There are lots of reasons to keep fit but very few of them have to do with how we earn our income. As a result, a tax deduction for a gym membership isn’t available to most people. And yes, the Tax Office has heard all the arguments before about how keeping fit reduces sickness and therefore is important to earning an income, and ‘…the way I look is important to my job’.

In general, a tax deduction for fitness expenses is only available if your job requires you to have an extremely high level of fitness. The nexus between how you earn your income and the deduction is about the physical demands and requirements of your specific role. Firefighters are a case in point. A person with what the ATO describes as a “general duties firefighter” role cannot claim a deduction for the money they have spent keeping fit, but a firefighter in a specialist search and rescue operations team for example, trained in a range of specialist skills including structural collapses and tunnel emergencies, and who is tested on fitness and ongoing strenuous physical activity as an essential part of their job, would be able to claim fitness expenses. Similarly, a professional ballet dancer is likely to be able to claim their fitness expenses. A model however, might not be able to claim their expenses as, while they need to look a particular way, their modelling role does not require physical training and exertion (clearly the ATO has not seen some the poses that models have to hold!). So, access to a deduction is about the specialist physical demands and requirements of your role.

A recent case before the administrative appeals tribunal (AAT) explored the boundary of who can claim fitness expenses, confirming that a prison dog handler could claim a deduction for the cost of his gym membership. In this case, the dog handler was responsible for training and maintaining two dogs. He was required to be available to assist in emergencies that might arise. While these emergencies didn’t arise often, the handler had to be prepared for the possibility of an emergency arising at any time. Reaching this decision, the AAT noted the handler:

• Was required to maintain a high degree of anaerobic fitness (including muscle strength sufficient to control a large German shepherd on a lead in a volatile situation);
• Was required to maintain a high degree of aerobic fitness (that is, a degree of speed and agility sufficient to enable him to move effectively with, and control and direct, his dog in an emergency); and
• Must also be prepared to restrain prisoners himself.

While the employer in this case did not specify any particular level of fitness for the dog handler role, the AAT held that a superior level of fitness was implicitly demanded. However, it did not all go the way of the dog handler. His claim for supplement expenses, travel to and from the gym, and gym clothing was denied.

While some commentators have suggested that the floodgates are now open for gym membership claims, as always, the devil is in the detail. To claim a tax deduction for fitness expenses it is generally necessary to be part of a specialist workforce. Police Officers for example cannot generally claim fitness expenses despite the fact that, like the dog handler in the AAT case, they need to respond quickly to emergencies and may need to subdue people. Unless they are part of a specialist response unit that is required to have a specific, high level of fitness, they are unlikely to be able to claim their gym membership expenses.

So, for the rest of us, gym memberships will continue to be a labour of self-love and care and not an essential part of how we earn our income.

It’s a great headline isn’t it? Spend $100 and get a $120 tax deduction. Days after the Federal Budget announcement that businesses will be able to claim a 120% deduction for expenditure on training and technology costs, we started receiving marketing emails encouraging us to spend now to access the deduction.

But, there are a few problems. Firstly, the announcement is just that, it is not yet law. And, given the Government is in caretaker mode for the Federal election, we do not know the position of the incoming Government on this measure. And, even if the incoming Government is supportive, we are yet to see draft legislation or detail to determine the practical application of the measure.

What was announced?

The 2022-23 Federal Budget announced two ‘Investment Boosts’ available to small businesses with an aggregated annual turnover of less than $50 million.

The Skills and Training Boost is intended to apply to expenditure from Budget night, 29 March 2022 until 30 June 2024. The business, however, will not be able to claim the deduction until the 2023 tax return. That is, for expenditure between 29 March 2022 and 30 June 2022, the boost, the additional 20%, will not be claimable until the 2022-23 tax return, assuming the announced start dates are maintained if and when the legislation passes Parliament.

The Technology Investment Boost is intended to apply to expenditure from Budget night, 29 March 2022 until 30 June 2023. As with the Skills and Training Boost, the additional 20% deduction for eligible expenditure incurred by 30 June 2022 will be claimed in the 2023 tax return.

The boost for eligible expenditure incurred on or after 1 July 2022 will be included in the income year in which the expenditure is incurred.

Technology Investment Boost

A 120% tax deduction for expenditure incurred by small businesses on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cyber security systems, or subscriptions to cloud-based services, capped at $100,000 per annum.

We have received a lot of questions about the specific expenditure the boost might apply to, for example does it cover website development or SEO services? But until we see the legislation, nothing is certain.

Skills and Training Boost

A 120% tax deduction for expenditure incurred by small businesses on external training courses provided to employees. External training courses will need to be provided to employees in Australia or online, and delivered by entities registered in Australia.

Some exclusions will apply, such as for in-house or on-the-job training and expenditure on external training courses for persons other than employees.

We are waiting on further details of this initiative to be released to confirm whether there will need to be a nexus between the training program and the current employment activities of the employees undertaking the course. So once again, until we have something more than the announcement, we cannot confirm how the measure will apply in practice or how broad (or otherwise) the definition of skills training is.

What happens if I have already spent money on training and technology in anticipation of the bolstered deduction?

If the measure becomes law, and the start date of the measure remains the same, we expect that any qualifying expenditure incurred in the 2021-22 financial year will be claimed in your tax return. But, the ‘boost’, the extra 20% will not be claimable until the 2022-23 financial year.

If the measure does not come to fruition, you should be able to claim a deduction under normal rules for the actual business expense.

The Government temporarily halved the excise and excise equivalent customs duty rates for petrol, diesel and all other petroleum-based products (except aviation fuels) for 6 months from 30 March 2022 until 28 September 2022. This has caused a reduction in fuel tax credit rates.

During this 6 month period, businesses using fuel in heavy vehicles for travelling on public roads won't be able to claim fuel tax credits for fuel used for this purpose. This is because the road user charge exceeds the excise duty payable, and this reduces the fuel tax credit rate to nil.

You can find the ATO’s updated fuel tax credit rates that apply for the period from 30 March 2022 to 30 June 2022 here. The ATO’s fuel tax credit calculator has been updated to apply the current rates.

The ATO’s Attack on Trusts and Trust Distributions

Late last month, the Australian Taxation Office (ATO) released a package of new guidance material that directly targets how trusts distribute income. Many family groups will pay higher taxes (now and potentially retrospectively) as a result of the ATO’s more aggressive approach.

Family trust beneficiaries at risk

The tax legislation contains an integrity rule, section 100A, which is aimed at situations where income of a trust is appointed in favour of a beneficiary but the economic benefit of the distribution is provided to another individual or entity. If trust distributions are caught by section 100A, then this generally results in the trustee being taxed at penalty rates rather than the beneficiary being taxed at their own marginal tax rates.

The latest guidance suggests that the ATO will be looking to apply section 100A to some arrangements that are commonly used for tax planning purposes by family groups. The result is a much smaller boundary on what is acceptable to the ATO which means that some family trusts are at risk of higher tax liabilities and penalties.

ATO redrawing the boundaries of what is acceptable

Section 100A has been around since 1979 but to date, has rarely been invoked by the ATO except where there is obvious and deliberate trust stripping at play. However, the ATO’s latest guidance suggests that the ATO is now willing to use section 100A to attack a wider range of scenarios.

There are some important exceptions to section 100A, including where income is appointed to minor beneficiaries and where the arrangement is part of an ordinary family or commercial dealing. Much of the ATO’s recent guidance focuses on whether arrangements form part of an ordinary family or commercial dealing. The ATO notes that this exclusion won’t necessarily apply simply because arrangements are commonplace or they involve members of a family group. For example, the ATO suggests that section 100A could apply to some situations where a child gifts money that is attributable to a family trust distribution to their parents.

The ATO’s guidance sets out four ‘risk zones’ – referred to as the white, green, blue and red zones. The risk zone for a particular arrangement will determine the ATO’s response:

White zone
This is aimed at pre-1 July 2014 arrangements. The ATO will not look into these arrangements unless it is part of an ongoing investigation, for arrangements that continue after this date, or where the trust and beneficiaries failed to lodge tax returns by 1 July 2017.

Green zone
Green zone arrangements are low risk arrangements and are unlikely to be reviewed by the ATO, assuming the arrangement is properly documented. For example, the ATO suggests that when a trust appoints income to an individual but the funds are paid into a joint bank account that the individual holds with their spouse then this would ordinarily be a low-risk scenario. Or, where parents pay for the deposit on an adult child’s mortgage using their trust distribution and this is a one-off arrangement.

Blue zone
Arrangements in the blue zone might be reviewed by the ATO. The blue zone is basically the default zone and covers arrangements that don’t fall within one of the other risk zones. The blue zone is likely to include scenarios where funds are retained by the trustee, but the arrangement doesn’t fall within the scope of the specific scenarios covered in the green zone.

Section 100A does not automatically apply to blue zone arrangements, it just means that the ATO will need to be satisfied that the arrangement is not subject to section 100A.

Red zone
Red zone arrangements will be reviewed in detail. These are arrangements the ATO suspects are designed to deliberately reduce tax, or where an individual or entity other than the beneficiary is benefiting.

High on the ATO’s list for the red zone are arrangements where an adult child’s entitlement to trust income is paid to a parent or other caregiver to reimburse them for expenses incurred before the adult child turned 18. For example, school fees at a private school. Or, where a loan (debit balance account) is provided by the trust to the adult child for expenses they incurred before they were 18 and the entitlement is used to pay off the loan. These arrangements will be looked at closely and if the ATO determines that section 100A applies, tax will be applied at the top marginal rate to the relevant amount and this could apply across a number of income years.

The ATO indicated that circular arrangements could also fall within the scope of section 100A. For example, this can occur when a trust owns shares in a company, the company is a beneficiary of that trust and where income is circulated between the entities on a repeating basis. For example, section 100A could be triggered if:

• The trustee resolves to appoint income to the company at the end of year 1.
• The company includes its share of the trust's net income in its assessable income for year 1 and pays tax at the corporate rate.
• The company pays a fully franked dividend to the trustee in year 2, sourced from the trust income, and the dividend forms part of the trust income and net income in year 2.
• The trustee makes the company presently entitled to some or all of the trust income at the end of year 2 (which might include the franked distribution).
• These steps are repeated in subsequent years.

Distributions from a trust to an entity with losses could also fall within the red zone unless it is clear that the economic benefit associated with the income is provided to the beneficiary with the losses. If the economic benefit associated with the income that has been appointed to the entity with losses is utilised by the trust or another entity then section 100A could apply.

Who is likely to be impacted?

The ATO’s updated guidance focuses primarily on distributions made to adult children, corporate beneficiaries, and entities with losses. Depending on how arrangements are structured, there is potentially a significant level of risk. However, it is important to remember that section 100A is not confined to these situations.

Distributions to beneficiaries who are under a legal disability (e.g., children under 18) are excluded from these rules.

For those with discretionary trusts it is important to ensure that all trust distribution arrangements are reviewed in light of the ATO’s latest guidance to determine the level of risk associated with the arrangements. It is also vital to ensure that appropriate documentation is in place to demonstrate how funds relating to trust distributions are being used or applied for the benefit of beneficiaries.

Companies entitled to trust income

As part of the broader package of updated guidance targeting trusts and trust distributions, the ATO has also released a draft determination dealing specifically with unpaid distributions owed by trusts to corporate beneficiaries. If the amount owed by the trust is deemed to be a loan then it can potentially fall within the scope of another integrity provision in the tax law, Division 7A.

Division 7A captures situations where shareholders or their related parties access company profits in the form of loans, payments or forgiven debts. If certain steps are not taken, such as placing the loan under a complying loan agreement, these amounts can be treated as deemed unfranked dividends for tax purposes and taxable at the taxpayer’s marginal tax rate.

The latest ATO guidance looks at when an unpaid entitlement to trust income will start being treated as a loan. The treatment of unpaid entitlements to trust income as loans for Division 7A purposes is not new. What is new is the ATO’s approach in determining the timing of when these amounts start being treated as loans. Under the new guidance, if a trustee resolves to appoint income to a corporate beneficiary, then the time the unpaid entitlement starts being treated as a loan will depend on how the entitlement is expressed by the trustee (e.g., in trust distribution resolutions etc):

• If the company is entitled to a fixed dollar amount of trust income the unpaid entitlement will generally be treated as a loan for Division 7A purposes in the year the present entitlement arises; or
• If the company is entitled to a percentage of trust income, or some other part of trust income identified in a calculable manner, the unpaid entitlement will generally be treated as a loan from the time the trust income (or the amount the company is entitled to) is calculated, which will often be after the end of the year in which the entitlement arose.

This is relevant in determining when a complying loan agreement needs to be put in place to prevent the full unpaid amount being treated as a deemed dividend for tax purposes when the trust needs to start making principal and interest repayments to the company.

The ATO’s views on “sub-trust arrangements” has also been updated. Basically, the ATO is suggesting that sub-trust arrangements will no longer be effective in preventing an unpaid trust distribution from being treated as a loan for Division 7A purposes if the funds are used by the trust, shareholder of the company or any of their related parties.

The new guidance represents a significant departure from the ATO’s previous position in some ways. The upshot is that in some circumstances, the management of unpaid entitlements will need to change. But, unlike the guidance on section 100A, these changes will only apply to trust entitlements arising on or after 1 July 2022.