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ATO needs to clarify COVID test deductions, says NTAA
04 April 2022
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The NTAA is urging the ATO to clarify the application of tax deductions for COVID tests because new legislation fails at “removing doubt”.
Taxation manager Rebecca Morgan said s.25-125 of the ITAA 1997 in the new legislation would not guarantee a deduction for all work-related COVID tests.
“The NTAA is concerned that the new S.25-125 may not achieve the Government’s desired outcome of removing doubt and providing clarity and assurance for taxpayers,” she said.
“For a deduction to be available under the new section, the purpose of getting the COVID-19 test must be to determine whether or not the person is allowed to attend or remain at a workplace or carry on a business.
“In addition to this, there is also an overarching requirement for a direct nexus between the costs of the test and the taxpayer’s assessable income, which uses identical wording to the S.8-1 general deduction provision.”
Ms Morgan said this would have a broad impact on employees across all industries given this affects their ability to either attend work or continue to work effectively.
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“The main concern here is for individual taxpayers and mainly for employees more than sole traders,” she said.
“Unfortunately, this could mean that COVID-19 testing costs may continue to be non-deductible where it is considered to be an expense incurred before the individual engages in the activity that produces their assessable income such as where the expenses are non-deductible preliminary expenses.
“This would create a disconnect between the intent and the law, which goes entirely against the grain of what the Government set out to achieve.”
Emerging concerns around ancillary
She said another issue with the s.25-125 deduction was the scope of expenses it potentially covers.
Ms Morgan said the wording in the section covered a loss or outgoing that was incurred “in respect of” testing for COVID-19.
“The Explanatory Memorandum accompanying the Bill then narrows this further by stating that ‘ancillary costs’ of acquiring the tests (including the costs of travelling and parking to purchase a testing kit) cannot be claimed as a tax deduction,” she said.
“In contrast, other incidental costs incurred during the purchase of the test (such as vendor credit card surcharge fees at the time of the purchase and postage and handling fees for online purchases) are not excluded from being deductible within the EM.
“In reality, many Australians have access to free PCR tests and, to a lesser extent, free or subsidised RATs. As a result, the actual cost of the test itself may not be very significant.”
However, Ms Morgan said travel expenses incurred to obtain or purchase a test might be considerable.
This would be of particular concern to those in regional areas with fewer options to purchase a test.
“In this regard, it is concerning that nothing in the wording of S.25-125 explains why the EM adopts its position and makes a distinction between the costs of travelling to purchase a RAT and paying for the delivery of an online purchase of a RAT,” she said.
Tax practitioners would have to be cautious when claiming deductions before the ATO made its position clear.
“Tax accountants would appreciate the guidance from the ATO as to how they will view this issue,” she said.
“The ATO needs to clarify how they would approach these types of claims as we move into the 2022 tax season so that tax agents are confident in what costs can be claimed.”
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