SW Accountants & Advisors (SW) is excited to announce the promotion of Trent Godden-Minette to partner, effective 1 January 2024, growing its partner ranks nationally and demonstrating an ongoing commitment to growth and client support.
Mr. Duane Rogers, CEO and Partner of SW congratulates Trent on his appointment and is pleased to see the firm’s purpose ‘Build lasting relationships with our clients and people to achieve shared success’, being demonstrated today. “Trent has displayed exceptional talent over many years to be promoted. His milestone achievement today is a testament to the firm’s unwavering commitment to support dedicated and talented individuals on their career journey,” says Mr Rogers.
“Our values are at the heart of our culture and Trent was the inaugural winner of the Open Doors Values Award, recognising his technical skill, approachability, and consistent positive demeanour towards colleagues at all levels,” remarked Mr Rogers.
National Head of Assurance & Advisory, Mr Rami Eltchelebi congratulates Trent: “Trent has been part of our growth story since he started with us as a graduate. We are so pleased to now have him join our partnership. Trent’s admission will create further capacity for growth and allow the firm to achieve its aspirations around creating a growing national practice with full capability in every area.”
Having been with the firm since accepting a graduate role in 2015, Trent became a Chartered Accountant in 2018 and has been busy building his knowledge and capability, having undertaken two secondments, one in the UK and the other at the University of Melbourne to facilitate the adoption of AASB 15 & 1058 (revenue standards). His deep technical accounting expertise has led him to present financial reporting and accounting standard updates across various platforms.
The firm’s recent record growth has coincided with the development of SW’s Senior Leadership program. Says Mr Rogers, “We have invested in developing our people with the right mix of skills required to not only service our clients, but also become great leaders in our business. I look forward to seeing Trent continue to open doors to opportunities for his team, his clients and the firm.”
Trent’s promotion is in addition to the three appointments made in July this year, with Laura Toscano and Janelle McPhee, and the lateral Partner appointment of Paul Hum. SW now has 42 partners across Brisbane, Melbourne, Sydney and Perth.
SW is delighted to announce the appointment of Greg Will, Director, to the SW Executive Board, effective 1 January 2024.
Says Chair of SW, Mr Stephen O’Flynn, “Since Greg and his team joined SW in 2022, he has played a key role in building our visibility and capability in our Sydney market and more broadly nationally with a focus on business and private client support. Having worked in professional practice for over 30 years, Greg is a trusted advisor to business and a well-regarded authority on private business issues, regularly commentating in national and local press on how to increase business value.
Being voted in by his fellow partners so quickly speaks to his calibre and professional standing. Greg’s leadership role will further enhance the firm’s strategic priority to build a larger presence in the Sydney market and I look forward to working closely with him.”
Greg fills the vacancy created by Steven Allan, Business & Private Client Advisory Director, who steps down from the Executive Board after 5 years’ service.
“I would like to thank Steve for the significant role that he has played on the Board and Executive Committee over a number of years. Steve has played an instrumental role in growing our national practice, being involved in the recruitment of most lateral partners and has had many international trips to meet with our friends at SW International as the international network has grown.” said Mr O’Flynn.
Mr Greg Will stated: “”I am really excited and honoured to be voted onto the board by my fellow Partners and to have a hands-on role in upholding the governance of the firm. The firm is in a strong growth phase, and I am looking forward to working with my fellow board members to maintain this momentum.”
Steve reflects on his time on the SW Board: “During my tenure, I have had the privilege of working alongside dedicated individuals committed to the success of our firm. I would like to express my gratitude to each member for their collaboration and support. Reflecting on my service, I am proud of the progress we’ve made together. The commitment to excellence, emphasis on teamwork, and the prioritisation of our goals have been instrumental in our achievements. I remain confident in the firm’s continued success and growth and extend my best wishes to the incoming leadership and the entire team.”
Over the next four years, SW has a strategic focus on: Growth, People and Digital, with leadership, governance and culture being the key building blocks that will underpin success. With a ranking of 22 in the 2023 Australian Financial Review Top 100 Accounting Firms*, SW continues to be a source of interest for clients and practitioners looking for a firm they can work with that has a long history with good financial stability, and an eye to the future.
Greg Will will work closely with reappointed board member Hayley Underwood, Duane Rogers as CEO, Bessie Zhang, Stephen O’Flynn (Chair) and independent director, Sangeeta Venkatesan.
SW congratulates Greg on his appointment and thanks Steve for his significant contribution during his tenure.
*Of all national accounting practices, SW ranks 9th.
Welcome to an exclusive interview series where SW’s Director, Rick, engages in insightful conversations with Polar 993 Founder, Adam Lindell. Together, they dissect the intricate world of fund management, offering an insider’s perspective on the nuances of navigating the financial landscape.
Embark on a journey into the fundamentals of fund management as SW’s Director, Rick Hemphill and Polar 993 Founder, Adam Lindell share invaluable advice tailored for first-time fund managers. Uncover the key insights, strategies, and essential knowledge that lay the groundwork for a successful venture into the world of fund management.
In the second episode, SW’s Director, Rick Hemphill and Polar 993 Founder, Adam Lindell unravel the complexities of capital sourcing, focusing on the pivotal task of raising the initial $25 million. Discover proven strategies, actionable tips, and real-world experiences that illuminate the path for fund managers seeking to secure the crucial capital to kickstart their investment journey.
Join SW’s Director, Rick Hemphill and Polar 993 Founder, Adam Lindell in the final chapter of this enlightening series, where they explore the ever-evolving investment market trends. Delve into the realms of Build-to-Rent (B2R), Build-to-Sell (B2S), and Managed Investment Schemes (MIS). Gain a comprehensive understanding of these trends, empowering fund managers to navigate the dynamic landscape of investment opportunities.
From all of us here at SW, we would like to thank you for your continued support throughout 2023. We are incredibly proud of how our community has demonstrated the values in this year #ownit #loveyourwork #embracetheride #sharetheload #opendoors. We wish you and your family the very best for the festive season and a healthy, happy and successful 2024.
Our offices will be closed from Friday 22 December 2023, reopening Monday 8 January 2024.
Welcome to the future of global investments! At SW, we’re proud to be part of the conversation at International Mining and Resources Conference (IMARC) and, as a long-standing partner, we are once again thrilled to be Silver Sponsors of the Mines and Money Investment Theatre. We’re delighted for the chance to connect with industry leaders and be part of shaping the global future of businesses and economies alike.
Invest Today, Lead Tomorrow
Date: Tuesday 31 October – Thursday 2 November
Location: International Convention Centre (ICC) Sydney, 14 Darling Dr, Sydney NSW 2000
Time: 8.30am – 5pm daily
SW is proud to be part of the conversation at IMARC for the sixth time, taking the lead on sustainable and equitable futures by sponsoring the Investment Theatre.
Join us as we hear from industry experts on all things Mining and Investments, including company updates and announcements from over 100 Junior Mining Corporates.
Rick Hemphill, John Dorazio and Blayney Morgan will be introducing critical minerals and mining companies to the stage in the SW Investment Theatre. In addition, the team will facilitate several panel discussions and interviews as outlined below.
Panel discussions
Investing experience in the Energy and Resource sector in Australia
4.10pm Tues 31 October | Mines & Money Investment Theatre sponsored by SW
Interviewer:
Bessie Zhang, Partner, Assurance & Advisory, SW Accountants & Advisors
Interviewees:
Louis Chien, Director, ASF Group
Capital raising and attracting investment for junior exploration
1.45pm Thurs 2 November | Mines & Money Investment Theatre sponsored by SW
Interviewer:
Blayney Morgan, Partner, Assurance & Advisory, SW Accountants & Advisors
Panellists:
John Forwood, Director, Lowell Resources Funds Management
Lucy McClean, Director, New South Wales, Victoria & Tasmania, AMEC
Campbell Olsen, Founder and Chief Executive Officer, Arete Capital Partners
Sarah Dulhunty, Capital Markets and Corporate Adviser, MinterEllison.
Connect with the SW Accountants & Advisors team on the IMARC Connect app or in person next week to see how we can #opendoors for your business.
Australia’s first sustainability reporting standards are out! The Australian Accounting Standards Board (AASB) has issued the much anticipated exposure draft (ED).
The exposure draft contains Australian Sustainability Reporting Standards (ASRS) 1 and 2, both of which focus on disclosure of climate-related financial information.
This approach contrasts with the approach taken by the International Sustainability Standards Board (ISSB) that issued a general sustainability standard (IFRS S1) and a climate standard (IFRS S2). Whilst the ISSB standards were used as the baseline, the proposed Australian standards in ED format contain a number of differences. The key differences between the proposed Australian standards and the international equivalent are as follows:
- limiting the required disclosure to climate-related financial disclosures only by replacing all references to ‘sustainability’ to ‘climate’
- edits to make the standards applicable to not-for-profit entities as well as for-profit
- edits to clarify certain technical matters around measurement and reporting of emissions
- some other edits to make the standard more applicable in the Australian context and to remove some duplication
The proposed standards will also be applicable to not-for-profit entities that meet the reporting criteria. However, the mandatory disclosure for not-for-profit entities will be less onerous than applies to for profit entities.
The Australian Parliament, rather the AASB, determined the entities scoped into the legislation. The AASB have included Treasury’s proposed roadmap, from its second consultation paper, for mandatory adoption of sustainability standards.
Treasury’s proposed roadmap for mandatory adoption includes:
Group 1 | 2024-25
Entities preparing accounts in accordance with the Corporations Act (chapter 2M) and meets at least two of the following:
- over 500 employees
- consolidated gross assets of $1bn or more
- consolidated revenue of $500m or more
AND Entities preparing accounts in accordance with the Corporations Act (chapter 2M) that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.
Group 2 | 2026-27
Entities preparing accounts in accordance with the Corporations Act (chapter 2M) and meets at least two of the following:
- over 250 employees
- consolidated gross assets at end of company’s financial year and any controlled entities is $500m or more
- consolidated revenue for company’s financial year and any controlled entities is $200m or more
AND Entities preparing accounts in accordance with the Corporations Act (chapter 2M) that are a ‘controlling corporation’ under the NGER Act and meet the NGER publication threshold.
Group 3 | 2027-28
Entities preparing accounts in accordance with the Corporations Act (chapter 2M) and meets at least two of the following:
- over 100 employees
- consolidated gross assets at the end of the company’s financial year and controlled entities is $25 million or more
- consolidated revenue for the company’s financial and any controlled entities it $50m or more
AND Entities preparing accounts in accordance with the Corporations Act (chapter 2M) that are a ‘controlling corporation’ under the NGER Act.
ASRS Application Date
The AASB is proposing that ASRS 1, ASRS 2 and related references would be applied:
- for entities in Group 1 – in annual periods beginning on or after 1 July 2024
- for entities in Group 2 – in annual periods beginning on or after 1 July 2026
- for entities in Group 3 – in annual periods beginning on or after 1 July 2027
What we are advising our clients to do as next steps
- reach out to your SW contact to get more information
- familiarise yourself with the content of the proposed standards and seek clarification on how you will be impacted
- provide feedback to the AASB regarding the content of the exposure draft
You should also attend SW’s financial reporting webinar on Thursday 16 November to hear more about these proposed standards. Click here to register
How SW can help
Our team of audit and assurance experts are fully informed of the requirements of the sustainability accounting standards and can assist with providing guidance for your business, as well as keeping you abreast of developments from an Australian reporting context.
Reach out to your SW contacts or the key contacts here for a conversation.
Contributors
Treasury has released for public comment an exposure draft of changes to the proposed thin capitalisation reforms. The proposed changes do not go as far as many would have hoped, but certainly include some welcome amendments in relation to trusts.
Significant reforms to the thin capitalisation regime were introduced in the Bill1 into the House of Representatives on 22 June 2023. A detailed outline of the reforms contained in this Bill were provided in an earlier SW client alert. The original Bill contained rules considered by many to be controversial. These issues were highlighted in submissions made by many stakeholders (including SW) to the Senate Economics Legislation Committee (Committee) as part of a review conducted on the impact of the Bill. In response to this review, on 18 October 2023, Treasury has released in exposure draft form a further round of proposed amendments for public comment. These amendments address some of the concerns raised in relation to the original Bill.
We have summarised below the issues and recommendations made in the SW Accountants & Advisors submission to the Committee compared to the changes to the Bill that have been proposed by the exposure draft.
| Concerns raised with original Bill | Changes proposed in the exposure draft |
|---|---|
| Trusts and partnership are excluded from applying the third-party debt test (TPDT) | The Bill will be amended so that the TPDT also applies to trusts and partnerships |
| Cross guarantees by member of the same group will preclude the application of the TPDT | The conditions of the TPDT will be relaxed to allow recourse arrangements to be implemented in relation to assets held by other entities in the same obligor group |
| Interest rate swap payments will not be deductible under the TPDT when the modified rules for conduit financing arrangements apply | A deduction will now be permitted under the TPDT for the payments made under an interest rate swap when the modifications to conduit financing arrangements apply |
| Foreign currency borrowings that are hedged and on lent under AUD loan terns will not satisfy the TPDT conditions when the modified rules for conduit financing arrangements apply | No change proposed |
| Trust distributions are excluded from the calculation of tax EBITDA for the fixed ratio test (FRT). Furthermore, there is no ability for excess tax EBITDA of a subsidiary trust to be ‘pushed up’ to a head trust. This means that property trusts with borrowing at the head trust would be severely disadvantaged with significant denial of debt deductions | The FRT will be amended to permit certain subsidiary trusts to ‘push up’ their excess EBITDA to a parent trust that has at least a 50% interest in the subsidiary |
| Proposed commencement date is 1 July 2023 (deferral requested) | No change to the commencement date |
We have below provided a brief summary of the main proposed changes included in the exposure draft.
Main changes
Welcome amendments proposed for trusts
- technical changes to ensure that trusts and partnerships are able to access the third party debt test (TPDT). In the original Bill a drafting error existed which meant that trusts and partnerships were unable to access this test
- the original Bill provided that trust distribution income was excluded in the calculation of tax-EBITDA for the purposes of the fixed ratio test. This meant that groups with geared holding entities would be significantly disadvantaged under the fixed ratio test. The proposed changes should allow the transfer of excess EBITDA from a subsidiary trust to a holding trust which has an interest of at least 50% in the subsidiary subject to satisfying certain conditions.
The amount of excess EBITDA that may be transferred from the subsidiary entity will be the parent’s proportionate share of the excess. Any amount of transferred EBITDA will also be taken into account in determining whether the transferee has any excess EBITDA, so that there may be successive ‘push up’ transfers in multi-tiered groups of eligible trusts.
Third Party Debt Test (TPDT)
- changes are proposed to the TPDT. For the most part these should broaden the applicability of this test. The proposed changes include:
- interest rate swap costs which relate to multiple debt interests, will now be deductible under the TPDT, subject to meeting certain conditions,
- a relaxing of the conditions for the TPDT in relation to permissible recourse arrangements. This will permit the following asset types to be subject to recourse arrangement without breaching the TPDT eligibility conditions:
- Australian assets owned by the entity,
- Australian assets that are represented by membership interests in the entity, except when the entity has a direct or indirect legal stake in assets not considered Australian. This ensures that membership interests cannot be tied to non-Australian assets, and
- Australian assets owned by an Australian entity within the obligor group related to the tested debt interest.
Where the TPDT is being considered for ‘conduit financiers’, the modifications referred to above will broadly also apply to the conduit financier and entities that borrow from the conduit financier.
- The provision in the original Bill permitting the use of credit support rights linked to the creation or development of land or other real property in Australia is proposed to be broadened. This concession is proposed to be extended to include the creation and development of specific movable assets located on the land. This expansion is intended to accommodate property that, while not considered part of the land, has a significant economic association with it.
Debt creation rules
- The proposed debt creation rules are widely regarded as controversial and not well targeted. As previously noted, these rules broadly targeted arrangements involving:
- an entity acquiring an asset (or obligation) from an associate which is funded by interest bearing debt, and
- an entity borrowing from an associate to fund a payment to that, or another, associate and incurring interest on the relevant debt.
- In response to the numerous submissions made to the Committee on these rules, refinements have been proposed, including:
- excluding Authorized Deposit-Taking Institutions and securitisation vehicles as well as certain special purpose entities that are exempt from the thin capitalisation provisions
- the introduction of exceptions to the conditions regarding the acquisition of an asset from an associate, in broad terms:
- the acquisition of a new membership interest in an Australian entity or a foreign company,
- certain new tangible depreciating assets, and
- the acquisition of certain debt interests, to allow for related party lending in certain circumstances.
- the introduction of exceptions to the rules targeting borrowings to fund payments to associates, in broad terms:
- payments that are merely back-to-back loans on the same terms relating to costs, and
- certain payments of principal under a debt interest.
- in addition to the above, various other amendments are proposed, including amendments specifying the order in which debt creation deduction rules and the thin capitalisation provisions apply (essentially, the debt creation rules apply first).
Commencement, application and transitional provisions
Many submissions made to the Committee urged the Committee to conclude that the new measures, particularly the debt creation rules, be deferred until 1 July 2024. However, the Committee has not adopted such recommendations, save for one exception. The effective date for the thin capitalisation measures remains 1 July 2023, so that any income year starting on or after that date would be affected. The one timing concession that is reflected in the new proposals is that for financial arrangements established before 22 June 2023, there is to be a one-year grace period in relation to the debt deduction creation rules. However, the debt creation rules will apply to all arrangements (whether pre-existing or new) from 1 July 2024.
SW comment
The changes proposed to the thin capitalisation rules in relation to trusts are most welcome. The changes proposed to the TPDT and the debt creation rules are positive, but many would have been hoping for changes of a more substantive nature.
Should the legislation proceed, inclusive of the most recent round of proposed changes, the thin capitalisation rules changes and the new debt creation measures will represent significant changes to the tax law affecting multinational groups.
We are now four months into the first year of operation of the new rules. Given these rules are still not settled, a 12-month deferral of the start date seemed appropriate. This, of course, will not be the case with the commencement date unchanged at 1 July 2023 (subject to the one exception noted for the new debt creation rules).
However, consultation on the reforms continues with submissions in relation to the exposure draft changes closing on 30 October 2023.
How can SW help?
Given that the basic thrust of the new thin capitalisation regime remains unaltered, it is important that if you are affected by the new rules, you clearly understand how these arrangements are likely to impact your existing arrangements. To understand how these measures and the proposed amendments referred to above may impact you, please contact your SW adviser or, alternatively, one of the contacts listed.
Contributor
Increased administration and difficult deadlines will be a strong focus of employer and stakeholder concerns as consultation opens on Treasury’s broad design plans for Payday Super.
As part of the 2023-24 Budget, the Federal Government announced that from 1 July 2026, super must be paid on payday, a change that will contribute towards a ‘dignified retirement for all Australians’.
Treasury has released the Securing Australians’ Superannuation consultation paper (the Paper), which will remain open until November 3, 2023. The Paper provides a number of areas for consultation, including in relation to:
- defining payday super
- updating the superannuation guarantee (SG) charge
- compliance mechanisms
- choice of fund and employee onboarding
It is intended that stakeholder answers will help inform the design of payday super implementation and compliance frameworks.
SW fully supports the intended purpose of the payday super to address the drivers of unpaid SG. Material change is required to systems and processes in employers, clearing houses, superannuation funds and the ATO to deal with increased frequency of contributions (up to 13 times) and tighter deadlines.
Treasury’s openness to considering a broad spectrum of issues is commendable, with few topics being excluded. If not designed well, there are also numerous aspects of the proposed design which may unduly increase the administrative and regulatory burden on employers.
SW is preparing a submission to Treasury addressing practical issues for Australian businesses in designing and implementing the payday super frameworks. While there are many matters that deserve consideration, we highlight several key consultation topics below and welcome your insights and feedback:
- the transition from self-assessment system for SG obligations to ATO-driven recalculations and assessments.
Employers who have conducted recalculations of pay and super will know that recalculations are rife with false discrepancies. It is proposed that under Payday Super, the ATO will recalculate superannuation obligations based on STP and superannuation fund reporting data. The ATO calculated superannuation shortfalls will result in “nudges” for employers to comply followed by assessments, moving away from the self-assessment system we currently have.
Is it possible for the ATO to eliminate assessments resulting from false discrepancies, and if so, how might this be done?
- due date for the making of superannuation contributions or receipt by the superannuation fund.
Treasury has suggested either deadline based on when payment is made, or one based on receipt by the superannuation fund.
Superannuation is often a subsequent process to finalisation of a pay run, and can involve significant manual intervention (e.g. in successfully producing and submitting the SAFF file).
Is a same day due date for payment or a three day deadline for payment into the superannuation fund realistic? If not, how long would employers need to complete processing and comply with deadlines?
- grace periods for employers to deal with payroll/Payday Super issues that will occur on a more frequent basis (from quarterly to payroll cycle).
There are many circumstances that arise which can cause superannuation shortfalls, some of which outside the employers control. For example, incorrect superannuation fund details, or paid amounts being reclassified (e.g. an employee incorrectly claims overtime that is re-classified to ordinary pay).
While proposed improvements in onboarding and superannuation stapling may reduce these instances, the increased frequency and tighter deadlines may result in more SG shortfalls.
Currently, employers have the quarter and 28 days to correct issues that arise.
Should there be a grace period which allows employers to correct shortfalls of superannuation? If so, what should be included as a concession in the grace period (interest, admin fees, income tax deductibility, SG calculations)?
In addition, should the SGC calculation be made easier to assist with the administrative burden of compliance?
How SW can help
While this has not been made law as of yet, we see a trend of increased transparency and compliance activity from the ATO in respect of superannuation compliance. In anticipation of these trends, or the proposed Payday Super changes, all employers should review the configuration of STP phase two reporting to the ATO as well as end -to -end superannuation processing to reduce the risk of superannuation shortfalls and review activity from the ATO or FWO.
SW has designed an end to end offering which includes a review of time and attendance / payroll system configuration, and the use of advanced data analytics to test superannuation compliance and reporting to superannuation funds and the ATO.
If you have any concerns with the proposed reforms or are interested to contribute to SW’s submission, please contact Paul Hum.
Contributors
The Australian Taxation Office (ATO) has introduced five further legislative instruments aimed at reducing Fringe Benefit Tax (FBT) record-keeping obligations. This is in addition to the four draft legislative instruments that we discussed in our earlier alert from March 2023.
While the earlier legislative instruments focused on travel benefits, these new instruments broaden the scope to include other areas such as Living-Away-From-Home Allowances (LAFHA) and private use of vehicles other than cars.
The ATO is progressively making it easier to comply with FBT obligations by offering more flexible record-keeping options. Employers now have a wider array of records they can rely on, which can be particularly beneficial for those who already maintain such records for other operational or compliance purposes. This not only simplifies the administrative process but also reduces the risk of non-compliance due to incomplete or missing employee declarations.
Summary of key points from the five additional Legislative Instruments
- LI 2023/D18 Temporary Accommodation Relating to Relocation: Employers can use employment contracts and relocation agreements as alternative records. This would be useful for organisations with frequent employee transfers.
- LI 2023/D19 Otherwise Deductible Benefits: This instrument provides guidelines for using alternative records for benefits that would otherwise be deductible to the employee. Employers can now use corporate credit card statements or expense management software as alternative records, reducing administrative overhead.
- LI 2023/D20 Maintaining an Australian Home: This instrument focuses on the alternative records that can be used for benefits related to maintaining an Australian home while an employee is living away for work. Payroll records and housing lease agreements can now be used as alternative records.
- LI 2023/D21 Fly-In Fly-Out and Drive-In Drive-Out Employees: This instrument allows employers to use employment contracts that specify an employee’s normal residence and employment details as alternative records. This is especially beneficial for industries like mining and construction, where such work arrangements are common.
- LI 2023/D22 Private Use of Vehicles Other Than Cars: This instrument specifies that employers can use alternative records like mobile apps that record travel distances via GPS and email correspondences to substantiate the usage of vehicles other than cars. This is a significant shift from traditional methods that often required manual logbooks, making the process more efficient and accurate.
These legislative changes will take effect from 1 April 2024, and employers should prepare in advance to simplify their record-keeping.
These new record-keeping options offer more flexibility and convenience for employers who already maintain such records for other operational or compliance purposes. They also reduce the risk of non-compliance due to incomplete or missing employee declarations.
To simplify record-keeping in accordance with the new FBT legislative instruments, employers should undertake an assessment of their existing corporate records. This may involve:
- reviewing the requirements outlined in the legislative instruments,
- conducting an inventory of all current records,
- cross-reference this inventory of current records with the types of records now considered adequate,
- update internal record-keeping policies and employee training for any gaps identified,
- run a test audit to validate compliance and maintain documentation of the assessment process for future reference.
How SW can help
If you need any assistance in understanding how you can simplify your record-keeping in light of these draft legislative instruments, please contact your SW advisor Stephen O’Flynn or Rahul Sanghani.
Contributor
The ATO has issued a new draft ruling which outlines and provides examples for when tax deductions for self-education expenses are available to individuals.
While the draft Ruling does not introduce significant changes, it provides greater clarity by detailing factors and examples that can be considered. Each taxpayer’s situation will determine the deductibility of their self-education expenses.
The draft ruling present numerous examples, the facts and circumstances of each taxpayer will determine if the expense:
- is incurred in gaining or producing assessable income,
- enables you to maintain or improve a skill or specific knowledge, or
- objectively leads to, or is likely to lead to, an increase in your income.
The full draft Ruling can be viewed here.
For employers who subsidise or reimburse self-education expenses for their employees, it’s crucial to understand the implications of the “otherwise deductible” rule in the context of Fringe Benefits Tax (FBT). Under this rule, if an employee could have claimed a deduction for the self-education expenses had they incurred them personally, the taxable value of the fringe benefit provided by the employer can be reduced. This aligns with the principles laid out in TR 2023/D1, making it essential for employers to review the new guidelines to ensure that any benefits provided are compliant with both income tax and FBT laws.
Details
On 27 September, the Commissioner released draft Taxation Ruling TR 2023/D1, addressing the deductibility of self-education expenses incurred by an individual and replaces TR 98/9 which has been withdrawn from 27 September 2023.
The draft Ruling reflects the current rules following the changes in 2022 that removed the $250 non-deductible threshold for self-education expenses. Therefore, self-education expenditure is deductible from the first $1 spent.
The Commissioner reinforces that self-education expenses will be deductible under section 8-1 to the extent that they:
- are incurred in gaining or producing your assessable income, and
- Are not:
- capital, private or domestic in natureincurred in gaining or producing exempt or non-assessable non-exempt (NANE) income
- prevented from being deducted by a specific provision.
A key focus of the draft Ruling is that self-education expenses will be incurred in gaining or producing assessable income if either or both of the following principles apply:
- income-earning activities based on skill or specific knowledge (Principle 1)
- leads to, or is likely to lead to, an increase in your income (Principle 2).
Principle 1
Where income-earning activities are based on the exercise of a skill or specific knowledge, expenses undertaken to maintain that knowledge or skill will be deductible.
The Commissioner notes following factors that the courts have determined when considering if expenses are incurred to maintain or improve knowledge or skills:
- if the knowledge or skills obtained are too general, there will not be a sufficient connection between the expense and the income-earning activity
- the self-education has a necessary connection to your income-earning activities at the time.
Principle 2
Where self-education will objectively lead to, or likely to lead to, an increase in income from your current income-earning activities, the expenses will be deductible.
The Commissioner notes following factors to assist in this determination:
- the increase in income is clearly linked to the self-education undertaken
- a real opportunity for promotion results from the self-education
- the self-education leads to or is likely to lead to a higher pay grade in your current income-earning activities
- the self-education leads to or is likely to lead to a bonus or higher pay grade once completed
- advancement of employment and salary must be a substantial part of you motives for undertaking he self-education.
The draft Ruling also highlights that if you were to cease your income-earning activity whilst you were completing a course, only expenses incurred up to the point when the activity ceases are deductible.
Exclusions
Another key focus of the draft Ruling is the following exclusions that will not be incurred in gaining or producing assessable income:
| Exclusion 1 | |
|---|---|
| Self-education expenses cannot be deducted if that are undertaken or designed to: Get employment, obtain new employment, or to open up a new income-earning activity. |
| Exclusion 2 | |
|---|---|
| Expenses incurred whilst you are not undertaking income-earning activities to produce assessable income. |
In addition to examples relation to each principle and exclusion, the Commissioner provides examples of self-education expenses relating to the following:
- course fees (including work-related conferences, HECS-HELP loan, VET Student loan etc.). Employers should remember that Higher Education Loan Program (HELP) charges are not otherwise deductible and the full value is subject to FBT if paid by the employer
- interest
- books, digital subscriptions and stationery
- airfares, Accommodation and meals (including course and holiday). This has been an area hotly contested over the years. Unfortunately, the examples provided merely replicate the existing examples in TR 98/9 and are quite simplistic and have an obvious outcome
- transportation costs
Apportionment
The Commissioner says that if an expense is not entirely incurred in gaining or producing your assessable income, it may be apportioned in certain circumstances.
Expenses can be apportioned in the following ways:
- according to its particular purpose where some parts are for an income-producing purpose, and some are not (where the expense has district parts), or
- on a fair and reasonable basis based on your facts and circumstances where the expense is singular.
FBT
From an FBT perspective understanding the “otherwise deductible” rule is of paramount importance. This rule stipulates that if an employee would have been eligible to claim a deduction for self-education expenses had they paid for them out-of-pocket, the taxable value of the fringe benefit that the employer provides can be reduced accordingly. However, to ensure that the otherwise deductible reduction is obtained, an employer should:
- obtain Employee declarations
- ensure that the benefit is covered by a Recurring fringe benefit declaration provided by the employee, or
- ensure that the benefit is covered by a No-private-use declaration prepared by the employer.
This is particularly relevant in light of the newly released draft Taxation Ruling TR 2023/D1, which provides updated guidelines on what qualifies as a deductible self-education expense.
Employers should closely review these new guidelines to ensure that the benefits they offer align with the ruling’s principles. By doing so, they can optimise their FBT liability while also ensuring compliance with income tax laws. This dual compliance not only mitigates the risk of potential penalties but also enhances the employer’s ability to provide meaningful benefits that support employees’ professional development.
How SW can help
The ATO is currently seeking comments on the new draft legislation, with the comments period closing on 27 October 2023.
Once TR 2023/D1 is finalised by the ATO, it is important to note that the ruling will apply both prospectively and retrospectively.
Please reach out to your usual SW advisor or one of our experts for more information about deductibility of self-education expenses or what the draft Tax Ruling might mean for you.