Seven Mistakes Not to Make When Claiming Tax Deductions
Each year, the technological resources available to assist the Australian Tax Office in identifying and investigating discrepancies in financial and income reporting become more comprehensive and far-reaching. This enables the ATO to better meet their mandate of ensuring taxpayer compliance with their lawful obligations by being able to more accurately detect false deductions and other tax avoidance methods.
It is not unusual for the ATO to issue warnings around tax time about their growing capacity to detect false expense claims or income reporting, and with an ever increasing amount of data at their disposal, their capacity to do so is set to increase even further.
This is not a warning to high-flying executives or companies seeking to make use of tax loopholes or other avoidance methods, these warnings are issued to all taxpayers and workers. The ATO has the capacity to cross-check a worker or employee’s reported employment expenses with the employer, and they will do so if your claimed expenses exceed the benchmark for your industry or sector. You can check these income and occupation benchmarks online using the ATOs website, or speak to your accountant or registered tax agent.
Claims for tax deductions on work-related expenses are particularly suspect, with the ATO continually advising that it wishes for taxpayers to claim deductions on all the expenses they are entitled to deduct, no more and no less. Guides are issued for specific industries and occupations which list the expected deductions relevant to that kind of income, and the ATO publishes resources on their website to assist taxpayers in identifying the expenses they may be entitled to claim for their specific occupation.
There are three important things to consider when claiming work-related expenses, and if these are not satisfied, you likely are not eligible for the deduction:
• Is the expense directly related to the earning of your taxable income?
• Did you spend the money yourself and not receive a reimbursement? If the expense was already reimbursed by your employer or another stakeholder, they are entitled to claim the deduction and not you.
• Do you have a record to prove that you met the expense for which you are claiming a deduction? Receipts are the gold-standard, but bank statements or other financial records may be used to identify the expense, when it was paid, and who it was paid to.
Rule Number 1: Ensure that your claims are justifiable
If your expense claims appear to be unusually high, it is likely that the ATO will contact your employer and request information about the duties you are required to perform as part of your employment. This means that if you are claiming travel expenses, but it turns out that you live a five minute walk from your place of employment, or if you claim for safety gear despite all the required equipment being provided by your employer, you are likely to have your deductions disallowed.
So not only does the total amount for which you are claiming expense-related deductions need to be within the reasonable limit for your taxpayers with similar circumstances, they also need to be reasonable in relation to your individual circumstances. The ATO has the capacity to obtain more detailed information about your employment and personal circumstances, and will do so if they believe your deductions do not accurately reflect the expenses you are likely to have incurred.
Rule Number 2: Ensure that you haven’t been reimbursed already
While there are certainly cases of fraudulent deduction claims on expenses which were reimbursed prior to tax time by the employer or another stakeholder, this rule is more complicated than the first.
Say for example that you are required to travel interstate to conduct business on behalf of your employer, or to carry out your expected duties. It is likely that the employer will explicitly reimburse you for this expense, as they may be able to claim a deduction on it themselves. If you were to claim such an expense despite already being reimbursed, this is obviously an act of non-compliance with your tax obligations.
In some cases, the line can be less clear. For example, it may state in your employment contract that reasonable travel costs or other expenses are included as part of your salary package. You may have forgotten this, and claimed deductions on expenses that were stated as being part of your salary. If the ATO were to examine your claims and contact your employer, they may disallow your deductions in full when they find out that the expenses were already met.
For this reason, it is very important that you check with your employer about the expenses you incur during the course of your occupation. They may inform you that the expense is already covered by payments made to you, and in this case you would be unable to claim related tax deductions.
In the case of travel, you may take public transport to work every day. If you keep a record of your public transport expenses, and your employment contract makes no mention of reimbursement for transport expenses, then this may be a deduction that you are entitled to claim at tax time.
Rule Number 3: Get Good Tax Advice
As an accounting firm, we understand the important of professional assistance in lodging your tax return and other tax matters. However, it seems to be all too common for new or inexperienced tax agents to make unrealistic promises to some clients about the deductions that they may be entitled to. If you are using a tax agent to lodge your tax return, ensure that they are experienced enough to understand what is likely to be considered an eligible deduction and what is not. There are many cases where tax agents have submitted returns claiming unusually high deductions, which then draws the ATO’s attention to that agent and their clients. If you are unfortunate enough to have engaged an agent who is conducting business of such low standards, you may find that your deductions will be disallowed in full, yet you have still had to pay the tax agent.
By being aware of the other rules on this list, you are better able to identify instances where a tax agent may be trying to see how many deductions they can get away with, not necessarily to your benefit. The task of a registered tax agent is to ensure that you receive all the deductions you are entitled to, no less, but certainly no more. To see tax agents and accounting professionals as money magicians at tax time is to severely understate the importance and complexity of the duties they are required to perform.
Rule Number 4: Keep records to substantiate your claims
It is vital that you keep records of all your expenses and transactions related to claims, or potential claims, which you may lodge at tax time. Keeping these records will enable you to swiftly produce verification in the event of a follow up by the ATO, and even if you are found to be ineligible for the deduction, by keeping adequate records relating to your claims you are demonstrating due diligence and making the ATO’s job easier, potentially reducing your liability. If you are unsure whether or not you are eligible to claim an expense, you can show the records you kept to your tax agent or accountant and they can assist you in claiming the appropriate deductions.
Rule Number 5: Never make claims for private, or mostly private, expenses
If you are unable to demonstrate through the provision of written evidence that your claims relate directly to your earning of income, then they are not eligible claims. For example, if you claim travel expenses after deciding to travel first-class on an interstate rail service, your decision to travel first-class is a private one and is not determined by your employment obligations.
Likewise, if your employer does not provide you with a uniform, but instructs employees to wear neat business-appropriate attire, you may not claim related clothing expenses as these clothes may also be used for private purposes.
Rule Number 6: Understand the basics of what is and is not eligible for deduction
If you understand the fundamentals of tax deductions for income-related expenses as they apply here in Australia, then you are better able to judge what you are and are not eligible to claim. Do your homework before tax time, and speak with your accountant or tax agent about the typical expenses profile for someone with your income and occupation. Check online for resources, such as the ATO guides outlining common deductions by occupation, which you can use to see what you are expected to claim for. You may notice things that you weren’t even aware you could claim deductions on, and therefore find yourself with a more balanced tax return.
If you do not attempt to gain even a basic understanding of these rules, and leave the task of claiming deductions up to the cheapest and most convenient tax agent you can find, you may be in for much more hassle than its worth.
Rule Number 7: Create digital records, and back them up
When tax time approaches, it is a very good idea to create a file on your computer that contains the relevant documentation or records that you will use to verify your deductions claims. These could include electronic copies of your bank or credit card statements, as well as digital invoices and receipts. You can also add notes with the finer details that you may need to provide in the case of a follow up.
Back up your data by uploading it to a cloud-based service, this way you can access it from any device and there is minimal risk of losing it. Being able to provide written records promptly if requested to do so is an important part of meeting your tax obligations, and will assist you in obtaining the deductions you are entitled to receive.
Lodging Your Tax Return
When you lodge your tax return using an automated service such as the ATO’s MyTax system, any claims you make for expense deductions are compared against the claims of other taxpayers in your industry or occupation, as well as those who have a similar income. This comparison is performed automatically, and is shown to you during the MyTax reporting process so that you will receive a warning in real-time if you are claiming an unusually high amount in comparison to those in similar circumstances. Tools such as this are part of the standardization of the entire tax-return system here in Australia, meaning taxpayers are automatically assessed against the information reported by other taxpayers with similar circumstances.
There are also free online tools available to assist taxpayers in calculating the deductions they may be entitled to, such as the MyDeductions element of the official ATO app. You can use this tool to record your expenses as they happen, ensuring that you have a valid record of expenses which you intend to claim deductions for. This alleviates some of your burden at tax time by ensuring that you don’t have to sift through receipts or financial records to find evidence of your expenses.
Your registered accountant or tax agent is here to help. Kingston Knight has extensive experience in tax compliance and tax structuring, ensuring that you receive the deductions you are entitled to and that your tax return is processed as quickly as possible. We can also assist you in collecting and storing the required records, and will advise you if there is any cause for concern in the material you have provided to us. Ensuring your compliance with regulation is one of the greatest ways we can help you as registered tax agents, freeing you from unneeded disputes or follow-up action and allowing you to get on with business while receiving the deductions and discounts that are yours by right.
Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax and accounting services, or email us at email@example.com.