ATO focus on the “income tax gap” for individual tax payers
The ATO has been signalling for months now that it is going to target work related and rental property deductions for individual tax payers this year. They have been conducting random audits of taxpayers, and recently published the results of the 2014-15 financial year audits. The result of this is that they have estimated a net tax gap over around 9.6 million individual taxpayers of $8.7 billion for an average of $906 for each taxpayer. The tax gap is defined as the difference between the tax actually paid by people and the amount that would be paid if everyone did the right thing.
During the audits they found that 72% of the tax returns submitted contained errors and the main reasons for the errors were:
- Claiming deductions for things unrelated to earning income
- Claiming deductions for private expenses
- Not keeping sufficient records to prove claims
- Overclaiming expenses for rental properties
- Not reporting cash wages
As a result they are repeatedly pushing the message of the three golden rules:
- You must have spent the money yourself and not been reimbursed.
- The expense must directly relate to earning your income.
- You must have a record to prove it.
Two of the main areas where people run into trouble are apportioning expenses where items have both a personal and business use; and claims made using the Commissioner’s reasonable rates.
Partial work use only
The ATO is unhappy with the typical way a large percentage is plucked out of the air when apportioning business use. Their preferred method for arriving at a percentage for electronic devices is for a four-week diary to be kept of the usage – this can be time spent, number of calls or another reasonable basis for apportionment. If you’re doing this for the internet, remember to include the usage of all the other people who use it.
Commissioner’s reasonable rates
The issue the ATO has here is that some taxpayers (and their agents) are treating the reasonable limits as a free deduction.
5,000 km of travel: You can claim up to 5,000 km of work travel without keeping a diary, but you do need to show how you worked out your claim. If you do the same trip every day (say to the post office and back) then you can show the working out. If you travel to a different office once a month for meetings, again you can show the working out. If you have less regular travel, then the ATO would like you to keep a diary to show typical usage. If you are audited they may ask to see a diary of your appointments or other proof that you travelled to different locations.
$150 of laundry: This is one that surprised a lot of us in the industry, but the ATO is keen to crack down on what it sees as a widely rorted claim. The clothing being laundered needs to meet the ATO criteria for deductible clothing and the rate to be claimed is $1 per load if washed separately or $0.50 if washed with other clothing. Remember if you’re working it on a typical week to take out any holidays.
Overtime meals: A lot of people think they can just claim the Commissioner’s rate for overtime meals ($30.05 for the 2017-18 year) and no questions will be asked as long as they have been paid an overtime meal allowance. If you haven’t received an allowance that you are declaring as income, then you cannot claim overtime meals even if you worked the overtime and had a meal while you worked. If you are audited, the tax office will ask some questions. They recommend you keep some typical receipts and a diary to show when and where you purchased your meals – paying by card and using your bank statement as supporting evidence would also help.
Travel (meals and accommodation): As with overtime meals, there is no free kick to claim the Commissioner’s reasonable rates for meals and accommodation. To claim meals while travelling you must have spent the night away from home – meals during the course of a day are not deductible if you spend the night at home (except for the overtime meals discussed above). You must also have received a travel allowance from your employer that you are showing as income.
You need to show how you estimated your meals while you were away – perhaps you have bank statements showing transactions at restaurants or hotels or a diary entry for a cash payment.
For truck drivers, the ATO recommends keeping records for three months to show how much you usually spend on breakfast, lunch and dinner – the records suggested would be receipts and bank statements showing your usual expenses.
To help with some of the record keeping requirements, the ATO has an app which can record all your business trips – you can record in real time using GPS technology, you can record later using point to point map data, or you can put in your own recording of the kilometres. If you have some trips you make on a regular basis, you can add these to your favourite trips for easier entry. You can use this to either create a diary of cents per km trips, or you can create a logbook in the app.
In addition to car records, you can also add in any expenses you have – you can take a photo of the receipt and then add the details – date, amount, business percentage, type of expense. You can back the data up to the cloud or email it to yourself or your accountant on a regular basis. I use the app personally, and the clients I have recommended it to who use it are very happy with the way it simplifies record keeping.