Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)Chapter 2: Deductibility of COVID-19 tests
Outline of chapter
2.1 Schedule 2 to the main Bill amends the ITAA 1997 by allowing an income tax deduction for taxpayers who incur relevant COVID-19 testing expenses in gaining or producing their assessable income. The deduction applies to those expenses incurred on or after 1 July 2021.
2.2 Legislative references in this chapter are made to ITAA 1997 unless otherwise specified.
Context of amendments
2.3 The Government is taking action to remove uncertainty on the tax treatment of COVID-19 testing expenses, ensuring that our response to the evolving COVID-19 pandemic remains flexible and practical. This action recognises that COVID-19 tests are one of a range of important tools for mitigating transmission risks and absences from the workplace.
Summary of new law
2.4 From 1 July 2021, the amendments provide individual taxpayers with a specific deduction for their loss or outgoing incurred in gaining or producing assessable income. The loss or outgoing must be incurred in respect of a COVID-19 test with the purpose of determining whether the taxpayer should attend their place of work. To qualify, the test must be one that is:
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- a polymerase chain reaction test for testing COVID-19; or
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- a test that is included in the Australian Register of Therapeutic Goods for testing COVID-19 (such as an approved rapid antigen test).
2.5 To claim the deduction under the amendments, taxpayers must meet the general substantiation requirements.
2.6 Employers that provide relevant COVID-19 testing to employees in the course of their work will not incur FBT liability.
Detailed explanation of new law
Deductibility of COVID-19 tests
2.7 From 1 July 2021, taxpayers may deduct expenses for COVID-19 tests under certain conditions. This deduction applies to the extent that the expense is incurred in gaining or producing their assessable income. To claim a deduction for this expense, the taxpayer must generally satisfy the following criteria:
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- the taxpayer is an individual;
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- the expense is incurred for qualifying COVID-19 tests (explained below); and
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- the purpose of testing the taxpayer for COVID-19 is to determine whether they can attend or remain at their place of work. [Schedule 2, item 2, subsection 25-125(1)]
2.8 To claim the deduction, there must be a sufficient connection between testing the taxpayer for COVID-19 and that taxpayer's assessable income. The amendments ensure that the expenses for relevant COVID-19 tests are deductible when undertaken for the purpose of determining whether a taxpayer should attend or remain at their place of work. The amendments cover circumstances where a taxpayer's positive COVID-19 status means that they cannot attend their place of work at all, or will instead work from home if they are able to. [Schedule 2, item 2, paragraph 25-125(1)(c)]
2.9 If, for example, a rapid antigen test is used due to a requirement for leisure activities and travel, or for the prospect of future employment, the expense is not deductible. In those circumstances, there is a lack of sufficient nexus between the expense and the taxpayer's assessable income.
2.10 Where the relevant expense is partially incurred in gaining or producing assessable income, the amount of the deduction is reasonably apportioned (e.g. where a two-pack rapid antigen test is purchased and one is used for purposes such as leisure travel, and one is used for work purposes, the amount of the expense is halved for the purposes of the deduction).
2.11 The ancillary costs of acquiring the tests, including the costs of travelling and parking to purchase a testing kit cannot be claimed as a deduction. However, it is not the policy intention to exclude other incidental costs during the purchase of the test, such as vendor credit card surcharge fees at the time of purchase, and postage and handling for online purchases.
2.12 The expense must be incurred in respect of a qualifying test that tests the taxpayer for COVID-19. To qualify, the test must be one that is either:
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- a polymerase chain reaction test (commonly known as a PCR test) for the detection of COVID-19; or
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- a test that is:
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- covered by the meaning of a therapeutic good and included in the Australian Register of Therapeutic Goods (maintained under section 9A of the Therapeutic Goods Act 1989); and
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- has the intended purpose of detecting COVID-19 and is included in the Australian Register of Therapeutic Goods for that purpose. [Schedule 2, item 2, paragraph 25-125(1)(b) and subsection 25-125(3)]
2.13 In general terms, from 1 July 2021, taxpayers who purchase and undertake COVID-19 tests to determine whether they can attend their place of work can deduct expenses for those tests to the extent that they are incurred in gaining or producing their assessable income. These include expenses for COVID-19 tests that are polymerase chain reaction tests undertaken through a private clinic where the taxpayer incurs the expense, or other tests included in the Australian Register of Therapeutic Goods, including those commonly known as rapid antigen tests.
2.14 Under the amendments, the taxpayer may not deduct an amount of the expense to the extent that it is capital, or capital in nature. A deduction is available for individuals who are required to purchase and use qualifying COVID-19 tests to determine whether they attend their place of work. In these cases, especially due to the consumable nature or the expected repeated use of tests, it is not expected that the relevant expenses would be capital in nature. [Schedule 2, item 2, subsection 25-125(2)]
Substantiation rules and applicable exceptions for COVID-19 test expenses
2.15 Division 900 provides rules regarding necessary substantiation of expenses that may be deducted in an income year. Under section 900-5, substantiation requirements of the Division apply generally to individuals.
2.16 Specifically, subsection 900-35(1) provides that work expenses (as defined under section 900-30) of $300 or less in an income year do not need to be substantiated if those expenses were incurred by the taxpayer in producing their salary and wages. However, if an amount over $300 is claimed in an income year, all amounts of the deduction need to be substantiated.
2.17 The amendments ensure that eligible expenses for COVID-19 testing are subject to the exception to the substantiation rules for work expenses where appropriate. [Schedule 2, item 3, subsection 900-30(7)]
2.18 This means that for employees who require COVID-19 testing to determine whether they will attend their place of work, they do not need to substantiate those expenses if their total work expenses deduction is $300 or less.
2.19 In circumstances where the exception from substantiation under the rules for work expenses does not apply, the existing rules for substantiation continue to apply.
Fringe benefits tax consequences for employers who provide COVID-19 tests to employees
2.20 As the amendments provide a specific deduction for individuals that incur relevant expenses for COVID-19 tests on or after 1 July 2021, there may be implications with respect to FBT.
2.21 In general, 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.
2.22 Under the FBT regime, the value of fringe benefits (benefits other than salary and wages) provided by employers to employees is generally taxable under the FBTAA 1986. COVID-19 tests provided by employers to employees (whether directly or through a third party under an arrangement, or as a reimbursement of the cost to employees) are considered benefits under the FBT regime.
2.23 An employer can, however, reduce the taxable value of the fringe benefit provided to an employee where the 'otherwise deductible' rule applies, for example, in sections 24 (employee expense payment fringe benefits), 44 (property fringe benefits) or 52 (residual fringe benefits) of the FBTAA 1986.
2.24 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.
2.25 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.
Consequential amendments
2.26 The list of provisions about deductions in section 12-5 is updated to include the specific deduction under the amendments. This provision acts as a guide to the legislation. [Schedule 2, item 1, table under section 12-5]
Commencement, application, and transitional provisions
2.27 The amendments commence on the first day of the first quarter following Royal Assent of the main Bill. [Clause 2]
2.28 The amendments apply to relevant expenses incurred on or after 1 July 2021. [Schedule 2, item 4]
2.29 Although the amendments apply retrospectively, the amendments provide an income tax deduction in the relevant circumstances and do not disadvantage affected taxpayers.