Last week the government tabled its response to the recent inquiry of the House of Representative's Standing Committee on Economics regarding tax-deductible expenses.
The inquiry highlighted Work-Related Expenses (WRE’s) as being a specific area of ‘abuse’ and proposed a number of recommendations into this, particularly with regard to compliance activities in the area. The report stated $100m of abuse was identified in a single year through a review of one in every 1,000 taxpayers. It was recommended that the Australian Taxation Office (ATO) review the compliance activity in WRE’s.
Following the government’s response to the inquiry, the ATO has responded with a public release advising that WRE’s will be a specific area of focus for ATO compliance activities. We have highlighted the key areas of examination noted by the ATO.
Before expenses can be claimed for WRE’s, you need to make sure:
- you paid for the expense and it was not reimbursed by your employer
- the expense was directly related to earning your income
- to the extent that the expense is used for private purposes, an appropriate apportionment of the costs is made
- you have records to support the expense
The onus of proving deductions rests with the taxpayers. Two areas that taxpayers often do not focus on are substantiation of deductions (i.e. keeping documentation and showing the connection with work-related activities) and apportionment of expenses. Below we provide further information in relation to each of these areas.
The ATO requires adequate substantiation before a deduction is allowed to be claimed. If your total claim for work-related expenses is more than $300, you must have written evidence to prove your claims. It is important to note that deductions under $300 are not automatically deductible with no substantiation, they still must be incurred and not reimbursed as per the two above-mentioned points.
The ATO do not accept a bank statement or transaction report as sufficient substantiation of a work-related expense. Written evidence is required to claim a deduction which is usually in the form of an invoice or receipt. The ATO may, however, request a bank statement as a secondary form of support if the deduction claimed is questionable.
The receipt of an allowance, although generally considered to be taxable income, does not automatically allow a taxpayer to claim a deduction for the expense up to the amount of the allowance. The expense is still subject to the above deductibility and substantiation rules and it will be important to show that the allowance has actually been used in relation to deductible WRE’s if a deduction is sought.
Apportionment of Expenses
Many deductions such as telephone, internet, depreciation of assets and motor vehicle expenses often include a private use portion. The ATO requires expenses such as these to be apportioned to claim only the work-related usage. An estimate of the work-related usage is not an acceptable form of substantiation for the ATO.
For expenses such as telephone and internet costs, you need to keep records for a four-week representative period. These records may include diary entries, including electronic records and bills.
For motor vehicle expenses a log book is required to be kept of a 12-week period in order to claim a percentage of all motor vehicle expenses. Alternatively, you can claim up to 5,000kms of work-related travel at an ATO defined cents per kilometre rate. It is important to note that substantiation is still required for the cents per kilometre claim and travel between home and work is generally not deductible. In the past the ATO have contacted employers to query them on the nature of their employees travel requirements. More that $8bn of car expenses are claimed each year being the most common work-related expense claimed.
Given the ATO’s indication of increased compliance activity in relation to WRE’s, it is important that taxpayers and their tax agents analyse their expenses and the claims being made when lodging their income tax returns.
For more information
If you require further advice on work-related expenses, please contact your local RSM office.