The income tax and FBT consequences of COVID-19 work-related test costs

The Government passed legislation that will allow individuals to deduct COVID-19 testing expenses. This is where there is a nexus with the calculation of assessable income. Employers are exempted from FBT if they reimburse or pay for eligible testing costs.

These amendments apply to expenses incurred after 1 July 2021. They are found in Schedule 2 of the Treasury Laws Amendment to Cost of Living Support (Cost of Living Support Other Measures), Act 2022. Royal Assent was given on 31 March 2022. This Act implements several Federal Budget initiatives for 2022-23.

This article describes the new rules for employers and individuals. It also incorporates practical guidance from the Explanatory Memorandum to Act (the Explanatory Memorandum) and recently released ATO factsheets for employees (the ATO guidance).

The deductibility rules

The ITAA 1997 provides a new section 25-125 that allows taxpayers to deduct any loss or outgoing incurred in the production or gain of their assessable income.

• The loss or outgoing results from testing the taxpayer for COVID-19.
• This test aims to determine if the individual can attend or stay at a place where they engage in activities.
  • To earn or produce their assessable income.
  • In running a business to produce or gain their assessable income.

The law states that losses or outgoings are not deductible if they are capital-related or capital-oriented. The Explanatory Memorandum states that the expenses are unlikely to be capital-in nature because of the consumable nature and repeated use of the tests.

The Explanatory Memorandum clarifies that amendments can be made to cover situations where an individual’s positive COVID-19 status allows them to work at home. This means there is no requirement for the work to be done at the workplace.

Types of tests that are covered by the deduction

If the test is:

• a polymerase chain reaction (PCR) test; or
• A therapeutic good is listed in the Australian Register of Therapeutic Goods. It relates to COVID-19.

This deduction covers expenses for PCR tests performed at a private clinic and rapid antigen testing (RATs).

Most individual deductions will be for the cost of purchasing over-the-counter Rats. The cost of testing kits imported from abroad or brands purchased overseas would not qualify for the deduction.

If the cost of testing cannot be claimed

These are the circumstances where the COVID-19 test cost is not deductible:

• The individual uses the test for personal purposes, e.g., To test their children before they go to school or daycare;
• The individual is reimbursed by their employer or another person;
• The individual does not plan to travel to their workplace and works remotely.

Multipacks of RATs are often sold if the expense is incurred to gain or produce assessable income but not for private purposes (e.g., The amount of the deduction can be reasonably allocated if the expense is incurred in gaining or producing assessable income and partly incurred for private purposes (e.g., leisure activities).

Are ancillary expenses, e.g., travel costs, deductible?

Explanatory Memorandum clearly states that the ancillary expenses of acquiring tests — including travel and parking costs to purchase a test kit or attend a PCR testing location — cannot be claimed for deduction.

It is not the policy to exempt other costs associated with the purchase of the test, such as credit card surcharges and shipping and handling fees for online orders.

The COVID-19 test can be claimed.

Mary works as a casual worker at a local café. Mary purchased a qualifying multipack COVID-19 test in April 2022. She only uses it before she begins a shift if she has COVID-19 symptoms or has been in direct contact with one. Her employer does not cover the cost of the COVID-19 test.

Mary can take a deduction for these COVID-19 test costs.

Use for personal and professional purposes.

Vinh purchases a qualified two-pack COVID-19 test at his local pharmacy. Vinh takes one test to ensure he is not suffering from COVID-19 before he goes to a local sporting event. Vinh realizes that he was exposed to COVID-19 a week later and takes the second test to confirm his COVID-19 status.