3 key focus areas for the ATO this tax time

Tax Time 2023: where is the ATO’s focus this year?

As the 2022-2023 financial year draws to a close, it’s almost time to begin preparing tax returns again.  On 15 May 2023, Tim Loh announced that the ATO’s key focus areas this year will be claims for work-related expenses, capital gains tax (CGT) and rental property deductions.

To avoid improper or unjustifiable claims, it is important to ensure that taxpayers have maintained adequate records and have a basic understanding of the rules. This article identifies the ATO’s priority areas and common mistakes that are made when lodging returns.

How can taxpayers claim working from home expenses?

A person is eligible to claim working from home expenses if they work from home to fulfil meaningful employment duties, incur additional expenses as a result of working from home and have adequate records to prove the additional expenses incurred.

Once eligibility is established, taxpayers can calculate the deductions which they are entitled to claim by using either the ‘‘actual cost’’ or ‘‘fixed rate’’ method. The ATO is particularly focussed on working from home claims because it changed the ‘‘fixed rate method’’ in February 2023 and is monitoring to ensure that people are not simply reproducing their tax return from the 2022 tax year. A brief explanation of the two calculation methods is set out below.

The ‘actual costs’ method

The ‘actual costs’ calculation method remains unchanged from the 2022 financial year and, as its name suggests, involves the taxpayer calculating the actual additional expenses that they incur while working from home. Examples of actual additional expenses incurred are:

• energy costs (such as electricity and gas);
• phone, data and internet costs;
• home office expenses, including stationery and computers; and
• the decline in value of depreciating assets

If depreciating assets are used for both work and private purposes, taxpayers can only claim the work related portion as a deduction. The ATO has developed a useful calculator for taxpayers to ascertain the decline in the value of this equipment, available here.

The ‘fixed rate’ method

The ‘fixed rate’ calculation method allows taxpayers to claim 67 cents for every hour that they have worked at home. The fixed rate method does not include claims for the decline in the value of depreciating assets. Therefore, taxpayers can determine the deduction to which they are entitled based on the ‘fixed rate’ method using the following formula:

($0.67 x Number of hours worked at home during financial year) + Claims relating to declines in depreciating assets + Claims relating to other expenses not covered by the fixed rate (i.e. maintenance of office furniture)

Record-keeping

Maintaining proper records allows taxpayers more flexibility when electing which method to use to claim working from home expenses. At the very minimum, taxpayers will need a record of the number of hours they have worked at home and invoices relating to depreciating assets. It is also important that all claims by taxpayers have a sufficient connection to their work and have not been reimbursed.   

What transactions attract CGT?

CGT is the tax paid on profits from selling assets, such as property, shares or units in a unit trust. Due to the increase of people using their homes for business purposes following the COVID-19 pandemic, the ATO has flagged that it will be ensuring that CGT is paid on the sale of all dwellings used to produce income.

While main residences are generally exempt from CGT, taxpayers may be liable to pay CGT if they have used any part of their dwelling for business purposes, including renting out rooms on Airbnb. Taxpayers will only have to pay CGT for their main residence for the period that they have used it for a business.

CGT will not apply to the taxpayer’s main residence if they do not have a specific area set aside for business activities or operate their business through a company or a trust.

Are there any relevant concessions, if there’s a CGT consequence from selling my home?

In addition, if taxpayers have used their main residence for business purposes, they should consider whether any of the small business CGT concessions apply. Gaining access to the small business CGT concessions requires that one of the following conditions must be satisfied:

• the aggregated turnover of the business is under $2 million;
• the asset is only used in the business of an affiliate or connected entity;
• the taxpayer is a partner is a partnership that is a small business entity, and the asset is either an interest in a partnership asset or an asset that is used in the partnership;
• the net value of the assets of the business and its related entities must be less than $6 million.
   

CGT and crypto

Further, the ATO will be paying close attention to profits from investment in cryptocurrency, which attracts CGT. Taxpayers should be aware that any form of income, such as trading shares through apps, trading in foreign exchange contracts or swapping Bitcoin for Ethereum may trigger a CGT event. The ATO regularly collects data from crypto exchanges and a new sharing economy reporting regime commenced on 1 July 2023.

What deductions can taxpayers claim for their rental properties?

There are several tax deductions that can be claimed by property owners to help offset the expenses associated with owning and maintaining a rental property. Some common examples are depreciating assets, repairs and maintenance, council rates, insurance and property management fees.

However, one particular area of concern for the ATO this year is rental owners’ treatment of interest deductions. Rental owners can only claim the interest expenses directly associated with the portion of the loan used for purchasing rental property. Any additional borrowing for personal purposes, such as for renovations or holidays, cannot be claimed as an interest deduction. The ATO has flagged that it will be looking at personal expenses that individuals may have inadvertently included in their rental property tax returns.      

Further, for owners of short-term rental properties, the ATO will be paying close attention to ensure that deductions are not claimed for periods when the relevant property was used personally or rented out at a discounted rate. As discussed earlier, adequate record keeping is essential for correct and justifiable lodgements.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Corporate and Private Clients team.

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