Tax Rambling

The JobKeeper application comes out on Monday and there is still one big question… As the JobKeeper payment is “monthly in arrears”, do I have to have paid my employees $1,500 a fortnight to get the $1,500 JobKeeper payment from the ATO (effectively reimbursing me for all or some of the amount I have already paid that employee)?

Section 10 of the regulations or the JobKeeper payments states that to be eligible or the $1,500 payment for an employee, the employer must have ALREADY paid the employee $1,500 for the fortnight in question (salary, PAYGW, salary sacrifice and super at least to $1,500). So the answer is YES.

There were rumours that the ATO would let you get away with it for the first payment in May, primarily due to the act tax the payment in May covers all of April but the regulations were no registered until 10 April and there is still questions being sorted out about eligibility (like turnover tests).

But now the ATO has come up with a totally impractical answer. Immediately upon JobKeeper enrolment, the ATO will issue the employer an acknowledgement notice. The ATO says with that notice you can run to the bank and borrow the money to pay the $1,500… This could get messy!

I have worked from home for over a decade. and I have always claimed my 52 cents for every hour I work. But now all the rest of you have joined me on the short morning walk from the kitchen to the desk… you get 80 cents and hour and I am stuck with my 52 cents…

Today the Commissioner updated the way we claim working from home expenses… he says there are three ways to calculate deductions for the running expenses of working at home:

• The fixed rate method – 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture, plus the work-related phone and internet expenses ($50 a year as we have no records), consumables, stationery, and depreciation of a laptop .
• The actual cost method ─ claim the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis which is way to hard to work out.
• And now the shortcut method ─ claim a rate of 80 cents per work hour for all additional running expenses

Under this shortcut method taxpayers can claim a deduction of 80 cents for each hour they work from home due to COVID-19 as long as they are:

• working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls,
• incurring additional deductible running expenses as a result of working from home.

If a taxpayer uses the shortcut method, they cannot claim a further deduction for anything else, including the depreciation of their laptop.

They must keep a record of the number of hours they have worked from home as a result of COVID-19. Examples are timesheets, diary notes or rosters.

If they use the shortcut method to claim a deduction they must include the note ‘COVID-hourly rate’ in their tax return.

So poor me… I don’t work from home due to COVID-19 but because I am slack and lazy, so I just get the 52 cents and hour…

Update – The Commissioner has released a Practical Compliance Guideline with some examples.

Example 1 – not working from home

13. Abed’s employer has requested staff take leave while the business is suffering a turndown due to COVID-19. Abed takes four weeks annual leave. During that period he occasionally checks his email to see if there is anything he needs keep abreast of while he is on leave. His employer also sends him text messages to keep him up to date on changes to the business.

14. This would not qualify as working from home as Abed is on leave and not actively working; he is just occasionally checking in. As such, Abed cannot rely on this Guideline.

Example 2 – working from home

15. Bianca is a sole trader who works as a copy writer and editor. She usually works out of a shared workspace in the central business district as it is easier to meet with her clients face-to-face. Bianca decides to work from home as a result of COVID-19 and replaces her face-to-face meetings with online video conferencing. Bianca continues to operate her business and would meet the criteria for working from home. As such, Bianca can rely on this Guideline to claim her additional running expenses.

Example 4 – additional running expenses incurred – business owner

23. Elizabeth runs a small business selling art and framing pictures. She has a store with a workshop to display the art and frames. She also does all her bookkeeping and administrative tasks in the office at the store. As a result of the downturn in people coming into her store due to COVID-19, Elizabeth decides to close her store and continue running her business online from home. As Elizabeth continues to run her business from home due to COVID-19, she can rely on this Guideline to claim her additional running expenses.

Example 5 – calculating additional running expenses using shortcut rate

30. Ephrem is an employee and as a result of COVID-19 he is working from his home office. In order to work from home, Ephrem purchases a computer on 15 March 2020 for $1,299. He intends to use the shortcut rate to claim his additional running expenses.

31. During the entire period he is working from home as a result of COVID-19, Ephrem notes in the calendar on his computer, when he starts and finishes each day along with a note about any breaks he has and how long those breaks were.

32. When it comes to lodging his 2019-20 tax return, Ephrem works out that during the period he worked from home as a result of COVID-19, he worked a total of 456 hours.

33. Ephrem calculates his deduction for the 2019-20 income year for additional running expenses as:

456 hours × 80 cents per hour = $364.80

34. As Ephrem has claimed his additional running expenses using the shortcut rate, he cannot claim a separate deduction for the decline in value of his computer. Ephrem keeps a record of the calendar entries he has made to demonstrate how he calculated the number of hours he worked from home. Ephrem also keeps the receipts for his computer purchase in case he will need to claim depreciation in future.

35. When he lodges his 2019-20 tax return using myGov, Ephrem includes the notation ‘COVID-hourly rate’.

Ten minute video on COVID-19 and the JobKeeper payment… Enjoy

And the source documents from the Treasury website

“I just have to have the documentation to prove my work related deductions.” Wrong. If you don’t have the substantiation you don’t have a deduction. Subsection 900-15(1) states…

To claim a work expense as a deduction you need to pass two tests. The first is the normal deduction rules and the second is you have written evidence. If you are a tax agent and someone who is an employee asks if they can claim a deduction for a work expense, your answer should end with “but only if you have written evidence that proves the expense. No substantiation, no deduction.”

Put simply, without paper and electronic evidence, that shows the name of the supplier, amount of the expense, what was purchased, when it was purchased and the date the document was produced, then the expenses is non-deductible.

In a recent Ruling, the Commissioner covers the specific exceptions and relief from substantiation provided in Division 900.

The first exception is where the total of work expenses is $300 or less. However, to claim this exemption records must be kept showing how the amount of the claim was calculated – taxpayers cannot just claim $300 without some record of what they spent the $300 on.

The second exemption is where the total of laundry expenses is $150 or less. Just like before, records must be kept showing how the claim was calculated.

The third exemption is where an allowance is received for travel expenses or overtime meal expenses that is less than the amount considered reasonable by the Commissioner. While the normal record keeping rules do not apply, some form of records must be kept showing how the amount of the claim was calculated and that it was incurred.

Ten minute video on the business credits under the Covid-19. Enjoy

Redbacks Yearbook 2020

If you look carefully you can find the amount those dodgy large corporate group dodge their tax affairs (illegally avoiding $2 billion in tax each year), but it is hard to see next to the ridiculously large amounts that small businesses (illegally avoiding $11.1 billion in tax each year – over 70% due to not declaring cash sales), individuals (illegally avoiding $8.4 billion in tax each year – around 80% dodgy work related deduction claims) and GST (illegally avoiding $5.2 billion in tax each year – mostly small businesses not declaring cash payments).

For the decades I have been involved in tax policy in this country, the biggest problem with our tax system is not loopholes or large business structuring… It has been dodgy small businesses not declaring cash and dodgy individuals (and sometimes their dodgy tax agents – the most recent research in Australia shows tax agent prepared returns make more mistakes on work related deductions than self prepared returns) making up deductions.

Lets not increase rates or bring in new taxes. Lets just fix the dodgy individuals and small businesses.

I’m “on call” so my travel to and from work is not private… Wrong… Sometimes…

According to Draft Taxation Ruling TR 2019/D7, titled “Income tax: when are deductions allowed for employees’ transport expenses?”, travel of an employee while ‘on call’ may not be private, even if it is between home and a regular place of work. Importantly, just awaiting a call from their employer to attend a regular place of work, does not stop the travel to work being private. To not be private, the employee’s duties must have “substantively commenced at their home and the employee is required to travel to a regular place of work to complete those particular duties.”

For example…

Christine is a highly trained computer consultant who is involved in supervising a major conversion in computer facilities which her employer provides for its customers. This requires her to be on call 24 hours a day. In order to assist in diagnosing and correcting computer faults while she is at home after her normal work hours, Christine’s employer installs specialised equipment at her home. Typically, matters can be resolved by Christine at home with the use of this equipment but if the problem cannot be resolved at home, Christine travels to the office in order to progress the matter further.

Christine’s travel between her home and the office every day is private travel between her home and her regular work location. The costs of this travel are not incurred in gaining or producing her assessable income. However, in circumstances where Christine is called to correct a fault after hours and where she commences work on that fault at home but has to travel to her employer’s premises because she cannot rectify it at home, the cost of travel between her home and the office will be deductible. Although this travel is between her home and a regular work location, the cost of these abnormal journeys are deductible because Christine commences substantive work prior to leaving home and then completes that work once she attends the office. Christine does not choose to do part of the work of her job in two separate places, but rather the two places of work are a fundamental part of Christine providing specialised support arising from the nature of her special duties. The expenses she incurs in travelling to the office in such circumstances are incurred in gaining or producing her assessable income.

But travel remains private where an employee awaits at home for advice from their employer whether they are required to work, in a sense on ‘standby’, and does not commence any substantive duties at the place where they receive the call or request from their employer.

Linda is a nurse. Sometimes Linda is required to be on standby duty. If Linda is called by her employer while she is on standby duty, she travels from her home to the hospital and starts her shift once she gets there. Linda’s travel is between her home and a regular work location with short notice of her start time. The travel does not occur on paid work time and accordingly, the expenses are a prerequisite to Linda’s income earning activities. The transport expenses Linda incurs in travelling from her home to the hospital are private and not deductible.

At call to work where you are (business) or at call to come into work (private). You can’t just say its not private because I am “on call”.

How many franking credits can I attach to this dividend, 30% or 27.5%?

I have been asked this question countless times since we introduced Base Rate Entities and the lower company tax rate of 27.5%. It is not a hard question to answer, but the Commissioner has made the answers easier by finalising Law Companion Ruling LCR 2019/5 Base rate entities and base rate entity passive income.

Have a look at these examples (all starting from para 53):

59. Kookaburra Co was founded on 1 July 2017.

60. As Kookaburra Co did not exist in the prior income year (the 2016-17 income year), its 2017-18 corporate tax rate for imputation purposes is 27.5%.

If the company did not exist in the prior year, you can frank at 27.5%.

But if the company did exist in the prior year then it works out its corporate tax rate for imputation purposes by assuming that its aggregated turnover, BREPI and assessable income are the same as in the previous income year.

61. Swan Co has been carrying on a business since 1 July 2014.

62. In the 2016-17 income year, Swan Co was dormant and had no aggregated turnover. Swan Co’s 2016-17 assessable income was nil, and so its BREPI was nil.

63. As Swan Co existed in the 2016-17 income year, the corporate tax rate for imputation purposes of Swan Co for the 2017-18 income year is determined as the corporate tax rate for the 2017-18 income year based on the assumption that its aggregated turnover, BREPI and assessable income are the same as the 2016-17 income year.

64. As Swan Co’s assessable income and BREPI for the 2016-17 income year are nil, it has no more than 80% of its assessable income as BREPI. As Swan Co has no connected entities or affiliated entities in the 2016-17 income year, Swan Co’s aggregated turnover for the 2016-17 income year is nil, its aggregated turnover is less than the relevant threshold for the 2017-18 income year. Therefore, its corporate tax rate for imputation purposes for the 2017-18 income year is 27.5%.

And yes, it is possible that the company tax rate for a year is different to the imputation or franking rate for the year.

68. In the 2017-18 income year, Cockatoo Co had an aggregated turnover of $48 million. Cockatoo Co’s 2017-18 assessable income was 82% BREPI.

69. In the 2018-19 income year, Cockatoo Co had aggregated turnover of $46 million. Cockatoo Co’s 2018-19 assessable income was 75% BREPI. Cockatoo Co’s 2018-19 aggregated turnover was below the aggregated turnover threshold of $50 million, and its BREPI was below the 80% threshold. Therefore, it was a base rate entity, with a 2018-19 corporate tax rate of 27.5%.

70. Cockatoo Co has a 2018-19 corporate tax rate for imputation purposes of 30%. This is because it is assumed its aggregated turnover, BREPI and assessable income are the same as the previous income year. As such it is assumed that, for the purposes of determining the corporate tax rate for imputation for the 2018-19 income year, Cockatoo Co’s aggregated turnover is the same as the 2017-18 income year, being $48 million, of which 82% is BREPI. Although the aggregated turnover is below the threshold of $50 million, its BREPI is above the 80% threshold. Accordingly, its corporate tax rate for imputation purposes is 30%.

Simple!