Individuals tax returns 2023

Welcome to Tax Time 2023. Today we will cover some of the key changes and overlooked provisions practitioners will need to consider this tax time.

This year The Tax Institute has also prepared a handy Individuals Tax Return checklist. Although the checklist does not cover every single issue that you may encounter, it serves as a guide to a range of issues that should be considered when preparing individual tax returns.

Before we dive into some of the detailed items of the individual labels of the tax return, let’s cover some of the key changes in 2023.

Firstly, this will be the first income year since the removal of the Low and Middle Income Tax Offset or LMITO. In 2022 the LMITO was increased to $1,500 and many taxpayers may have received a refund in this year as a result of the LMITO. In 2023, these clients may not receive the same tax refundable or may even have a tax payable even if their taxable income is the same as 2022. It is important to keep this front of mind when explaining any changes in your client’s tax position for the 2023 financial year.

Now we will look at some of the individual tax return labels and provide some guidance on some key points to consider. Lets start with income.

Allowances

Tax return question 2 is where income from allowances is recorded. There are some key things to consider when completing this label.

Remember to get enough information to allow you to correctly differentiate between a reimbursement and an allowance. Broadly, an allowance is the payment of a definite predetermined amount to cover the estimated expenses of an employee. In addition to the usual allowances, a pandemic allowance paid by an employer because of COVID-19 is included at this label.

However, compensation for an expense already incurred is a reimbursement and should not be included in this label of the tax return. If your client receives a reimbursement:

• the reimbursement is generally subject to FBT (subject to exemption);
• it is not included in the assessable income of the employee; and
• the employee cannot claim a deduction for the expense.

Also, certain allowances are also not reportable at this label. These may include certain travel allowances or overtime meal allowances received under an industrial law, award or agreement. To be non-reportable, the other conditions must be met, and further information is contained in our Individual’s checklist.

Superannuation income streams

Whether superannuation income streams are taxable will depend on a number of factors including:

• the taxpayer’s preservation age;
• the age when the taxpayer will receive the payment;
• the type of income stream received;
• whether the money in the superannuation account is tax-free
• whether the taxpayer is receiving a death benefit income stream; and
• whether defined benefit income cap, low-rate cap, or untaxed plan cap has been exceeded

Broadly, superannuation income streams paid to recipients aged 60 years or over are generally characterised as non-assessable and non-exempt income if the payment is:

• sourced from untaxed funds; or
• a capped defined benefit income stream.

If superannuation income streams are required to be reported, Label A to D in question 7 of the individuals tax return, titled ‘Australian annuities and superannuation income streams’ will need to be completed.

Remember, if your client is entitled to a tax offset for an eligible superannuation income stream; you will need to also complete tax offset question T2 for the individuals income tax return. Further information about taxable superannuation income streams can be found in our individuals tax checklist and the ATO website.  

Personal Services Income

We generally think of complexities arising from personal services income, or PSI, as being the distinction between whether the income is PSI or whether it was derived through conducting a personal services business or PSB. This question is crucial as it determines where an individual reports this income and what deductions they can claim against the income. This can be a detailed process, and I refer you to our individuals checklist for further information. The ATO’s view has recently been updated in TR 2021/D2.

Broadly, assessable income attributed to an individual from another entity, such as a company, partnership or trust, under the PSI rules should be included at question 9 of the individual tax return. Attribution occurs where:

• the ordinary or statutory income of a personal services entity (PSE) includes the PSI of an individual;
• the PSE is not conducting a Personal Services Business; and
• the amount is not promptly paid to the individual as salary or wages.

If the individual derives the PSI directly as a sole trader, rather than through another entity, they will need to include their income at both:

• question 14 ‘Personal services income’ in the supplementary tax return; and
• item P1 in the business and professional items schedule for individuals.

Where an individual or entity conducts a PSB, the label on the individual tax return at which the PSI is included will depend on the characterisation of the income received and the type of entity it is received from.

Where PSI is received by a sole trader, the business income and expenses must be declared at question 15 of the supplementary tax return section of the individual tax return in addition to completing the business and professional items schedule for individuals.

If an entity conducts a PSB, the PSI rules will not apply and the income will be dealt with the entity level according to the usual tax rules.

General deduction rules

Moving onto deductions, there are three rules that must be met, to enable a taxpayer to claim a deduction for a work-related expense.

1. The cost of the deduction must be incurred by the employee and not reimbursed by their employer.
2. The expense must be directly related to earning assessable income.
3. The employee has kept records to prove they incurred the cost.

Home office expenses

From 1 July 2022, your clients will only be able to claim their working from home expenses using two methods:

• The revised fixed rate method; or
• The actual cost method.

The 80 cent shortcut method and the previous 52 cent method are no longer available for use.

The revised method was introduced in PCG 2023/1 and is available for use from 1 July 2022 and applies a rate of 67 cents per hour when working from home. Similar to the previous 80 cent shortcut method, the revised method does not require a dedicated workspace in order for your client to claim a working from home deduction.

To use the revised method, three criteria must be satisfied.

The first criterion is that the taxpayer must be working from home while carrying out their employment duties or carrying on their business on or after 1 July 2022. Minimal tasks, such as, occasionally checking emails or taking phone calls while at home will not qualify as working from home.

The second criterion requires the taxpayer to ‘incur additional running expenses’ Thankfully this does not require taxpayers to conduct a comparative exercise to demonstrate that additional running expenses have been incurred as a result of working from home. Rather, the PCG states that one of the qualifying expenses needs to be incurred. The qualifying expenses include:

• energy expenses, such as electricity and gas for lighting, heating and cooling when working from home;
• internet expenses;
• mobile and home phone expenses; and
• stationery and computer consumables.

Lastly, your clients must also keep relevant records in respect of the time they spent working from home and for the additional running expenses.

From 1 July 2022 to 28 February 2023, taxpayers need to keep a record which is representative of the total number of hours worked from home during this period.

However, from 1 March 2023 onwards, taxpayers must keep a record of the total number of actual hours they worked from home.

This is different from the previous 52 cent method where taxpayers were able to keep a four week diary that was representative of the hours they worked in order to use this rate.

Records of hours can be in the form of:

• timesheets
• rosters
• logs
• time-tracking apps; or
• a diary or similar document kept contemporaneously.

Whatever the form, it is important to ensure that the records are contemporaneous.

In addition to a record of the actual hours, your clients will also need to keep one document for each of the additional running expense. This means that taxpayers who incur more than one type of expense will need to keep more records in order meet the ATO’s requirements.

Examples of evidence include:

• One monthly or quarterly bill for energy, mobile and home phone and internet expenses; or
• For stationery and computer consumables, a receipt for an item purchased.

If the bill is not in the taxpayer’s name, they will also have to keep additional evidence showing the expense was incurred. This can include a joint credit card statement showing payment, or a lease agreement showing that the property is shared.

Decline in value of depreciating assets is not covered by the revised method, allowing taxpayers who claim the revised rate to also claim a deduction or decline in value of these assets.

If the revised fixed rate method is not suitable for your clients, the actual cost method is still available to be used. Do remember that the evidentiary requirements will be dependent on the type of expenses they are seeking to claim.

Work-related motor vehicle costs

Work-related costs incurred by employees for a car the taxpayer owned, leased or hired under a hire-purchase agreement are claimed at D1 Work-related car expenses in the individual tax return.

The two methods available for taxpayers to claim their work related car expense are:

• The Cents per kilometre method; or
• The Logbook method

Refer to Taxation Ruling TR 2021/1 and our individuals checklist for further details of the requirements.

A common mistake is what a ‘car’ is. Oddly enough, the legislation defines a car as a motor vehicle (except a motor cycle or similar) that is designed to carry a load of less than one tonne and fewer than nine passengers. If the motor vehicle doesn’t meet this definition, it isn’t a ‘car’ for deduction purposes and the actual costs incurred by your clients must be claimed at label D2.

Cents per kilometre method

The cents per kilometre method can be used for claims of up to 5,000 km per car per year. The ATO rate includes all expenses incurred for the decline in value, registration, insurance, repairs and maintenance.

The rate is 78 cents per kilometre for the 2022–23 income year

Remember that electric vehicles are subject to the same rules as other vehicles. Electric vehicle owners may use either the cents per kilometre method or logbook method in calculating their
work-related car expenses.

While there is no requirement to retain receipts, the taxpayer must show how the business kilometres were determined to substantiate a cents per kilometre claim. This could be by recording work‑related trips:

• in a diary; or
• in myDeductions in the ATO app.

Logbook method

While there are no requirements around the distance travelled to use the logbook method, it method is generally used by taxpayers who:

• travel more than 5,000 kilometres a year; or
• have a particularly high business use percentage.

To use this method, a valid logbook must be retained. A logbook is valid for five years. However, if the business use changes, the ATO suggests that a new logbook should be completed.

The logbook must:

• cover a minimum continuous period of at least 12 weeks that is broadly representative of the work-related travel throughout the year
• include the purpose of every journey, odometer reading at the start and end of each journey and total kilometres travelled during the period; and
• include odometer readings at the start and end of each income year.

In each of the four years following the first year, the taxpayer needs to retain:

• odometer readings for the start and end of the full period claimed
• the work-related use percentage based on the logbook.

The ATO has recently released draft PCG 2023/D1 which allows drivers of zero emission vehicles to use a rate of 4.20 cents per kilometre to calculate the cost of electricity when an electric vehicle is charged at the home. The rate is proposed to begin from 1 July 2022, and taxpayers will be required to keep odometer reading at the beginning and end of each financial year to evidence the kilometres travelled. As a transitional approach, taxpayers who do not know the opening odometer balance at 1 July 2022 are allowed to use a reasonable estimate of the reading.

Work-related self-education expenses

Work-related self-education expenses can be claimed by employees where the self-education or study will either:

• maintain or improve the specific skills or knowledge the taxpayer requires in their current employment activities; or
• result in, or is likely to result in, an increase in the taxpayer’s income from their current employment activities.

If your client incurs self-education costs, these will be claimed at label D4 of the individual tax return.

This year is a little different from every other year in that the $250 non-deductible threshold for self-education expenses has been removed.  This means that your clients can claim the full amount of self-education costs providing the self-education and study expenses meet the eligibility criteria.

Deductions for self-education expenses include:

• Fees payable on some study and training support loans (that is, FEE-HELP and VET Student Loan), but not repayments on the loan itself
• Car expenses - if your self-education and study expenses have sufficient connection to your current employment, you can claim daily travel expenses from your:
  • home to your place of education and back
  • work to your place of education and back.

However, you can't claim the cost of the last stage of your travel. For example:

• Home to your place of education, and then to work
• Work to your place of education, and then to your home.
• Internet, data, stationery postage

More information on the type of deductions that can be claimed can be found on the ATO website.

Work-related clothing, laundry and dry-cleaning expenses

Only costs for occupation-specific clothing, protective clothing, compulsory work uniforms, and non-compulsory work uniforms registered with AusIndustry’s Textile, Clothing and Footwear (TCF) Corporatewear Register clothing can be claimed. The cost of buying, hiring, repairing or cleaning conventional clothing used for work cannot be claimed.

Written evidence is required for laundry expenses (other than dry-cleaning expenses) greater than $150. If the amount of the laundry claim is greater than $150, and the total claim for work-related expenses exceeds $300, then diary records of laundry use should be maintained.

For laundry expenses up to $150, the Commissioner’s estimates detailed in TR 98/5 allows:

• a claim of $1 per load where only work-related clothing is laundered; and
• 50 cents per load where both private and work clothing is laundered at the same time.

Where the Commissioner’s estimate is used, the taxpayer should retain details of the number of washes that were done during the year, and what type of clothes (work-related, private or both) were included in each wash.

Your clients might need a gentle reminder that it is not a so-called ‘automatic deduction’. They must be able to show how they came up with the total of their laundry expense claim.

Personal superannuation contribution deduction

Individuals wanting to claim a personal tax deduction for superannuation contributions made during the income year must:

• provide the trustee of the fund with a written notice of their intent to claim a deduction; and
• receive acknowledgement from the trustee of receipt of the notice.

They can make this claim at item D12 ‘Personal superannuation contributions’ in the supplementary tax return.

The notice must be given to the trustee by the earlier of:

• the day on which the tax return for the income year in which the contribution was made was lodged; or
• the end of the next income year.

The notice will not be valid if, at the time it was given to the trustee:

• the individual was not a member of the fund;
• the trustee no longer held the contribution (e.g. it was rolled over to another fund); or
• the trustee has begun to pay a superannuation income stream based in whole or part on the contribution.

If the notice is not valid or not provided when required, the taxpayer may not be able to claim the deduction and the character of the contribution may change from concessional to non-concessional.

Practitioners should also note recent changes in the legislation. From 1 July 2022, the work test for individuals aged between 67 and 74 was abolished for non-concessional contributions and salary sacrifice contributions. However, it still applies for these individuals seeking to claim a deduction for personal superannuation contributions. So, those individuals aged 67-74 seeking to claim a deduction for personal superannuation contributions must still meet the work test.

Rental property income and deductions

Section 21 of the individuals tax return is where the income and expenses for renting out investment properties are recorded. Remember that the type of use of the property will determine the characterisation of the income for tax purposes. A property may initially be acquired for a certain purpose; however a change in the intention may trigger a change in the treatment of the asset and resulting income, either at the time of the change in intention or on the subsequent sale.

When preparing the rental property information, all the rental and other rental-related income must be included in the tax return. This includes payments that your clients receive, or become entitled to receive, when they rent out their property, whether it is paid to them or their agent.

Rental expenses will only be deductible If you rent out your property or it is genuinely available for rent. Your clients will only be able to claim deductions for the expenses that relate to the income-producing use of the property not the personal use.

Repairs and maintenance

Expenditure your client makes to a rental property is generally deductible, providing the property is being rented at the time. However, there are some key things that should be considered before automatically defaulting to a repair being deductible.

Initial repairs

Cost of repairs to investment properties are generally deductible.

However, costs incurred to remedy defects, damage or deterioration that existed at the time the property was acquired are considered to be capital in nature and are denied as an immediate deduction. They can however form part of the cost base of the property for CGT purposes.

It is also important to consider whether the repairs made to the property were in fact payments to bring the asset back to its original state without changing its character or if it involves bringing it into a more valuable or desirable form, state or condition than a mere repair would do which could result in it being classified as an improvement.

Some factors to consider when determining whether something is a repair or an improvement include:

• Whether different materials from the original were used to replace or restore the function of the property.  If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement.
• Technological advancements or enhancements — generally, the greater the degree of technological advancement involved in work done to property, the more it is likely the work goes beyond a 'repair'. 
• Whether the repairs were done at the same time as other improvements.  If the repair work is inextricably bound up with work of an improvement nature, and the repair work cannot be separately segregated and its cost accurately quantified independently from the cost of the improvements, the ATO will regard the cost of the entire work as being of a capital nature and not deductible.

If work done goes beyond 'repair' and the whole cost is capital expenditure, no amount is allowable as a deduction under section 25-10 for 'notional' repairs. TR 97/23 contains detailed information on what the ATO would consider a repair or maintenance.

Capital works

The capital works deduction is available for:

• buildings or extensions, alterations, or improvements to a building
• alterations and improvements to a leased building, including shop fitouts and leasehold improvements
• structural improvements such as sealed driveways, fences and retaining walls
• earthworks for environmental protection, such as embankments.

Not all capital works are eligible for a deduction under Division 43. Structural improvements that are permanent, non-essential for the structure or costs associated with creating artificial landscapes are some costs that are excluded from Division 43.

Also it is important to remember that your clients are only able to claim a deduction for capital works providing the construction commenced after the relevant date for the type of construction work. These dates are listed on the ATO website.

CGT cost base reduction for Division 43 claims

Remember, division 43 amounts claimed in previous years are excluded from the cost base of the respective CGT asset to which they relate. Where a taxpayer has insufficient information to ascertain the amount of the Division 43 deduction, the ATO will not require the taxpayer to adjust the cost base of the asset.

Assets of $300 of more

Depreciating assets acquired for $300 or more for a rental property are unable to be fully written off in the income year in which they were purchased. Instead, these are eligible for a deduction for only the decline in value for that year.

Reduced deduction for second-hand assets

Generally, a reduction of the decline in value deduction is required from 1 July 2017 if the depreciating asset in a residential rental property was used for private purposes or was not held by the taxpayer when it was first available for use. Certain exclusions apply.

A capital loss under CGT event K7 may also arise on the sale of the property and related depreciating assets where a deduction was denied under section 40-27.

Supplier ABN's

It is important that your clients are aware that when they hire a contractor for services and repairs connected with their rental property, they will need to check the contractor has an Australian business number (ABN). If the contractor does not provide your client with their ABN, your client may have to withhold 47% from the payment made to them and transfer that withheld amount to the ATO.

Your client may not be able to claim deductions for these expenses if they don't withhold when they were required to.

Disposal of properties

Lastly, how the property was used during its ownership by your client will determine how it will be assessed. The profit or loss can be either through the CGT provisions or as a profit making undertaking assessable under section 6-5 or section 15-15, or under the trading stock provisions in Division 70. The appropriate section will depend on the circumstances of your client.

Crypto assets

Generally, the disposal of crypto assets will trigger a CGT event.

When your clients dispose of any crypto asset, they will need to consider capital gains tax and may need to include a capital gain or loss in their income tax return.

A disposal occurs when:

• one crypto asset is exchanged for another;
• crypto assets are traded, sold, gifted or donated; or
• crypto is converted to a fiat currency (a currency established by government regulation or law) – for example, to Australian dollars.

Transferring crypto assets from one digital wallet to another digital wallet is not considered as a disposal as long as the same individual or entity maintains ownership of it.

If the taxpayers crypto holding reduces during a transfer to cover a network fee, the transaction fee is a disposal and has capital gain consequences.

Crypto chain splits

A blockchain is a record of all transactions, made up of blocks, of a particular crypto asset.

At regular intervals a new block may be added to the chain. This can result in what is known as a ‘chain split’ of the blockchain where there are competing versions.  These competing versions share the same history up to the point where their core rules diverge.

As an investor, if your client receives a new crypto asset as the result of a chain split (such as Bitcoin Cash being received by Bitcoin holders), the value of the new crypto asset is not treated as either:

• ordinary income; or
• a capital gain at the time they receive it.

However, they will need to work out their capital gain or capital loss when they dispose of the new crypto asset received as a result of a chain split. The cost base of a crypto asset received as a result of a chain split is zero.

Your client may be entitled to the CGT discount if they hold the new crypto asset for 12 months or more before disposing of it.

When a chain split occurs, you need to work out which of the ‘chains’ the new crypto asset belongs to. To do this you need to examine the rights and relationships of the crypto assets you now hold.

If one crypto asset has the same rights and relationships as your original crypto asset, it is likely a continuation of the original asset. The other crypto asset may be the new asset resulting from the chain split.

In some instances, the original crypto asset may no longer exist if none of the crypto assets held after the chain split have the same rights or relationships as the original. Where this is the case,  CGT event C2 happens to the original asset. Therefore, each crypto asset you hold is a new asset with an acquisition date of the date of the chain split with a cost base of zero.

The ATO have provided guidance on when crypto can be a personal use asset. This may be the case if your client keeps or uses the crypto asset for personal use. The most common situation of personal use of crypto assets is to buy items for personal use or consumption.

Further information on crypto assets can be found on the ATO website or in our individuals checklist.

Crypto record keeping

You must keep records of each of your crypto assets and every transaction, to work out whether you have a made a capital gain or loss. For crypto assets, taxpayers should keep:

• receipts when they buy, transfer or dispose of crypto assets
• a record of the date of each transaction
• a record of what the transaction is for and who the other party is (this can just be their crypto asset address)
• exchange records
• a record of the value of the crypto asset in Australian dollars at the time of each transaction
• records of agent, accountant and legal costs
• digital wallet records and keys; and
• a record of software costs that relate to managing their tax affairs.

Remember, taxpayer need to keep details for each crypto asset as, similar to shares, they are separate CGT assets.

Record keeping

Lastly, we will discuss record keeping for tax time. The type of records will generally be dependent on the types of activities your client is involved in.  Generally, records may be retained in paper or electronic form and should generally be retained for five years from the date the individual tax return is lodged.

However, sometimes the tax provisions requiring or allow alternative substantiation requirements.

Work-related expenses $300 or less

Section 900-35 of the ITAA 1997 allows individuals to claim a deduction for their work-related expenses without maintaining written records for the claim. This substantiation exception applies where the taxpayer’s total work-related expenses is $300 or less. The $300 work-related expenses provision applies to laundry expenses but excludes motor vehicle, travel and overtime meal allowance expenses. Remember, this does not mean taxpayers are allowed a free $300 deductions. Some form of evidence is still required outlining the expenses and why they were incurred.

Depreciating assets costing $300 or less

Section 40-80(2) of the ITAA 1997 provides an immediate deduction for depreciating assets that a taxpayer begins to hold in an income year that cost no more than $300 and the asset is:

• used predominantly for the purpose of producing assessable income that is not income from carrying on a business;
• not part of a set of assets that the taxpayer started to hold in that income year where the total cost of the set of assets is more than $300; and
• not identical, or substantially identical, to any other asset that the taxpayer starts to hold in that income year that collectively cost more than $300.

A depreciating asset that does not meet all these conditions will be eligible for a deduction for the decline in value for that income year and for later income years based on the effective life of the asset.

Evidence of small expenses

In certain circumstances, Section 900-125 allows individuals to claim a deduction for small expenses without retaining supplier documents. To utilise this exception:

• Each expense must be $10 or less;
• The total of all the small expenses is no more than $200;
• The expenses are incurred in the income year of the deduction; and
• The individual makes a record of the expense instead of getting a document from the supplier.

The Tax Institute resources

The Tax Institute website contains several resources that may be useful during Tax Time 2023. In addition to our Individual tax time checklist, we also have produced:

• Company tax time checklist
• Trust tax time checklist
• EOFY checklist
• The tax rates table that is updated quarterly
• And many other resources and articles with further detail on many of these topics.

ATO resources

The ATO website also contains many resources that may help you in preparing clients’ individual tax returns or better assist your clients to understand their tax obligations. Some of the ATO’s key resources include:

• myDeductions in the ATO application
• Individual tax return instructions 2022
• Occupation and industry specific guides
• Tax time toolkits.

Conclusion

The topics that we have covered in this session and the accompanying checklist are not an exhaustive list of tax provisions that you will encounter with all your clients. The checklists and this recording are just a reminder of some of the traps that practitioners and taxpayers may encounter when preparing the 2023 individual tax return.