Episode Details

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 Tax Commissioner, 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:

1. The taxpayer must have incurred the expense themselves – and not have been reimbursed.

2. The expense must be incurred in gaining or producing assessable income.

3. 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 tolera