ATO To Toughen Up on Tax deductions

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ATO To Toughen Up on Tax deductions


Australia’s Federal tax commissioner, Chris Jordan, has recently announced his intention to increase compliance activity for individuals and business owners who have been claiming deductions they are not entitled, in an aim to reduce the nations ‘tax gap’.

According to Mr. Jordan a tax gap is “an estimate of the difference between the amounts the ATO collects and what we would have collected if every taxpayer was fully compliant with the existing laws,” the large market tax gap is estimated to be $2.5 billion annually, while individual tax payers filing their own returns are also over-claiming at significant volumes.

With $22 billion in work-related expenses for the 2014-15 income tax year and a further $44 billion in rental property deductions, Commissioner Chris Jordan sees this as a major potential leakage to tax revenues, estimating the lost revenue on “over-claimed” deductions to be somewhere between $750 million and $1.2 billion.

With the use of computer assisted audit techniques and data analytics, the Australian Taxation Office can undertake these types of reviews and audits with much lower levels of personnel than were previously required.

Subject to certain restrictions, you can claim a tax deduction for expenses that you incur to the extent that they relate to you earning assessable income. It is important to note that where deductions exceed $300 for an individual taxpayer in an income year, written evidence is required in support of all claims, that is, not just the claims that exceed $300. Written evidence includes keeping invoices or receipts for the costs incurred, as well as in some circumstances keeping log books or written calculations for certain claims.

Below is a summary of some of the common costs claimed in personal tax returns as well as the substantiation requirements for such costs:

  • Motor vehicle costs – there are only two methods for claiming car costs being the “cents per kilometre” method and “log book” method. Where less than 5,000 business kilometres are travelled in a year, a fixed amount per kilometre can be claimed. Under this method, you need to be able to demonstrate to the ATO how you came up with the number of kilometres travelled. Under the log book method, records need to be kept of all motor vehicle costs for the period (such as receipts and invoices) and the business proportion of the travel can be claimed as a deduction.
  • Laundry costs – the costs of acquiring and laundering/dry cleaning protective clothing, uniforms and occupation-specific clothing can be claimed as a deduction. Receipts / Invoices for clothing purchases are required to be kept as well as diary records for laundry records. Whilst the ATO does not seek substantiation if the laundry cost is less than $150, this only applies where all other deductions are less than $300.
  • Other work related costs – this is the general category for all work-related costs that don’t fit into another category. Common deductions are things like attending seminars, work related subscriptions, reference books and technical journals, and home office costs. With all such costs, written documentation is required to be kept, which includes substantiating on what proportionate costs (e.g. 50% of phone bill) are determined.

If you have any questions on personal tax deductions and your substantiation requirements generally, please do not hesitate to contact your ESV engagement partner on 02 9283 1666.