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  • Common errors made by individuals that concern us

    We have a range of strategies in place to alert individual taxpayers and their agents to common errors we see and provide information about how to avoid them. However, based on the results of our compliance activities, we remain concerned about the level of incorrect reporting of deductions for work-related expenses and rental properties, and the extent to which these errors are occurring in returns prepared by tax agents.

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    Work-related expenses

    While we understand that most individuals appreciate why they pay tax and make an effort to get it right, we see many instances of incorrect reporting of work-related expenses.

    Key principles

    Individuals are entitled to claim deductions for certain work-related expenses if:

    • they spent the money and were not reimbursed by their employer
    • the expense was directly related to earning their income and not for a private purpose, and
    • they have a record such as a receipt, bank statement or diary entry to prove the amount being claimed or how it was calculated.

    If the money was spent for both work and private purposes, only the work-related portion can be claimed as a deduction.

    If an individual’s total claim for work-related expenses is more than $300, the person must keep receipts as evidence to prove the claim. If they claim below $300 in total, receipts are not required. However if we ask them, the taxpayer must be able to show how the claim was worked out and demonstrate that the cost was related to earning their income.

    Deductions claimed

    Over the past two years, the median amount claimed for work-related expenses has decreased by 2.6%.

    Claims for car expenses reduced in 2015–16, due to policy changes aimed at simplifying the methods of calculating deductions.

    Individuals not in business – median amount claimed for work-related expenses ($)

    Deductions

    2013–14

    2014–15

    2015–16

    2016–17

    2017–18
    (see note 1)

    Car expenses

    1,824

    1,900

    1,756

    1,650

    1,485

    Travel expenses

    395

    400

    401

    389

    364

    Clothing expenses

    210

    227

    240

    235

    219

    Self-education expenses

    900

    890

    1,063

    1,000

    953

    Other work-related expenses

    577

    612

    656

    665

    675

    Total work-related expenses

    962

    1,077

    1,171

    1,166

    1,140

    Source: unpublished ATO tax return data.Note 1: Individuals not in business as at 30 June 2019. For 2017 and prior years, figures relate to individuals not in business as at the time of lodgment.

    Common errors we see

    Errors we commonly see for all types of work-related expenses include:

    • claiming deductions when no money was spent
    • claiming deductions for private expenses
    • not correctly apportioning expenses between work-related and private purposes
    • not having records to prove claims.

    We also see exceptions to substantiation rules being used as ‘standard’ deductions, where taxpayers claim up to or around the substantiation exception amount, but have not spent the money.

    Examples of common errors we see for specific types of deductions include:

    • clothing, laundry and dry-cleaning expenses  
      • claims for ineligible clothing that is not occupation-specific, protective clothing or a unique distinctive uniform
      • claims for a flat rate for laundry expenses without a reasonable basis for estimating the expenses incurred
       
    • vehicle and travel expenses  
      • claims for private travel including travelling between home and work
      • claims for car expenses that have been salary sacrificed
      • claims for carrying bulky tools where the employer does not require the tools to be used for work or provides secure storage to keep them at the workplace
      • claims for meal expenses when there was no overnight travel
       
    • self-education expenses  
      • claims for paying Higher Education Loan Program (HELP) debts
      • claims for expenses that are not directly related to current work activities
      • claims for expenses reimbursed by the employer
       
    • other work-related expenses:  
      • claims for home office expenses such as phone and internet expenses that have not been apportioned between work-related and private purposes
      • claims for the full cost of items that exceed the $300 asset threshold
      • claims for safety equipment provided by the employer
      • claims for meals associated with working overtime that exceed the amount spent
      • claims for expenses reimbursed by the employer.
       

    See also:

    Rental properties

    The results of our random enquiry program show nine out of 10 returns contained an error at rental deduction labels, particularly for ‘other’ deductions and interest.

    Key principles

    People are entitled to claim certain deductions for rental properties but only for the period the property was rented or available for rent. Similarly, if only part of the property was used to earn rent, only the portion relating to the income earned may be claimed.

    People are also entitled to claim certain deductions for the decline in value of certain assets and, subject to the type and date of construction, certain capital works expenditure. They are also required to keep certain records to substantiate income and expenses relating to rental properties.

    The government has recently moved to restrict or remove specific types of rental income deductions, including travel to a residential investment property, as part of their Housing Tax Integrity measures.

    Deductions claimed

    Around 13% of individuals not in business claimed deductions of $27.6 billion for rental property expenses in their 2017–18 returns.

    Individuals not in business – deductions claimed for rental property expenses, 2017–18 return

    Deductions

    Individuals claiming (%)

    Amount claimed ($b)

    Median claim ($)

    Interest

    11.0

    13.2 

    8,878

    Capital works

    7.0

    2.2

    2,274

    Other rental expenses

    13.4

    12.2

    6,478

    Source: unpublished ATO tax return data.

    Common errors we see

    Errors we commonly see for rental expenses include:

    • claiming deductions for properties that are not genuinely available for rent
    • claiming deductions for loan interest expenses when a portion of the loan was used for private purposes
    • incorrect categorisation of capital works and capital allowances
    • not having records to substantiate income received and deductions claimed.
    • incorrectly apportioned claims for interest deductions

    See also:

    Returns prepared by tax agents

    Our compliance activities indicate that the adjustment rate for agent-prepared returns is higher than that for self-prepared returns.

    Tax professionals have a critical role in the tax and super systems. They are intermediaries, conduits and influencers of behaviour, providing expert advice to clients to meet their obligations. While most tax professionals focus on complying fully with legislative obligations, some do not always get it right.

    We also recognise that individuals don’t always meet their obligation to provide their agents with complete and accurate information about their tax affairs. While we acknowledge it is not possible for tax agents to verify everything their client tells them, we expect they will take reasonable steps to test their client’s eligibility to claim deductions.

    Common errors we see

    We most commonly see tax agents making claims for deductions that do not represent a sufficient connection to income or that cannot be substantiated. We also see exceptions to substantiation rules being used as a ‘standard’ deduction, regardless of whether the client has actually spent the money.

    Key drivers for the errors we see in agent-prepared returns include:

    • time and cost pressures – agents not taking steps to verify information provided by the taxpayer
    • outdated knowledge and expertise – agents not applying the tax law correctly
    • competitive behaviour – a small number of agents deliberately overstating claims for deductions to gain an unfair advantage and increase their market share. This can also be in response to pressure to accommodate clients’ expectations of a large refund.

    We will continue to work with tax agents, their professional associations and the Tax Practitioner’s Board to improve our advice and guidance, increase correct reporting and protect honest agents from unfair competition.

    See also:

    Last modified: 11 Nov 2019QC 56238