On 8 February 2021, the Government announced that it would introduce specific legislation to ensure that the cost of Covid-19 Rapid Antigen Tests (RATs) would be both tax deductible (if work related) and FBT exempt for employers. The Prime Minister assumed it was deductible/FBT exempt on 22 December 2022, when defending the Government’s decision to not make these tests free of charge (save for some pensioners etc.). It is far from clear that there is any such blanket conclusion, as the media started reporting (see below). The core issue is that the RAT cost might not have the requisite ‘nexus’ with earning assessable income or might be ‘private’ in nature. Also, it might not be a ‘fringe benefit’. I had intended to provide my own technical analysis, but it could not be done quickly – which is an indicator that the legislation is needed.
Assistant Treasurer’s announcement
The Morrison Government is taking action to ensure that COVID‑19 tests (including Polymerase Chain Reaction and Rapid Antigen Tests) are tax deductible for hard‑working Australians, and exempt from fringe benefit tax for businesses, where they are purchased for work‑related purposes. This applies both when an individual is required to attend the workplace or has the option to work remotely.
By introducing this legislation, the Government will also ensure that fringe benefit tax will not be incurred by employers if they provide COVID‑19 testing to their employees for work‑related purposes.
This change will take effect from the beginning of the 2021‑22 tax year and will be in place permanently.
[Assistant Treasurer’s website – Media Release]
The ATO put out this matching post
The government announced on 7 February 2022 that they will ensure COVID-19 testing expenses are tax deductible for testing taken to attend a place of work.
This will also mean fringe benefits tax will not be incurred by employers if they provide COVID-19 tests to their employees for this purpose.
This measure is not yet law. As is the normal practice, we will provide more detailed advice and guidance once the measure is enacted.
In the interim, if you have incurred expenses for COVID-19 tests, you should keep a record of those expenses.
[ATO website – RATs deductibility announcement]
On 4 Jan 2022, the Financial Review reported how the cost of Rapid Antigen Tests (RATs) could be non-deductible to employees and cost employers double, because of Fringe Benefits Tax (FBT)
Tax could double RAT costs for bosses
Prime Minister Scott Morrison’s comments about rapid antigen tests being tax-deductible are “misleading” and fringe benefits tax could effectively double the cost of a $25 kit to around $50 for businesses, an expert says. Mr Morrison has on several occasions talked about tax deductibility in relation to rapid antigen tests.
On December 22, he said the omicron COVID-19 variant was likely to spur greater use of rapid antigen tests before adding: “Now, they’re tax-deductible if you need to take one for work purposes, just like PPE is,” referring to personal protective equipment.
But Tracey Dunn, an associate director (Perth) for audit, tax and consultancy firm RSM, said the statement was “misleading” because rapid antigen tests would be tax-deductible “in very limited circumstances, unless the PM is proposing to change the law”. Ms Dunn said salary earners would qualify for a tax deduction only if rapid antigen testing was mandatory under their employer’s COVID-19 response plan, or if compelled by a state health order to get tested to travel for work.
“RAT kits purchased by individuals for private purposes such as personal travel, convenience, absence of PCR testing, will not be tax-deductible unless the law is changed to specifically allow a tax deduction for private RAT kits,” she said.
There is an issue for businesses too because, although the cost of tests is deductible as a business expense, each kit could attract fringe benefits tax of up to $24, according to Ms Dunn. “Unfortunately when the FBT Act was drafted in 1986, it didn’t contemplate pandemics, and if it is the intention of the government to provide tax relief in respect of RATs to business owners and individual taxpayers, urgent clarification, and legislative amendment is required.”
However, former Australian Tax Office director Tania Waterhouse, who now runs her own legal firm, said businesses were providing tests on workplace safety grounds and therefore should not be liable for FBT.
“My view is that if I’m providing a RAT for my staff it’s an [occupational health and safety] issue,” she said. “By that token, it is an obligation to provide them with the tests and I don’t believe it’s a fringe benefit. I’d be willing to take it on and run it as a test case.” Ms Waterhouse said the Prime Minister should immediately clarify his comments about the tax treatment of rapid antigen tests.
Views differ in the tax community, but Ms Dunn said it was highly likely rapid antigen tests would be caught under FBT laws, although there was an exemption if the tests were administered by a doctor or nurse.
“The tax impact on businesses could be huge, firstly because of the amount of tests an employer may be required to purchase, and secondly, the cost,” she said. “The current FBT rate is 47 per cent and is levied on the ‘grossed up’ value of the benefit provided.
“As RATs are currently subject to GST, this means the grossed-up value of a single test costing $25 would be around $52. “As a result, the FBT payable on the single test could be as high as $24, effectively increasing the pre-income-tax cost of an individual test to around $49.
“The employer would be eligible for a tax deduction for any FBT paid. However, they will still be out of pocket.”
AUTHOR – Joanna Mather works in our Sydney newsroom. Email Joanna at jmather@afr.com