On 11.2.22, the Tax Institute emailed members (in TaxVine 3) the views of their Senior Advocate: Robyn Jacobson, CTA, on the existing laws about the interlocking income tax and FBT treatment, of the costs of COVID-19 tests and the necessity of the recently announced changes to the law. They are to ensure the deductibility of work related costs of Covid tests, particularly the ‘rapid antigen tests’ (RATs), which are not administered by medically trained personnel. I mentioned in a previous TT article, that an assessment of the existing law was complex and left it to another time. Robyn has been good enough to plot a course through the existing law, which is set out below. I think you’ll agree that the proposed changes are necessary.
This week, the Treasurer, the Hon Josh Frydenberg MP, announced in an address to the Australian Industry Group that COVID‑19 test expenses will be tax deductible where the testing is undertaken to attend a place of work, and fringe benefits tax (FBT) will not be incurred by employers where COVID‑19 tests are provided to employees for this purpose.
The next day, this policy announcement was further explained in a media release issued by the Assistant Treasurer, the Hon Michael Sukkar MP, which confirmed that:
- COVID‑19 test expenses incurred by individuals will be tax deductible 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; and
- employers will not be liable for FBT if they provide COVID-19 testing to their employees for work‑related purposes.
Was this policy change necessary?
Under the current tax law, the cost of a COVID-19 test that is purchased and used by a worker in order to go to work, rather than while working and earning assessable income, may not be tax deductible. This is akin to costs incurred in order to travel between your home and regular place of work, such as public transport or car parking, which are generally non-deductible expenses (of course, there are some limited exceptions). Alternatively, the testing costs could be considered to be an outgoing of a private or domestic nature under the negative limb in s 8-1(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997).
From an FBT perspective, s 58M(1) of the Fringe Benefits Tax Assessment Act 1986(FBTAA) treats as an exempt benefit an expense payment fringe benefit, a property benefit or a residual benefit that is in respect of, or is for the purpose of, a work-related medical screening of the employee.
The definition of work-related medical screening in s 136(1) of the FBTAA makes it clear that this FBT exemption is available to employers only where:
- testing is carried out by a legally qualified medical practitioner or nurse; and
- testing is available to all employees.
These conditions mean that many employers may still have been liable for FBT, as the majority of testing is undertaken at home and not by a legally qualified medical practitioner or nurse.
It was pleasing to see the Government’s response this week, following weeks of The Tax Institute seeking clarification on the policy position from both the ATO and Treasury.
When will the policy take effect?
The change to the law to make testing costs deductible will apply from 1 July 2021 (from the 2021–22 income year), and the change to make the tests exempt from FBT will apply from 1 April 2021 (from the 2021–22 FBT year). Importantly, the changes to the law will be in place permanently.
As always, the implementation of the policy is dependent on the introduction of an amending bill to give effect to the announcements. It is vital that the amending bill is introduced and passed by Parliament during the handful of sitting days in February and March, before the Federal election is called, to ensure that taxpayers have certainty for the 2021–22 income and FBT years.
How will the ATO administer this policy?
This is now the most important question. Many will welcome the announcements this week and, indeed, it is pleasing to see the policy intent clarified by the Government. However, the spotlight must inevitably turn to the ATO who has responsibility for administering the law and issuing guidance material on the new rules. In this environment, we would hope that the ATO takes a very pragmatic approach in administering this new policy.
(Once the measures are legislated), the focus now turns to the ATO to provide guidance on the following:
- In what circumstances is an individual considered to have incurred a COVID-19 test expense for a work-related purpose, including employees who continue to work from home?
- What substantiation requirements apply to an individual to demonstrate that they have incurred a COVID-19 test expense for a work-related purpose?
- How will taxpayers substantiate testing expenses incurred between 1 July 2021 and 6 February 2022 (the day before the Government’s announcement), given the uncertainty surrounding whether testing costs were in fact deductible and the high likelihood that most taxpayers have not retained the necessary receipts?
- How should taxpayers apportion the cost of a pack of COVID-19 tests where their family members have availed themselves of tests from the same pack, thereby giving rise to a partial non-work-related purpose?
The ATO acknowledged on 8 February 2022 that guidance material will be updated as necessaryonce the measure is enacted. We would hope that the ATO guidance material would also cover:
- Employees who undertake COVID-19 testing when travelling on work — current ATO web guidance makes it clear that these taxpayers can claim expenses they incur for required COVID-19 testing related to their overnight work travel.
- Employees who undertake testing for work-related purposes but who are not travelling on work — deductions will be available for these taxpayers.
- Individuals who undertake testing for work-related purposes but who are not employees, such as sole traders and contractors — deductions will be available for these taxpayers.
- Individuals who undertake testing other than for a work-related purpose — deductions for tests will not be available, but ATO guidance is still necessary for this cohort of taxpayers to ensure that they do not mistakenly claim testing costs.
- Employers to explain the operation of the FBT exemption.
The ATO guidance material should also remind taxpayers that deductions will not be available where the employee has been fully reimbursed for the testing costs by their employer or did not incur the expenditure at all (because the employer provided the tests).
In relation to the FBT legislative amendment, it is unclear whether the current exemption in s 58M of the FBTAA will be broadened, a new exemption will be inserted into the FBTAA or the Government will rely on the existing ‘otherwise deductible rule’. If the latter is relied upon, whether an employer has an FBT liability for providing COVID-19 testing to their employees for work-related purposes will entirely rest on whether the employee can claim a tax deduction — this loops us back to the perennial debate and headaches on what constitutes a ‘work-related purpose’ and the associated substantiation requirements.
Closing comments
As the above observations point out, there are a range of issues that still require clarification and guidance. We have already raised the substantiation issue with the ATO and will continue to raise and seek resolution of other related issues on behalf of our members.
I have posted on this topic in our member-only Community hub. Join the conversation and share your thoughts and ideas on the challenges and issues which you will need to deal with in discussions with your individual and business clients.
Kind regards,
Robyn Jacobson, CTA – Senior Advocate