BE WARNED AND BE PREPARED: ATO AUDITING WORK RELATED EXPENSES

By Brian Spurrell

This month’s column is designed to assist you in preparing for the preparation and lodgement of your 2018 individual income tax return.

Firstly, a warning.

The Commissioner of Taxation, Chris Jordan has foreshadowed that the tax office is going to focus on work-related expenses that are claimed in your personal tax return at items D1 – D5 including car and travel expenses, laundry and clothing expenses, home office, telephone, internet and conference expenses etc.

Secondly, be prepared to substantiate your claims.

• Regardless of whether you use the services of a registered tax agent or you prepare and lodge your tax return yourself, you are required to sign a declaration that effectively certifies the following:
• you the taxpayer, have spent the money and were not reimbursed,
  that the expenses you are claiming were directly related to the earning of your assessable income, and
• you have a record to prove it which can be produced if requested.

Thirdly, if you use a registered tax agent,

You are responsible for the claims made in your tax return and that the information included in items D1 – D5 satisfy the three dot points above. Tax agents must rely on you for correct claims and the correct amounts of the claims. You should not be relying on the tax agent to determine the amounts claimed.

Why is this so when you engage a tax agent and trust them to do your tax return on your behalf?

Well, please take note of the following disclosure from Commissioner Chris Jordan in his address to the Tax Institute National Tax Conference in Cairns in March this year;
“the percentage of returns that are incorrect when prepared by tax agents on behalf of taxpayers is greater than the percentage of incorrect returns prepared by taxpayers themselves.”
The ATO has already undertaken 960 random audits and found that some agents neglect to check that the client has actually spent the money they claim to have spent on items directly related to earning their income. Mr Jordan acknowledged that “while these are small amounts in most cases, when you add them, you end up with a very large figure – an aggregate somewhat larger than the large corporate tax gap that we released of $2.5 billion dollars” he claimed.

This claim not only surprised the ATO but has also disturbed the professional accounting bodies into advising their members to take greater care in order to protect their clients from the potentially unpleasant and costly outcomes from a tax audit.
In light of the above warning, what action do you need to take before either preparing and lodging your own 2018 personal tax return or gathering the relevant information to enable your tax agent to prepare your return?

1) Know what is claimable
Your previous year’s tax return is a good starting point to remind you what expenses are likely to be claimable in 2018. Check expenditure items at D1 – D5, and other deductions at D6 – D10 and D11 – D15.

Use the ATO website at www.ato.gov.au/Individuals/Income- and- deductions/Deductions-you-can-claim/ This is an excellent user friendly aid to finding what you may be able to claim and includes a demonstration of an excellent expenses recording tool my/Deductions

2) Substantiate your claims
For most expenditure items you will need acceptable evidence that you have incurred the cost. Evidence may be in paper or electronic form and preferably be in the form of an invoice or receipt but can also include entries in bank and other financial institution statements, credit card statements and email receipts providing together the documentation constitutes written evidence of the

• name of the supplier
• amount of the expense
• nature of the goods or services
• date the expenses was incurred and or date of the document

In limited circumstances the above information if recorded by the taxpayer will be acceptable:

• minor expenses of $10 each or less providing the total of these expenses does not exceed $200
• when written evidence cannot be obtained such as parking fees and tolls

The following expenses are excluded from the above record keeping requirements but have been foreshadowed by the ATO as targeted deductions:

• Laundry of uniforms, occupation specific clothing and protective clothing not exceeding $150. A claim of $0.50 per wash when clothing is mixed with other clothing or $1.00 per wash if dirty clothing needs to be washed separately is claimable. A written estimate based upon the number of weeks worked and number of times clothing is washed per week based on a representative four week period would be an acceptable method of claiming this deduction.
• If your total claim for work related expenses excluding claims for car expenses, meal allowance, award transport payments allowance or travel allowance expenses does not exceed $300. The ATO does expect the taxpayer to be able to explain how the claims were worked out and why the claim is reasonable based upon the requirements of the taxpayer’s occupation. If your claims exceed $300, you must have records to substantiate the total expenditure, not just the amount over $300.

There are now only two methods available for claiming car work related expenses:

• The cents per km method @$0.66 per km up to a maximum of 5000 km. If this method is selected you need to be able to show how you worked out your business kilometres, preferably by producing diary records of work related trips.
• The log book method which is based on the business use percentage of the expenses for the car by using a logbook and recording the opening and closing odometer readings for a representative minimum 12 week period and during that period recording the distances travelled each day for work related purposes. The business use percentage is then applied to the car’s running costs. You will be required to keep records of the car’s running expenses and financing costs or depreciation. Fuel costs can either be determined from actual receipts or estimated based on the car’s fuel consumption and average pump prices for the year. This option usually provides a greater deduction when you have travelled more than 5000km but is more complex and it may be advisable to utilise the services of a registered tax agent to determine which method offers the greatest deduction.

3) Apportion expenses between private and work related use.
This is a challenging area to determine the amount of work related use and will be closely scrutinised by the ATO when undertaking an audit as it is an area where over claiming and guesswork is rife.
The ATO expects you to keep records for a four week representative period in each income year. Records may include diary entries, electronic records and invoices. Evidence that your employer expects you to work at home or make work related calls will assist in justifying a deduction.

a) Claiming mobile phone, internet and home phone expenses

If you use your own phones and internet for both work and private purposes you will need to work out the percentage that reasonably relates to your work use by applying the four week representative period approach.
If your work use is incidental and amounts to less than $50 p.a. in total you need not analyse your bills but use the following rates:

• $0.25 for work calls made from your landline
• $0.75 for work calls made from your mobile
• $0.10 for text messages sent from your mobile

If work use is likely to exceed $50 p.a. you will need to work out the work related percentage using a reasonable basis. This is a complex area due to the different methods of billing for these services, so please refer to the ATO Website URL earlier and add /claiming-mobile-phone-internet-and-home-phone-expenses and select a methodology illustrated in the examples that best matches your billing system.

b) Claiming home office expenses

If you are required by your employer to undertake after hours work at home or you are authorised to work at home on a part-time or casual basis or the nature of your work is such that you need to undertake work related activities at home then you can claim a deduction either:

• at the rate of $0.45 per hr worked on work related matters. This is the simplest method and merely requires you to keep a diary record over a representative four week period of your work related hours worked, or
• if you have a room or area set aside as a home office and furnished accordingly then you may claim incremental occupancy costs such as heating, cooling, lighting apportioned on a percentage of floor area basis, depreciation and repairs to office furniture and equipment and cleaning expenses. You can access a “Home Office Expenses Calculator tool on the ATO website to guide you if you choose to use the apportionment method.

Concluding Comments
More than ever before, greater care will need to be exercised in claiming expenses in your tax return, even if you use the services of a registered tax agent, as the likelihood of increased audit activity, particularly on work related expenses has been placed high up on the ATO audit agenda. Unfortunately space does not permit more in depth explanations and more comprehensive coverage, but you can unearth a wealth of useful information by exploring the ATO website referred to earlier. If your tax position is complex and you have claimed significant work related expenses in the past, then it may be in your best interests to consult a registered tax agent.

Disclaimer:
The content of this article is not intended to be relied upon as professional advice and should not be used as such. If you have any questions you should consult a registered tax agent.
Brian Spurrell FCPA, CTA, Registered Tax Agent.
Director, Personalised Taxation & Accounting Services Pty Ltd
PO Box 143 Warrandyte 3113. Ph: 0412 011 946
Web: www.ptasaccountants .com.au