Sept 2023 Round Up - Why is the ATO targeting self-education expenses?

Why is the ATO targeting self-education expenses?

There had to be a reason for the release of a new draft ruling, right? We look at what TR 2023/D1 reveals.

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Inside this month Michael Carruthers (Tax Director), Matthew Tse (Tax Adviser) and Lisa Armstrong (MD) bring you:

Self-education expenses for individuals

A new draft ruling TR 2023/D1 has been issued by the ATO which looks at when deductions for self-education expenses are available for individuals. The new ruling effectively replaces TR 92/8 and TR 98/9 which have now been withdrawn.

While there aren’t any significant changes to the ATO’s approach in this area, the ATO does provide more detailed and specific guidance in certain areas. Also, the ATO has updated its guidance to incorporate more recent court decisions.

The draft ruling provides more clarity by setting out factors to consider that can help determine when self-education expenses are deductible in certain scenarios. A good example of this is determining when overseas study tours have a sufficient connection with an individual’s income earning-activities. This is often a challenging area to work through in practice.

Some of the key points from the ATO’s draft ruling are summarised below:

• While this is not always the case, one of the key challenges in claiming deductions for self-development or personal development courses is that the knowledge or skills gained are often too general.
• If someone ceases their employment or income earning activity part-way through completing a course, the expenses would be deductible only when incurred up to the point when the income producing activity ceased.
• If a particular course is not entirely deductible, a deduction may still be available for some of the course fees where there are particular subjects or modules in that course that are sufficiently related to the individual’s employment or income earning activities. The course fees may need to be apportioned.
• A distinction needs to be made for course fees relating to enrolment in a full fee-paying place versus a Commonwealth supported place. This is because course fees are not deductible if they relate to a Commonwealth supported place.

The deductibility of course fees is not impacted by the individual borrowing money to pay for those fees. The ATO provides the example of a full-fee paying student using a FEE-HELP loan to pay for course fees. However, a deduction isn’t available for repaying the principal amount borrowed or any indexation of the government loan.

Instant asset write-off & energy incentive before Parliament

Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 is currently before the House of Representatives. If enacted, it introduces:

$20k instant asset write off

With temporary full expensing having expired on 30 June 2023, the instant asset write-off threshold for small businesses was originally due to drop back to $1,000.

However, in line with the announcement in the May 2023 Federal Budget, the Bill introduces amendments which allow small business entities to claim an immediate deduction for eligible depreciating assets (or eligible improvements) costing less than $20,000 for the 2024 income year.

This applies only to small businesses with an aggregated annual turnover of less than $10 million where they have chosen to apply the simplified depreciation rules in the 2024 income year.

The $20,000 threshold also applies in determining whether the full balance of the general small business pool is written off in the 2024 year.

The ‘lock out’ rules that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out of the regime continue to be suspended until 30 June 2024.

Small business energy incentive

The Bill also introduces amendments for the small business incentive announced in the May 2023 Federal Budget.

In broad terms, the incentive allows businesses with aggregated annual turnover of less than $50 million to access a bonus deduction equal to 20% of the cost of eligible depreciating assets or improvements to existing depreciating assets that support electrification or more efficient energy use.

The maximum bonus deduction is $20,000 (i.e., up to $100,000 of qualifying expenditure).

To be eligible for the bonus deduction:

• The expenditure must be eligible for a deduction under another provision of the tax law; and
• The asset must be first used or installed ready for use, or the improvement cost incurred, between 1 July 2023 and 30 June 2024.

If a new depreciating asset is being acquired, the following additional conditions need to be satisfied:

• The asset must use electricity; and
• There is a new reasonably comparable asset that uses a fossil fuel available in the market; or
• It is more energy efficient than the asset it is replacing; or
• If it is not a replacement, it is more energy efficient than a new reasonably comparable asset available in the market; or
• It is an energy storage, time-shifting or monitoring asset, or an asset that improves the energy efficiency of another asset.

If improvements are being made to an existing depreciating asset, the expenditure needs to satisfy at least one of the following conditions:

• It enables the asset to only use electricity, or energy that is generated from a renewable source, instead of a fossil fuel;
• It enables the asset to be more energy efficient, provided that asset only uses electricity, or energy generated from a renewable source; or
• It facilitates the storage, time-shifting or usage monitoring of electricity, or energy generated from a renewable source.

There are a range of exclusions from the bonus deduction, including expenditure on assets that can use fossil fuel, assets which have the sole or predominant purpose of generating electricity (e.g., solar panels), capital works, and motor vehicles. Financing costs, including interest and borrowing expenses, are also excluded.

Technology Boost clarified?

Clarity on technology investment boost

Many practitioners have been recently turning their minds to the bonus 20% deduction that is available to some clients under the technology investment boost.

For a particular cost to qualify for the boost, one of the key conditions is that the expenditure needs to be spent wholly or substantially for the purpose of the client’s digital operations or digitising their operations.

In many cases, the key challenge is working out whether the expenditure meets this condition.

While there are some examples of costs that might qualify in the explanatory materials accompanying the legislation and in the existing ATO fact sheet in this area, there are still significant areas of uncertainty.

Recognising the difficulty in this area, the ATO has released some additional guidance. Although the guidance does not provide a full or exhaustive list of eligible costs, it does make some comments on certain expenditure and confirms the following:

• An ongoing subscription to an accounting software platform for a client’s business would be within scope of the boost; and
• A multifunction printer and scanner would not qualify if it was intended to be used only to make copies of paper copies, but it would be within the scope of the rules if used to scan paper documents for digital use and storage.

Outside of this, the ATO suggests that a good indicator of whether an expense is within scope of the boost is to consider whether the business would have incurred the expense if they didn’t operate digitally.