Accountant expenses denied as deductions: Recent ATO announcements about COVID-19 payments

On 3 September 2021, The ATO updated the public information about taxation of certain Government payments during COVID-19 pandemic, following announcements by the Treasurer, Josh Frydenberg. The changes have reclassified a number of Federal and State/Territory Government payment to ‘non-assessable non-exempt’ (‘NANE’) income, meaning the payments are non-taxable. 

However, this announcement has other consequences, included disallowing deductions for payments made to accountants in obtaining the Government COVID-19 payments.  

What is non-assessable non-exempt income? 

NANE income is both ordinary or statutory income that has been declared by tax legislation of another Commonwealth law to be neither assessable or exempt income. 

Where income is NANE, the following consequences occur:

• Amount is tax-free,
• Any expenses related to deriving the income is not deductible, 
• Capital gains and losses on assets used to produce NANE income are disregarded, and
• Tax losses cannot be utilised by NANE income.

Summary of which Government COVID-19 payments are NANE

The following payments have been reclassified to NANE income, and do not need to be included in your tax return:

• COVID-19 Disaster Payment made to individuals affected by the July/August 2021 lockdowns across Australia 
• Small business support payments including the State/Territory grants relating to the recovery from COVID-19 and Commonwealth support payments established under the COVID-19 Business Assistance Program. 

The ATO has listed the eligible grants and support programs to be:

VIC state grants

• Alpine Business Fund
• Alpine Resorts Support Program (Streams 1, 2 and 3)
• Business Continuity Fund
• Business Costs Assistance Program Round Two
• Business Costs Assistance Program Round Two - July Extension
• Business Support Fund 3
• Impacted Public Events Support Program
• Independent Cinema Support Program
• Licensed Hospitality Venue Fund
• Licensed Hospitality Venue Fund 2021
• Licensed Hospitality Venue Fund 2021 - July Extension
• Live Performance Support Program
• Melbourne City Recovery Fund – Small business reactivation grants
• Outdoor Eating and Entertainment Package
• Small Business COVID Hardship Fund
• Sole Trader Support Fund
• Sustainable Event Business Program

NSW state grants

• 2021 COVID-19 business grant
• 2021 COVID-19 JobSaver payment
• 2021 COVID-19 micro-business grant
• NSW Performing Arts COVID Support Package

Deductions Denied

As part of the updated information, the ATO has confirmed that expenses incurred in acquiring the NANE income will e disallowed. The ATO website states:

In the course of carrying on a business, you may incur one or more expenses that are related to getting a government grant that is non-taxable. Such expenses may include costs associated with the application process and expenses incurred to satisfy any eligibility requirement of the grant. 

Many of the COVID-19 State/Territory Grants required a tax agent to confirm specific details or lodge the application to make an application. Denying deduction to accountants, whilst in line with the law about NANE income, creates a burden for the taxpayer and the accountants. 

The accountants may charge for the services they provide to their many clients in obtaining various COVID-19 grants but may not receive payment due to the current economic situation for most small businesses. 

For taxpayers who receive the COVID-19 grants, they may have to use part of the grants (intended to be used for keeping small business afloat during the hard COVID-19 times) to pay their accountants who assisted in obtaining the grant..  

How can Tax Controversy Partners help you?

These types of special rules limiting tax deductions can easily be missed without expert tax advice, leading to ATO audits, amended assessments, penalties and interest charges.

Obtaining legal advice before you make any claims is important, as specialist tax lawyers we can provide you with detailed advice on your circumstances and guide you through making the best choices for you and in helping you to manage any engagement with the ATO. 

At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and based on understanding likely ATO actions. 

Please contact us to help using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.