Will your tax return attract ATO focus on deductions you are claiming?

In a speech to the National Press Club on 5 July, Tax Commissioner Chris Jordan warned businesses and individuals to only claim deductions they are entitled to. The ATO monitors the tax gaps presented by taxes collected as opposed to the taxes they estimate should be collected and is using this information to help determine their taxpayer focus areas. Analysis of taxpayer data from previous years is highlighting the level of deductions being claimed, which in some cases the Australian Taxation Office (ATO) feels is questionable.

Take the fact that written evidence is not required for laundry claims of less than $150.00. Approximately 11.7 million people were employed in Australia in the financial year ending 30 June 2015. Of those, 6.3 million claimed laundry expenses which is a cost of $1.8 billion in tax. Assuming these claims are all legitimate, this means over half of our workforce was compulsorily required to wear a uniform for work, as you are not allowed to claim expenses for non-compulsory work uniforms. The Australian Taxation Office (ATO) suspects that there are a number of taxpayers claiming deductions that don’t require substantiation simply because they think that other people are doing the same and that it doesn’t hurt anybody.

For the same financial period, the ATO believes there is a shortfall of 6% (approximately $2.5 billion) in the amount of corporate tax collected and the amount that should have been collected.

These represent significant shortfalls in revenue for the ATO and impact on the government’s ability to deliver services for the benefit of Australian society and economy.

Below is a shortlist of activities currently attracting ATO interest.

Small Businesses

• 1. Reporting outside of small business benchmarks for your industry
  2. PAYG withholding not being deducted from wages or forwarded to the ATO
  3. Super Guarantee Contribution obligations not being met
  4. Being registered for GST without actively running a business
  5. Not lodging activity statements
  6. Sales reporting being incorrect
  7. Deliberate hiding of income or avoiding of obligations through not registering, not keeping records and/or not lodging correctly.

Individuals

1. • High claims for work related expenses compared to persons in similar occupations
   • High rental property expenses
   • Being registered for GST without actively running a business
   • Receipt of non-commercial rental income for holiday homes
   • Claiming interest deductions on a private loan amount
   • Claiming deductions by default, including where substantiation is not required
   • Expenses for self-education, travel, meals, and phone and internet use are also in the spotlight.

Private Groups

1. • Tax and/or financial performance doesn’t compare to similar businesses
   • Tax affairs being obscure
   • Unusual transactions – large amounts, includes transfer or shifting of wealth
   • Aggressive tax planning history
   • After-tax income not able to support the lifestyle being lived
   • Private assets treated as business assets
   • Governace and risk management systems lacking

For information on how the ATO defines a ‘Private Group’ see https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/What-you-should-know/About-privately-owned-and-wealthy-groups/Private-group-approach/.

So are deductions not allowed any more?
Deductions are still legally permissible. However, as always you should make only use them for allowable expenses you have actually incurred and have evidence of. The ATO has specific instructions about what can be claimed available online – see https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/.

A legitimate claim may still attract ATO interest if it falls outside of the parameters they expect based on similar individuals or businesses, this is where the information or supporting documents you keep will be important.

If you are concerned about how this may apply to you or your business, please give us a call on 03 5339 3200 or contact us here.

Thanks for reading.

By Genna Kidd
 

The information contained on this website has been provided as general advice only.  The contents have been prepared without taking account of your personal objectives, financial situation or needs.  You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.