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RATs tax implications for businesses

Tax and business experts have raised concerns about statements made by Prime Minister Scott Morrison that rapid antigen tests (RATs) for COVID-19 are “tax deductible”.

RATs tax implications for businesses
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Tracey Dunn, an associate director (Perth) for audit, tax and consultancy firm RSM, said the statement was “misleading” because rapid antigen tests would be tax-deductible “in very limited circumstances, unless the PM is proposing to change the law”.

“If it is the Federal government’s intention that the cost of RATs is tax deductible for individual taxpayers and exempt from Fringe Benefits Tax (FBT) for businesses, legislative change may be required,” Ms Dunn said.

Ms Dunn provided a breakdown of the tax implications of RATs for businesses, individuals and companies.

Individual taxpayers

For individual taxpayers, RAT kits will generally not be tax-deductible, except in very limited circumstances. 

An individual taxpayer may qualify for a tax deduction for a RAT where they are required by their employer to take a test before undertaking work, for example where there is a mandatory requirement under an employer’s COVID-19 mandate.

However, the Australian Taxation Office (ATO) may take the view a RAT taken prior to commencing work is “not on work time” or “preliminary” to the workday and as a result, not tax-deductible.  

An individual should qualify for a tax deduction for expenses incurred in purchasing RATs where: 

  • The taxpayer is required to take a RAT because of a requirement of the destination jurisdiction to enter the state
  • The taxpayer is required to take a RAT to return to their home state.

RAT kits purchased by individuals for private purposes (personal travel, convenience, no access to PCR testing) will not be tax-deductible unless the law is changed to specifically allow a tax deduction for private RAT kits.

Business taxpayers

Where the employer incurs expenditure providing RATs to employees, the cost should be a tax-deductible business expense, as the expense will be necessarily incurred in carrying on the business as the employer has a duty of care to safeguard employees in their workplace. 

However, where the employer provides RATs at no cost to employees this may be the provision of a fringe benefit and as such, subject to fringe benefits tax (FBT). 

FBT is currently levied at a rate of 47 per cent on the “grossed up” value of the benefit provided, and if an FBT exemption is not available to the employer, for every $1 the employer spends on acquiring a RAT, the employer will incur approximately $1 in FBT. 

In simple terms, if FBT applies, the cost of the RAT to the business owner will double. 

The employer will be eligible to claim a tax deduction for any FBT paid, however, they will still be out of pocket. 

For business owners already feeling the pressure from the extensive spread of COVID-19, particularly from staffing issues, this could present an insurmountable burden. 

The burden made worse because of unprecedented demand and a shortage of RATs resulting in significant price rises.

FBT exemptions

There are a number of exemptions under the Fringe Benefits Tax Assessment Act 1986 (FBT Act) that employers may be able to access to reduce their FBT exposure from the provision of RATs. 

These include an exemption under section 58M for work-related medical screening, an exemption under section 58P for minor benefits, or by application of the “otherwise deductible rule”.   

To be eligible for the work-related medical screening FBT exemption, both of the following conditions must be satisfied:

  • The test must be carried out by a legally qualified medical practitioner or nurse.
  • The testing is available for all employees.

If this exemption doesn’t apply (due to self-testing by the employee) the employer may be required to pay FBT on the expense unless the minor benefit exemption or otherwise deductible exemptions apply. 

Given the frequency at which RATs will be required, it is unlikely employers will be able to access the minor benefit exemption as it only applies where the notional taxable value of the benefit is less than $300 (including GST) and the benefit is provided on a minor, infrequent and irregular basis.  

Where the employer reimburses an employee for the cost of a RAT, the otherwise deductible rule may apply to reduce the taxable value for FBT purposes to zero. 

The otherwise deductible rule applies where the employee would qualify for a personal tax deduction because the RAT was required for work-related travel, and the RAT is a requirement to enter or leave a state or international jurisdiction. 

Where the employer directly incurs the cost of a RAT that is required for an employee’s work-related travel, the cost will not be subject to FBT and will be tax-deductible.

The FBT Act was introduced in 1986, a time where the pandemic costs employers typically incur in ensuring employees have a safe work environment, were not contemplated. 

Whilst it may not be the intention of the government that business owners incur an FBT impost on the provision of RATs to employees, urgent legislative change may be required to achieve this outcome.

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