With tax time fast approaching, no doubt there are many individual taxpayers eagerly counting down the days until they can lodge their 2019 Income Tax Return and hopefully receive a much-anticipated tax refund.
Caution is advised on a number of fronts as tax time 2019 brings with it, new challenges and a focus by the Australian Taxation Office most taxpayers have never experienced before.
So, what do individual taxpayers need to be looking out for at tax time?
Income Statements, myGov and Single Touch Payroll
From 1 July 2018 many employers were required to start using single touch payroll (STP) to report employee payroll information. STP, in the long run, will be a good thing, particularly for employees who will be able to track their year to date pay information in live time and check if their employer is complying with compulsory superannuation guarantee requirements.
The short term presents challenges however as we move away from the PAYG Payment Summary to an online Income Statement accessed via myGov.
As all employers move toward STP in the 2020 financial year, individual employees will need to set up a myGov account and link to the ATO if they wish to access their pay and superannuation information. The employer will no longer provide an annual PAYG Payment Summary. Alternatively, the individual can obtain their pay information from their registered tax agent.
Caution is advised if the individual uses a registered tax agent to prepare their income tax return, as linking a myGov account to the ATO will break the connection with the agent and the agent will not receive ATO correspondence on behalf of the individual unless express authority is provided to the agent and the agent re-establishes the correspondence preferences with the ATO.
Individuals who have set up a myGov account are strongly advised not to ignore emails or text messages from the ATO as they may miss very important ATO correspondence.
When it comes to lodging 2019 income tax returns, individuals are also cautioned to check their income statement has been marked ‘tax ready’ in myGov before lodging their income tax return. If the income statement is marked ‘year to date’ or ‘not tax ready’ it means the employer has not finalised the payment information and important information may be missing.
Employers have until 31 July 2019 to finalise myGov income statements so please exercise caution before lodging your return online. If you lodge your return and the information in your income statement is incomplete you may need to lodge an amended return or risk amended assessments by the ATO.
Putting aside the issues with accessing up to date and final information surrounding taxable income and tax ready income statements, be warned, the ATO has individual taxpayers in their sights. If individual taxpayers think lodging their return via an agent protects them from ATO audit activity, they need to think again. A recent change in audit selection by the ATO has identified that many of the risks with non-compliance such as omitting income and claiming ineligible deductions is occurring at the agent level, not the individual, so this year both individuals and agents will be under close scrutiny.
Limit Risk – Claim Eligible Tax Deductions
The only way to limit the risk of ATO audit or review is for taxpayers to ensure they are only claiming for deductions to which they are entitled and can substantiate.
If your employer pays for, or reimburses you, for a work-related expense, you can’t make a claim for that expense in your tax return. If you don’t hold the required substantiation, you risk not being able to make a claim and if the expense hasn’t been incurred in earning your assessable income (conditions apply) you also can’t claim a deduction.
Don’t be fooled by deductions that don’t require substantiation such as laundry or motor vehicle expenses (using cents per kilometre). If you don’t wear specific protective clothing or required to wear a uniform, you will not be eligible to claim an expense for laundry costs. Similarly, if you are not required to use your vehicle for work-related purposes (this doesn’t include driving to and from work), it is not customary for your role, or it is not your car, the ATO will soon flag the motor vehicle claim as unusual and you can expect a ‘please explain’ from the ATO.
If you receive an allowance for example travel or meals and your employer pays you a rate at or below the reasonable amount and does not include the amount on your income statement, it is very unlikely you will be able to claim a deduction for the actual expenses you incurred (unless they exceed the allowance) in your tax return.
If you want to limit the risk of ATO audit or review this year my tip is to make sure you do your research and ensure you can claim a deduction for your expenses. Don’t rely on your tax agent to protect you either; if your agent relies on your assertions that the information is correct, you hold the necessary substantiation and you sign off on your return as being true and correct, it won’t protect you from ATO scrutiny if your deductions are outside the norm.
Income and Data Matching
The ATO has very sophisticated data matching programs and is generally aware of how much interest and dividends each taxpayer receives.
They also have information in relation to the taxpayer’s asset sales. To avoid the ATO auditing and amending your returns for non-disclosure of income or capital gains make sure you include these in your returns. If you have questions on whether the amounts are assessable, please discuss this with your tax agent.
Rental property claims will also be under close scrutiny this year with the ATO focusing on market value rent (if the property is not rented at arms-length) they will also review deductions for interest, repairs, and other holding costs.
If you rent a property to a family member, make sure you have substantiation from local rental agents that the rent charged is at market value or alternatively, ensure any deduction claimed for rental property expenses have been adjusted appropriately. If the property was not available for rent all year (e.g. you have a holiday home you only rent for part of the year) ensure the rental deductions are apportioned on a reasonable basis.
With a reported $8.7 billion tax gap for individuals we can expect the ATO to be hot on audit activity and individuals who have pushed the envelope in prior years (and perhaps received higher than normal refunds) can expect not only to be audited this year but may also find the ATO will be looking to review and audit prior year returns.
Taxpayers who can’t support prior year deductions, either because they weren’t genuinely entitled to them or did not hold the necessary substantiation, may face amended assessments, penalties, and interest.
Tax agents may also face penalties where the ATO is able to demonstrate recklessness or intentional disregard of the law. In a recent Administrative Appeals Tribunal case, both taxpayer and agent received a 75% penalty where the taxpayer did not disclose the correct income from the capital gain on the sale of a property.
Word of warning, just because your mate got a $3,000 refund doesn’t mean it was correct. His or her circumstances may be very different from yours, or he or she could be in the firing line of the ATO.
For further information
If you have doubt over the deductions you can claim, contact your local RSM office for assistance.