New ATO ruling on WRE claims – TR 2019/D4
In a continued ‘push’ on education and awareness surrounding WRE claims, the ATO has recently issued Taxation Ruling TR 2019/D4 (‘the draft ruling’), setting out when an employee can deduct a work-related expense. The ruling reiterates that a work expense can only be deducted if it:
- qualifies for a deduction (i.e., generally under S8-1); and
- the employee can substantiate it under Division 900 (i.e., by getting written evidence).
The new ruling is intended to summarise the foundation of general deductibility principles for employee work expenses and provide a useful list of work-related expense categories and issues with links to relevant rulings, determinations and other material published by the ATO.
In short, the ruling confirms the three golden rules when it comes to WRE deductibility, including that an expense must be:
- Incurred – for example, the expense must not be paid by, or reimbursed by, an individual or entity other than the taxpayer.
- Deductible – in that, under S.8-1, the expense is incurred in gaining or producing assessable income (i.e., the expenditure satisfies the positive test of S.8-1) and it also meets the negative tests in that the expense is:
- not a capital loss or outgoing;
- not private or domestic in nature;
- not incurred in relation to gaining or producing exempt or non-assessable non-exempt income; and
- not denied by another provision of the tax law.
- Substantiated – by means of written evidence or in accordance with the specific exceptions and relief from substantiation provided in Division 900 (e.g., the $300 total work expense exception, the $150 laundry expense exception, and/or travel and overtime meal allowance exceptions).
As a whole, the draft ruling covers reasonably familiar ground for most practitioners.
TAX TIP – Relevance of employer requirements
One interesting point of note is a discussion in the draft ruling on the relevance of employer requirements, and whether a WRE becomes deductible merely because an employer specifically requires the employee to incur the expense. In short, paragraph 27 of the draft ruling reiterates that an employer’s requirements do not determine the question of deductibility.
This is significant as increasingly, NTAA members have encountered situations where ATO auditors put a huge reliance on employer confirmations when it comes to the appropriateness of WRE claims in individual tax returns (indeed, this was an audit methodology engaged in the case of Reid and FCT [2019] AATA 4624, as discussed below).
Specifically, a number of examples contained in the draft ruling confirm that a WRE expense may be deductible without an employer requiring the expenditure. For example, a taxpayer incurring expenditure in relation to a course directly connected to their current employment (without their employer’s specific support) may still be in a position to claim self-education expense deductions. Refer to Example 6.
Alternatively, expenses may be non-deductible despite an employer’s specific directions such as a restaurant requiring its waiters to dress in ‘black and whites’ (in Example 5), or support such as where an employer encourages a dental practice receptionist to undertake a ‘Certificate in Dental Assisting’ so as to open up a new career opportunity (in Example 7).