Our primary concern is the incorrect reporting of deductions

The income tax gap for individuals who are not in business is primarily influenced by incorrectly claimed deductions. We see high rates of incorrect claims for work-related and rental property expenses, and mistakes are more prevalent in agent-prepared returns than in self-prepared returns.

Amounts of incorrect deduction claims at an individual level tend to be small; however, this trend is concerning as:

• Small amounts of incorrect claiming over this large population add up to a significant impact on the tax revenue available to the Australian Government to fund programs that benefit our community.
• It indicates some individuals and agents are unclear about what they can claim in deductions and the operation of the substantiation rules, or perceive it is acceptable to bend the rules.
• Incorrect calculations of taxable income resulting from over-claimed deductions can affect the accuracy of credits and offsets. This can also impact government programs for example, the collection of Higher Education Loan Program (HELP) debt and entitlements such as family assistance payments.

Work-related expenses

Work-related expenses remain the main contributor to the net tax gap, making up 48% or $4 billon. Employees are entitled to claim deductions for work-related expenses if all the following apply:

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

Errors at the deduction items range from genuine mistakes to deliberate over-claiming. However, most commonly we see deductions being claimed where there is no connection to income earned or no substantiation to show an expense was incurred. We also see claims for expenses that are private in nature.

Working in partnership with the tax profession and the community, we have increased the level of understanding of when a claim can be made and the records needed to verify them. This improvement has reduced the average work-related expenses claim by around $120 (over the past two years) resulting in an estimated revenue gain of $560 million.

Rental expenses

We have completed over 300 rental audits as part of our random enquiry program and found errors in almost nine out of 10 returns. Rental deductions contribute $1.5 billion to the net tax gap.

The random enquiry program and our broader compliance programs found most mistakes could be avoided by identifying:

• when an investment loan has been refinanced or redrawn on for private purposes and apportioning the interest expenses
• the proportion of time a rental property is used for private purposes and apportioning deductions appropriately
• what records need to be kept to make deduction claims, to prove the income you earned and to demonstrate that your property was genuinely available for rent or steps you have taken to build a dwelling.

While there are a number of factors contributing to the issues we see, our ability to effectively administer deductions is limited by a lack of third-party data to verify claims and provide pre-fill information in tax returns.

The community expects people to lodge their tax returns and pay the right amount of tax, however many people are not getting their deduction claims correct.

The government provided the ATO with additional funding in the 2019–20 Budget allowing us to expand our work-related expenses and rentals program of work. We expect to engage with over a million clients (directly and indirectly) about their work-related expenses claims and review 4,500 rental claims this year.

See also:

• Individuals and the PAYG withholding system in operation