On 30 March 2022, both Houses of the Parliament of Australia passed the Treasury Laws Amendment (Cost of Living Support and Other Measures) Bill 2022 (Bill). The Bill comes after an announcement made by the Federal Treasurer in February 2022 on the intended deductibility of Covid-19 tests (please see our prior article on Covid-19 testing for more information).
The Bill received Royal Assent on 31 March 2022, and outlines the amendment of the Income Tax Assessment Act 1997 (ITAA) to allow an income tax deduction for an individual who incurs costs associated with testing themselves for the presence of Covid-19, on or from 1 July 2021, where:
- There is sufficient connection between testing and the individual’s ability to produce assessable income (i.e. the purpose of testing is to determine whether an individual can attend or remain at a place of work); and
- The costs are incurred on Covid-19 tests which are either a Polymerase Chain Reaction (PCR) test, or otherwise included in the Australian Register of Therapeutic Goods (ARTG) for legal supply in Australia (i.e. currently Rapid Antigen Tests (RAT)).
The legislation does not extend to ancillary costs incurred in acquiring the Covid-19 tests, such as travelling and parking expenses to purchase a testing kit.
Furthermore, the legislation also applies to employees who cannot attend their workplace at all or must work from home due to a positive Covid-19 status.
What are the Fringe Benefits Tax (FBT) implications of Covid-19 testing?
This legislative reform also indirectly facilitates the removal of FBT for employers who provide Covid-19 tests to employees for use before attending a place of work.
Employers who provide Covid-19 tests to employees will benefit from a reduction in their FBT liability - to the extent an employee would have otherwise been entitled to an income tax deduction (had they incurred the expense personally) - through the ‘otherwise deductible rule’ (OWD).
This is beneficial for employers who have implemented testing programs to encourage employees to regularly test for Covid-19 before attending the physical workplace.
It is important to understand the FBT record-keeping requirements that must be satisfied to give effect to the OWD rule apply to Covid-19 tests. Employers who want to utilise the OWD rule are required to obtain the following:
- A receipt or invoice confirming the cost of Covid-19 tests provided to employees and the date of payment;
- Documents demonstrating that Covid-19 tests are required for work-related purposes (i.e. a Covid-19 plan or policy, firm-wide email to employees etc.); and
- Employee or employer declarations which confirm the extent to which the Covid-19 testing expenses would be otherwise deductible to the employee.
What declarations are acceptable for applying the OWD?
The declarations an employer requires to substantiate use of the OWD varies depending on the type of benefits being provided, that is, whether an employer reimburses an employee (i.e. an expense payment fringe benefit), gives employees use of their Covid-19 test (i.e. a residual fringe benefit) or provides a Covid-19 test to an employee (i.e. a property fringe benefit). Declarations are typically required to be completed by an employee, however, in limited situations, an employer declaration covering multiple employees suffices.
Employee declarations
An employee declaration is completed by an employee and confirms the portion of the Covid-19 testing costs that the employee would have been able to claim as an income tax deduction. Specific declarations exist for an expense payment fringe benefit, a residual fringe benefit or a property fringe benefit, and is typically required every time a benefit is provided by an employer.
However, if an employer is providing ongoing Covid-19 testing benefits to an employee, the employee is able to complete a recurring fringe benefit declaration. A recurring declaration will apply to identical benefits (i.e. other Covid-19 tests which are essentially the same) and be valid for five years, provided the deductible portion of the benefit does not reduce by more than 10 per cent.
Employer declarations
Alternatively, employers who provide an expense payment fringe benefit or residual fringe benefit can sign a No-private-use declaration. With respect to Covid-19 tests, an employer may replace the employee declarations with one annual declaration, on the condition that the benefits provided to employees were for employment-related purposes only, and there was no private usage by employees. Please note, this declaration is not available if employers provide employees with a property fringe benefit.
Any and all of these declarations are to be kept on file by the employer and are not required to be submitted to the Australian Taxation Office (ATO). For further information regarding declaration requirements, please visit the ATO’s page on FBT, COVID-19 tests and the otherwise deductible rule.
What should employers do for the upcoming 2022 FBT compliance period?
The amendments will commence on the first day of the first quarter following Royal Assent, being 1 April 2022, but will apply to expenses incurred on or after 1 July 2021.
Employers should be aware of the following options which apply to Covid-19 testing expenses:
Expenses incurred on or after 1 April 2021 to 30 June 2021
- Covid-19 testing expenses will be tax deductible to an individual as a travelling expense where the individual is required to test prior to entering a specific state / jurisdiction for work purposes. As such, an employer can reduce the taxable value of Covid-19 tests using the otherwise deductible rule.
- Employers can claim an FBT exemption for Covid-19 tests which are carried out by, or on behalf of, a legally qualified medical practitioner and are available generally to all employees, under the work-related medical screening exemption detailed in s58M of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Note, this exemption may not be appropriate for RAT tests given these are often self-administered.
The minor benefits exemption in s58P of the FBTAA should apply where the taxable value of the Covid-19 test is less than $300 and the benefit is provided on an infrequent and irregular basis. Note, this exemption may not be appropriate for employers who provide Covid-19 tests to employees regularly as part of testing programs.
Expenses incurred on or after 1 July 2021
Where an employer has provided Covid-19 tests to an employee to attend a place of work, and the aforementioned exemptions / concessions do not apply, the employer may choose to utilise the otherwise deductible rule to reduce the taxable value of Covid-19 tests. Employers must ensure they have the relevant documentation and employee / employer declarations to substantiate the OWD before lodging their 2022 FBT return.
Employers should ensure they are aware of the various ways in which Covid-19 testing expenses can be treated for FBT purposes. Given the Bill has only recently been enacted, we recommend employers maintain appropriate supporting documentation on Covid-19 testing expenses, including the relevant declarations as applicable.
This new legislation will benefit employers who have continued to use testing programs to mitigate the risk of Covid-19 contractions in the workplace.
If you have any questions about these reforms and how they affect your FBT obligations, please reach out to your PwC representative.
