Whilst historically ATO audits were targeted at big business and the wealthy, this has changed. Now more than ever, individuals, business and self-managed superannuation funds are at risk of being selected for an audit, investigation or review. The Commissioner of Taxation, Chris Jordan has confirmed the ATO has been instructed to undertake random audits targeting over claiming of business expenditure and work-related deductions.
The ATO is using real-time data to compare taxpayers with others in similar occupations and income brackets, to identify higher-than-expected claims related to expenses including vehicle, travel, internet and mobile phone, and self-education.
Innocent until proven guilty tends to be the ATO’s presumption. So, even if your books are squeaky clean, this won’t stop a random ATO enquiry! These audits don’t only involve emotional stress but can disrupt your business or work and can cost a significant amount for extra accountancy, bookkeeping and if necessary, legal fees.
The ATO’s Golden Rules
The ATO has provided three rules in determining whether the deduction your claiming is eligible:
- The taxpayer must have incurred the expense themselves – and not have been reimbursed.
- The expense must be incurred in gaining or producing assessable income.
- The claim must comply with the substantiation rules – i.e. all records must be kept.
Remember, the onus of proof is on the taxpayer. It is important to know what you’re eligible to claim before lodging your tax return and to make sure you don’t claim more than what you’re entitled to. For example, it’s a myth that you can claim the standard $150 laundry expense for having a work uniform, or the $300 work related expense without having incurred the expense or the 5,000-kilometer motor vehicle claim.
While the ATO will certainly be looking at unusually high claims for work-related expenses of all types, car expenses and clothing and laundry expenses are the two categories which will receive the most scrutiny.
Having a uniform doesn’t automatically mean you’re eligible for a deduction
Expenditure on conventional clothing is generally not deductible. For clothing to be deductible, there must be sufficient nexus to the income earning activity. This means the clothing must distinctively identify the wearer as a person associated with a particular profession, trade, vocation, occupation or calling.
There is no standard laundry deduction of $150
Although there is no substantiation exception for deductions for washing, drying and ironing if the amount doesn’t exceed $150, this does not automatically provide taxpayers with a standard deduction of $150. The taxpayer must still be able to verify that they actually incurred the expenditure.
No standard deductions for 5,000 kilometres
Although there’s substantiation exception for claims made under the cents per kilometre method — capped at 5,000 kilometres, this does not represent a ‘standard deduction’. The taxpayer is entitled to a deduction only for kilometres actually travelled in the course of producing assessable income. Travel between home and work is generally not deductible.
The substantiation exception means that there is no requirement to keep detailed records in a logbook or similar. However, you must still be able to verify that you undertook the purported trips for a work purpose, and that the kilometres claimed reflect the distances actually travelled by car during those trips.
Don’t be aggressive to save a couple $$ in tax
The mindset that everyone cheats a little, is one that the ATO won’t tolerate. The ATO’s compliance activities and data analytics many years ago were not as sophisticated as they are now. Their data matching activities across taxpayers with the same occupation codes has already generated significant audit activity in the past few months alone.
The risk of deductions falls on the taxpayer, not their accountant. It is imperative to get the right advice before claiming your deduction.
Should you consider audit insurance?
The cost of responding to a tax audit or government compliance investigation can be very costly. The audit process can be time consuming and take your accountant many hours responding to questions, information requests and audit findings.
Tax Audit Insurance covers a business in the event that it receives a random audit from the Australian Tax Office. It covers the costs of professional fees incurred whilst preparing for the audit from accountants, lawyers, bookkeepers and any other advisers required, and other expenses incurred during the audit.
Being audited can be both time consuming and costly for you and/or your business – you will most likely be asked to provide records and receipts of past transactions and you will almost certainly need the services of the above to assist in the ATO enquiry.
What should you do now?
The beginning of a new financial year is a great time to set new habits. Speak to your tax advisor to understand what substantiation/information you might need to collect to maximise your tax deductions at the end of this financial year. A proactive accountant will be able to tell you exactly what you need to do for you to safely maximise your deductions. Leaving it until the end of the financial year might be too late.
Consider getting audit insurance – particularly if you operate your own business (we can arrange this for our clients if needed. We confirm that we do not receive any benefits for doing so).
Of course, if you have any questions, don’t hesitate to reach out to us.
