December 2024 – Practice Update

February 18, 2025

ATO’s tips for small businesses to ‘get it right’

While the ATO knows most small businesses try to report correctly, it understands that mistakes can happen.  The ATO advises taxpayers that it is important to get the following ‘basics’ right:

• using digital tools and business software to help track and streamline processes to increase the efficiency of their business;
• keeping accurate and complete records, which will help taxpayers meet their tax and super obligations and make lodging easier; and
• getting the right advice from trusted resources such as their registered tax professional or the ATO’s website, which can help taxpayers navigate change and uncertainty at any stage of the business life cycle.

Taxpayer’s claims for various ‘home business’ expenses rejected

In a recent decision, the AAT rejected in full a taxpayer’s claims for “several classes or categories of deductions.”

For the relevant period of 1 July 2021 to 30 June 2022, the taxpayer was (according to his employer) a ‘technical architect’.

However, the taxpayer also claimed he worked from home 6am to 11pm seven days a week, 365 days of the year (as he was ‘always on call’), and his income tax return for the 2022 financial year claimed a wide range of deductions, totalling approximately $40,000.

The AAT separately considered each category of deductions claimed, and rejected each in turn.

In relation to his home office ‘occupancy expenses’ (e.g., for home insurance, council rates, waste disposal, water rates, and repairs), the AAT noted that the ‘home office’ rooms (comprising floorspace occupying 31% of the dwelling’s total floor area) were not physically separate from the remainder of the dwelling, which the taxpayer shared with four other members of his family.

Home office running expenses (e.g., gas, power and internet) were disallowed on the grounds that the taxpayer had “not properly established an entitlement to such deductions or otherwise appropriately apportioned them between private or work-related activities.”  The AAT found his 100% claim for the internet, on the basis that the other members of the household did not use the internet connection, “very difficult to accept”.

In relation to plant and equipment expenses, the evidence was “largely non-existent.”

In relation to consumable expenses, the AAT noted that they appeared to be for goods or services of a private or domestic nature (including medications, toilet paper, milk, tea, sugar and insect spray).

The AAT also rejected the taxpayer’s claim for “payments made to his spouse for tax management, office cleaning and document management/storage”, noting that the services provided were generally of a private or domestic nature, and that the rendering of invoices by the spouse “has a degree of artificiality to it”.

ATO reminder about family trust elections

Taxpayers may be considering whether they should make a family trust election (‘FTE’) for a trust, or an interposed entity election (‘IEE’) for a trust or other entity.

Making an FTE provides access to certain tax concessions (assuming the relevant tests and conditions are satisfied), although there are important things to consider.

In particular, once the election is in effect, family trust distribution tax (‘FTDT’) is imposed when distributions are made outside the family group of the ‘specified individual’.  FTDT is a 47% tax, payable by a trustee, director, or partner, as the case may be (depending on the entity).

Taxpayers should review FTEs and IEEs annually to ensure they remain appropriate.  Taxpayers can only revoke or vary FTEs and IEEs in limited circumstances and subject to certain conditions.

Before making a distribution or annual trust resolutions, trustees should identify the members of the specified individual’s family group.  This will help avoid FTDT liabilities.

Please contact our office if you require any assistance in this regard.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances

 

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