In November, the ATO released a draft Practical Compliance Guideline PCG 2022/D4 setting out the approach that taxpayers who work from home can use from 1.7.2022. Taxpayers will continue to have a choice by claiming their actual expenses or being able to use the revised fixed rate method for calculating the deduction for work-related additional running expenses incurred as a result of working from home.

The revised fixed-rate method uses a fixed rate of 67c per hour for each hour worked from home during the income year for the following expenses:

• internet expenses
• stationery and computer consumables
• energy expenses for lighting, heating/cooling and electronic items used while working from home
• mobile and/or telephone expenses

The Guideline can be relied on to calculate the deduction for additional running expenses using this method if the taxpayer:

• works from home while carrying out employment duties or carrying on a business on or after 1.7.2022
  • incurs additional running expenses as outlined above, which are ordinarily deductible as a result of working from home, and
  • keeps and retain relevant records regarding the time spent working from home and for the additional running expenses (covered by the rate per hour) incurred.

A separate home office or dedicated work area is not required to rely on this Guideline.

ELECTRIC VEHICLES TO BE EXEMPT FROM FBT

In November, amendments were made to the Bill during its passage which provided that the exemption for petrol-based plug-in hybrids will end on 1 April 2025 and that a review of the amendments relating to the exemption for FBT and customs purposes must be undertaken within three years.

Electric cars exemption

In December, the ATO provided valuable guidance on this. From 1.7.2022, employers do not pay FBT on eligible electric cars and associated car expenses.

Eligibility

You do not pay FBT if you provide private use of an electric car that meets all the following conditions:

• the car is a zero or low-emissions vehicle
• the first time the car is both held and used is on or after 1.7.2022
• the car is used by a current employee or their associates (such as family members)
• luxury car tax (LCT) has never been payable on the importation or sale of the car.

Benefits provided under a salary packaging arrangement are included in the exemption.

The Government will complete a review of this exemption by mid-2027 to consider electric car take-up. We will provide an update when this review begins.

Zero or low emissions vehicle

A vehicle is a zero or low-emissions vehicle if it satisfies both of these conditions:

1. It is a:

• battery electric vehicle
• hydrogen fuel cell electric vehicle, or
• plug-in hybrid electric vehicle.

1. It is a car designed to carry a load of less than 1 tonne and fewer than 9 passengers (including the driver).

Motorcycles and scooters are not cars for FBT purposes and do not qualify for the exemption, even if they are electric.

Plug-in hybrid electric vehicles – 1 April 2025 onwards

From 1 April 2025, a plug-in hybrid electric vehicle will not be considered zero or low-emissions vehicle under FBT law.

However, you can continue to apply for the exemption if both the following requirements are met:

1. Use of the plug-in hybrid electric vehicle was exempt before 1 April 2025.
2. You have a financially binding commitment to continue providing private vehicle use on and after 1 April 2025. For this purpose, any optional agreement extension is not considered binding.

Example: exemption applies to the original agreement without extension

Simon enters into a novated lease with his employer and a finance company that entitles him to use a plug-in hybrid electric vehicle.

The lease begins on 1 April 2024 and lasts 3 years, to 31 March 2027. Extending the lease for a further 2 years is available from 1 April 2027.

Simon’s private use of the vehicle is exempt from FBT up to 31 March 2027 because:

1. He starts using the vehicle before 1 April 2025, and the requirements of the electric car exemption are met.
2. A binding commitment is to continue providing the vehicle until 31 March 2027.

However, the exemption will not apply after 31 March 2027, even if the option is taken to extend the lease for an additional 2 years. This is because when the exemption for plug-in hybrid vehicles ends (just before 1 April 2025), the extension is conditional on being exercised at a future time. Therefore, the agreement at that time was not binding beyond 31 March 2027.

‘Held and used’ electric car

The practical effect of this requirement is that the electric car must be used for the first time on or after 1.7.2022 – even if it is held before this date.

An electric car is ‘held’ when it is:

• owned (includes cars acquired under hire-purchase arrangements)
• leased (or let on hire), or
• otherwise made available by another entity.

An electric car is considered ‘used’ when it is used or available for use by any entity or person.

DODGY SALES SUPPRESSION TECHNOLOGY

There is a global crackdown on businesses suspected of supplying and using illegal electronic sales suppression tools (ESST) or software to avoid paying taxes.

This Australian Taxation Office (ATO) initiative is undertaken in Australia and supported by the Australian Federal Police (AFP) in Victoria, New South Wales, Queensland, Western Australia, and Tasmania. Officers conducted raids at 35 separate premises suspected of supplying and using ESST.

ATO officers worked closely with counterparts in His Majesty’s Revenue and Customs (HMRC) in the United Kingdom and the Internal Revenue Service (IRS) in the United States as part of a lengthy and comprehensive investigation into the use of tax avoidance technology.

Globally, the coordinated action by the ATO, IRS and HMRC involved collecting evidence, intelligence gathering, search warrants, notices to produce, interviews, taxation assessments, and subpoenas.

At a meeting, ATO Deputy Commissioner said, “These dodgy sales suppression tools allow retailers to keep a separate set of books and launder the money in one transaction. They conceal and transfer this income anonymously, sometimes offshore.”

It has been illegal to produce, supply, possess, use or promote ESS tools (ESST) or software in Australia since October 2018.

EMPLOYEE VS INDEPENDENT CONTRACTOR – ATO DRAFT GUIDANCE

The ATO has released for consultation the following draft guidance on classifying employees and independent contractors:

• Taxation Ruling TR 2022/D3 Income tax: pay as you go withholding – who is an employee?
• Practical Compliance Guidance PCG 2022/D5 Classifying workers as employees or independent contractors – ATO compliance approach

While professional associations and key stakeholders will no doubt be making submissions, tax practitioners and their clients will await finalisation with some interest.

So many SMEs remain at risk by wrongfully classifying workers as contractors. If an individual work under your control and direction, being paid an hourly rate, is not able to determine their hours or delegate their work, then on the face of it, they are an employee. The ATO website contains decision trees to assist in this.

The exposures can be significant and are not limited to

• Having to remit Pay as You Go tax at a later date
• Historical Superannuation Guarantee Charge (SGC) payments at a later date
• Personal injury claims if the worker was not covered under your workers’ compensation policy due to them being wrongfully classified as a contractor.

These exposures could result in payments significant enough to threaten the ongoing viability of the business. Real care needs to be taken.

RETHINKING STAGE THREE TAX CUTS

As reported in the Sydney Morning Herald (S.M.H.), some of the nation’s most respected economists have called on the Federal Government to reconsider the size, shape and timing of the $254 billion stage three tax cuts, saying they pose a risk to the budget and will push up inflation.

The tax cuts, legislated by the previous Government with Labor support in 2019, have come under increased scrutiny since Treasurer Jim Chalmers revealed in October that their expected cost over the decade to 2032-33 has climbed $11 billion in less than six months.

This was before the Covid-19 pandemic led to government spending blowouts. Higher interest rates in the last 12 months have also led to a significant deterioration in the Budget outlook.

Parts of the ALP want the cuts to commence on 1.7.2024 to be ditched. Chalmers has said they will impose a growing cost on a budget already struggling under the weight of increasingly expensive programs. The Government has indicated it intends to honour its election promise to deliver them.

The stage three tax cuts will eliminate the 37% marginal tax rate for those earning between $120,000 and $180,000. They will also reduce the 32.5% tax rate to 30% for people earning between $45,000 and $200,000.

This places the Federal Government in a challenging position. In our view, the tax cuts are only viable if the Federal Government increases the GST rate to 15% while compensating the more vulnerable in our society. This might increase our GST rate with most OECD nations and help solve the budget deficit issue.

R&D TAX INCENTIVE FOR ACTIVITIES CONDUCTED OVERSEAS

In the Administrative Appeals Tribunal case of TDS Biz Pty Ltd and Commissioner of Taxation [2022] AATA 3543, it was held that the taxpayer was not entitled to the research and development (R&D) tax incentive for supporting R&D activities conducted overseas.

The AAT held that the supporting R&D activities were not merely supplying components, effectively affirming the Commissioner’s Decision. As such, the activities were not covered by paragraphs 355–210(1)(d) or 355–210(1)(e) of the Income Tax Assessment Act 1997 (ITAA 1997). Accordingly, there were no notional deductions under section 355–205 of the ITAA 1997 arising from the expenditure on the supporting R&D activities and no entitlement to a tax offset.

ANTI-AVOIDANCE RULE FOR TRUST ENTITLEMENT (SECTION 100A)

In December, the ATO finalised essential public advice and guidance products for trustees and advisers on trust reimbursement agreements where section 100A may apply. Section 100A is an anti-avoidance rule applicable where a beneficiary’s trust entitlement arose from a reimbursement agreement.

• Taxation Ruling TR 2022/4 provides the ATO’s view about reimbursement agreements for section 100A, including the exceptions for agreements that:
• don’t have a tax reduction purpose
• are entered in the course of ordinary family or commercial dealing
• this was initially released in February 2022 as Draft Taxation Ruling TR 2022/D1 Income tax: section 100A reimbursement agreements and takes into account feedback received from the community and tax professionals on the draft ruling
• applies to trust arrangements before and after its issue and should be read in conjunction with PCG 2022/2.

Practical Compliance Guideline PCG 2022/2 Section 100A reimbursement agreements – A.T.O. compliance approach:

• sets out how the ATO assesses risk for a range of trust arrangements which section 100A might apply and aims to provide more certainty to taxpayers and advisers by setting out how we will engage with them
• applies before and after its date of issue – for entitlements arising before 1 July 2022, the ATO will apply the guidance first published on their website in 2014 to the extent it is more favourable to the taxpayer’s circumstances
• provides more examples to help taxpayers understand how the ATO will dedicate compliance resources for the low-risk arrangements (green zone) or high-risk (red zone)
• should be read in conjunction with TR 2022/4.

The ATO stresses that they have not retrospectively changed their views on how the law operates. This includes taxpayers who entered into arrangements between 1 July 2014 and 30 June 2022 and relied on their previous guidance.

The ATO recommends that if taxpayers rely on the finalised PCG, they should retain records of why their agreement would fall outside the red zone to resolve any potential disputes readily.

NEW LEGISLATIONS

Treasury Laws Amendment (2022 Measures No.4) Bill 2022, passed by the House of Representatives on 23.11.2022 and then put before the Senate on 1.12.2022. The Bill proposes a range of measures, including some first announced by the former Government, including:

The digital games tax offset

• The digital games tax offset applies to qualifying Australian development expenditure incurred concerning eligible game development from 1.7.2022.

Amendments to clarify digital currencies

• amendments to clarify that digital currencies (such as bitcoin) continue to be excluded from the income tax treatment of foreign currency for income years that include 1.7.2021 and later income years and in the context of the goods and services tax, about supplies or payments made on or after 1.7.2021.

 Reducing compliance burden for FBT

• measures to reduce the compliance burden for employers finalising their fringe benefits tax returns by allowing the Commissioner of Taxation to exercise discretion, allowing them to rely on adequate alternative records holding all the prescribed information.

Skills and training boost for small businesses

• the skills and training boost for small businesses (with an aggregated annual turnover of less than $50 million) in the form of a bonus deduction equal to 20% of eligible expenditure for external training provided to employees incurred from 29.3.2022 until 30.6.2024.

Technology investment boost for small businesses

• the technology investment boost for small businesses (with an aggregated annual turnover of less than $50 million) in the form of a bonus deduction equal to 20 per cent of eligible expenditure on expenses and depreciating assets for purposes of their digital operations or digitising their operations and incurred 29.3.2022 until 30.6.2023.