Tax Time 2022

Intro:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for businesses and accounting professionals.

Elinor Kasapidis:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for business and accounting professionals. Hello, I'm Elinor Kasapidis, Senior Manager of Tax Policy at CPA Australia. It's Monday, the 6th of June, and the end of financial year is fast approaching. As many taxpayers and tax agents finish up their 2021 tax return, lodgements, tax time 2022 begins. Over the next four episodes, we'll be talking with Assistant Commissioner Tim Loh from the ATO's individuals and intermediaries area, who is the official face and voice of tax time. Welcome, Tim.

Tim Loh:
Thanks Elinor. Thanks for having again this year.

Elinor Kasapidis:
Our series with you last year was very popular, particularly the podcast on work-related expenses. So, we'll revisit that topic for common mistakes, what people get wrong, and how tax agents can help get it right. We also have a dedicated episode for tradies. We will also be talking about investments and tax in our third podcast, and finish up with a chat on side hustles and multiple income streams. But for today, our focus is on work-related expenses. With over-claimed work expenses, estimated to cost the government $3.7 billion a year, the ATO is on the case and has been checking work-related expenses for quite a few years now. Tim, what are some of the things that have improved, and where might employees be getting confused about where the line is?

Tim Loh:
Yeah, good question, El. Look, COVID has certainly shifted the work-related expenses landscape. Over the last couple of years we've focused a great deal on educating taxpayers about the changes, the support measures in place, and the need for registered tax agents to speak with your clients about their current working arrangements. So, in anticipation of people claiming what they were entitled to, we expected to see a decrease in claim for work-related car and travel expenses last year. And today, overall, in tax time 2021, the trend for tax agent clients reflect a reduction at these levels, which was predicted. Now, we're pleased to report that downloads of our occupation guides and posters continue to increase, which I think are fantastic sources for CPA professionals. And we regularly review and update these products to ensure they're user-friendly and contain relevant examples for you to help your discussions with your clients.

Tim Loh:
In terms of employees getting confused about where the line is, I guess one of the key issues, which we know CPA professionals know about is where taxpayers try to claim a deduction for a work-related expense where there isn't a sufficient connection to their income-producing activities. And look, we know sometimes these are general mistakes, but others we know are deliberate, and in those cases we do take firmer action. Now, some of the examples that we see mistakes being made are the normal travel between home and the regular workplace. We all need to travel to our place of work, but the act of getting there is not an activity that produces our income, and that's considered to be a private expense.

Tim Loh:
Another example is taxpayers counting conventional clothing they wear while working, such as business at the time when you go into the office. But we've also had people try and sneak a deduction for active wear, the trackies and the PJs. And I think I've said this before, but there are only two people who can claim for their PJs, and that's B1 and B2 from Bananas in Pyjamas. The other thing we see people making a mistake on is private or domestic expenses that relate to the home, so food, drink and shelter. So, common examples are the Tim Tams, which we'll talk about a bit more, but they're just not a deductible expense for employees.

Tim Loh:
So my advice to CPA professionals and registered tax agents is to continue to have those in-depth conversations with clients about their circumstances and ask them, "What has changed over the last financial year?" They may be entitled to claim for things this tax time that they couldn't last year and vice versa, especially if they've changed jobs, which you can understand, a lot of people have done so over the last year. And when your client's position doesn't make sense, it's really important to ask that extra question. As I mentioned before, our occupation guides and posters are a really good help and support for your conversations with your clients, and they cover those common misconceptions and contemporary examples.

Elinor Kasapidis:
Thanks, Tim, and I am a fan of those occupation guides.

Tim Loh:
They're great. Yeah, they're great. Just great complementary source of information to support those discussions with your clients.

Elinor Kasapidis:
And tax can be complicated, and we're running with the line, CPA Australia's running with the line this year about, "Yeah, nah." So, lot of the time you'll come with a receipt or an expense and think, "Can I claim this?" And deep down you know in your heart, probably not, and it's about following that gut instinct and certainly not trying to game the system. So, those general rules for deductibility haven't changed, but there was new legislation passed to allow COVID-19 tests purchased from 1st of July, 2021, to be deductible. What are the rules to claim these amounts?

Tim Loh:
Yeah, that's right, El. Look, taxpayers can claim a deduction for a COVID-19 test from 1 July, 2021 provided they satisfy these four conditions. So, it was used for a work-related purpose. So, if you bought a COVID-19 test to work out if you can go to Byron Bay with your mates, that's not a deductible expense for a COVID-19 test. The second condition is you paid for a qualifying COVID-19 test, so it's a PCR or a RAT. You paid for the COVID-19 test as the employee, so you didn't get it reimbursed by the employer for the cost. And most importantly, and something that we're really focused on at the ATO, is you kept a record, such as a receipt, to prove that you incurred the cost and it was for work-related purposes.

Elinor Kasapidis:
So Tim, because the law was only changed in March this year, many employees may not have kept receipts. What approach to recordkeeping is the ATO taking?

Tim Loh:
Look, at the ATO we always say to people to keep your receipts for anything that's work-related. That makes the job easier for registered tax agents, including CPA professionals. But look, if an employee's paid for a qualifying COVID-19 test that was used for work purposes, prior to the law change, and they no longer have that receipt, we will accept reasonable evidence of that expense. So, in terms of what that reasonable evidence is, reasonable evidence from our perspective is documents that show the cost of the test and the requirement to take it for work purposes. So this may include banking credit card statements, which can show that the expense was for a COVID-19 test, or a diary or other documents, including receipts, that show a pattern of buying COVID-19 tests after the law change in March that could reasonably have applied from 1 July, 2021.

Elinor Kasapidis:
And it'll be interesting, I think, to see, because like you say, most of the time, my advice to people is just keep your receipts, and then at the end of the year, you can go to your tax agent or work your way through them to decide which are actually deductible. It's really difficult to go back in time. So, I guess one tip is from the 1st of July, it's like a new financial year's resolution. "I'm going to set my recordkeeping up each year and make sure I capture everything, so then I can make the decisions when I need to." So Tim, while mandates have been lifted across Australia, many employees are now continuing to work in a hybrid environment with more days at home. Will the shortcut method for home office expenses continue to be available after the 30th of June this year?

Tim Loh:
Well, we introduced the temporary shortcut method at short notice as a response to COVID-19, and to support the significant number of people required to work from home, many of them for the first time. And it's really simplified the process for a large number of people. Now, we're mindful that many Aussies continue to find themselves working from home, and as a result, we are assessing the working from home methods for the 2022/2023 financial year with a view to modernising it, and expect to provide some more information about this early in the new financial year. Now, I'm going to sound like a broken record by the end of this, but whatever methods are available in the new financial year really depend on the records that you have. You really need to have the records in play, whatever the methods available are for the next financial year.

Tim Loh:
So, it's really important that you let your clients know that they keep the record of all hours that they've worked at home, they have receipts for all depreciating assets or equipment used for when working at home, and they've recorded their personal and work-related use of assets. Now, if your clients are claiming working from home expenses in this year's tax return, it's really important that they use one of our current methods to calculate their deduction, and make sure that they complete or satisfy the eligibility and recording keeping requirements.

Tim Loh:
As many of CPA professionals would know, the available methods include the temporary shortcut method, which is that all-inclusive rate of 80 cents per hour, in terms of how many hours you've worked from home. If your clients do use this method, they can't claim additional working from home amounts, including the depreciation of furniture and equipment and technological items. The other two methods are the 52 cents per hour fixed rate method, which currently requires a dedicated home office area, and you can claim for phone and internet expenses, and the decline for some depreciating assets like your technological items. And the final method is the actual cost method. Both those two methods, the 52 cents per hour fixed rate method and the actual cost method, they're more complicated methods and you need really good records to use those particular methods.

Elinor Kasapidis:
Thanks, Tim. The key message I get from that is shortcut won't be available, start keeping your records. So, for a lot of people who, a couple of years ago rarely worked from home, but probably do maybe three, four days a week now, they need to think, "From the 1st of July, what is it that I need to do for my expenses this year?" Because it's not a diary anymore, is it?

Tim Loh:
That's right, El, and I think your advice before was absolutely spot on. From 1 July, it's a new year, and make sure you've got those great records to support the deductions you can claim for next year.

Elinor Kasapidis:
Fantastic. Now, that's a really important change I think, that when people come in for their tax time conversations, like you said, it's part of having that conversation about work, about expenses, about recordkeeping. You mentioned so many great examples, but they're so popular. Do you have any other weird and wonderful attempts to claim work from home expenses that have come across your desk?

Tim Loh:
Yeah, look, unfortunately we do sometimes see people who try to make weird and incorrect claims, and it's not just when it comes to working from home expenses. So, I noticed a media article recently telling people that they could claim toilet paper. That's obviously incorrect. It's the same for other private expenses, like the Tim Tams you mentioned, or decorative items for the desk, like a plant. These can't be claimed as a tax deduction, because they're considered to be private expenses.

Tim Loh:
Across the ATO's desk, we also see some other weird claims, like people claiming their food, and their justification for that is that they won't be able to work if they can't eat. We've also seen a salesperson claim high heel shoes as protective equipment. Not sure how that's protective equipment. We've also seen outsourcing of laundering claims due to working full-time, because they've got a small child and they've got another bub on the way. Again, that's something that you just can't claim as a tax reduction. And then we had another taxpayer trying to claim the purchase of a birthday gift of $6,000. So, these are some of the weird claims that we sometimes see come across the ATO's desk.

Tim Loh:
Now, then we also see some other claims where the taxpayer needs a little bit more education, because they may not understand that none of these items can be claimed. So, another example we have is a taxpayer claiming a blue flamingo shirt as part of their uniform as a general manage. For that particular case, we also reported them to the fashion police as well. And then, we also see dental surgery work claimed with the job's description outlining they must always be presentable. Again, that's an expense that's considered to be private in nature. You can't claim that as a tax deduction.

Elinor Kasapidis:
I wish I got $6,000 birthday presents and could deduct all of my clothes. But yeah, I think that's the nuance that has really been challenged with work from home, because private and work have become so blended that in people's minds, you're not necessarily thinking in terms of tax. So, those are some really good examples and some great tips. You've talked a lot already around tax agents and professionals sitting down with their clients, things about, "What has changed in your work year? How are you actually spending your time?" And that would help them understand what kind of claims would be expected and what might be reasonable. Do you have any other further tips or pointers for our listeners today?

Tim Loh:
Yeah. Look, when it comes to these conversations tax agents are having with their clients, I think first thing's first. It's really important to keep the skills and knowledge up to date, and aligned to your client base, and as my second commissioner Jeremy [inaudible 00:14:05] says, in order to provide advice that hits that Goldilocks spot of an informed basis and making sure that it displays high practise and professional standards. So I think first and foremost, it's having that technical knowledge in place. Again, what I'd encourage you to do is to have those continued, in-depth conversations with your clients about their circumstances, and whether their prior year deductions have changed. As I mentioned before, many people have changed jobs, so there's an opportunity there to ensure the deductions match the different job types that they have over the course of the year.

Tim Loh:
Some common mistakes we see every year, and I'm going to sound like a broken record, but it's the recordkeeping. Taxpayers having no records, or the incorrect records. It's really important clients know what records they need to keep, and not accept deductions if they don't have the records. The key thing to remember is if there's no record, you just can't claim the deduction. And the next is another point, if the work-related deduction is not directly related to the income year your client earned, then it can't be claimed as a work-related deduction. And similarly, if it's not directly related to the job or the earning, the income that you're earning, it can't be claimed as a deduction.

Elinor Kasapidis:
The nexus one's always interesting because people have an amazing way of rationalising certain expenses. So, thank you so much, Tim, for the updates and messages on the topic. Next week, we'll be taking a closer look at work-related expenses for tradies, who often have to think about a few extra things when it comes to their tax. If you've got a question about any of the topics we've discussed today, or any of our policy and advocacy work, please email us at [email protected] Thank you for joining us today. If you've enjoyed what you've heard, please tune in again next week for tax time, episode two, and tell your friends. From all of us here at CPA Australia, thanks for listening.

Outro:
Thank you for listening to this week's episode of With Interest. So you don't miss an episode, please subscribe to the CPA Australia podcast on Apple Podcasts, Spotify or Google Podcasts.

Intro:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for businesses and accounting professionals.

Elinor Kasapidis:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to -know information for business and accounting professionals. Hello, I'm Elinor Kasapidis, senior manager tax policy at CPA Australia. It's Monday the 13th of June, and we continue our Tax Time chats with assistant commissioner, Tim Loh from the ATO's individuals and intermediaries area who is the official face and voice of Tax Time. Welcome back, Tim.

Tim Loh:
Thanks a lot. Thanks for having me.

Elinor Kasapidis:
Now, last week, we talked about work-related expenses generally with lots of tips about client conversations and record keeping obligations, and this week we're going to take a closer look at work-related expenses and tradies. Now, tradies regularly fork dollars out of their own pocket to invest in equipment or make sure they're well protected on the job. This means they often have a stack of expenses, but they can't always be claimed for tax purposes. How should employees in the trades think about deductions, Tim?

Tim Loh:
Yeah, look, El, all employees, whether you're a tradie or not, no matter what occupation you have, must meet the three golden rules before claiming work-related deduction. The money must have been spent themselves and was reimbursed by the employer. The expenses must directly relate to earning their income, and they must have a record to prove it, and usually a receipt is the best form of record. If the expense was for both private and work-related purposes, your client can only claim a deduction for the work-related component. Now, to be clear a bacon and egg roll or a sausage roll with sauce is considered to be a private expense, not a work-related expense.

Tim Loh:
When it comes to in terms of tools and equipment, if it's used work-related purposes and costs $300 or less and it isn't a part of a set that costs more than $300, your client can claim a deduction for the full amount. Now, if it does cost more than $300, the client will need to claim the cost over the useful life of that particular asset. So, that is using decline in value. Now, remember that if your client bought the item part through the year, they could only claim decline in value for the period of the income year that they owned it. So, if you bought it on the 30th of June this year, the deduction's going to be pretty small.

Tim Loh:
Your client can claim a deduction for the cost of protective items if they wear them to protect themselves from the real and likely risk of injury or illness in their work environment or while performing their work duties. So, I think for example the steel-capped boots, that would be a deduction that they could claim. Now to be considered protective, the equipment must provide a sufficient degree of protection against the risks of illness or injury your client is exposed to in carrying out their work duties. So, protective items on top of the steel-capped boots are things like your safety glasses, helmets, and breathing masks. Now in terms of some of the specific items that are available for deduction, those things are like the protective clothing and footwear, as I mentioned before, the steel-capped boots again are one example, but also protective rubber boots, for example, that concreters could claim whilst they're on job site.

Tim Loh:
Things that you can't claim are conventional clothing that your clients wear at work which aren't regarded as protective clothing because they lack that protective quality designed for the risks of their particular work. So, this includes jeans, drill shirts, shorts, trousers, socks, and just your standard closed shoes. Now things like sunglasses, sun hats, and sunscreen, you can claim deduction for the work related use of sunglasses, sun hats, and sunscreen lotions if they work in the sun for extended periods and they use these items to protect themselves from the real likely risk of illness or injury while at work. Now you can't claim deduction if their employer pays for or reimburses them for the cost of the course. Again, that's an example of the three golden rules not being satisfied.

Elinor Kasapidis:
That's a whole list of things, and I'm thinking about friend of mine who's a tradie and might go to Bunnings, picks up a couple of tools, maybe a $400 piece of machinery, and then buys some egg and bacon rolls on the weekday with his mates, and I guess the real challenge, like you're saying, when you think through all of those different terms and conditions, I just want to go to work, right, and I just want to use my tools. So, it's a real challenge to think through the different kinds of purchases and whether they're private, whether it's got to be depreciated over time, and so it is a really challenging area. You've already sort of talked about some of the examples of rubber boots when things can be actually claimed. We've also heard about doggy daycare and radios bought for work sites. Are there any other unusual claims or things that you hear from taxpayers?

Tim Loh:
Yeah, look, El, we do see a few claims that way off the mark, and we also get some where we see tradies getting it wrong and maybe because they don't realise they are getting it wrong, and I'll start with the ones that are kind of way off the mark. One tradie tried to claim expenses relating to their photography hobby. That's clearly not related to their job as a tradie, and that can't be claimed as a tax deduction. We also saw a building, a construction supervisor claim for an oven. Again, that's just something that's just not related to them earning income. Now to ones where they maybe hadn't realised they had it wrong, a boilermaker tried to claim $2,000 for water, and we also saw a construction worker try to claim chiropractic and gym fees so that he could keep fit to do his job. In that that circumstances, again, they consider to be private expenses and you can't claim them as deductions.

Elinor Kasapidis:
Yeah, that's really, I think where the judgement of a tax agent can be helpful, and of course, Tim, you do put out occupation guides for tradies as well. So, that often points them in the right direction, and like you say, there's a whole spectrum. I love the idea, perhaps the supervisor was also moonlighting as a chef on the work site. I'd love to hear the backstory on that one. But we talked just before, I was just saying how recordkeeping, you've almost got to put each expense into a bucket for tax time. And so, do you have any suggestions around recordkeeping? Because at the end of the day, it's actually the taxpayer who needs to keep the records. You can't put everything on the tax agent and say, "Well, you figure it all out." So, do you have any tips or tricks or things they can do that will help both them and their tax agent and the ATO to get tax time right?

Tim Loh:
Yeah. Good question, El. Look, while the glovebox might be a handy place to store receipts when you're picking up your supplies as a tradie, the receipts can fade over time, plus there's good chance you might lose them as well in that glovebox. But we do have an alternative option to help tradies get their records right on the go, and the best piece of advice I can give is for tracking expenses is for tradies to use the My Deductions tool on the ATO app, and it's really easy. All you need to do is simply take a photo of the receipt in the app, record the details of the expense, and that tax time, they can just email that information to a registered tax agent. So, it makes the tradie's job easy. It makes the tax agent's job easy, and it makes the ATO's job easy, and it also makes sure that get the deductions you're entitled to, nothing more, nothing less.

Tim Loh:
We often find that when audited, people don't have the records to substantiate their claims, and it's really important that your clients know that the records that they need to keep need to be in the form of generally speaking a receipt. As I said before, the best option in my opinion is to use the My Deductions tool in the ATO app. Now, one thing to remember is that the recordkeeping requirement will obviously will vary depending on the deduction type and the calculation method used. The best suggestion or advice I could give is to check out the ATO website, ato.gov.au/keepingrecords for a snapshot of all the recordkeeping requirements, but the most important thing to remember is no record equals no deduction.

Elinor Kasapidis:
So, no record equals no deduction, 1st of July, all of our tradie listeners, but like you said, Tim, just everybody more generally, if you're working from home more often these days, download the app. There are also other apps out there, but the ATO one is designed to fit with various systems, and recording things digitally, Tim, you sort of said as well, often when you come to ask the question, "Where's your receipt?" they don't necessarily have it. They might have had it, but they don't have it anymore. So, again, would the My Deductions app just have that available and that could be shown to the ATO if they had any questions?

Tim Loh:
Yeah, absolutely. So, that's just a really easy way to send that information to your registered tax agent because once they've got that, they've got effectively got the evidence that's required to support the deduction, and it's also a good idea to make... From our perspective, mainly from a tax payers perspective, if you've got the right habits from 1 July of each financial year, you can claim all the deductions that you're entitled to. It's hard finding the old shoebox of receipts from 1 July last year, and for one reason, the receipts could be faded, but two, if you don't have the receipts from early in the financial year which is a long time when you start thinking about doing your tax return, you might miss out on some deductions that you're actually entitled to.

Elinor Kasapidis:
That's exactly right, and I love the idea of setting up good habits throughout the year. The vast majority of people will have a phone. Even tradies working site to site, you've always got a phone. You can snap a copy of the receipt, upload it, and then it's almost set and forget because you can go to your tax agent and they can help you work through the rest. That's so helpful because like you say, recordkeeping seems to be where most people fall over. It's not that the ATO doesn't necessarily believe their story. It's just if you don't have records to prove it, like you say, there's no deduction.

Tim Loh:
Right.

Elinor Kasapidis:
So, in that context from the ATO's point of view for tradies, we talked a little bit last week about general questions to ask about clients and their employment arrangements and how they work, is there anything more specific to tradies that you could suggest?

Tim Loh:
Yeah, look, there's a few things that we want, we think it would be good for tax agents to cover in their conversations with clients. I think it's really important to have in-depth conversations with your clients about their particular circumstances and whether prior deductions have changed. Mistakes that we see, the recordkeeping, I sound like a broker record, but taxpayers just don't have the records or the incorrect records to support the deduction. So, it's important that they've got that. Nexus is another important thing, making sure the work-related deduction is directly related to clients earning income capacity in order for them to claim deduction.

Tim Loh:
Car expenses are something you know, that we see people look to try and claim as a tradie. Nearly 3 million people claimed work-related car expenses in 2021, and one of the most common mistakes was people using the cents per kilometre method to make their claim, and then double-dipping while claiming expenses separately, such as fuel, car insurance, and registration. Now your client can claim the cost of using a car they own when they drive directly between separate jobs on the same day and to from an alternative workplace for the same employer on the same day. They generally can't claim the cost of normal trips between home and work, even if you live a long way from your usual workplace or have to work outside normal business hours.

Tim Loh:
Now in limited circumstances, tradies can claim the cost of trips between home and work where they have shifting places of employment. So, that is when you don't have a fixed place of work, and you have to continually travel from one work site to another throughout your workday or when the tradie has to carry bulky tools or equipment for work, and all of the following conditions apply, one, the tools or equipment were essential to perform the employment duties and they don't carry them merely as a matter of choice, the tools or equipment are bulky, meaning that because of the size and weight, they're awkward to transport. It can only be transported conveniently by the use of a motor vehicle. So, if you're just carrying a power drill, that's not going to cut it as a bulky tool. And finally, there's no secure storage for the items at the workplace.

Tim Loh:
Now if your clients claim car expenses, you can use a log book method, or the cents per kilometre method to calculate the deduction. Again, you need really good records to make sure you can use either of those methods. And finally, in terms of reimbursement, some taxpayers don't realise if they are reimbursed for the work-related expense they incurred, you can't claim a deduction. You can't claim that expense as a deduction. That's considered to be double-dipping because your employee's claiming deduction, and you are trying to claim deduction over the same expense.

Tim Loh:
Just a final reminder is as I mentioned before, the ATO app's a great tool to use to claim or keep track of all your expenses through the My Deductions tool, and it's really easy and simple to use. All you need to do is take a photo of the receipt in the app, and record the details of the expense, and at tax time, you can send that information off to your registered tax agent.

Elinor Kasapidis:
And that's where all the fun begins because all of those things. I was thinking through just nexus, that's where a tax agent can actually help to establish nexus, and then you were talking about the conditions to be able to claim trips between home and a workplace, and they're the sorts of conversations and checklists that need to happen just to make sure that those claims are right, and certainly as well as part of that conversation, educating the client for the coming year as well. So, there's lots in there. Thank you so much, Tim. For me, the conversation has highlighted both the similarities between all employees and their work-related deductions as well as the distinctions for tradies, given the kinds of arrangements that they have and the sort of tools that they tend to carry.

Elinor Kasapidis:
So, that's all on work-related expenses. We're moving onto investments next week, focusing on rentals, and everybody's favourite, crypto assets. If you've got a question about anything we've discussed today, or have a suggestion for a topic you'd like us to explore, you can email us at [email protected] Thank you for joining us today. If you've enjoyed what you've heard, please tune in again next week and tell your friends. From all of us here at CPA Australia, thanks for listening.

Outro:
Thank you for listening to this week's episode of With Interest. So you don't miss an episode, please subscribe to the CPA Australia podcast on Apple Podcasts, Spotify or Google Podcasts.

Intro:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for businesses and accounting professionals.

Elinor Kasapidis:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for business and accounting professionals. Hello, I'm Elinor Kasapidis, senior manager tax policy at CPS Australia. It's Monday the 20th of June, and we continue our Tax Time chats with assistant commissioner, Tim Loh, from the ATO's individuals and intermediaries area who is the official face and voice of Tax Time. Welcome back, Tim.

Tim Loh:
Hi El. Thanks for having me again.

Elinor Kasapidis:
As technology reduces barriers to investment globally, Australians are increasingly investing in a broad range of asset types through many markets and exchanges, both in Australia and overseas. Property investment also remains a firm favourite. While everyone loves building their wealth, tax may not necessarily be something they think about. Sometimes they might not even know that they need to pay tax. On the deduction side, rental property expense claims have been identified by the ATO as another area where mistakes are commonly made. Tim, let's start with those. Rental expenses are an ATO priority when it comes to claims by individuals. Where are the problem areas and what are investors getting wrong?

Tim Loh:
Look, thanks El. Deductions for rental properties, as you said, are a key contributed to the tax gap. The rental component of individuals not in business tax gap is estimated at being 1.6 billion. Now, in terms of the areas that we want people to watch out for, it's really important to make sure that deductions are apportioned according to the share ownership. So, Mum, Dad going 50/50, or anything where there's more than one person on ownership papers, income and expenses really need to be divided up by the share of ownership. Another thing to watch out for is properties must be generally available for rent. So, check if your clients use the property themselves, or that friends or family rent at mate's rates. If they're renting it out at mate's rates, they aren't eligible to claim expenses for these periods.

Tim Loh:
Now, if they're vacant, they must be able to show that they attempted to rent the property out at market rates. We know properties aren't generally available for rent when they advertise at higher than average rates in that location or when unreasonable or restrictive conditions are in the lease. So, one example is let's say, Airbnb as an example. If you're customising your rent upwards say around Christmas time so you can use it yourself, that would be an example of when your property isn't generally available for rent, and the deductions in that case would need to be apportioned for that period.

Tim Loh:
Now, each rental property needs to be included on its own rental property schedule. So, we sometimes see expenses for multiple properties bundled up into one schedule, and even if the numbers all stack up, it comes up in our systems and it's something that we end up looking at. So, it's really important that you have that separate rental property schedule. Now, we also see taxpayers claiming items for rental properties are only used for personal use and not for the rental property. That's an absolute no-go as a tax deduction. One tip that we have is clients should set up a depreciating asset schedule for all brand new assets over $300 to keep track of them. So, things like dishwashers, smoke alarms, air conditioning, and so on. Taxation ruling TR 2021/3 covers many types of depreciating assets, including how many years they take to depreciate, and obviously, as I said before, don't forget to make an appropriate adjustment for any private use. While an immediate deduction is available for a new asset costing $300 or less, like guarding tools being one example, you need to proportion for any private use in relation to that production.

Tim Loh:
Another thing to remind people of is to check if the repairs or maintenance should be classified as capital works that need to be claimed over a period of time. So, examples of capital expenses generally include structural improvements. Like a 20k kitchen renovate, that would be considered to be a capital works. It must be claimed over several years and not as an outright deduction. Another thing to note is if your client has sold their rental property during the income year and they're entitled to any main resident exemption, it's really important to make sure you report it in your client's tax return in the year the contract was signed. To reduce the likelihood of any contact from us, I encourage you to also include any main resident exemption they're entitled to.

Elinor Kasapidis:
Tim, thank you so much. That was a great rundown of the rental expenses and the aspects that a lot of property owners do need to get right. In particular, your comment about rental property schedules being submitted as a whole rather than for separate properties seems to suggest that's probably the way the books have been kept too. Once again, I think we've got our theme for our Tax Time podcasts, and that is about recordkeeping, making sure that, like you said, Tim, the depreciating asset registers are established right from the beginning, the property accounts are kept separate, and of course, that always those conversations with tax agents at tax time. So, that's rental. I also, before we move on, have noticed that you do make a comment about interest expenses, and what are some of the tips or the tricks or the issues that you see when it comes to loans?

Tim Loh:
Yeah, look, I think it's really important when it comes to loans that if you are borrowing money or additional money or refinancing for private expenses, that you apportion the interest expense that's used for your investment property versus the refinance component that might be used for a personal expense. So, my advice would be to have a separate loan account so you can really kind of clearly identify the interest that's used for your rental property vis-à-vis the interest that's related to the personal expense, if it's buying a boat or buying a car with the refinance fund. So, that would be my best tip to make sure you can clearly show the evidence that the interest that you are claiming for the rental property is purely for the investment property.

Elinor Kasapidis:
So, while a redraw might be financially flexible sometimes for tax, it can make things a bit tricky. And speaking of tricky, as crypto and digital assets become more mainstream, Australians are dipping their toes into these types of investments at quite a rapid rate, and we've seen from the volatility over the past few months that it is a bit of a wild ride. A couple of years ago, we were talking about million-dollar capital gains, and now we would suspect that there'd be a few capital losses coming through this side of the financial year. So, while most of us are getting our heads around paying capital gains tax on the gain when exchanging or trading, can you talk us through some of the things that we need to think about when declaring gains or losses from crypto assets?

Tim Loh:
Yeah. No, good question, El. Look, if your clients are investing in crypto assets, every time a crypto asset is disposed of, there will be a CGT event. So, as you said before, if you sell, swap, or exchange your crypto, that's going to be a capital gains tax event. So, your clients, again, need to keep really good records of the times in which the crypto asset is disposed of. People often overlooked that transferring crypto assets to a platform, an exchange or a smart contract may be a disposal of that crypto, depending on the rules of the platform or exchange or the code of a smart contract, but at a minimum, they need to keep a record of every transaction, have dates of transactions, the value of the crypto in Aussie dollars at the time of the transaction. So, this can be from a reputable crypto online exchange, what the crypto asset was for and where they received it from. So, even if it's just their crypto address, that's information that will be required as a minimum.

Tim Loh:
The other records they need to keep include receipts of purchase or transfer, exchange records, records of agent to accounts and the legal costs, software costs related to managing their tax affairs, as well as any transaction costs like wallet fees and the like. Now, if your clients have the right records, it'll be easier to calculate the cost base for each disposal, including things like, as I mentioned before, those wallet fees, but also brokerage fees, transfer costs, platform costs, borrowing expenses, interests, or loans that they've been borrowing to buy crypto, and legal fees. Now, like other investments, crypto assets have high and lows as you pointed out before, El, but most investments aren't quite as volatile. Now, with the recent crash in prices, it's really important to remind your clients that they can't use their capital losses to offset salary and wages as a crypto investor, but they can offset those capital loss against other capital gains that they might have made during the year, whether it's from property shares or other crypto gains that they might have made.

Tim Loh:
Now, if your client can't utilise the loss in the current year, they can carry them over into future years. It's just really important that they include that in this year's tax return as a carried forward capital loss, and they can do that at net capital losses in the tax return. By including those carried forward losses, there's less likely of us contacting taxpayers when the losses are then used later on against future capital gains. And when your client does get any capital gains, they need to be reported at total current year capital gains and net capital gains in the tax return.

Tim Loh:
Now, one thing to remember is while the CGT rules applied to the disposable of crypto assets, they may be displaced in some circumstances with the gain or losses being subject to tax on a revenue basis, for example, gains in the order or in the course of carrying on a business or from a profit-making scheme. So, in those cases, the gain made from the crypto asset needs to be reported as ordinary income in your tax return. For example, if you make gains from mistaking or airdropping arrangement in the course of carrying on a business or a profit-making scheme.

Elinor Kasapidis:
And things like Bitcoin mining or professionally trading crypto, so not just as a hobby on the weekends, that's where you start to become more of a business, I guess, and it becomes ordinary income rather than the holding of an asset. I guess really it's the uncertainty because share trading, for example, has been around for a long time. People understand what a disposal looks like. They're pretty clear usually on script for scripts or rollovers, things like that, whereas in the world of crypto, they're not always seeing the same mirror image, and I think that's really the challenge. So, it's really good, Tim, that the ATO's coming out there.

Elinor Kasapidis:
You are really catering to the vast majority of people who hold a bit of crypto. They might exchange it for another one occasionally, and they may even buy a coffee with it, and it's those sorts of transactions and events that people need to be open about with their tax agent and actually where the tax agent needs to understand how to classify it and how to report it. In a digital space, there is actually a lot of data. So, you talked about what records need to be kept, and because you've got the blockchain in theory, there's actually a lot of it already in the systems. When it comes to assets and investments, the ATO collects a lot of that data, including on rental bonds, property managements, crypto exchanges, share exchanges. You often publish your data-matching protocols. It's a pretty long list. How do you use the information?

Tim Loh:
Yeah, look, what we would say is we use this information for a number of different things, but for the most part, for example, for rental properties, as an example, we get a lot of data, including from sharing economy platforms, information about rental bonds, property management, and property transactions. The main reason why we use the information is to actually help educate investors on their tax obligations and remind them to include the right information in their tax returns. So, we use it to ensure people are paying the right amount of tax. So, we do use it for data-matching purposes as part of those data-matching protocols, but our key driver is really to make sure that we are educating investors about their tax obligations. We're not in the business of trying to catch people. It's just not, it's not a great use of our resources. We think it's better if we use our resources to educate investors.

Elinor Kasapidis:
And it's a good prompt. I did get feedback from one member who was saying they can see the data on online services for agents where you data match crypto currency transactions, for example, and it's interesting because they go through that client conversation, and client doesn't even mention it. Even anything else that you earned money from and the client's like, "Yeah, nah, nothing." And so, being able to play that back in real time or as soon as possible, Tim, is very helpful because it does actually facilitate those conversations and allows the tax agent to make sure that the taxpayer's getting it right.

Elinor Kasapidis:
So, that's a positive news story for you and the information that you do play back. It's also important, I think, because many people very early on in the game really didn't understand the tax consequences. Now that the conversation is that, yes, there's tax, it really is just making sure that they understand when that tax occurs, and how much it's going to be, and that they're reporting it correctly. So, that's a really helpful summary. Do have a look for our listeners at the ATO's guidance on crypto, and there's always more in that space to listen to. Before we sign off, I did have one question though. We've talked about crypto assets and non-fungible tokens. NFTs are pretty popular in the media at the moment, people buying these different tokens and different NFTs, sorry. Is the guidance basically the same, Tim? How do you approach those?

Tim Loh:
Yeah, good question, El. Look, how tax is applied to non-fungible tokens depends on the way your client uses the NFT or NFT and the reasons for holding them. So, if your client just buys a piece of art, a piece of digital art to hang on a wall, it's more likely to be personal, on the digital wall, I should say, it's more likely to be a personal asset, but if your client uses the NFTs to gain income such as charging people to see that piece of digital art, it's no longer going to be a personal-use asset, and so that's going to be taxed in a different way. So, and then when it comes to selling of these things, typically speaking, if you're in the business of selling NFTs, you're going to be taxed on a revenue account basis rather than a capital gains tax account basis. So, again, it really depends on people's facts and circumstances when they're investing in these NFTs.

Elinor Kasapidis:
So, those vast virtual real estate holdings that I've been building up on my phone during trips, maybe I should start thinking about establishing [inaudible 00:15:45] for those then. That's so helpful. Thank you, Tim. That was our wrap up. That's a wrap up of our third episode, and in our fourth and final Tax Time episode next week, we're going to cover side hustles. If you've got a question about any of the topics we've discussed today, or you have another suggestion for something you'd like us to explore with interest, email us at [email protected] Thank you for joining us today. If you've enjoyed what you've heard, please tune in again next week for our final Tax Time podcast for this year. From all of us here at CPA Australia, thanks for listening.

Outro:
Thank you for listening to this week's episode of With Interest. So, you don't miss an episode, please subscribe to the CPA Australia podcast on Apple Podcasts, Spotify, or Google Podcasts.

Intro:
Welcome to CPA Australia's With Interest podcast. Bringing you this week's need-to-know information for businesses and accounting professionals.

Elinor Kasapidis:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need to know information for business and accounting professionals. Hello, I'm Elinor Kasapidis, Senior Manager Tax Policy at CPA Australia. It's Monday the 27th of June and in our fourth and final episode in our Tax Time series, Assistant Commissioner, Tim Loh, from the ATO's Individuals and Intermediaries area is back to talk side hustles. Welcome back, Tim.

Tim Loh:
Thanks El, thanks for having me.

Elinor Kasapidis:
The way Australians work is changing, with many having multiple employers in a year or earning income on the side. As a result, their tax affairs can become more complicated. Tax is sometimes an afterthought. So Tim, what's the ATO's message to the casual ride-share driver, or the part-time jewellery maker selling through an online platform?

Tim Loh:
Look, we know lots of taxpayers have picked up a side hustle during the pandemic, El. This include a wide range of activities, such as freelancing, as you mentioned before, as a ride share driver, or a part-time jewellery maker. Whether it's setting up a local market store or receiving income from subscribers through online content they've created from platforms like YouTube, Patreon, Twitch, OnlyFans. And look, there's been some confusion about when income from these side hustles is taxable.

Tim Loh:
Now, if a client is carrying on a business, they need to report that income from that business in their tax return. Now, generally speaking, when your client provides their labour, skills, or rents out their property for a fee, they need to report this income in their tax return. So this applies, regardless of whether they're using a digital platform, or more traditional means such as word-of-mouth, or newspapers to advertise that particular service. Now, it doesn't matter whether your client is an employee, independent contractor, carrying on a business, or none of these. If they've received payment for these services, the income needs to be reported, even if it's a one off.

Tim Loh:
Now, if your client declares side hustle income, the good news is that they can also claim deductions for expenses they incur in earning it. So as long as they've kept their receipts and the expense is directly related to earning this side hustle income. This includes the cost of managing their tax affairs through a registered tax agent.

Tim Loh:
Importantly, your client can only claim a deduction for the work-related part of their expenses. So if they're a food delivery rider, they can claim some of their bike costs, but they can't claim any of their private use of those particular bike costs. Now every source of income is different, and the deductions your client can claim in relation to it depend on the type of income, and what is required to earn it.

Tim Loh:
So to claim a deduction, your clients must meet the three golden rules. They must have spent the money themselves and weren't reimbursed, it must be directly related to earning their income, and they must have a record to prove it, receipts are the best form of record. Now, depending on the nature and size of your client's side hustle, or how much they earn, they may need to also register and pay for GST.

Tim Loh:
Now, if your client provides ride-sourcing services, they needed to have an ABN number and be registered for GST from the day they start, regardless of how much they earn. So GST applies to every dollar earned as a ride-sourcing driver. You kind of also need to lodge business activity statements monthly or quarterly.

Tim Loh:
Now, if your client's side hustle is an enterprise, which includes a business, they may need to apply for an ABN and register for GST if the GST turnover for all the activities is $75,000 or more. Now this is the case if the side hustle is a more traditional business, such as a market store, or a new economy business conducted entirely online. Now, if your client isn't registered for GST, they need to check each month to see if they've reached the threshold, or are likely to exceed it as they'll need to register within 21 days of meeting the threshold.

Tim Loh:
And in addition to paying GST, your client must also lodge a business activity statement every month or quarter. And it's really important that your client understands how to issue an invoice to customers and clients to correctly account for the GST.

Tim Loh:
And now it's really important that your clients plan ahead for their income tax to keep a really healthy cash flow for their business. And it's really important to remember that the income that they earn from the sharing economy may not have any tax withheld. So it's really important that you plan ahead to make sure that you've got the right amount of money to pay for that tax bill at the end.

Tim Loh:
And one thing to note finally is to avoid or minimise a large tax bill, your client can use the Pay As You Go instalment system to set aside regular prepayments of the tax on the income throughout the year, to avoid a large tax bill.

Elinor Kasapidis:
Thanks, Tim. And the side hustle always starts small, doesn't it? And wouldn't it be many people's dreams to be able to reach $75,000 turnover from what starts really often as a hobby, or a talent, or something that they want to explore. But I really liked how you said, "Look, if you're earning income from it, that's really your starting point." That's probably going to say that there's a tax element to it. And then as a result, you're going to need to be keeping your records. And we always, like I said, the theme is record keeping.

Elinor Kasapidis:
Even before you're at that stage, it really is probably quite good when you're thinking about spending money on things. It's just a good financial habit, isn't it, to put the receipts aside just in case you hit the big time, or your YouTube channel, or your TikTok channel takes off. Because without the receipt, you can't claim that camera or you can't claim those inputs, so that's quite helpful.

Elinor Kasapidis:
Which goes to the basic question about whether someone is in business, and you did allude to it just before, but what are the types of things the ATO considers when looking at these types of situations? So I'm sort of on the cusp, I want to make a go of it, but I'm not quite there yet. Is there a thinking process, or what would you like to see tax agents talk to their clients about on this aspect?

Tim Loh:
Yeah, really good question, El. Look, as with tax and any of these questions around whether someone's operating a business, there's no single factor that determines whether your client's side hustle is a business. And you really need to consider the relevant factors as a whole before you can draw a conclusion on whether someone's in business.

Tim Loh:
Now, some of the key factors you need to include and consider to determine whether a client side hustle is a business include, whether the person intends to carry on a business, but this is not the essential factor. It's just something that you determine objectively from the facts. Whether the activity has a profit making purpose, and a prospect of profit, even if they may be unprofitable in the short term, it could still be considered to be a business. Whether the activities are repeated and regular, organised in a businesslike manner. Whether the activity has a significant commercial purpose or character, or is better described as a hobby or recreation activity. And the size and scale of the activities, although it's possible that an activity can be a business despite being small in scale.

Tim Loh:
So, remember just because your clients have other sources of income, doesn't necessarily mean that their side hustle isn't a business. So if your client isn't in a business yet, it's also important that they keep these factors in mind because as their activities change or grow you can reassess this from time to time, and particularly when there's a significant increase or change in the nature of activities. So it goes back to the point you made before, El, that it's really good to keep good records from the start, and that way you've got those records in play to make sure that you claim the deductions that you're entitled to for your side hustle.

Elinor Kasapidis:
And I like how you emphasise the client conversations. So same with work related expenses, what's your working situation like? How is it different from last year? It's the same with these side hustles. Has it grown? Has it changed? How are you going? Do you need to register for GST?

Elinor Kasapidis:
But let's say I run my own side hustle. I don't because tax is all consuming, but let's say I did. I'm waking up in the morning and I'm just trying to see if I've made a sale or got my likes. I'm not necessarily thinking, oh, what are my tax compliance obligations? So in this new type of economy where people can participate and earn income in lots of different ways, what challenges do these new types of economic activity pose for tax administration and compliance? And what can taxpayers and tax agents do to work better with the ATO to get it right?

Tim Loh:
Yeah, good question. Now look, in the emerging sharing economy that we all live in now, having a side hustle is something that people are accumulating on a day-to-day basis, but one thing we're really keen on ensuring is that we've got a level playing field for all types of businesses. So from our perspective at educating sellers on these platforms to understand and assess if they're carrying out a business, as well as increasing transparency of sellers sharing economy income, will be key factors for us in terms of ensuring compliance, but also making sure we've got that level playing field for all businesses.

Tim Loh:
If your client's side hustle becomes a side business, they'll have those additional tax obligations, as I mentioned before, which include the need for an ABN, registering for GST, and implementing a really good record keeping system to track income and expenses. It's really important to also make sure they're managing their cash flow, as I mentioned before. So making sure they've got a plan for paying tax on their business income when they lodge their activity statements and annual tax returns.

Elinor Kasapidis:
And I think as well, because the future is digital, both in Australia and New Zealand is also having the conversation administrations around the world. It's more as a general comment, but just how, in interacting with the digital ecosystem, running your businesses online, does that make it easier? How can you actually record things so that your tax time isn't so onerous, or your other obligations aren't so difficult? So in that digital sense, do you have any tips to make sure that individuals are correctly reporting and recording their taxes?

Tim Loh:
Yeah, look, from our perspective, when it comes to record keeping, it's really important that they've got the records there. Taking advantage of those kind of digital ecosystems in order to make sure they've documented those deductions and the income perspective as well.

Tim Loh:
Now, I guess from a record keeping perspective, it's really important that you calculate the accessible income, and entitlement deductions, and other concessions. So from a record keeping perspective, most business records need to be kept for five years, and as most CPA practitioners will know, you've got to be aware it's your client's responsibility to ensure that the information in the tax return is correct before lodging. And if your client is running that side hustle business, they should start to consider using commercially available software packages. They can actually help meet their record keeping and reporting obligations much more easier than the old spreadsheet to do that.

Tim Loh:
So it's really important to emphasise that your clients can only claim deductions they're entitled to, nothing more, nothing less. And I'm going to sound like a broken record, but the three golden rules equally apply when someone's running a side hustle business as well.

Elinor Kasapidis:
Becoming digital native, I think there's a real opportunity for future businesses that are designed to work in that ecosystem. You can see, you mentioned the commercially available software. There is a way to make it efficient. Tax, I don't think the way the system is at the moment, it can't necessarily be simple or easy, but it can be simpler and easier by getting the fundamentals right.

Elinor Kasapidis:
And of course, if your side hustle is turning into a business, tax is only one thing to worry about. So it is good, I think, you mentioned cash flow before. Preparing for instalments, registering for GST, maybe getting an ABN, a trading name. So there are all these other things that if you do have a side hustle that is going quite well, it might be a good time to see a tax agent or to see a business advisor to find out what to do next, and get it right.

Elinor Kasapidis:
So thank you so much, Tim. You've been with us for four weeks. You've shared your insights and expertise with us and our listeners. Tax time is always a great opportunity to remind everybody about what they need to do to claim their expenses properly, for tax agents and our members to hear from you about what's on your radar. And our theme of course is record keeping. So in fact, while we're talking about 2022, I think one of our key messages today is about from the 1st of July, 2023, get your records in order to make your next year's tax return really seamless.

Elinor Kasapidis:
So thank you so much, Tim. And we really appreciate having you back again this year.

Tim Loh:
Thanks so much, Eleanor, appreciate the opportunity.

Elinor Kasapidis:
If you've got a question about anything that we've discussed during our full Tax Time podcast, or you have a suggestion for a topic you'd like us to explore, email us at [email protected] Once again, a huge thanks to Tim, and thanks to you, our listeners for joining us today. If you've enjoyed what you've heard, please tune in again next week and tell your friends. From all of us here at CPA Australia, thanks for listening.

Outro:
Thank you for listening to this week's episode of With Interest. So you don't miss an episode, please subscribe to the CPA Australia podcast on Apple Podcasts, Spotify, or Google Podcasts.