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addressing the deductibility of self-education expenses incurred by an individual and replaces TR 98/9 which has been withdrawn from 27 September 2023.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.

David Chu, Head of International Business, recently joined Thomas Sung (host) on the SBS Radio Cantonese Program to discuss a number of tax return considerations for the 2019-2020 financial year amidst the pandemic. Listen to the podcast episode in Cantonese or read the transcript of his interview in English below.

English transcript:

Host: David, I understand there have been rumours recently that the ATO have been telling people not to rush with their tax returns. How likely is this news to be true? I know you professionals also have a view, right?

David: Yes. You mentioned the ATO has been telling people not to rush with their tax returns. The ATO did not say that, however, some accounting professionals did. That is not wrong. Everyone needs to file a tax return every year. Due to the pandemic this year, people want to do it earlier and get tax refunds sooner. In fact, the ATO has also released some data, noting that as of mid-July this year, more than 1.7 million tax returns have been lodged, and the ATO has already processed 457,000 tax claims, making refunds of more than $1 billion, averaged at about  $2,300 for each claim. The ATO reported that more people filed their tax returns earlier this year than in previous years, an increase of 10% year-on-year.

Host: Are they doing this in order to receive tax refunds as soon as possible?

David: Yes. In the current situation, the unemployment rate has gone beyond 7%, and some informal statistics even show figures above 10%. Even when you are out of work, life has to go on, so some people want to file tax returns and get tax refunds earlier. We note that every time we receive our pay, the employer withholds income tax for us. As some people were underemployed during the first half of this year, and some even lost their jobs, their annual income would naturally decrease. Given the decreased income, the tax withheld by the employer would be more than necessary. By lodging the tax returns earlier, people will get back the refunds sooner. This is reasonable.

Host: Then why did the accountants ask us to slow down our tax filing?

David: There are two reasons. First, when you file your tax return in July, a lot of information about your income has already been submitted to the ATO electronically. Your employer or banks have already submitted your pay or interest information to the ATO. When you file your own tax return, you can read about all your income by logging in to your MyGov account. It is all displayed online and your tax return can be submitted by just one click. However, some organisations might not have done their submission to the ATO in time. Some accountants are worried that if you file your tax too early while some organisations have not done their reporting to the ATO in time, the income information you read on the ATO’s website may not be complete. Then you will need to make supplementary submissions later. Sometimes the ATO will send you a letter asking why you have under-reported. If it is not a large amount, then you can just do a supplementary filing. However, if it is a larger amount, a fine may be imposed. Early tax filing might have consequences of income under-reporting and leave problems for yourself.

In addition, due to the pandemic this year, employees may need to work from home and cannot go back to the office. Therefore, there will be tax relief offered since you will have consumed more water, electricity and gas at home. The ATO will allow deductions for you to claim this year. These expenses can be claimed against your income in tax filing. For these deductions, the ATO provides an option of three methods. The easiest one is, no matter how much water, electricity and gas you use, working from home entitles you to $0.80/hour against your income, and then you just multiply it by the time spent working. Another method is $0.52/hour, plus the work-related proportion of other expenses incurred at home. For example, if a lamp is used at work for two hours, then you will work out a percentage. The third method is reporting your actual expenses, which means your actual costs of working from home. Each method has advantages and disadvantages. The easiest is the $0.80/hour method, which saves you time in keeping detailed records, but it may lead to under-reporting. You will need to figure out which method works best for you. If you file your tax too early and have used the $0.80/hour method, your accountant might say you have underreported it, as the actual amount might be higher than $0.80/hour. Therefore, some accountants will advise you to slow down and do precise calculations, which may be good for you. This suggestion is understandable, for the purposes of claiming more deductions for clients, and reducing tax payments. However, if you use the actual expenses method, the difficult part is keeping all of your invoices and receipts. Can everyone keep these documents properly? Not necessarily.

Host: From the perspective of accountants, which method is advisable? For example, the first one, or the reporting your actual expenses method, which truthfully reflects the situation of the taxpayer, but the third type seems to be the fastest and easiest.

David: Of course, if you can keep complete documents properly and you can show that they can substantiate the actual costs of working from home, then this method might work better for you, as you only need to add up the costs as of 30 June. However, not everyone is able to do so. From the beginning of the pandemic to being advised to work from home, from March to June, if you have kept these documents since the onset, that is undoubtedly excellent. However, if you don’t have these documents, you might not be able to find them, especially those from March. If you rely solely on guessing, you might guess it wrong. A wrong guess may mean over-deduction and tax underpayment, for which there may be penalties in the future.

Host: OK. One last question: It is already the tax filing period, which cuts off at the end of October. When is an advisable time for people to file their taxes? How should they prepare for tax filing?

David: The ATO has always encouraged taxpayers to keep their invoices and receipts. Australia is different from other countries. In Australia, the ATO would initially believe whatever tax deductions you claim, and will give you a tax refund. Nevertheless, the ATO’s system is very sophisticated. How much do people in the same industry report as expenses, and what about people from the same suburb? What about people in the same occupation? The ATO has a sufficiently large pool of information. If the information you provide deviates from the industry or occupation average, the ATO is entitled to investigate you. If you are found to have under-reported your income and over-reported your expenses you may be fined, in addition to making a supplementary tax payment. Therefore, the key is to keep receipts and invoices for all expenses. If you are already doing so, that is great. There is no single rule as to the time of filing. If you have had all the information, of course you can do it as soon as possible. However, if you are not sure that the information is complete, it is not a bad idea to hold off for some time and get the information complete and ready for filing. Many organisations spend a month after 30 June sorting out the information for submission to the ATO. Most of the information should be ready by August. However, if you want to get your tax refund earlier and do not want to wait that long, it is up to you. Some complicated tax filing may need to enlist the help of an accountant. This is helpful because if you file it by yourself, you need to do it before 31 October. If you have an accountant to act on your behalf you will have until early next year or the middle of next year to file your tax. However, if you have a tax claim and file the return a bit later, you will receive the refund later. This is a personal choice. The key is always to have complete records.

Host: This is the most important. If the records are not complete, you have to guess. When the ATO asks you to show the data you filed and you are unable to produce it, the consequences will be serious if you have over-reported your expenses.

David: Yes. Of course no one wants trouble. Keep it as accurate as possible.

Host: Ok. We are very grateful to Mr. David Chu, Head of International Business of ShineWing Australia, for his analysis, and it is advisable that you collect the documents and information during this time and put them in order before filing your tax return. That may be better. Thank you!

David: Thank you Thomas! Thanks everybody.

Get in touch

David is attuned to the Asian listed company market, international taxation issues, corporate regulations and various stock exchange requirements and is highly regarded in the market place. Reach out below to discuss how we can support your business during this challenging time.

The post Tax return considerations for the 2019-2020 financial year appeared first on SW Accountants & Advisors.