Will you find yourself in the ATO spotlight this year? In this article, we outline four of the most common tax return errors. Avoid these errors and reduce your chance of appearing on the ATO’s audit radar.
“Enhancements in technology and the use of data means we are able to take a much broader approach than previous years; and identify and investigate claims that differ from what is normal across all industries and occupations.”
Source: Australian Taxation Office 2016
The Australian Taxation Office (ATO) has once again advised it will continue to closely monitor work-related expense claims for the 2017 income year. Each year, around 12 million individual tax returns are lodged with the ATO, either directly or via a registered tax agent. On average, 350,000 of these tax returns are identified as containing errors or omissions.
With rapidly improving technology and data-matching at the ATO’s disposal, the most common tax return mistakes are now very easily detected. The ATO have their radar set to detect unusually high work-related expenses. And they promise they will be following up on each detected anomaly.
It seems that every year now, they work harder and harder to to detect “issues” in your tax return. But the good news is you can easily avoid ATO audit drama. Read on as we cover off the four most common tax return errors and show you how to avoid them.
Error 1: Guessing or estimating tax deductions
Never guess or estimate your income or tax deductions. Ever. Always ensure that you use accurate figures when reporting your income, the amount of tax you’ve paid, and your deductions. The ATO generally has records of PAYG Payment Summaries, so your data will most certainly be compared against the information they already have on file for you.
Contractors needn’t think they’re off the ATO’s radar either. A document called the Taxable Payment Annual Report will be lodged with the ATO to report the total amount of earnings you received (including GST). It acts very much like a PAYG Payment Summary and will appear on your ATO file.
Exaggerated or “guesstimate” expense claims, or a lack of receipts and evidence will rarely go unnoticed. We can’t emphasis enough the importance of lodging an accurate tax return so as to avoid raising a red flag.
TAX TIP: Always wait until you can access your finalised (tax ready) Income Statement or official PAYG summary before you complete your tax return. Be careful to enter the actual amounts on your receipts into your deduction claims.
Error 2: No proof of purchase
Some taxpayers seem to think that there’s a ‘maximum’ amount that they can claim without receipts, for each category of work-related expenses in the tax return. That’s not the case! Without expense receipts, you can only claim a maximum of $300 worth of work related expenses - in total.
Chances are, you’re eligible to claim more than $300, which can boost your tax refund just nicely. However, without receipts, it’s your word against theirs. The ATO’s position is: no proof, no claim. So please keep your receipts all year-round, and beyond. It is critical that you keep good records and track of all of your receipts throughout the year so don’t short change yourself at tax time; not only will this save you money, but it will save you a lot of angst should you be selected for an ATO audit or review.
Remember: If you over-claim on expenses and receive an amount of tax refund that you’re not entitled to, the ATO will ask you to repay the difference. You’ll also be charged interest and possible penalties which vary from 25% to 75%.
Error 3: Failing to keep written evidence
Yes, there are certain deductions for which expense receipts are not required, per se. But that doesn’t mean you don’t need written evidence.
For example, a common misconception amongst taxpayers is that it’s ok to include a work-related car expense claim using the cents-per-kilometer without having any actual written proof. Granted, the ATO’s website (here) clearly states that you don’t need written evidence, but then goes on to say that in an audit situation you’ll be asked to show how you calculated your claim. For this reason, we strongly recommend that you keep a written or electronic diary throughout the financial year to evidence your work-related kilometers travelled.
Some other misconceptions around record-keeping pertain to mobile phone, home phone and internet costs. For all three expenses, the usage needs to be substantial and not merely incidental to your income producing work. The ATO’s Practice Statement PS LA 2001/6 goes deep on this matter, but can be summarised as follows:
- Mobile phone expenses: If ever subject to ATO audit scrutiny, you must be able to demonstrate how you calculated your mobile phone expense deduction. You may need to show the number of business calls compared to private calls, or time spent on business calls as opposed to private calls.
- Home phone expenses: You must have account invoices to show that the expense was incurred. Beyond that, you’ll need to itemise actual work-related calls or record a four-week diary to determine the work-related percentage of phone calls and use that percentage to claim for the entire year . If your phone account happens to be in the name of one person but used by other occupants of the home, we suggest you keep a very detailed diary; the ATO gets rather antsy on this issue and will try to find a way to disallow your claim.
- Internet expenses: You must have account invoices or receipts to show that the phone and internet costs were incurred by you. When apportioning non-bundled home internet costs, the ATO should generally accept a four-week representative diary of home internet time or data usage (whichever is most appropriate).
- Home office running expenses: you may be eligible to claim deductions for home office expenses if it’s normal practice in your industry to undertake work duties from home, if it’s essential to your income earning activities or if it’s a condition of your employment. The ATO have undertaken heavy audit action in the past few years on home office expense claims, and can request to see your home office diary, records to show the cost of your power and gas, the brand names and power consumption rates of your home office appliances, and the number of hours each appliance was used. Be vigilant!
- Laundry expenses: It’s also worth mentioning the deductibility of laundry expenses, as the ATO has been known to get quite hung up on this of late. While you don’t need receipts as such, the $150 deduction is not an automatic deduction. You still need to be able to demonstrate that you wear a corporate uniform (i.e. with logo) or protective clothing, and that your claim is based on a reasonable estimate. The ATO considers a reasonable claim to be $1 per washing load, where only the work-related clothes are being laundered, or 50 cents per load where the laundry items are included.
TAX TIP: If you want to be prepared if the ATO come a knockin’ we recommend you complete the appropriate diaries. If you’d like a copy of our recommended diary templates, please get in touch with us at Platinum Accounting & Taxation.
Error 4: Failing to understand the need for ‘nexus’
Nexus… what? It’s a rather archaic word derived from Latin, dating back to the 1600’s. But the ATO loves it.
From the ATO’s perspective, ‘nexus’ simply means that there must be a clear connection between the expense and your income-earning activities.
Just because you incurred a work-related expense and have proof of purchase, doesn’t necessarily mean the ATO will blindly accept the expense claim. You have to be able to demonstrate how and why it relates to your work activities.
To further confuse the issue, the fact that your employer directs you to incur the expense doesn’t automatically make it tax deductible, and the fact that you voluntarily incurred a work-related expenses doesn’t necessarily preclude it from being an allowable deduction!
TAX TIP: Satisfying deductibility nexus tests can be a complex and grey area at times. If in doubt, speak with us at Platinum Accounting & Taxation.
As the ATO’s data-matching capabilities have become more and more sophisticated, we’re here to help you navigate the shifting tax landscape.
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