Contractors omitting income

Through data matching, the ATO is seeing some contractors incorrectly reporting or omitting contractor income. Contractors need to report all their income in their tax return, including payments made by businesses for their contracting work.

Note that, as part of the taxable payments reporting system (TPRS), certain businesses must lodge a 'Taxable payments annual report' (TPAR) to report payments made to contractors for providing the following services:

• building and construction;
• courier;
• cleaning;
• information technology;
• road freight; and
• security, investigation or surveillance.

For taxpayers who work as a contractor and provide any of these services, the business they contract to should be reporting those payments to the ATO on their TPAR. Contractors obviously then need to include this income on their tax return.

If the ATO suspects a contractor may have omitted TPRS income on their tax return, it may contact them to request they amend their tax return. If the contractor does not take action, the ATO may conduct a review and audit of their business, and penalties and interest may apply.

Government payments programs

The ATO is reminding taxpayers that receive government payments for delivering services under a Commonwealth program, such as healthcare, disability support or child care, that they have an obligation to:

• keep accurate records; and
• report any such income they receive in their tax return.

The ATO recently advised that it would be contacting taxpayers and tax agents in February by email to ensure that income received from government agencies (such as the Aged Care Subsidy or under the National Disability Insurance Scheme) is reported correctly in their tax returns.

The ATO has updated its Government Payments Program data-matching program protocol to better detect non-compliance, and work more effectively with other government entities.

Check GST credit claims before lodging BASs

Taxpayers who are registered for GST can claim GST credits (or input tax credits) for the GST included in the price of goods and services they buy for their business.

However, if they buy something for both business and private use, they need to apportion their GST credit to only claim the business use.

For example, if they buy a car for ride-sourcing (ie. to use as an Uber driver), they should work out the percentage they use it for business purposes and only claim a GST credit on that amount.

When completing their next BAS, the ATO is asking taxpayers to remember that they cannot claim GST credits for purchases:

• where they do not have a tax invoice;
• that were cancelled or reversed; or
• that do not have GST in the price (such as bank fees).

Taxpayers that have nothing to report still need to lodge a 'nil' BAS by the due date.

Work-related expense claims rejected by Administrative Review Tribunal

The Administrative Review Tribunal (ART) recently disallowed a taxpayer's claims for many different types of work-related expenses.

The taxpayer was employed full-time as an engineer, working from home two days a week. For the 2023 income year, he claimed deductions totalling over $61,000, in relation to (among other things) car expenses, travel expenses, clothing expenses, and home office expenses, all of which he claimed were work-related. 

The ATO largely disallowed these deductions, and the ART affirmed the ATO's decision, primarily due to problems with substantiating these claims.

For example, in relation to the car expenses, the ART noted that none of the logbooks were contemporaneous, and the logbook entries were inconsistent with independent records (ie. car service records).

In relation to travel expenses (taxi and Uber fares), the ART noted that the taxpayer did not provide evidence clearly identifying which travel expenses had been reimbursed by his employer, and the ride share documentation did not include the date, time or destination of travel.

In relation to home office utility expenses, the ART noted that the taxpayer only provided calculations estimating the business use proportion of those expenses, without providing any documentary evidence to substantiate the expenses themselves. In any case, the ART was not satisfied that the taxpayer's apportionment of those expenses was fair and reasonable.

Ferrari not exempt from FBT

The ART has confirmed that a 2010 Ferrari California vehicle provided by a company to its director did not qualify for the car fringe benefit exemption, finding that the exemption applies only to commercial vehicles and that the Ferrari was designed to carry passengers.

The taxpayer company, which provided professional services in Perth, purchased the second-hand Ferrari in October 2013 under a hire-purchase arrangement. The vehicle was used by the sole director primarily for commuting, as well as for client visits, and was garaged at the director’s home. Following an audit, the Commissioner issued default FBT assessments for the years ending 31 March 2014 to 31 March 2022. The taxpayer objected to the assessments (but not the penalties), and the objections were disallowed.

Before the ART, the taxpayer contended that the Ferrari was an exempt car benefit on the basis that it was effectively a racing car and not a vehicle designed for the principal purpose of carrying passengers, relying on expert evidence that the model was a highly exclusive sports car “born to race”.

The Tribunal rejected this argument and held that, on its proper construction, the exempt car benefit applies only to commercial vehicles. The Ferrari was not a commercial vehicle and, despite being a sports car, it was designed for the purpose of carrying passengers.

The ART also rejected the taxpayer’s reliance on logbooks, describing them as complete fabrications and giving them no evidentiary weight. The Tribunal was not satisfied that any private use was minor, infrequent and irregular, noting evidence of private trips, including travel to Margaret River with his girlfriend.

Special Topic: ATO update on inherited homes & what it means for your family’s wealth

The ATO has issued a Draft Taxation Determination TD 2026/D1 which looks at how inherited family homes are treated for capital gains tax (CGT) purposes. Some industry commentators have dubbed it a “death tax by stealth”, but it is a bit more complex than this.

The draft guidance focuses on a specific aspect of the rules around applying the main residence exemption to inherited properties, potentially exposing deceased estates and beneficiaries to significant tax if not planned correctly.

Why does TD 2026/D1 matter?

Under current law, deceased estates or beneficiaries can potentially sell a deceased individual’s former family home without paying CGT if certain conditions can be met. This exemption is particularly valuable for properties owned long-term, where unrealised gains could be substantial.

In order to access a full exemption you normally need to ensure that:

• the property is sold within 2 years of the date of death (but the ATO can potentially extend this deadline); or
• that the property has been the main residence of certain qualifying individuals from the date of death until the property is sold. These qualifying individuals can include the surviving spouse of the deceased individual, the beneficiary selling an interest in the property or someone who has “a right to occupy the dwelling under the deceased’s will.”

The draft ATO guidance focuses on this second point, what does it mean for someone to have “a right to occupy the dwelling under the deceased’s will.” In summary, the ATO’s view is that:

• The right to live in the home must be explicitly granted in the will to a named individual.
• Broad discretionary powers given to trustees, separate agreements, or even testamentary trusts (TTs) are not sufficient in the ATO’s view.

For example:

• A will giving an executor discretion to allow a family member to occupy the home does not meet this requirement.
• A trustee of a TT who allows a beneficiary to live in the house is seen as separate from the will and may trigger CGT on sale.

Some legal and real estate experts warn this could force families to sell homes within two years of death to avoid CGT, especially in high-value areas.

Consider an example where you are inheriting a $2 million home with a capital gain of $1.5 million, this could expose the beneficiaries to $300,000–$600,000 in tax, depending on discounts and their marginal tax brackets.

However, it is important to remember that there are still other ways for the sale of the property to qualify for a full exemption.

What are some practical steps to protect your Estate?

While we wait for the ATO to finalise its guidance in this area, there are steps you can take to protect your family’s assets:

• Review and update your will, especially if you are planning to provide certain individuals with the right to occupy a property.  Does the will currently provide this right to specifically named beneficiaries?
• Plan the timing of inherited property sales. The two-year exemption window remains, but if you inherit a property and intend to hold it longer than this, weigh any potential CGT exposure against future rental income or family needs.  Partial CGT exemptions might still apply, but the rules and calculations can be complex.
• Seek professional advice, especially if your estate plan uses TTs.  You will normally need to work closely with tax and legal advisors to structure the plan appropriately.
• Be market aware. Estate planning can intersect with market timing.  Quick sales may preserve CGT exemptions, but this needs to be weighed up against non-tax factors.

The key takeaway from this draft ATO guidance is clear, estate planning is a complex area and needs to be navigated carefully to preserve family wealth and avoid unintended tax implications.

Please do not hesitate to contact your Lowe Lippmann Relationship Partner if you wish to discuss any of these matters further.

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