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A taxpayer can claim a tax deduction if the expense is incurred in producing or gaining assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
However, to do so, taxpayers must meet strict substantiation requirements The importance of these requirements is frequently overlooked.
The recent Administrative Appeals Tribunal (AAT) decision in Copley and Commissioner of Taxation (Taxation) [2024] AATA 8 (Copley) re-affirmed the strict application of the relevant substantiation requirements, as well as the formidable onus of proof faced by taxpayers in seeking to contest an amended assessment.
Background
Mr Copley is the Managing Director of The Vines Real Estate (WA) Pty Ltd (Vines Real Estate), where is also a director and 50% shareholder, as well as a director and 50% shareholder of Copley & Associates Pty Ltd (Copley & Assoc). Deriving income from his employment with Vines Real Estate, as well as director’s fees from Copley & Assoc, Mr Copley claimed numerous work-related expenses in his personal income tax returns for the 2018 to 2020 income years (Relevant Period).
The Commissioner issued notices of amended assessment which denied the following work-related expenses (totalling just over $150,000) that Mr Copley claimed for the Relevant Period:
- car expenses;
- credit card interest;
- mobile phone expenses;
- donations; and
- various other expenses incurred through various vendors, including RACWA, Officeworks, etc.
The decision
Mr Copley submitted that all expenses he claimed as income tax deductions for the Relevant Period were incurred to earn his income from his employment at Vines Real Estate and that he would have only made those claims if they were genuine work-related expenses. However, the AAT held the expenses were not deductible because there was no or insufficient corroborating evidence to support his claims.
The AAT concluded that in the absence of corroborating evidence supporting the expenses claimed, such as tax invoices that meet the requirements of Subdivision 900-E of the Income Tax Assessment Act 1997 (ITAA 97), logbook entries that satisfy Subdivision 28-G of the ITAA 97, or mobile phone records that comply with PS LA 2001/6, Mr Copley was not entitled to deduct the relevant amounts.
The AAT decision also emphasised the burden under s 14ZZK of the Taxation Administration Act 1953 (TAA) which requires him to establish not only that the amended assessments were excessive or otherwise incorrect, but also precisely what the assessment should have been.
Key reasons for claimed income tax deductions being denied:
- Failed to keep adequate receipts and records to support his claimed expenses and apportion personal and business usage.
- Mr Copley sought to claim interest on seven credit cards as an income tax deduction. The distinction between personal and business usage was unclear, and there was no further evidence of what the balance comprised aside from Mr Copley’s verbal assertions.
- It was unclear which party has actually incurred the relevant expenses.
- The vehicle was owned by Copley & Assoc, and Mr Copley had claimed expenses using the logbook method. Even though the expenses were incurred by Mr Copley himself such as insurance and registration, section 28-95 of the ITAA 97 provides that only the party which ‘holds’ the car may claim deductions using the logbook method.
- The telephone invoices relied upon were in the name of Mr Copley’s wife which raised doubt as to who incurred the expense.
- Ensuring records are in the correct form (rather than a bank statement).
- Mr Copley did not have any receipts or tax invoices for claimed donations, although it is likely that at least two were legitimate charitable donations because bank statements showed that they were made to ‘Movember’ and ‘Telethon’, respectively. Notwithstanding, because bank statements do not satisfy subsection 900-115(2) of the ITAA 1997, no relevant income tax deductions were permitted.
Key takeaways
Copley re-affirms that the evidentiary burden lies with the taxpayer, and even if the Commissioner concedes that expenses may bear the characteristics of deductible work-related expenses, deductions will be denied where taxpayers fail to meet strict substantiation requirements.
Copley also highlighted that taxpayers must establish that expenses are incurred by them and establishing a nexus between the income they have derived and the deduction.
Well-documented records, aligned with legislative requirements, are imperative to avoid lost deductions.
FOR MORE INFORMATION
If you would like to learn more about the topics discussed in this article, please contact your local RSM office.
