Prior to 1 July 2022, taxpayers were able to use one of three methods for calculating a deduction for expenses incurred as a result of working from home:

• the actual costs method, which involved calculating the actual expenses incurred as a result of working from home;
• the fixed rate method, which allowed 52c per hour for each hour a taxpayer worked from their home office to calculate their electricity and gas expenses, home office cleaning expenses, and the decline in value of furniture and furnishings. In addition, a separate deduction for the taxpayer’s work-related internet expenses, mobile and home telephone expenses, stationery and computer consumables and the decline in value of a computer/laptop could also be claimed; and
• the shortcut method, which was introduced during the COVID-19 pandemic to make it easier for the large proportion of employees suddenly finding themselves working from home. This method allowed taxpayers to claim 80c per hour for each hour that they worked from home and covered all expenses such as phone, internet, decline in value of equipment and furniture, electricity, gas, lighting etc.

From 1 July 2022, taxpayers can no longer use the shortcut method of 80c per hour and the ATO has now revised the fixed rate method. According to the ATO, the revised fixed-rate method apportions additional running expenses “on a fair and reasonable basis by using a fixed rate of 67c per hour”. Not only is this rate lower than the 80c per hour used by the shortcut method, but it is also proposed to include energy expenses (electricity and gas), internet, mobile, telephone, stationery, and computer consumables, some of which could have been claimed as a separate deduction under the previous fixed rate method.

The work-related decline in value of any depreciating assets can continue to be claimed as a separate deduction under the proposed fixed rate method, as can other running expenses not specifically outlined above. Therefore to calculate the total deduction under this new revised fixed rate method, taxpayers will need to calculate the number of hours worked from home during the income year, and multiply that by 67c per hour. To that figure, the decline in value of depreciating assets and other running expenses which are not included in the 67c base rate can be added giving a final deduction amount.

Given the continual increase in energy bills and other inflationary pressures, this new proposed fixed rate method is likely to yield consistently lower deductions than if the actual cost method was used. Coupled with the abolition of the shortcut method, this means that taxpayers will either have to accept a lower WFH deduction in the coming years or deal with increased paper work to be able to claim WFH deductions under the actual costs method.

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In instances where your business owes rent for a past occupancy period which is later waived or released by the landlord, including under bankruptcy or insolvency law, if you have already claimed a deduction for the rent on the business tax return, you will still be entitled to that deduction. However, the unpaid amount will be considered to be a debt forgiveness. This means that the amount will not need to be included in the assessable income of the business but may be offset against amounts that could otherwise be claimed as deductions.

For businesses that have already paid rent for a past occupancy period and claimed a deduction, any amounts waived or refunded will need to be included as assessable income.

Where your landlord waives rent related to a future period of occupancy, the business will not be entitled to a deduction for the amount of rent that would have been paid. The only amount that can be claimed is the amount of rent that the business is required to pay. For example, if a landlord reduces the amount of rent payable from $500 per week to $25 per week, the business is only entitled to claim $25; if the rent payable is reduced to nil, the business is not entitled to a deduction.

For businesses that account for GST on an accruals basis, a waiver or variation of rent payable may lead to GST consequences. If the business has already claimed a GST credit for the rent which is waived or refunded, an increasing adjustment will need to be raised to pay back the credit that was claimed. This will need to be done in the BAS period in which the business becomes aware of the waiver or receives a refund.

Deferrals, however, generally do not need any GST adjustment. Businesses do need to be aware that if their landlord has changed the rental agreement, including timing or amount of scheduled payments, the GST credit that can be claimed will be based on the new agreement. In addition, if your business had claimed a GST credit for a deferred amount which the landlord later writes off as a bad debt, an increasing adjustment may be required.

Businesses that account for GST on a cash basis need not worry about adjustments as they can only claim GST on the basis of actual rent paid as shown on a tax invoice (ie GST credits cannot be claimed for deferred rent until the rent is actually paid).

Besides the income tax and GST consequences, rental concessions, whether it be a waiver or a deferral given by your landlord, may also have CGT consequences for your business. This may occur if, for example, your landlord has changed the rental agreement for payment or other consideration from the business or has created a new or additional agreement. Where that has not occurred (ie the landlord has given the rental concession on an existing lease without any consideration, payment or new agreement), there will be no CGT consequences.

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The interim report looked at objections data obtained from the ATO mainly for the 2019, 2020 and 2021 financial years. It seeks to provide taxpayers with an insight into the breadth and scope of objections work undertaken by the ATO. While some data for the 2017 and 2018 financial years was available, the IGTO noted that the ATO declined to provide all the data, citing data integrity and significant manual work required to process it.

In this initial stage of investigation, the IGTO did not investigate the data provided by the ATO beyond analysing, tabulating, extrapolating, and charting it in order to report the information publicly. The initial observations of the IGTO can be summarised as follows:

• The ATO appears to have processed and actioned a higher volume of objection cases in the 2021 financial year compared to prior years. This was coupled with a reduction in the number of withdrawn or invalid objections. Most of the underlying causes for the influx in 2021 were due to COVID-19 objections lodged by small businesses;
• A large proportion of objections received each year are self-initiated objections and in each of the financial years investigated, self-initiated objections exceeded objections lodged against ATO compliance action;
• Around 20% of “valid” objections are withdrawn without a decision being issued; and
• Around 50% of objections for the 2019 and 2020 financial years were lodged by registered tax agents; that  proportion increased to 58% for the 2021 financial year.

According to the IGTO, these observations will provide the basis for Phase 2 of the investigation, where taxpayers and other stakeholders can make further submissions. Previous issues of concern identified include:

• The lack of independence and impartiality of the objection process (either actual or perceived);
• A lack of clarity in objection decisions;
• Insufficiently resourced objection functions, leading to objections officers reviewing decisions of more senior staff, or officers being involved in objections where they previously provided advice on the matter; and
• A lack of sufficient knowledge of the objection process on the part of some taxpayers, especially in the areas of lodging effective objections, which may lead to unnecessary time and effort.

Some of areas that the IGTO will look to pursue in Phase 2 of the investigation include:

• Reasons for the high proportion of self-initiated objections and their impact on ATO resourcing;
• Underlying causes for objections being withdrawn prior to a decision being issued, and its impact on ATO resourcing;
• The composition of tax professionals that are assisting taxpayers with objections, as well as the comparative timeliness and outcomes of objections that are prepared and lodged by the taxpayer without assistance compared to those that are lodged with the assistance of a professional; and
• Whether reporting by the ATO of the quantum of tax in dispute would assist to improve its administration of objections overall.

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The interim report looked at objections data obtained from the ATO mainly for the 2019, 2020 and 2021 financial years. It seeks to provide taxpayers with an insight into the breadth and scope of objections work undertaken by the ATO. While some data for the 2017 and 2018 financial years was available, the IGTO noted that the ATO declined to provide all the data, citing data integrity and significant manual work required to process it.

In this initial stage of investigation, the IGTO did not investigate the data provided by the ATO beyond analysing, tabulating, extrapolating, and charting it in order to report the information publicly. The initial observations of the IGTO can be summarised as follows:

• The ATO appears to have processed and actioned a higher volume of objection cases in the 2021 financial year compared to prior years. This was coupled with a reduction in the number of withdrawn or invalid objections. Most of the underlying causes for the influx in 2021 were due to COVID-19 objections lodged by small businesses;
• A large proportion of objections received each year are self-initiated objections and in each of the financial years investigated, self-initiated objections exceeded objections lodged against ATO compliance action;
• Around 20% of “valid” objections are withdrawn without a decision being issued; and
• Around 50% of objections for the 2019 and 2020 financial years were lodged by registered tax agents; that  proportion increased to 58% for the 2021 financial year.

According to the IGTO, these observations will provide the basis for Phase 2 of the investigation, where taxpayers and other stakeholders can make further submissions. Previous issues of concern identified include:

• The lack of independence and impartiality of the objection process (either actual or perceived);
• A lack of clarity in objection decisions;
• Insufficiently resourced objection functions, leading to objections officers reviewing decisions of more senior staff, or officers being involved in objections where they previously provided advice on the matter; and
• A lack of sufficient knowledge of the objection process on the part of some taxpayers, especially in the areas of lodging effective objections, which may lead to unnecessary time and effort.

Some of areas that the IGTO will look to pursue in Phase 2 of the investigation include:

• Reasons for the high proportion of self-initiated objections and their impact on ATO resourcing;
• Underlying causes for objections being withdrawn prior to a decision being issued, and its impact on ATO resourcing;
• The composition of tax professionals that are assisting taxpayers with objections, as well as the comparative timeliness and outcomes of objections that are prepared and lodged by the taxpayer without assistance compared to those that are lodged with the assistance of a professional; and
• Whether reporting by the ATO of the quantum of tax in dispute would assist to improve its administration of objections overall.

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Currently the CCS percentage is based on a family’s income with the maximum subsidy rate being 85% for those with an income of between $0 and $72,466. The percentage then deceases by 1% for every $3,000 of income a family earns above $72,466 up to $177,466, at which point the subsidy percentage is 50%. Between the income brackets of above $177,466 and below $256,756, families will generally receive a 50% child care subsidy.

For families with incomes above $256,756, the child care subsidy percentage decreases by 1% for every $3,000 above that until the income amount of $345,756 is reached. Those families with an income above $346,756 but below $356,756 receive a subsidy of 20%. Families that earn above $356,756 will not receive any child care subsidy. In addition, under the current CCS rules, families with more than one child in care will receive an additional higher subsidy of 30% for each second and subsequent child in care capped at a maximum of 95%.

The Bill, as introduced, will amend the CCS so that families earning up to $80,000 will be able to receive a CCS percentage of 90%. To reduce confusion, the Bill will also simplify the different income tiers of the current system so that families that earn above $80,000 will be subject to one taper rate of 1% per additional $5,000 of family income earned until it reaches 0% for families earning $530,000.

The existing measure of higher subsidy for second and subsequent children in care will also be retained under the proposed new system. Families with children aged 5 or under in care will continue to receive an additional 30% to a maximum of 95% on top of the former CCS rates. Families will be entitled to the higher CCS rate up until a family income of $356,756 (2022-23). If families earn $356,756 (2022-23) or higher, all children in the family will be entitled to the new CCS base rate until it reaches 0% entitlement at $530,000.

Example

The Jones family earns $190,000 per year and has 2 children in care, both aged 5 and under. Under the current system, their CCS subsidy percentage would be 50%. Under the new CCS system, they would be entitled to a subsidy percentage of 68%. This has been calculated by subtracting $80,000 (new base rate) from the family income of $190,000. That figure of $110,000 is then divided by $5,000 which yields 22(%). The relevant subsidy percentage is therefore 90% (new top subsidy percentage) minus 22%, giving a figure of 68%. Overall, the Jones family will be better off under the new CCS system.

When passed, the proposed changes to the CCS will apply from the first CCS fortnight of the income year starting on 1 July 2023. It should also be noted that the lower income (base rate) threshold of $80,000 will be indexed going forward.

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The ATO warns taxpayers that it receives rental income data from a wide range of sources including share economy flatforms, rental bond authorities of various States, property management software providers, and State and Territory revenue and land title authorities. This information will then be matched to the information provided by taxpayers on their tax returns meaning that there is no hiding income from the all seeing eye of the ATO.

One of the income categories for rental properties that may be important for this year and that many landlords may not know to include is insurance payouts. With the La Nina weather event causing flooding along large parts of the country, if you obtained insurance payments in relation to loss of rental income or repairs, that would need to be included.

For those renting out their investment property, their home, or part of their home on a short-term basis on digital sharing platforms such as AirBnB, that income will need to be included, and any expenses will need to be apportioned according to the space rented out. There may also be CGT consequences upon selling the property so taxpayers will need to be careful.

Joint owners of properties will need to ensure that their income and deductions are in line with the rental property’s ownership interest, which generally depends on legal documents at the time of purchase.

As for expenses, the ATO notes that while some expenses such as rental management fees, council rates, repairs, interest on loans, and insurance premiums can be deducted in the year its incurred. Other expenses, such as borrowing costs, capital works, and some depreciating assets can only be claimed over a number of years. Capital works include replacing a roof or a new kitchen or bathroom. Depreciating assets such as dishwashers or ovens over $300 will need to be claimed over their effective life.

In addition, taxpayers should also be aware that if they redraw on a rental property loan for private expenses or to purchase a private asset, the amount of interest relating to the loan for the private expense or asset cannot be claimed as a deduction. There may also be other instances where a deduction in relation to a rental property will be denied such as when a property is advertised significantly above reasonable market rate, or where unreasonable restrictions are imposed on potential tenants.

Taxpayers that have sold a property during the 2021-22 income year will need to be cautious as capital gains is also one of ATO’s focus areas for this year. Those that have rented out a part of their property may only be entitled to a partial main residence exemption depending on the amount of space rented out.

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if you’re thinking of selling a property, you probably know all about finding a solicitor or conveyancer and a real estate agent, but did you know that you’ll also need to obtain a clearance certificate from the ATO for most properties?

This clearance certificate requirement applies to all transactions involving taxable Australia real property or an indirect Australian real property interest that provides company title interests, with a market value equal to $750,000 or more. With the mean dwelling price in Australia at $779,000 (according to the latest ABS statistics), and even higher for NSW, Victoria and ACT, it is highly likely that you’ll need to apply for a clearance certificate if you’re selling.

In the current market conditions, if you’re not sure whether your property will have a market value of $750,000 or more (ie if the property is going to auction), the safest thing to do is to apply for a clearance certificate. That way, if the property is sold for less than $750,000 you won’t need to provide the purchaser with the certificate, however, if it is sold for $750,000 or more, you’ll have the certificate handy.

The certificate provides certainty to purchasers of properties regarding their withholding obligations. Presenting the purchaser with a valid certificate confirms that withholding tax is not applicable to the transaction, otherwise, the purchaser must withhold 12.5% of the purchase price and remit the amount to the ATO.

In a situation where a vendor is an Australian tax resident but fails provide the purchaser with a clearance certificate, which causes the purchaser to remit a corresponding amount to the ATO. The vendor is able to claim a credit for the withheld amount when they lodge their tax return. This amount may then be refunded if no CGT is payable on the sale of the property.

To ensure that you’ll receive your certificate on time, the ATO recommends that you apply online at least 28 days before you require it. Applications are processed in order of date of receipt by the ATO, therefore, with the higher volume of property sales during the spring and summer months, vendors should apply at the earliest opportunity. According to the ATO, higher risk and unusual cases may also require greater manual intervention, which could take longer.

Once a clearance certificate is issued, it is valid for 12 months from the date of issue. As long as the certificate is provided by the vendor to the purchaser during the time specified on it, and this occurs before settlement, then it does not matter how long into the future the settlement may be. The vendor named in the certificate is also able to use it for multiple disposals of real property that occur within the 12 month period.

Remember, because the clearance certificate names specific vendors, if there are multiple owners of a property, each vendor will need to apply for a separate clearance certificate in their own name. That name also must match the name shown on the certificate of title of the property, although some slight variation may be accepted in some circumstances provided additional documents are supplied.

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Receiving scam calls purportedly from the ATO and other official departments may be a thing of the past with the completion of a successful trial of software to block specific calls. Under the most commonly reported version of the scam, people would receive calls which appear to come from a legitimate phone number used by the ATO.

This scam is usually referred to as “spoofing” and the scammers use software to mislead the caller line identification technology on most mobile phones and modern fixed line phones. Rather than transmitting the actual, typically overseas, phone number the call is coming from, the nefarious software “overstamps” it with another phone number. Commonly, the numbers used are widely publicised, such as the numbers used by taxpayers to call the ATO.

In 2019, 107,000 impersonation scams were reported to authorities. The scams constantly evolve according to the headlines, for example, in February, the scam was targeted at bushfire victims promising them an 8% bonus on their tax return. More recently, scammers purporting to be from the ATO have been calling members of the public asking them to provide their bank account details as a part of the JobKeeper payment requirements.

Aside from those scams driven by headlines, there is always the tax refund and tax debt scams which are particularly prevalent towards the end of October when most individual tax returns are due, but some could run year-round. In fact, just recently, the ATO has alerted the community to an SMS scam which claims that recipients are due to receive a tax refund and to click on a legitimate looking link. The ATO notes that it will never send an email or SMS asking people to access online services via a hyperlink.

Due to the prevalence of these scams and the large amount of money lost by individuals, Australian telcos along with the ATO and Australian Communications and Media Authority (ACMA) collaborated on a 3-month trial of technology to block these scam calls appearing to originate from legitimate ATO phone numbers. Under the Scam Technology Project, participating telcos used software to identify calls which had been “overstamped” with specified ATO phone numbers and blocked them.

According to the government, the trial has been “highly successful” in blocking spoof calls from specified ATO numbers. It notes that while it will not stop scammers randomly ringing Australians pretending to be from the ATO, it will stop specific ATO numbers appearing in the caller line identification on the recipient’s phone, making the scam seem less convincing.

The trial is not the only initiative under the project, the industry peak body for the telecommunications sector (Communications Alliance) is also developing an industry code called Reducing Scam Calls, which will mandate steps telcos must take to identify, trace and block scam calls. In addition, the Alliance will create an information-sharing framework for telcos to work with regulators against phone scams.

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Tax time 2022 is fast approaching, and this financial year, the ATO will again be focusing on a few key areas to ensure that individuals are doing the right thing and paying the right amount of tax. These key areas are considered by  the ATO to be problem areas where individuals make the most mistakes.

Like last year, the ATO recommends that people wait until the end of July to lodge their tax returns and not rush to lodge at the beginning of July as much of the prefill information has not yet been bedded down. In the past, it has been noted that individuals who lodge early forget to include interest from banks, dividend income and payments from government agencies and private health insurers.

“You can check if your employer has marked your income statement as ‘tax ready’ as well as if your pre-fill is available in myTax before you lodge. That way, an amendment doesn’t need to be made later, which could result in delays to your refund” – Tim Loh, ATO Assistant Commissioner

The ATO also reminds taxpayers that while it receives and matches information on rental income, foreign sourced income and capital gains, not all of that information will be prefilled for individuals. Taxpayers will therefore need to ensure that all that information is included to avoid being caught up in ATO data-matching programs later on.

Some of the traditional areas that the ATO will be focusing on this year include record-keeping, work-related expenses, and rental property income and deductions, as well as capital gains from property and shares. In addition, this year the ATO will also focus on capital gains from cryptocurrency assets. It should be noted, however, that with  the recent crashing of cryptocurrency prices individuals are more likely to have a capital loss.

The ATO reminds taxpayers that any deductions that are claimed require substantiation, and those individuals who deliberately attempt to increase their refunds by falsifying records or are unable to provide records to substantiate those claims will be subject to “firm action”. For those taxpayers working from home or in hybrid working arrangements who claim expenses related to that, the ATO has said it will be expecting a corresponding reduction in other expenses claimed such as car, clothing, parking, tolls etc.

Currently, there are still 3 methods available to taxpayers to deduct working from home expenses. These are actual cost, fixed rate, and the short-cut method. Taxpayers should check their eligibility and work out the one that suits their situation the best.

With the intense flooding experienced earlier this year, the ATO notes that some rental property owners may have insurance payouts related to their property. Any insurance payouts along with other income received such as retained bond, or short-term rental arrangements need to be reported as income.

Lastly, the ATO will be keeping a close eye on those individuals disposing of property, shares, and cryptocurrency, including non-fungible tokens (NFTs). Those with a capital gain need to include the gain in their tax return and pay tax on the gain at their marginal tax rates. Individuals who have recently sold out of cryptocurrency assets may have experienced a capital loss, which the ATO warns cannot be offset against other income such as salary and wages, and only against other capital gains.

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Where an individual, either alone or in a partnership, carries on a business activity, the non-commercial loss rules generally apply to prevent losses from non-commercial activities (ie where the outgoings or deductions exceeds the income) from being offset against income from other sources (ie salary and wages of the individual or other income). This is unless the activity satisfies one of the four commerciality tests, or the Commissioner of Taxation exercises discretion not to apply the rules.

The four commerciality tests are:

• assessable income test – assessable income (ordinary and statutory income) from the business activity for the income year is at least $20,000, or would be reasonably estimated to be at least $20,000 if the activity were carried on for the whole year;
• profits test – activity has made a profit for tax purposes in at least 3 of the past 5 income years, including the current year;
• real property test – total value of real property, or interests in real property, used on a continuing basis in carrying on the activity is at least $500,000; and
• other assets test – the total value of other assets used on a continuing basis in carrying on the activity is at least $100,000.

If the activity is deemed to be a non-commercial business activity by virtue of not satisfying any of the commerciality tests, or the Commissioner declines to exercise their discretion, the losses from the activity are quarantined within the business and carried forward to be offset against assessable income of the business activity in future years or until such time the activity passes one of the commerciality tests.

It should be noted that the non-commercial loss rules specifically prevent any taxpayers with an adjusted taxable income of $250,000 or more from offsetting excess deductions from non-commercial businesses against salary and wages. It does not matter that the business activity itself could satisfy one of the commerciality tests, if a taxpayer’s income is above the threshold, they must defer the loss unless the Commissioner exercises his/her discretion.

The adjusted taxable income is not simply taxable income, it is the sum of the taxpayer’s taxable income, reportable fringe benefits total, reportable superannuation contributions and net investment losses for the income year.

In recognition of businesses doing it tough the last few years due to COVID-19 restrictions (ie lockdowns, restricted operating, etc), and natural disasters such as floods and bushfires, the ATO is proposing a safe habour for qualifying individuals who made non-commercial business losses in 2019-20, 2020-21, or 2021-22. This will allow those businesses to manage their tax affairs as if the Commissioner had exercised his/her discretion, and there will be no need to specifically apply for the exercise of discretion.

In order to qualify for the safe habour, the business activity must have made a tax profit in the immediately preceding income year, and:

• satisfy the income requirement (ie the individual seeking to deduct the loss from the activity must have an adjusted taxable income below $250,000);
• a loss was made by the business activity;
• the activity was affected by flood, bushfire, and/or a government imposed lockdown, closure or restriction due to COVID-19;
• the event meant that the business activity was unable to be carried on to the same scale as usual or some or all of customers were not able to access the business activity or access it in the same way as usual; and
• no private ruling has been requested that the Commissioner exercise his discretion.

It should be noted that this proposed safe habour does not prevent business operators from applying for an exercise of the Commissioner’s discretion in the usual way if they do not fall within the above terms. In addition, business activities that seek to apply the safe habour must have evidence to support that application.

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