Tax tips for accountants podcast series

Intro:
Hello, and welcome to the CPA Australia podcast, your weekly source for accounting, education, career, and leadership discussion.

Elinor Kasapidis:
Hello, and thanks for joining us today. My name is Elinor Kasapidis and I'm the senior manager of tax policy at CPA Australia. This week on the CPA Australia podcast, we will be discussing tax time 2021 with assistant commissioner, Tim Loh from the Australian Taxation Office. In this first of four episodes, we will focus on work-related expenses, including insights for tax agents. This will help you with your client conversations and be aware of the ATO's focus areas this tax time. Our guest today is from the ATO's individuals and intermediaries division. It's a pleasure to welcome you, Tim.

Tim Loh:
Hi, Elinor.

Elinor Kasapidis:
Tax time 2021 has arrived and as always, it's likely to be a busy start for taxpayers, tax practitioners, and the ATO. We know the ATO has been doing a lot of work to keep tax agents and individuals up to date with their obligations and helping out by providing guidance and tools to help make things easier. CPA Australia works closely with the ATO to share resources and connect with tax agents. Tim, how can tax agents best engage with you this tax time to optimise their services and get the best value out of the information you produce?

Tim Loh:
Good question, El. Look, in support for tax professionals, we've got a range of communication channels, including instructional videos to help navigate online services for agents, and a tax time 2021 video series with key information for tax professionals. We've also hold regular meetings with the Tax Practitioner Stewardship Group members where we provide year-to-date lodgement and refund figures. These meetings are supported by key ATO business areas and provide an opportunity for the ATO to update members on the progress of tax time. The meetings also allow for external members to raise any issues or concerns from the tax practitioner community. Key messages from these meetings are shared with the broader community via the ATO website. External members are also invited to raise issues through the TPSG secretariat.

This tax time we'll also be providing information to the tax profession through a number of mediums, such as a dedicated segment in the tax professionals newsletter that many of you would have seen, through the social media, the tax professionals conversations webcast, and a dedicated episode on our Tax inVoice podcast. This year, we're going to be updating our tax time toolkits, which registered tax agents can use in their conversations with their clients.

Elinor Kasapidis:
That is such a list and me sitting on the TPSG, for members that are listening, as things pop up during tax time, you're always welcome to contact us, and through those forums that Tim mentioned, we can certainly pass on what's going on, on the ground through to the ATO. Now, on to our focus topic. Work-related expenses have been in the ATO's sights for a few years now. What improvements have you observed during this time and what are some of the issues that remain a problem?

Tim Loh:
Look, we estimate that the incorrectly claimed work-related expenses contributes almost $4.4 billion to the individuals not in business tax gap. So, as you can imagine, it's a big focus for us every single year and particularly this year. Look, last year we saw a decrease in the value of work-related expenses for car, travel, and non-PPE clothing, and self-education as a result of the introduction of travel restrictions as a result of the pandemic and limits, obviously, in the number of people who gather in groups. In terms of figures, we saw a 5.5% decrease in car and travel expenses last year. And we expect this year, being a full year in which a lot of the travel restrictions have been in place, we expect this trend to continue downward in this year's tax returns.

Now, some of the common mistakes we see include people accidentally or deliberately double-dipping their working from home expenses using the all-inclusive temporary shortcut method, also claiming for specific items such as laptops or desks. The shortcut method is an all-inclusive method so it covers everything from electricity use to telephone and internet costs to depreciation of your home office equipment, any technological items like your laptops and your iPads. You can't claim separately for any of these items if you were using the temporary shortcut method. Now, another expense that we sometimes see people claim are those personal expenses, like your coffee, tea, and biscuits. Last year we did see some people claim the old dunny roll which is not a deductible expense. It's private in nature. And while some of these costs might be supplied by your employee, if you're lucky enough, like your coffee and tea and biscuits, they aren't directly related to earn your income. So, you can't claim these expenses when you are working from home. So, that means you can't claim those Tim Tams.

Elinor Kasapidis:
Those are really good reminders, I think because when the shortcut method was first introduced, it was for a short period last tax time so people sort of were still getting used to the rules. So, it's always good to have that reminder. For tax agents, when their clients walk in and they don't necessarily know if there's been personal use or what exactly has been adjusted downwards, for example, as a result of COVID, do you have any tips for tax agents in terms of how they could negotiate or manage those client conversations? What are the things that the ATO might expect of tax agents or would like tax agents to talk about with their clients at this time?

Tim Loh:
Yeah, look, from our perspective, obviously, the tax agents are the experts in tax. I think from our perspective, we're really keen on making sure that agents ask their clients the questions and have the conversation with them about the things that they're trying to claim in their tax return and making sure that they understand, the client understands that for a lot of the claims that they want to make, you really need to have good records. I think there is some misunderstanding sometimes with clients that they... What you can and can't claim, and it can be different, obviously, depending on the job that you have and the industry that you are working in.

So, I think from our perspective, it's about us trying to make it easy for agents as well from an ATO perspective. So one thing we were trying to do is have those tax time toolkits, which are in PDF format and which can be shared with your client, and they're a really simple way to just give agents that I guess, support in some of the conversations that you're having with your clients on things on which you can and can't claim in your tax return.

Elinor Kasapidis:
And you raised some good points there because I think the TPB has got the rules for tax agents around reasonable care and verifying client records and what they're doing. And what I heard you say was also getting to know your client, what industry they work in, what sort of equipment or expenditure would be reasonable to expect from them, and then also having a conversation around have they been reimbursed, have they used any of it for personal things. It's having those more detailed conversations, really, isn't it?

Tim Loh:
Exactly right, El, and that's what we're looking for. And we're not asking tax agents to do an interrogation of your clients, but it really is about asking the question. This year has been different for many people because of the pandemic. We know people have had to get extra jobs to make ends meet. So, it's about just asking the question and really having that conversation with your client because it's an important aspect of making sure things are right in the tax return.

Elinor Kasapidis:
And you did mention record keeping before. So, shortcut method for working from home, the ATO's been quite generous and said, "All you need is a timesheet," but you've got logbooks for motor vehicle expenses or apportionment. The guidance from the ATO talks about just be reasonable about it. Are we talking about pages and pages of calculations and receipts, or where do you think record keeping... How can it be made easier for clients and what can tax agents do to educate their clients do you think?

Tim Loh:
Yeah, that's a really good question, El. I think from our perspective, obviously, the more records and the better records you have, the easier it is to verify claims I think from our perspective. Obviously, the working from home method that we've been asking people to use if they think it's a method they want to use is really easy and simple. And as you said, El, the only record you need are your diary entries or timesheets or roster entries that show how many hours you've been working from home.

So, obviously, that method's a really easy method. You've obviously got the 52 cents per hour method and the actual cost method which require more documentation, and you also have to work out what the work-related bit is as well, which always makes things a little bit more trickier. I guess, what we would be looking for say for internet expenses as using that as an example is really making sure that you're documenting how many hours you're using it for work-related purposes. And then, working out how many hours you're using it for Netflix, and obviously, you've got to portion it if there's a few people in your household using the internet as well.

So, from our perspective, it's just making sure that you can support that deduction if you were asked in an audit to substantiate the claim that you make in relation to that particular working from home expense. But yeah, obviously, it depends on the expenditure, but yeah, the better records you have the easiest to substantiate the deduction that you're going to claim.

Elinor Kasapidis:
So, I have to keep my kids off Fortnite then if I want my business-related proportion of my work-related expense internet to be up there. So, no, that's really helpful. And I think in shared houses as well where you do have multiple people working from home, where you have the kids home from school, particularly those of us in Victoria, yeah, that percentage goes down a bit, doesn't it?

Tim Loh:
Well, that's why we say, potentially for some people, the 80 cents per hour shortcut method is a really simple way because you don't have to worry about the apportionment stuff. You just work out the number of hours you've worked from home, and then that's the deduction you get. And so, for people who have been working in Victoria, I know a lot of people have been working full time at home as a result of the pandemic. So, if you've been working full time, 40 hours a week, 48 weeks of the year, and that deduction's about $1,500. So, it's a really simple way to get the deduction. But like with anything, if you think you have a deduction that's higher than that, you're more than welcome to use the existing two methods that are available, and we've got calculators on our website for people to use… agency use if they wish to use that as a way to compare the various methods.

Elinor Kasapidis:
Sure, and I know the myDeductions app now has... Or maybe it always did have that inter-functionality with online services for agents so clients can actually throughout the year upload their deductions there and have it all ready for tax agents at the end of tax time. Is that right, Tim?

Tim Loh:
Yeah, that's exactly right. So, whether you use a tax agent or lodge it yourself, but particularly with the agents, you can get your clients to use that tool, and yeah, that information can be sent straight to you on online services for agents, and that makes things a lot easier, and that allows you to really focus on you having that kind of fulsome conversation with your client.

Elinor Kasapidis:
It can be hard because sometimes clients will say, "What sort of records? Are you kidding me? Do I have to keep that?" So, at least this is an easy way of doing it. Now, just, you did mention earlier in the podcast, just some numbers around the decreasing value and volume of motor vehicle and travel expenses. So, because that was only for part of the 2020 tax time year, I'd suggest that you'd be looking or expecting even more of a decrease in particular geographic areas or working in particular industries. Does that mean agents should be checking the claims and not necessarily just cutting and pasting last year's? They should actually, again, just stop and check to see how COVID has affected people's claims?

Tim Loh:
Yeah, that's right, El. That's really good advice. From our perspective, like I said, look, car and travel expenses have decreased by nearly 5.5% last year. Having said that, we do expect working from home expenses to increase, especially for those people who have been working from home. So, I think from our perspective, we know most people do the right thing and we know most agents do the right thing. From our perspective, it's just making sure that you're not copying and pasting previous claims. Things have changed this year, and as I said before, we do expect working from home expenses to decrease. But at the same time, we do see car and travel expenses to decrease. So, you just can't be in two places at once so we'll be on the lookout for anyone who maintains their car and travel expenses and has increasing working from home expenses because that just doesn't make sense from our perspective. So, that will be a red flag for us this tax time.

Elinor Kasapidis:
You do have very clever analytics engines and they work in real-time, I think so everything gets flagged upfront. So, what we have been telling members to tell their clients is that you do have these very sophisticated risk engines, and I'd almost call it artificial intelligence and to expect to get a few questions from the ATO if something doesn't make sense, and that was a great example, Tim. As we just come towards the end of the podcast, with less travelling in our day, I sort of think, "What am I going to do with my extra two hours at home?" And a lot of people will have spent that time on self-education. How much of that can be claimed? When can it be claimed and what do people have to be aware of with respect to self-education?

Tim Loh:
Yeah, look, that's a really good question in terms of self-education. Look, probably you can claim a deduction for self-education expenses if it's directly related to your current employment, and it maintains or improves the skills and knowledge you need for your current duties or results in or is likely to result in an increase in your income from your current employment. You can't claim a deduction if the self-educational study course doesn't have a connection with your current employment, only relates in a general way to your current employment, or enables you to get employment or change employment. So, you can't claim it for those meditation courses. They're probably a bit too general from your normal employment. So, you generally can't claim a deduction for the first $250 of expense for self-education. But as you would have seen through the budget announcement that the government have made, they're removing that exclusion of the first $250 of deductions for prescribed courses of education. So, this measure will have effect on the first income year after the date of Royal's assent of the enabling legislation.

Elinor Kasapidis:
Awesome. So, this tax time though, tax time 2021, that $250 is still there.

Tim Loh:
That's right.

Elinor Kasapidis:
Thank you so much, Tim. So, really, what I've heard is about the client conversations. When you sit down with your client, just make sure that you have checked COVID impacts, make sure that they do have those records. The second point, of course, is around the quality of those records and making sure that things like personal use percentages, logbooks, timesheets, they're all up to date and in order. And then finally, the one I took away as well as that real-time analytics. So, the ATO is very clear around what sort of behaviours they're expecting to see from which industries, which geographic sectors, and that they do monitor that quite heavily because that $5 billion-plus tax gap isn't going to close itself. So, thank you very much, Tim, for your insights today.

Tim Loh:
Thanks, El.

Elinor Kasapidis:
In our next tax time podcast with Tim, we'll be covering cryptocurrency. Be sure to visit our show notes on the CPA Australia podcast webpage for links and more information on this episode. Thank you for listening.

Outro:
Thanks for listening to the CPA Australia podcast. For more information on today's episode, please visit the show notes at www.cpaaustralia.com.au/podcast. Never miss an episode by subscribing to our podcast on Apple Podcasts, Spotify, or Stitcher.

Intro:
Hello, and welcome to the CPA Australia Podcast; your weekly source for accounting education, career, and leadership discussion.

Elinor Kasapidis:
Hello, and thanks for joining us today. My name is Elinor Kasapidis and I am the Senior Manager of Tax Policy at CPA Australia. Today on the CPA Australia Podcast, we will be discussing tax time 2021 with Assistant Commissioner Tim Loh from the Australian Taxation Office. In this episode, we will focus on cryptocurrency to help you with your client conversations and be aware of the ATO's focus areas this tax time. Our guest today is from the ATO's Individuals and Intermediaries Division. It's a pleasure to welcome you Tim.

Tim Loh:
Hi, El, how you going?

Elinor Kasapidis:
Good, good. So, second podcast out of four. We covered work-related expenses in our first podcast. This time, it's all about cryptocurrency, the new frontier of investing. Now, the ATO has been on the case for quite a few years, but this tax time you've really been on the front foot about cryptocurrency. What is it, and why is it an issue for the ATO?

Tim Loh:
Look, thanks, El. Look, the term cryptocurrency is generally used to describe a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain. And you're right; the growth in popularity of cryptocurrency across the community means the ATO will also be increasing our focus this year on cryptocurrency. Look, the prices of cryptocurrency have skyrocketed over the last 12 to 18 months. In April this year, Bitcoin, for example, was trading at $80,000. It's come down a little bit from that high, but given the rise in prices, a lot of people are attracted to investing in cryptocurrencies now. And this increase in investment in cryptocurrencies, we just want to remind people this tax time that they must report a disposal of cryptocurrency for capital gains tax purposes in certain circumstances.

Elinor Kasapidis:
And you sort of mentioned a lot of terms like blockchain and crypto, and for many people it really is just about getting into an opportunity that seems to be growing. And you mentioned capital gains tax, so it's really about getting out there and reminding people that even though it might be something new, it's not that there isn't a tax consequence, or that the laws haven't kept up with the pace of change. Is that correct?

Tim Loh:
Yeah, that's right. So look, while cryptocurrency may appear to operate in a digital world, and when it interacts with the real world the ATO keeps a close eye on what's happening in the cryptocurrency world. So we'll get information and data from banks, and financial institutions, and cryptocurrency exchanges, and we'll track that money and the information back to taxpayers. So what I would say is this, think of cryptocurrency like shares. So, similar tax obligations arise from trading in cryptocurrency or investing in cryptocurrency. So, typically there's four transactions that can trigger a capital gains tax consequence if you're an investor. So if you sell or gift cryptocurrency, if you exchange cryptocurrency for another cryptocurrency; so if you swap Bitcoin for Ether, as an example. If you convert cryptocurrency to a fiat currency, like Australian dollars, or if you buy goods and services with cryptocurrency. So, those are typically the four transactions that can trigger a capital gains tax consequence.

Elinor Kasapidis:
And a lot of people, when they get into this, they're not necessarily thinking, "Oh, this is what I'm going to do with it." Or, "This is the information that I need to keep." They sometimes don't even think about how they're purchasing it, like in their own name or through a company, or even through a self-managed superannuation fund. Is that 50% discount available for individuals who hold crypto for more than 12 months?

Tim Loh:
Yeah, that's right. That's a good question. So have if you're holding cryptocurrency in your own name as an individual, and if you have held the cryptocurrency for more than 12 months, or at least 12 months, you can get a capital gains tax discount. So, it's something to think about if you're an investor, just to remind yourself that if you have held it for at least 12 months, you can claim a capital gains tax discount.

Elinor Kasapidis:
And you did mention those record prices of 80,000, and you also mentioned that things have piped down a little bit since then. If I make a capital loss, so if I sort of bought high and sold low because I just wanted to get out, it got a bit too risky for me, can I also have capital losses available for me?

Tim Loh:
Yeah, good question. Yes you can. So, let's say for example, you bought in April this year and you disposed of it recently, say maybe yesterday, for example... I think it was trading at about $48,000, so you would have made a $32,000 capital loss. Look, that would be bad luck obviously. But yeah, you can use that capital loss and offset against other capital gains that you've made during the year. So, if you made some gains in relation to shares or property, you can offset that capital loss against those capital gains.

Elinor Kasapidis:
And I liked your share analogy before, because a lot of the time the terminology is what seems quite foreign, but boiling it down to the basics. The other thing that I've heard around the traps is chain splits and forks. So, a particular currency might actually end up splitting into two different forms, or it goes onto a different blockchain. Do you have any advice... So if a client walks into a tax agent's office and says, "Well, I started off with some Bitcoin, but then it forked and I've got these new things, what do I do?" Do you have any guidance or information on that?

Tim Loh:
Yeah. You can run to our website. I think that's a good start, and don't freak out is probably the second piece of advice. But look, I think from a tax perspective, chain split implications where cryptocurrency is held by an investor as an investment are such that if you hold cryptocurrency as an investment and receive a new cryptocurrency as a result of a chain split, such as Bitcoin cash being received by Bitcoin holders, you don't derive ordinary income or make a capital gain at that time as a result of receiving that new cryptocurrency. But instead you'll make a capital gain when you dispose of it. So when working out your capital gain, the cost base of the new cryptocurrency received as a result of the change split is zero.

Again, also, if you hold the new cryptocurrency as an investment for at least 12 months, you may be entitled to the CGT discount as well. So yeah, that's something that people need to think about in the context of chain splits. And another thing to note is, in respect to chain split implications, where cryptocurrency's held in a business that's been carried on, a new cryptocurrency received as a result of a chain split in relation to cryptocurrency held in the business, carried on, will be treated as trading stock where it's held for exchange or sale in the ordinary course of business. The new cryptocurrency must be brought to account at the end of the income year, given that is considered to be trading stock.

Elinor Kasapidis:
So it's gone from something quite unfamiliar to a language that I think many tax agents are very, very familiar with. So, really, it's just another asset and you just treat it the same way.

Tim Loh:
Exactly.

Elinor Kasapidis:
Yeah, so you did mention though, that being in business, you're treating it as trading stock. So, there is that line between. And the vast majority of people are going to be investors. But let's say I'm buying and selling relatively small amounts of cryptocurrency, but I'm doing it pretty regularly. I'm no millionaire or anything, because I didn't buy Bitcoin early enough or sell it at 80,000, but I spend a lot of time monitoring exchanges. I read those Reddit threads and I'm doing courses. I'm not quite sure whether I'm in business; am I a trader, or am I still an investor? And the reason that it matters to me is that 50% discount for the currencies that I do hold for more than 12 months, even though I'm maybe trading some others on a more regular basis. What are the factors, do you think, that the ATO will look at in that kind of scenario?

Tim Loh:
Yeah, it's a good question, El. I think for most people, as you quite rightly pointed out... For most people, they're going to be investors in cryptocurrency rather than traders in cryptocurrency. From our perspective, we'll obviously look at a number of different things in terms of how long you hold the cryptocurrency for, how often you're trading cryptocurrency. So from our perspective, it's really going to depend on the facts and circumstances of each particular person. But yeah, as I said before, for the most part, most people will be investors in cryptocurrency and so they'll be entitled to a capital gains discount if they've held it for more than 12 months. And if they've made a loss, they'll get a capital gains tax loss which they can offset against other capital gains that they've made during the year.

Elinor Kasapidis:
That's really helpful. And when we're talking about business versus investor, and then people look down and they go, "Oh, but personal use asset." There have been people, though, who have right from the beginning, they want to use Bitcoin as a form of currency to buy and sell things, or they will buy crypto on a particular site or for a particular set of purposes. How does the ATO look at those kinds of purchases and sales of crypto?

Tim Loh:
Look, broadly, cryptocurrency won't be a personal-use asset if it's kept if it's kept or used mainly as either an investment, part of a profit-making scheme, or in the course of carrying on a business. But cryptocurrency can be considered to be a personal-use asset. So if you acquire and use it within a short period of time, or directly exchange it for items you personally use or consume, that's likely to be a personal-use asset in those particular circumstances. But the longer you hold cryptocurrency, the less likely we consider it to be a personal use asset. So, if you held it... Say you bought it last year and it was only, say $30,000, and then you sold it... And you held on it for about five or six months and sold at $80,000... Well, I don't think that would be a personal-use asset in that particular circumstance. But if you bought it and then, let's say next week, you used it to buy something, then I think that'd be more of a personal-use asset. But yeah, again, it's going to really depend on people's facts and circumstances. We've got some information on our website that agents can check out to have that discussion with their clients about.

Elinor Kasapidis:
Yep. Awesome. And finally, just on crypto, I notice that the ATO just refreshed its data-matching protocols up to 2022/23. Where are you getting the information from, and what will you be doing with it?

Tim Loh:
Yeah, look, we get information from a number of cryptocurrency exchanges. So, as you quite rightly pointed out, El, we've got a cryptocurrency data-matching programme that has been in place since April 2019, in which we, as you quite rightly pointed out, we just recently extended for a further three financial years, up to and including the 2022/23 financial year. As I said before, it might seem that cryptocurrency transactions operate in an anonymous digital world, but as I said before, we get a lot of information and records from cryptocurrency designated service providers as part of this data-matching programme. And we use that to match this data to an individual to ensure people trading in cryptocurrencies are paying the right amount of tax. And that data that's provided the ATO includes cryptocurrency purchase and sell information. So, we use that information to send letters to taxpayers as one example. So, this year we'll be sending a hundred thousand letters to taxpayers to remind them of the cryptocurrency tax obligations, and we'll also be nudging people or sending pop-up messages to 550,000 Aussies who've been trading in cryptocurrency this year to make sure that they include any of their gains or losses in their tax return. So tax agents will be able to get that pop-up message, as well, when they're helping their clients put together their tax return.

Now, in addition, where clients don't report their transactions in their tax return, something to note is that returns may be delayed while we review why amounts related to the cryptocurrency have not been included. And we can subsequently contact the client to review their affairs or any missing transactions. And in cases where we believe clients have been deliberately avoiding their cryptocurrency tax obligations, we'll be increasing our compliance activities through audits and, where necessary, the application of penalties. So we want to help tax agents and taxpayers to get it right, and ensure that they're paying the right amount of tax. And as I said before, we will be using that data to remind people to include those cryptocurrency transactions in their tax return this year.

Elinor Kasapidis:
Those are some big numbers. I know that one in five Australians is investing in crypto, but for you to be actually matching that and sending out those hundreds of thousands of notifications... What's really useful is having those as pop-up messages. So, that's fantastic. What I heard from this podcast was declare cryptocurrency gains and losses, don't think that it's not a problem or that the ATO won't find out. And the other part of it is just making sure that it's treated correctly and that it's not necessarily this new whiz-bang kind of asset; it is very much treated like existing assets, such as shares. Thank you so much for your insights today, Tim.

Tim Loh:
Thanks so much for having me, Elinor.

Elinor Kasapidis:
In our next tax time podcast with Tim, we'll be covering property investment. Be sure to visit our show notes on the CPA Australia Podcast webpage for links and more information on this episode. Thanks for listening.

Outro:
Thanks for listening to the CPA Australia Podcast. For more information on today's episode, please visit the show notes at www.cpaaustralia.com.au/podcast. Never miss an episode by subscribing to our podcast on Apple Podcasts, Spotify, or Stitcher.

Intro:
Hello, and welcome to the CPA Australia podcast. Your weekly source for accounting, education, career and leadership discussion.

Elinor Kasapidis:
Hello, thanks for joining us today. My name is Elinor Kasapidis and I'm the senior manager tax policy at CPA Australia. On this CPA Australia podcast. We will be discussing tax time, 2021 with Assistant Commissioner, Tim Lowe from the Australian Taxation Office. In this episode, the third of four, we will focus on property investments to help you with your client conversations and be aware of the ATO focus areas this tax time. Our guest today is from the ATO's Individuals and Intermediaries division. It's a pleasure to welcome you again, Tim.

Tim Loh:
Hi, Elinor how are you?

Elinor Kasapidis:
Good. So, third podcast out of four, and now we're talking about property. Australians love property, and many use their money to build their wealth through commercial and residential property investments. The last year has brought both pain and joy to investors with skyrocketing residential house prices, but also stresses for landlords with rental waivers, eviction moratoriums, and some businesses in tenants struggling to pay their rent. A whole bunch of tax issues have arisen from this situation. Do you have any examples of the things the ATO has been dealing with Tim?

Tim Loh:
Yeah, thanks Elinor. There's obviously a number of issues that we've been dealing with. And obviously we want to make sure that tax agents get this right for their clients. Last year, we did see a lot of people get things like rental income protection insurance or receiving payouts. We would just remind tax agents and their clients that you need to declare this income in your tax return, but you only have to declare it when you actually receive it. So, that's something that tax agents and their clients should be aware of.

From a deduction perspective, we always see people like errors in relation to deductions for rental properties. And so, as you can imagine, it's a key focus area again for us this tax time. So we do see a number of common mistakes made in relation to rental deductions. So some of the common mistakes that we see people make in relation to claiming deductions for cost incurred when travelling to their property.

So, unless a taxpayer is in the business of letting rental properties, travel costs can't be claimed. Another thing we do see some people do is when they do take out a loan to purchase their rental property, they can sometimes refinance that loan and look to use that refinanced monies to purchase some private expenses like go on a holiday or purchase a car. And so we use data analytics to make sure that deductions are only claimed on the proportion of the loan that relates directly to the rental property. So again, it's just a reminder to tax agents and their clients that you can't claim a deduction for the interest expense, that relates to that private component. The other thing we also sometimes see every year is people trying to claim things for renovations. And trying to claim those renovations and the deductions associated with that immediately, as many of your listeners would know, you need to claim those costs over a period of time and they can't be deducted outright. So, you can't claim that 25k reno for the kitchen as an outright deduction.

Elinor Kasapidis:
Those are really useful things because I think with loans, you can do all sorts of wonderful things with them these days, including redraws, and accounting for it can get quite messy. So of course, I'm going to go back to the theme of even the past two podcasts, which is about record keeping. Really what's your advice to residential property investors in particular, and those that aren't in the business of letting out properties, there's quite a lot of records to be kept over the period in which you hold the house isn't there?

Tim Loh:
Yeah, that's right Elinor, obviously record keeping is really important. So to make the tax agent's job easier it's important to have good records and from a deductions perspective, it's really important to make sure that you've kept all the receipts. I'm not telling anybody anything they don't already know, but yeah, having those receipts and having those records preferably electronically makes things a lot easier. So, if the ATO does come knocking, you have that information at hand and you can substantiate the claim that you made. Another thing we want people to be aware of is when you are making some of these claims it's really important to make sure you've got those tenancy agreements in place. We have leased it out to people because you can only claim expense when the property is being generally leased to third parties at arm's length rates in order for you to get a deduction in relation to your mortgage interest for the entire year. So, it's really important to make sure that you've got records like those. And look, we've got some fantastic information on our website that tax agents can search for in relation to rental property expenses.

Elinor Kasapidis:
And those tenancy agreements are really important because that's that primary source documentation. And sometimes rentals can be quite informal. So let's say for example, I'm just leasing out part of my house or let's say Airbnb. So I've sort of outsourced that facilitation to someone else, how formal do my tenancy agreements or my documentation have to be in those kinds of situations?

Tim Loh:
Yeah. So look, obviously in a perfect world you'd want the proper legal documentation that's probably more associated with your long term leasing arrangements. I guess with situations involving Airbnb and accommodation sharing platforms. A lot of those platforms will provide you with some information. So I think in those cases, again, it's probably even more important in those cases to really document when the property has been available for rental lease to tenants using those platforms. Because say, if you're only using, let's just use a really simple example, but if you're using Airbnb and your renting it for five days, and that's the only time you're ever renting out the property, well, you're only going to be able to claim five days of interest deductions. So it's really important that you've got really strong documentation to support the number of days that you have generally rented or leased the property out to third parties.

Elinor Kasapidis:
And that is a really important point, particularly in the COVID environment. A lot of investors might own a second home, a holiday home that they usually let out, but COVID and the lockdowns did make it impossible to get guests in. So, you sort of highlighted where you're only leasing it out for five days, or you've only got people in there for five days, but what happens if it was available and I wasn't staying in there. I just couldn't get anyone in because there are no tourists. There's nothing going on. Does the ATO have any guidance for tax agents to help their client navigate through those periods?

Tim Loh:
Well, I think for those periods, look, we often see people try to do the right thing and apportion expenses, but we also see a number of I guess, tax payers and their agents incorrectly apportion expenses, particularly for those kinds of short-term rental puppies, when they fail to account for the periods when they, or their family and friends use the property, or when they choose to actually keep the property vacant. Obviously, COVID-19 was kind of a once in a lifetime, hopefully once in a lifetime situation. I think from our perspective our website has got a lot more information about exactly those types of circumstances. And when you actually got a property generally available for rent. So, it's just something that really depend on people's facts and circumstances, because obviously Victoria's a bit different to the situation across the states, across the various states and territories in Australia. So, it really is going to depend on each person's particular facts and circumstances. And the best thing I would suggest is check out our website to find out more.

Elinor Kasapidis:
Awesome. And you're right about those geographic differences. I'm sure there are some areas of Australia which are now booked out for the next three years in terms of getting their occupancy rates up. So, there are also situations, and I mentioned it earlier just where tenants were struggling to pay the rent and landlords reduce those amounts to help keep it affordable and to help keep the tenants in the property. How would these as being traded by the ATO?

Tim Loh:
Yeah, look, in this regard, my message is generally be mindful that obviously many clients have changed circumstances during this year as a result of COVID-19. So as you said, Elinor, some landlords would have received reduced rental income. So, they only need to include the actual rent receipt as I mentioned before. So, for example, if they usually receive $400 a week and the tenants are only paying $250 you only have to include the $250 as income. So, that might be that you might get a larger net rental loss in other years as a result of that rental decrease. But, while rental income may be reduced, owners will continue to obviously incur normal expenses on their rental property and we'll still be able to claim these expenses in their tax return. As long as they reduce rent charges, determined at arm's length. Have regard to obviously the difficult current market conditions. And this applies, just to be clear, whether the reduction event was initiated by the tenants or the owner.

Elinor Kasapidis:
And so really it's about arm's length and commercial. And if that's what it took to get your tenants and your property through this crisis, then that's okay. A cheeky one that I have heard around the grapevine, if I had to reduce my rent, can I claim that lost income as a deduction?

Tim Loh:
Look, it's a cheeky question but no, you can't claim that as a deduction unfortunately.

Elinor Kasapidis:
Glad to hear it from the horse's mouth. I thought, "That's a nice one to try on." Now we've also got the vacant land rules. They did kick in from the 1st of July, 2019, but people are still getting their heads around it. What are the key things tax agents need to check in with their clients with respect to these rules?

Tim Loh:
Yeah, it's a good question El, now some entities and taxpayers with particular circumstances, will still be able to claim deductions for costs incurred in holding vacant land. So, for example that the entity holding the land is a company or the land is used in carrying on a business, in those situations, you can still claim a deduction for holding vacant land, but for people who don't fit those circumstances, I think one of the questions you'll need to work out is whether there's a substantial or permanent structure on the land and its use. So, for the agents, you probably know this already. So, I'm probably telling you something that you already know, but you know, a substantial and permanent structure is a building or other structure constructed on the land that is significant in size or value, not incidental to the purpose of another structure or proposed structure on the land, not related to or reliant on or exists to support the use or function of another structure.

Or fixed and enduring. So, it's not built for a temporary purpose. So, land will be considered vacant during the period, the entity held the land. If it did not contain that substantial permanent structure that I mentioned, it contains a substantial and permanent structure. And the structure is original central premises, which was constructed or substantially renovated while the entity held the land. And the premises are either not yet lawfully able to be occupied or lawfully able to be occupied, but not yet rented, or made available for rent. So as you can see, it really depends on the facts and circumstances as to whether you'd be subject to these particular provisions. I've got heaps of information on the website which can be found by searching under QC60628, and that's got some really good information that will really help agents make that determination for the clients.

Elinor Kasapidis:
Thanks, Tim. I think that probably explains why we recommend that property investors do go and see their tax agent, particularly if they have vacant land or don't know if they have a substantial permanent structure because that legislation had a journey and I do find the website material quite useful, and there is a bit of a decision tree, but there are judgement calls that need to be made. So I think that with tax agents, and even when things are being renovated, that's one of the things I think that catches some clients out.

Tim Loh:
Yeah. And you're absolutely right El. Like I think in this area, the registered tax agents, your CPA registered tax agents will be the best people to speak about the vacant land provisions.

Elinor Kasapidis:
I wouldn't want be doing it myself. I have to admit, I'd prefer to hand it off to my tax agent. Now, just finally, the ATO recently published more data matching protocols. So, we talked about cryptocurrency before. Now we're talking about property management and rental bonds. So what's the plan for this information?

Tim Loh:
Well, we've conducted the rental bond data matching programme since 2005 and we intend to continue this data matching programme for another three years. So, rental bond data was originally collected with property transfer data for the rural property transaction data matching programme. But following the federal budget announcements back in 2013, 14, reporting of property transfer data, [inaudible 00:14:14] become mandatory from one July, 16. The real property transaction data matching programme has been amended to support property transfer data. The number of individuals affected by this data collection is expected to be about 350,000 each financial year. Now with the rental bond data matching programme, we use that information to identify and address taxation risks, which include income tax risks, so taxpayers owning income producing property and the obligations to make sure that they report that income in their tax return. And we also use it to help support and identify cost base calculations for taxpayers to make sure that they're correctly calculating their cost base.

So, rental [inaudible 00:15:04] data, which we collect under this programme is used with information included in people's tax returns. And the ATO uses that data, compare that against our records and the other data that we hold to make sure that taxpayers owning, coproducing properties are doing the right thing.

Elinor Kasapidis:
That's really good to know. And I'm aware that you're not at the stage where this kind of information can necessarily be put into a pre-fill environment, but I guess what the message is to tax agents is just be aware of what the ATO will be looking at and make sure that you ask your clients about it. So, do you have your rental bond information? Where are your property management invoices? What are all of those items so that basically you can get your client to get it right from the start and the ATO doesn't need to follow up. Would that be right?

Tim Loh:
You've hit the nail right on the head Elinor that's exactly right. It goes back to what we said in other podcasts already, which is just having that conversation with your client and making sure that you've got it right the first time, that's what everyone wants to happen. The client wants that to happen. It's great for the tax agent, it's great for the ATOs. So, we don't have to worry about people might've accidentally missed out on including some income, like if it's done right, the first time it just saves everybody some time.

Elinor Kasapidis:
Awesome. So, thank you so much Tim, for your insights on this podcast.

Tim Loh:
Thanks Elinor. Thanks for having me again.

Elinor Kasapidis:
In our next tax time podcast, we'll be covering side hustles and the gig economy. Be sure to visit our show notes on the CPA Australia podcast webpage for links and more information on this episode. Thanks for listening.

Intro:
Thanks for listening to the CPA Australia podcast. For more information on today's episode, please visit the show notes at www.cpaaustralia.com.au/podcast. Never miss an episode by subscribing to our podcast on Apple Podcasts, Spotify or Stitcher.

Intro:
Hello and welcome to the CPA Australia Podcast, your weekly source for accounting, education, career, and leadership discussion

Elinor Kasapidis:
Hello, and thanks for joining us today. My name is Elinor Kasapidis and I am the Senior Manager of Tax Policy at CPA Australia. This week on the CPA Australia Podcast, we will be discussing tax time 2021 with Assistant Commissioner Tim Loh from the Australian Taxation Office. In this final episode, we will focus on side hustles and the gig economy. Our guest today is from the ATO's Individuals and Intermediaries Division. It's a pleasure to welcome you for this final podcast. Thank you for coming back again, Tim.

Tim Loh:
Thanks Elinor, thanks for having me again.

Elinor Kasapidis:
In our previous podcasts, we have talked about work-related expenses, property and crypto. Now let's move on to side hustles and the gig economy. Companies like Uber and Deliveroo are some of the most visible examples of this type of gig economy, but how broad is the definition in reality?

Tim Loh:
Good question, El. In respective of side hustles or the gig economy or side businesses, look, it doesn't matter whether you're an employee, independent contractor, carrying on a business or none of these. When you provide services in return for a fee, the income you earn is still assessable and needs to be reported in your tax return, even if it's a one off payment.

Look, the sharing economy is an economic activity through a digital platform, where people share assets or services for a fee. So if you provide services or assets through a digital platform for a fee, your client will need to consider how, what income tax they'll need to pay, and potentially even GST could potentially apply to your earnings.

Now, there are all sorts of sharing economy activities, from providing a ride source services like Uber, as you mentioned before, for a fare, including to renting out a room on Airbnb, whether it's on a short term basis or a longer term basis. And these days, you can even share assets, like your car and storage space.

So you can provide personal services, including creative or professional services, doing odd jobs like deliveries and furniture assembly, like on Airtasker is another example. And so we would consider these things as referring to the gig economy.

Elinor Kasapidis:
That's actually really, really broad. And I think that people have always done a few sort of things on the side or an odd job here or there, but this digital economy and the changing nature of work has really put that on steroids, I would have thought. Are you seeing a lot of that activity from the ATO's point of view?

Tim Loh:
Yeah. We're obviously seeing it in real time. Obviously this year has been obviously a really challenging year for people, because of COVID-19. So we know people are on different types of income and looking for second jobs and third jobs to make ends meet. So we are definitely seeing the change of people's working lives. It's not the old one job that you have for your career. We are seeing a lot of people have multiple jobs and doing different things to make ends meet. So yeah, it is something that we're seeing, and it is a changing working environment that I think will be changed forever as a result of COVID-19. And I think COVID-19's really just accelerated that.

Elinor Kasapidis:
The diversity of income sources, and I think from a tax point of view, as an individual, because you're having to report income and collect your information on expenses from multiple activities, that can be a real challenge. And for our members out there, guiding your clients through that process of understanding what they need to keep in terms of records to substantiate expenses, but firstly also understanding what they need to declare, is something that's of high value, but really should be done at the start of the year, not at tax time 2022.

So this tax time 2021 provides also an opportunity just for those clients who do seem to have a few extra jobs, or are looking for new opportunities to make money, just to set them up on the right path. The other challenge of course, is things like the irregularity and volatility of income. So if they end up on the pay as you go instalment system, how do you manage and monitor some of those instalment payments and things like that? And making sure that where they do operate through a digital environment, Tim in our previous podcast did talk about Airbnb actually providing some form of information for records. What kind of information can they collect from those online platforms to help them out? That's a bit of commentary from me. Did you have anything else to add on that, Tim?

Tim Loh:
Yeah, but you just hit on a really, really important point, Elinor, which is that conversation for next year. It's great to be talking to, and it's great for your tax agents to be talking to your clients about this year's tax time and getting their tax return lodged on time. But really it's about next year. It's about the record keeping and it's really crucial to make sure that you've got those good habits from 1 July this year, for next year's tax return. And as we've mentioned time and time again, Elinor, it's all about the conversation with your client. This year has brought on a vaster range of change in people's circumstances. So it's really important to understand what they're doing and what's changed for each individual, and it has changed for a lot of people. So I think what you said before was really on point.

Elinor Kasapidis:
And that's, I think, where it goes from just being tax return preparation to advisory, and actually helping and educating clients, which is also what the ATO has been doing a lot of work on. What do you think, from the ATO's perspective, what have you observed has been some of the biggest challenges for individuals who are operating in the gig economy, often outside their main job?

Tim Loh:
As you sort of touched on before, there are a lot of difficulties for individuals when they are taking on these extra activities outside their main job. It's important to note that whether people have undertaken a business, or just earning some additional pocket money on the side through a digital platform such as a website, or through Airtasker, using another example, you've just got to include the income in your tax return. And it's just really making sure that you do include that income, but also at the same time, you may be entitled to some deductions that relate to that second job as well. So it's really important that you're both including your income and also making sure that you claim the deductions that you're entitled to, which are directly related to that second job, or that you're getting pocket money from. So it's really something to think about and make sure that, as I said before, you claim your income and also claim your deductions.

Elinor Kasapidis:
I know that the ATO's website does have information on a hobby versus business. So let's pretend I knit tea cosies as a hobby, but all of a sudden they become the latest thing on Instagram, because everybody's making tea at home, and I suddenly make all of these sales. At what point, what are some of the things I should be thinking of, or what should tax agents be asking about when they hear about my hobby, and how it's going. Are there any flags, or any sort of triggers that would say, "Hey, you need to just take a look at whether this is actually now a business."?

Tim Loh:
Yeah, that's a good question, El. It's always a very difficult question to answer, right, because it's really dependent on people's facts and circumstances. Interestingly, I came across the business.gov.edu website, which talks about what is a business versus what is a hobby. So that's a really good place to start for your listeners out there. But from the ATO's perspective, I think the thing we would say is we've obviously got a line of sight across all economic activity that's happening in this market.

I think for us, in terms of what is a business, I think things like the intent of what you're trying to achieve. So if you've got a profit making intention, you're wanting to make money from these activities, then that's going to probably mean it's probably closer to a business. If it's quite repetitive, so if you're making constant sales on a daily basis, that's probably indicating that the activity's more of a business. The capital that you invest, if you start investing in a special machine to do some of this activity, that's going to be really indicative of a business, and the planning associated with the activities. So if you've got spreadsheets and business plans, that would probably indicate that you've got a business, rather than a hobby. So those are some of the factors that probably will drive what we think would be deemed to be a business, but really, it's going to really depend on people's facts and circumstances.

Elinor Kasapidis:
And back to those client conversations again. It really is about working through each of those. And as for my tea cosy business, I never intended to make a profit, but yeah. I'm about to outsource it to somebody else. I think I'm probably going to have a sit down to talk about it with my tax agent. You did mention, just before, a line of sight. So you are out there looking at these sorts of transactions and economic activities. We know, we've talked about it in the last two podcasts, we know about the ATO's data matching capabilities. How are they used in this area? What are you doing to identify participants in the gig economy?

Tim Loh:
What we're trying to do, El, is just really trying to use the data matching protocols that we have across a number of range of topics, as we talked about in previous podcasts. We've got a number of analytical tools in place that enable us to kind of identify people who may be under-reporting their income from a range of these activities conducted through the gig economy, or through their side hustle. Our view is, look, if people have made a genuine mistake and they haven't included the income for a genuine reason, we'll support them in understanding the law, and try and get them back on track to make sure they don't make the mistake again. But if people are deliberately not including this income, we will take further action. And in those situations we'll be applying penalties.

And that's what I think most Australians would want us to do, because we want people to have a level playing field when they're doing these kind of activities. Because when you are doing these activities, it's not like you're doing it in a vacuum and you're the only person selling the tea cosies, for example. You've got competitors in the market. And so it's really important that everyone is on a level playing field. So I think most Australians would be expecting us to make sure that we are ensuring people are doing the right thing.

Elinor Kasapidis:
Absolutely right. And there's a lot of money to be made in what might be termed a gig economy, but it's also the side hustles being an influence. So you can actually get good sponsorship deals. There's a lot more potential out there. So it's good that the ATO is seeking that alignment of treatment and that consistency in terms of the application of tax. Of course, because we've got a progressive tax regime, if you're not earning that much, again, you're going to fall below the thresholds anyway.

Tim Loh:
That's right. That's right.

Elinor Kasapidis:
But on the flip side, so my tea cosy business has taken off. So that's all great. I'm going to stop paying tax on that, but there's a flip side and I just mentioned influences before. So there are a group of people, especially young people, who want to become TikTok stars or YouTubers, and they actually invest a lot of money and savings into the best equipment, they pay for branding and advertising to build their base. And they really work hard, right? So regular, all of that stuff around profit intention, but nothing's really happening. So there are many, many, unfortunately, failed attempts at becoming sort of famous in this space. How does that work when it comes to claiming those expenses against other income? For example, I might still be waitressing or doing my checkout chick job at Woollies. Is there a balance there? Can I claim those expenses because my heart is in the right place and my intention is to be a business?

Tim Loh:
That's a really tricky question, El. I think, as I described earlier, the tax implications of earning money from content creation, like you've just quite rightly pointed out, for these platforms is the same for anyone. So obviously they would be making some money from these activities. But also as you said, they might be also incurring a number of expenses associated with earning that additional income through a digital platforms.

So I think it goes back to the points I raised before about whether it's a hobby versus whether you're running it like a business. It's obviously going to really depend enormously the type of legal entity you're using. So obviously if you're using a company, then those losses would likely to be trapped in that particular vehicle. Or similarly with a trust as well. I guess with individuals, it's really going to depend on particular and quite complicated rules, which many of the tax agents would be aware of, around non-commercial losses, and there's questions around whether that income could be potentially offset against that. So we've obviously got lots of information about non-commercial loss rules on our website that tax agents can check out on behalf of their clients. But yeah, it's really got to depend on people's facts and circumstances.

Elinor Kasapidis:
That's fantastic. And I think that the more that these new forms of employment and... Or not even employment, really. These new forms of income earning, and all the permutations and combinations, it does take a while to try and find the comparison in the existing ways of working and thinking in the tax treatment of those things. So it's great to be able to start to apply existing tax laws. And also potentially there are special committees and things looking into where there might be gaps and where things might need to be done.

Tim Loh:
That's right, Elinor. Exactly right. Things are changing and people can appreciate that we're trying to deal with the changes just as much as tax agents are trying to deal with the changes and clients are trying to deal with the changes. But with COVID-19, it really has changed, I think, the working environment and the way people work forever. And so it's something, not just the ATO and other revenue agencies have to deal with, but the tax agents and CPAs will have to deal with and clients. There's always going to be new technologies coming up, and the ways of working are going to be different. So obviously the tax treatment needs to take into account these changing circumstances.

Elinor Kasapidis:
Absolutely. And with a pre COVID estimate of $6.3 billion in economic activity generated by the gig economy, I'm sure that that's expanded by at least a hundred percent since then. And it's amazing how much all these smaller transactions add up to. And with that, I'd like to say huge thank you to Tim, for your insights, both on this podcast, as well as the previous three. It's been a privilege to have you here and have the ATO speak to us. We really appreciate it.

Tim Loh:
Thanks so much, Elinor. It's been a real pleasure speaking to you on the podcast. So thanks for having me again, and hopefully I get invited another time.

Elinor Kasapidis:
Anytime. We'd love to have you on.

Be sure to visit our show notes on the CPA Australia podcast webpage for links and more information on this episode. Thanks for listening.

Outro:
Thanks for listening to the CPA Australia podcast. For more information on today's episode, please visit the show notes at www.cpaaustralia.com.au/podcast. Never miss an episode by subscribing to our podcast on Apple Podcasts, Spotify, or Stitcher.