You can deduct expenses related to the property, but when it comes to interest deductions, there are some unique requirements to keep in mind. If you borrow money from an overseas lender, for example, you may be liable to withhold tax responsibilities.

Co-Owned Properties

Except in very limited circumstances where it can be shown that the equitable interest in the property differs from the legal title, rental income, and expenses must be recognised in accordance with the legal ownership of the property for tax purposes. When the taxpayers are related, the ATO will assume that the equitable right is the same as the legal title (unless there is evidence to suggest otherwise such as a deed of trust, etc.).

This means that even if you pay most or all of the rental property expenses, you should recognise 25% of the rental income and rental expenses in your tax returns if you own a 25% legal interest in the property (the ATO would treat this as a private arrangement between the owners).

The only exception is if the parties financed money independently to purchase their interest in the property, in which case they would claim their own interest deductions.

4. Capital Gains from Crypto, Property or Other Assets

If you sell an item, such as a house, stocks, crypto or NFTs, or collectibles for $500 or more, you must compute the capital gain or loss and report it on your tax return. If you bought a boat for less than $10,000, Capital Gains Tax (CGT) does not apply.

Crypto and Capital Gains Tax

This is a common question when do I pay tax on cryptocurrency?

If you get a cryptocurrency to make a private purchase and do not keep it, it could be considered a personal use asset. However, in the vast majority of situations, this is not the case, and people acquire cryptocurrency as an investment, even if they do occasionally use it to make purchases.

When you sell cryptocurrencies, you usually trigger a CGT event. Selling bitcoin for fiat currency (e.g., $AUD), exchanging cryptocurrency for cryptocurrency, gifting, trading, or using it to pay for products or services are all examples of this.

For CGT purposes, each bitcoin is treated as a separate asset. You are disposing of one CGT asset and purchasing another CGT asset when you sell one cryptocurrency to buy another. A taxing event is triggered as a result of this.

If you keep ownership of the cryptocurrency, transferring it from one wallet to another is not a CGT disposal.

Receipts and information of the type of coin, purchase price, time and date of transactions in Australian dollars, records for any exchanges, digital wallet and keys, and what has been paid in commissions or brokerage fees, as well as records of an accountant, tax agent, and legal charges are all essential. The ATO conducts data matching initiatives on a regular basis and has access to data from a variety of crypto banks and platforms.

If you lose money trading bitcoin, you can usually only deduct the loss if you are in the business of trading.

Gifting an Asset Might Still Incur Tax

Capital gains tax is not avoided by donating or gifting an asset. The market value substitution rules may apply if you receive nothing or less than the asset’s market value. For the purposes of your CGT computations, the market value substitution rule can treat you as having received the market value of the asset you donated or gifted.

For example, if Mom and Dad acquire a piece of property and subsequently present it to their daughter, the ATO will look at the worth of the property at the time it was gifted. If the market value of the land is higher than what Mom and Dad paid for it, a capital gains tax burden would generally arise. It does not matter that Mom and Dad did not get paid for the land.

Cryptocurrency donations may be subject to capital gains tax. If you donate cryptocurrency to a charity, you will most likely be judged on the market value of the cryptocurrency at the time of donation. If the charity is a deductible gift recipient and is set up to take cryptocurrencies, you can claim a tax deduction for the donation.

What we can Expect from the Next Government of Australia

Australia’s 31st Prime Minister, Anthony Albanese, has been sworn in and a government has been established. We take a look at what we know so far about the new government’s policies in the context of a lot of challenges and no quick solutions.

The Economy

Creating jobs, promoting participation, increasing and improving productivity, generating new company investment, and increasing wages and household incomes” is the government’s stated economic aim.

In October of this year, the government will present its second Federal Budget, which will establish the government’s fiscal policy direction. The Albanese government has indicated that its priority is to grow the economy rather than raise taxes, yet maintaining growth ahead of inflation is a tricky balance. The government will attempt to “redirect spending from unproductive to more productive goals,” according to Treasurer Jim Chalmers.

Treasury Secretary Dr. Steven Kennedy summed it up in a recent address when he remarked that the most significant recent economic development has been the higher-than-expected spike in inflation. The headline rate of inflation in the March quarter of 2022 was 5.1%, the highest in more than two decades. Price increased as a result of various shocks, some of which are brief and others which are more permanent. These are some of the shocks:

  • Global demand for commodities is putting a strain on supply systems, driving up shipping prices, and cluttering ports;
  • The invasion of Ukraine by Russia, drove up the price of oil, energy, and food. Russia supplies 18 percent of the world’s gas and 12 percent of the world’s oil. Russia and Ukraine together account for around a fifth of world wheat commerce; and
  • Lockdowns on COVID-19 in China are affecting supply networks. China has a COVID policy of zero.

Energy prices have had a significant impact on inflation in Australia (the temporary reduction in fuel excise on 28 September 2022).

Personal Income Tax

A variety of personal income tax reforms were described in the 2019-20 Budget.
Stage 3 of the reforms is set to begin on 1st July 2024. Stage 3 decreases the number of tax brackets by combining 37% and 32.5% rates into a stage 30% rate for people earning $45001 to $200000. People are entitled to the certainty of the tax savings that have been legislated, “Mr. Albanese told Sky News. We are not going to change them. That is what we are looking for in the future.”

Where will the Money Come From?

At this time, it is unclear how the government plans to address the $1.2 trillion deficit. Treasury and finance have been entrusted with going through the budget line by line “… see where there are areas where we can make sensible savings and return that money to the budget,” according to Finance Minister Katy Gallagher.

Multinationals

During the election campaign, multinationals giving their tax fair share was a go-to target. From 2023, the strategy for multinationals employs OECS’s two-pillar framework elements to ensure Multinational Enterprises (MNEs) and to reform international taxation regulations are subject to minimum 15% tax rate. Australia and other jurisdictions and other countries, presenting higher than 90% of global GDP, are different signatories to the framework.

 The multinational policy of Government helps the OECD framework by:

  • Limiting debt regarding deductions by multinationals to 30% of profits, as suggested by the OECD, but keeping the arm’s length requirement and the worldwide gearing ratio in place.
  • From 1 July 2023, corporations will be limited in their capacity to use Australia’s tax treaties by holding intellectual property in tax havens. Payments for the use of the intellectual property would not be eligible for a tax deduction if they were made to a jurisdiction that did not pay enough tax.
  • Imposing transparency measures, such as reporting requirements for tax data, beneficial ownership, tax haven exposure, and government tenders.

The reforms will adopt consultation and are not predictable to take effect until 2023.

 No Change to SG Rate and Rate Increase

No change in the legislated superannuation ensures a rate increase. The SG rate will rise from 1st July 2022 to 10.5% and gradually rise by 0.5% every year until it extends to 12% in July 2025.

ATO Refocus on Debt Collection
During the epidemic, the ATO did not pursue many corporate tax debts and permitted tax refunds to flow even if the business had a tax liability. The ATO’s position has since altered, and it is now collecting debts and offsetting them against refunds. Expect the ATO to offset any refunds against any tax debts that have been put on hold, and to take steps to actively seek settlement of the debt. Around two-thirds of the total debt outstanding to the ATO is owed by small businesses. If you have a tax debt, it is crucial that you work with the ATO to figure out how to pay it off.