By now, it shouldn’t come as a surprise the ATO focuses on certain hotspots at tax time to call out taxpayers who have either accidentally or deliberately made errors. To avoid falling into a trap, here’s what you need to look out for in two key areas: work-related expenses and claims for investment properties.
According to the ABR, 60.5% of total Federal and State government revenue ($559.8b) was raised from taxes on income, profits and capital gains, well above the OECD average of 34 percent and 5.9% more than in 2017-18 ($528.6b). Furthermore, 41% of the total tax revenue was collected from individual taxpayers (that’s 2.15 times more than businesses…).
Despite this staggering burden on individual taxpayers the ATO believe there was a $8.7 billion shortfall in the amount of taxes it should have collected in 2019. The ATO claim work-related expenses play a big role in the ‘tax gap’ and we’re expecting them to pay close attention this year on the following deductions:
- Motor vehicle claims where taxpayers take advantage of the 68 cent per kilometre flat rate available for journeys up to 5,000kms (the ATO is concerned that too many taxpayers are automatically claiming the 5,000km limit regardless of the actual amount of travel)
- Deductions for home office use, including claiming for “occupation” costs like rent, rates and mortgage interest, which are not allowable unless you’re actually running a business from home
- Claims for work-related clothing, dry cleaning and laundry expenses
- Overtime meal claims
- Union fees and subscriptions
- Mobile phone and internet costs, with a particular focus on people who are claiming the whole (or a substantial part) of the bill for their personal mobile as work-related
- Incorrectly claiming deductions under the rule that allows taxpayers who have incurred work-related expenses of $300 or less in total to make a claim without receipts (the ATO believes that some taxpayers are claiming this – or an amount just less than $300 – without actually incurring the expenses at all).
Property investment claims
In 2019 property taxes increased by a notable $2.4b from the previous year and the ATO appear committed to continuing the trend with investment properties and holiday homes under the spot light.
The ATO commissioner, Chris Jordan said at the Tax Institute’s National Convention in Hobart in 2019 the tax office had audited claims for over 300 rental property and ‘found errors in almost nine out of 10 returns reviewed’.
Based on the common errors this year the ATO are likely to focus on the following:
- Excessive interest expense claims, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property
- Incorrect apportionment of rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly
- Holiday homes that are not genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed.
- Incorrect claims for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years.
However, the ATO have stated it expects rental losses to be bigger than normal this year due to the hit that rental returns have taken during the COVID-19 crisis. So long as a property is legitimately available for rent there will be no changes to entitled deductions.
Unsurprisingly, the ATO also advised that the number one cause leading to the dis-allowance of rental property claims continues to be where taxpayers are unable to produce receipts or other documentation to support a claim.
So the golden rule is; if you can’t substantiate it, you can’t claim it, so it’s essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.