The decision by the full Federal Court makes clear that informal arrangements and internal accounting entries are not enough to support deductions for related-party transactions. This case has particular significance to taxpayers who enter related party transactions with specific relevance to family groups that may currently lack the requisite written documentation. This case also has potential ramifications for corporate groups that are not consolidated for income tax purposes and cross border related party transactions.

The background

Two companies in the S.N.A Group entered into agreements with two asset-owning trusts for the use of rent rolls, trademarks, and associated assets in 2005. The agreements covered the period from 2005 until 2015, at which point they lapsed and were not renewed. Despite this, the operating companies continued to use the assets and continued to make payments after the agreements had lapsed, claiming the payments as deductible service fees.

The primary judge found in favor of the taxpayer, concluding that the taxpayers were subject to a presently existing liability and that the fees were therefore deductible under section 8-1. The primary judge held that, although there was no longer a written contract, the terms could be inferred from the parties’ conduct. The primary judge was particularly sympathetic to the commercial practice of small businesses, where related-party transactions are not always documented.

However, the Full Federal Court held that, there was no objective evidence after 2015 of communications between the parties, their bookkeeper, or their external tax accountant indicating that the companies were subject to a liability for the use of the assets. Nor were any tax invoices issued by the trusts. Furthermore, the method for calculating the payments for the use of the assets, which was based on the unitholders of the trusts receiving a specified percentage return, was inconsistent with the fees ultimately paid.

The making of payments and recording those payments in the books of related parties is not sufficient to infer a request for the provision of services or assets. Taxpayers must be able to objectively support a liability when charging fees for services and the use of assets by related entities. They should ensure that agreements between related parties are properly documented and kept up to date so as to cover the relevant period for which deductions are claimed.

Practical implications

Taxpayers who do not have written agreements, or who are unable to objectively demonstrate the existence of a contract are at risk of having deductions denied for transactions with related entities.

Contemporaneous documentation for related-party transactions should be prepared and regularly reviewed so that it covers the relevant period of any deductions and clearly details the method of calculation. Where documentation is not available, taxpayers should identify and retain other evidence to support the existence of a contract, including emails, minutes, invoices, or workpapers.

How SW can help

The decision in Commissioner of Taxation v S.N.A Group Pty Ltd [2026] FCAFC 10 makes clear that informal arrangements and internal accounting entries are not enough to support deductions for related-party transactions. Groups with inter-entity dealings should take this opportunity to review whether their agreements are properly documented and supported by objective evidence.

SW can assist by reviewing your existing related-party arrangements, assessing the robustness of your charging methodology, identifying gaps in contemporaneous documentation, and helping you update or formalise agreements to ensure they withstand scrutiny. Taking proactive steps now can significantly reduce the risk of deductions being denied in the future.

Contributors

Stephen Peries

Richard Osborn

The post Full Federal Court denies deductions for transactions between related parties appeared first on SW Accountants & Advisors.

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:

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.

Contributors

Rahul Sanghani

Blake Trad

The post Tax deductions for self-education expenses appeared first on SW Accountants & Advisors.

One of the significant changes introduced by the ATO is the discontinuation of the 80 cents per hour pandemic shortcut method, which was available since 1 March 2020. Commencing 1 July 2022, taxpayers can claim a deduction for their actual expenses or opt to use the revised fixed-rate method of 67 cents per hour for each hour worked from home during the tax year. The revised fixed-rate method covers expenses such as electricity, gas, phone usage, internet, stationery, and computer consumables. ATO has also required more record-keeping documents to prove your WFH hours.

What you need to know

The ATO has advised taxpayers to keep accurate records of their hours worked from home during the income year and invoices or bills in the name of the homeowner or service recipient as evidence of additional running expenses incurred. It is imperative to note that to claim WFH deductions, taxpayers must work from home to fulfil their employment duties, and not just carry out minimal tasks such as checking emails or taking calls.

It is worth noting that assets and equipment such as a computer or similar electronic device, desk, and office chair that often provide taxpayers with more substantial deductions are not included when using the revised fixed-rate method and need to be claimed separately.

PCG 2023/1 relaxes the ATO’s approach towards home offices, and taxpayers are no longer required to have a separate home office or a dedicated work area set aside in their homes to claim WFH deductions. However, if multiple individuals are working from home simultaneously and claim the actual cost method, they must apply an appropriate apportionment methodology to isolate individual components of the expenses incurred.

WFH calculations and proof

The ATO has announced that from 1 March 2023, they will take a stricter approach to record-keeping, requiring taxpayers to provide records as they occur, such as timesheets, rosters, logs of time spent accessing employer systems, or a diary of the full year to substantiate their WFH hours. The ATO will no longer accept estimates or four-week diaries from that date.

These revised deduction methods will significantly impact individuals working from home who claim tax deductions for expenses incurred during that time. Accurate record-keeping of WFH hours and related expenses is crucial to ensure that deductions are appropriately claimed. In case of any queries, taxpayers are advised to contact their tax professionals or the ATO directly.

Click here to find out the details of different calculation methods and what are the common mistakes when making WFH claims in our previous article.

How SW can help

• Provide further information and discuss which method suits your circumstances best
• advice around how to ensure the maximum tax benefit is obtained with minimal administration workload
• review expenses incurred and advise which expenses are eligible and can be claimed
• provide assistance with determining the useful life of assets and assist with calculating decline in value of work related items
• assist in calculating work related claims using the two methods and provision of workpapers to support the claim in the event of an audit
• help ensure that you have the necessary evidence and records to support your claims
• minimise any compliance risks.

If you have any queries about the revised deduction methods for work from home expenses or PCG 2023/1, please contact your SW representative or check out the key contacts provided.

Contributor

Tom Warrington

Justin Batticciotto

The post Work from home – ATO revised deduction methods appeared first on SW Accountants & Advisors.