12/10/2022, 12:30 Income tax and FBT implications of work-related COVID-19 test costs - TaxBanter

Home > Income tax and FBT implications of work-related COVID-19 test
costs

Income tax and FBT

implications of work-

related COVID-19 test costs

April 28, 2022 COVID-19 updates, FBT, Tax Time

Contents [ hide ]
The deductibility rules
FBT implications for employers
Further info and training

The Government has passed legislation to ensure that the expenses of

COVID-19 testing incurred by individuals will be deductible where there is
an appropriate nexus to the derivation of assessable income. Employers will
also be exempt from paying FBT where they pay for or reimburse eligible Categories
testing costs.
Select Category

The amendments, which apply to expenses incurred on or after 1 July 2021,

are contained in Schedule 2 to the Treasury Laws Amendment (Cost of
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Living Support and Other Measures) Act 2022, which received Royal Assent
on 31 March 2022. The Act implements a package of 2022–23 Federal Search for articles
Budget initiatives.

This article outlines the new rules for individuals and employers, and Did you know?
incorporates some practical guidance from the Explanatory Memorandum
to the Act (the Explanatory Memorandum) and the recently released ATO Tax Yak and Banter Blog content

fact sheets for individuals and employers (the ATO guidance). will generally be eligible for CPD
hours. Please check with your
professional or regulating body to
The deductibility rules confirm.
New s. 25-125 of the ITAA 1997 allows an individual taxpayer to deduct a loss
or outgoing to the extent it is incurred in gaining or producing their
assessable income, if: Subscribe to the Tax Yak
Podcast
the loss or outgoing is incurred in respect of testing the taxpayer for
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COVID-19;
the purpose of the test is to determine whether the individual may
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attend or remain at a place where they engage in activities:

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to gain or produce their assessable income; or

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in the course of carrying on a business for the purpose of gaining
or producing their assessable income.
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The legislation provides that the loss or outgoing is not deductible to the
RSS
extent that it is of capital, or of a capital nature. However the Explanatory
Memorandum notes that it is not expected that the relevant expenses
would be capital in nature due to the consumable nature and expected
repeated use of the tests.

The Explanatory Memorandum makes it clear that the amendments cover

circumstances where the individual’s positive COVID-19 status means that
they will work from home instead of at their place of work. That is, there is

no requirement that the work can only be undertaken at the place of work.


Types of tests covered by the deduction
A test is eligible for deduction under s. 25-125 if it is:

a polymerase chain reaction (PCR) test; or

a therapeutic good that is included in the Australian Register of
Therapeutic Goods and relates to the deduction of COVID-19.

The types of expenses covered by the new deduction would include

expenses for PCR tests undertaken through a private clinic where the
individual incurs the expense, and rapid antigen tests (RATs).

In practice, most individual deductions will relate to the costs of acquiring

over-the-counter RATs. Costs incurred for brands of test kits purchased
overseas or imported from overseas which are not appropriately registered
in Australia would not be eligible for deduction.

When the costs of tests cannot be claimed

The circumstances in which the cost of a COVID-19 test is not deductible
would include the following:

the individual uses the test for private purposes — e.g. to test their
children before they attend school or day care;
the individual receives a reimbursement from their employer or
someone else; or
the individual works from home and does not intend to attend their
workplace.

RATs are commonly sold as multipacks. Where the relevant expense is

partially incurred in gaining or producing assessable income and partially
incurred for private purposes (e.g. for leisure activities), the amount of the
deduction is reasonably apportioned.

Are ancillary costs, e.g. travel costs,

deductible?
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The Explanatory Memorandum clearly states that the ancillary costs of

acquiring tests, including the costs of travelling and parking, to purchase a
test kit — or to attend a PCR testing site — cannot be claimed as a
deduction.

However, it is not a policy intention to exclude other incidental costs during

the purchase of the test, such as credit card surcharge fees, and postage
and handling for online purchases.

Application date
The new deduction rules apply in relation to losses and outgoings incurred
on or after 1 July 2021.

Examples

The ATO has provided the following examples of the types of claims which
it will accept.

COVID-19 tests that can be claimed

Mary is a casual employee at a local café. In April 2022 Mary buys a
qualifying multipack of COVID-19 tests, which she only uses before
commencing a shift if she has any COVID-19 symptoms or has been in
contact with a COVID-19 case. Her employer does not reimburse her for the
cost of the COVID-19 tests.

Mary can claim a deduction for the cost of these COVID-19 tests.

Personal and work-related use

Vinh buys a qualifying two-pack of COVID-19 tests at the local pharmacy.
Vinh uses one test to confirm he does not have COVID-19 before attending a
local sporting event. A week later he realises that he has been exposed to
COVID-19 and uses the other test to check his COVID-19 status before
attending his place of work.

As Vinh used one test for personal use and one test for work purposes, he
can only claim a deduction for half the cost of the two-pack of COVID-19
tests.

Substantiation rules
As a result of the legislative amendments, a deduction of COVID-19 test
expenses is subject to the work expense substantiation rules in Subdiv 900-
B of the ITAA 1997. Written evidence to support the deduction must be
retained for five years from the later of the due date and the lodgment date
of the tax return.

According to the ATO guidance, appropriate evidence may be a receipt or

invoice, and correspondence from the individual’s employer stipulating the
requirement to test.

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Note

The exception from substantiation that applies where an individual’s

total work-related expenses for an income year does not exceed $300
also applies to COVID-19 testing costs.

Costs incurred before law change — ‘reasonable

evidence’ is sufficient
The ATO states that it will accept ‘reasonable evidence’ of expenses
incurred before the new rules became law on 31 March 2021, if the
individual did not keep a record of those expenses.

Reasonable evidence is documents that show the cost of the test and the
requirement to take it for work purposes. this evidence may include:

bank and credit card statements;

a diary or other documents, including receipts, that shows a pattern
of buying COVID-19 tests after the law change that could reasonably
have applied from 1 July 2021.

Claiming a deduction in tax return

The ATO advises that an individual claiming a deduction should enter the
amount at ‘Other work-related expenses’ in their tax return (this was Item
D5 in the 2021 Individual Tax Return form), and include in the description
field ‘COVID-19 tests’.

At time of writing the 2022 tax return stationery has not yet been released.

FBT implications for employers

As a consequence of the new deduction for individuals, employers that
provide relevant COVID-19 testing to employees in the course of their work
will not incur FBT liability through the operation of the ‘otherwise
deductible’ rule.

Benefits provided by employers

COVID-19 tests may be provided by employers to their employees, or their
associates:

directly;
through a third party under an arrangement; or
as a reimbursement of the cost to employees.

These are considered benefits under the FBT regime. For example:

employee expense payment fringe benefits (s. 24 of the FBTA Act) —

where the employer pays for, or reimburses, an employee’s or an
employee’s family member’s COVID-19 test;
property fringe benefits (s. 44 of the FBTA Act) — where the employer
purchases the COVID-19 tests and gives them to their employees or
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their employees’ family members for free or at a discount; or

residual fringe benefits (s. 52 of the FBTA Act) — where the employer
provides their employees or their employees’ family members with a
COVID-19 test that is not an expense payment or property benefit.

Application of the otherwise deductible

rule to reduce FBT liability
The Act does not introduce any amendments to the FBTA Act. However,
where an employer provides the benefit of COVID-19 tests to employees to
determine whether they can attend their place of work, and this benefit
was provided on or after 1 July 2021, the employer may reduce their FBT
liability by applying the ‘otherwise deductible’ rule.

The otherwise deductible rule allows the employer to reduce the taxable
value of the fringe benefit (and therefore the FBT liability) by the amount of
the income tax deduction the employee would otherwise have been
entitled to claim at the time the benefit was provided had the employee
incurred the relevant costs.

The ATO guidance states that the otherwise deductible rule does not apply
to:

COVID-19 tests the employer provides if:

the employee uses the test for private purposes e.g. to test their
children before they return to school or day care;
the employee works from home and does not intend to attend the
workplace; or
the employer has not received the declarations that are required
under the FBT law;
any travel or parking expenses the employer pays or reimburses their
employees to get their COVID-19 test. These expenses do not have a
sufficient connection to the employee obtaining or undergoing a
COVID-19 test to be regarded as being incurred in respect of testing
them for COVID-19.

The otherwise deductible rule only applies to the extent that the employee
could have claimed the work-related portion of the expenditure on COVID-
19 tests as an income tax deduction. For example, if the employer buys a
multipack of COVID-19 tests and allows the employee to use some for
private purposes (such as by other family members or for leisure activities),
the otherwise deductible rule only applies to the portion of the expense,
property or residual benefit used for a work-related purpose.

Specific exemptions from FBT

Some benefits are exempt from FBT. If one of these exemptions applies, the
employer will not need to consider whether the otherwise deductible rule
applies.

Exemption for work-related medical screening

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The work-related medical screening exemption (s. 58M of the FBTA Act)
applies if both of the following apply:

testing is carried out by, or on behalf of, a legally qualified medical

practitioner or nurse;
testing is available to all employees.

If only some of the employer’s employees get COVID-19 tests, the tests are
still exempt if they are offered to all employees.

Minor benefits exemption

The minor benefits exemption (s. 58P of the FBTA Act) will only apply if:


the tests are provided infrequently and irregularly;
the cumulative value of the tests provided to an employee during the

FBT year is less than $300.


Application date
The otherwise deductible rule may be applied to reduce the taxable value
of benefits provided on or after 1 July 2021. For the FBT year ending 31
March 2022, the otherwise deductible rule would not apply for the period 1
April 2021 to 30 June 2021. However the medical exemption and minor
benefits exemption may be applicable for the entire 2021–22 FBT year. Note
that these general FBT exemptions do not impose a requirement that a RAT
is registered in the Australian Register of Therapeutic Goods and therefore
may be available in relation to benefits provided in relation to tests
acquired or administered overseas for Australian employees.

Examples
The ATO has provided the following examples.

COVID-19 tests fully deductible to employee

Stella is a casual employee at a local café. In April 2022 Stella’s employer
buys a qualifying multipack of COVID-19 tests, which is given to Stella. Stella
only uses the tests before starting a shift if she has any COVID-19 symptoms
or has been in contact with a COVID-19 case.

Stella would be able to claim deduction for the cost of these COVID-19 tests
if she had paid for them and had not been reimbursed by her employer.

Stella’s employer can reduce the cost of the property fringe benefit to nil
under the otherwise deductible rule, provided the required records are
kept.

COVID-19 tests where only partly deductible to

employee
Brett buys a qualifying two-pack of COVID-19 tests at the local pharmacy.
Brett’s employer reimburses Brett for the cost of the tests.

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Brett uses one test to confirm his child does not have COVID-19 before
going to school. A week later he uses the other test to confirm his COVID-19
status before attending his place of work, as he was exposed to COVID at a
child’s birthday party.

Brett’s employer can reduce the value of the expense payment benefit by
50 per cent by applying the otherwise deductible rule, provided the
required records are kept.

FBT record keeping

The existing FBT record keeping requirements apply. Where the otherwise
deductible rule is applied, the employer would need to ensure they have
the relevant documentation and employee declarations to substantiate the
extent to which the benefit provided would have been otherwise
deductible to the employee.

To apply the otherwise deductible rule, the employer must keep records,
including:

a record of the costs of COVID-19 tests the employer pays for your
employees (including reimbursements) and the dates the employer
paid for them — this may include a receipt or invoice;
a completed appropriate employer declaration or employee
declaration.

Refer to the ATO fact sheet for detailed information about relevant FBT
declarations that may apply.

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