This year, the ATO has announced that one of its target hotspots for audit will be work-related expense claims made by individuals. In particular, deductions for car, travel, uniform and laundry expenses will be under increased scrutiny. The Government announced additional funding in the 2018 Budget to address non-compliance.
The ATO conducted random audit to measure tax gap. It was found that the estimated tax gap for individuals not in business was approximately $8.7 billion for 2014-2015 income year. In comparison, the tax gap for large corporations was $2.5 billion for the same year. According to the ATO, seven out of ten returns randomly selected for review contained errors.
The ATO uses sophisticated analytical models to cross-match data received from multiple sources through electronic lodgement channels to identify taxpayers making erroneous claims in their tax returns and flag high-risk returns requiring attention. Data obtained from third parties is used to populate taxpayer’s Prefilling Reports information, including salary earnings, employee termination payments, government payments, taxable superannuation payments, interest and dividends, income from employee share schemes and managed funds. In the last few years, the ATO expanded their pre-filling services to include information on disposal of capital assets, such as shares and real property.
Common mistakes in individual returns claims
Work-related expenses for salary earners:
– claiming “standard” deduction under $300 under exception to substantiation rule where no expenses have been incurred
– claiming travel and car expenses made for private purposes, including travel from home to work
– claiming travel and overtime meal expenses per diem where conditions for the expense have not been satisfied or where no related allowances have been paid by the employer
– claiming uniform, clothing and laundry expenses on items of conventional clothing and footwear
– claiming ineligible home office expenses, such as cost of occupancy (e.g. rent, mortgage interest, rates, land tax)
– claiming deduction for self-education expenses where the expenses have no direct connection to current work activities
– claiming expenses reimbursed by the employer
– claiming immediate deductions for purchase of assets costing $300 or more that have effective life of more than one year
– not apportioning deduction for private (or non-work related) component of the expense
– claiming ineligible deductions for income protection premiums
– claiming deductions that are private or domestic in nature
– making ineligible claims for gifts and donations, e.g. to organisations not registered as tax-deductible gift recipients, or where something was obtained in return for a donation
Rental property and other investments:
– claiming deductions for costs related to purchase of property
– claiming deductions for repairs done immediately after purchase of property
– claiming deductions for works that constitute improvements rather than repairs
– incorrectly classifying repairs, capital works and depreciable assets under capital allowance provisions
– claiming interest on portion of the loan that is not related to purchase, improvements, maintenance or running costs of the rental property
– claiming expenses while the property is not rented or being genuinely available for rent
– claiming immediate deduction for borrowing expenses (expenses related to loan establishment)
Sole trader expenses:
– claiming deduction for ineligible entertainment expenses
– deduction for private expenses
– including GST credits on expense amounts by GST-registered taxpayers
– claiming expenses against non-assessable income, such as from hobby
– claiming deductions on fines and penalties (except where they arise under a contract)
– not applying small business concessions correctly
– claiming unpaid superannuation expenses for employees
– claiming ineligible car expenses (e.g. from home to place of business) or claiming a percentage on car costs where logbook was not maintained
– claiming travel expenses related to private matters or not keeping appropriate evidence
– claiming ineligible business expenses where PSI (personal service income) rules apply, such as home occupancy expenses (e.g. rent, mortgage interest, rates, land tax) and payments to associates for support work.
– offsetting business losses against other income where requirements of non-commercial losses tests are not satisfied
These are just most commonly occurring mistakes made by individuals in their tax returns. The list is by no means exhaustive. Constant legislative changes and growing complexity of the tax law in Australia make it increasingly difficult for taxpayers to apply the rules correctly and avoid making tax mistakes.
Do you need help to get your deductions right? Our Registered Tax Agents are happy to assist.