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House of Representatives

Tax Law Improvement (Substantiation) Bill 1994

Explanatory Memorandum

(Circulated by the authority of the Assistant Treasurer,the Hon. George Gear, M.P.)

General Outline and Financial Impact

The Bill will replace the substantiation provisions of the Income Tax Assessment Act 1936

The new provisions will make improvements that may be considered in 3 parts:

·
a clear, helpful structure and layout
·
plain language in a personable style
·
changes to administrative requirements that are unnecessarily complex or out of touch with current commercial reality or normal behaviour.

Changes to structure

The Bill will significantly change the structure and order in which the substantiation law is presented, so that the important requirements of the law are more easily found.

One of the innovations of the Bill is its use of highlighted key principles at the start of each major segment of the Bill. These will give readers a simple entry point.

As well the Bill will make extensive use of navigational aids to identify, and guide readers to, those provisions relevant to them.

Changes to language

The existing law has been completely rewritten in clear, everyday language that tries to anticipate the needs of its readers.

To make readers more comfortable in following the law, the Bill introduces another innovation by addressing the reader personally throughout as 'you'. This will set a tone that is essentially friendly and not bureaucratic.

Greater use is made within the text of examples and notes to provisions.

The Bill is shorter, clearer, simpler and more readable than the present law. Overall, the legislation has been reduced by about half.

Changes to administrative requirements

The main changes proposed by this Bill to make the procedural rules less cumbersome are as follows:

Car expenses: Log book rules

Change: Taxpayers using the log book method to calculate car expense deductions can base their business use percentage on a reasonable estimate in all cases.

Existing law: Taxpayers must use one of 3 different percentages, depending on the circumstances.

Revenue impact: Nil.

Compliance cost impact: The change proposed should reduce compliance costs.

Change: Taxpayers must keep a new log book every 5 years.

Existing law: A new log book must be kept in numerous circumstances, including if the difference between the business use percentage shown by the log book exceeds, by more than 10 percentage points, a reasonable estimate of the business use.

Revenue impact: Nil.

Compliance cost impact: The change will reduce the number of situations in which a new log book must be kept.

Car expenses: Cents per kilometre method

Change: Widen the application of the cents per kilometre method of calculating car expense deductions, so that the maximum deduction (based on 5,000 business kilometres travelled) may be claimed by taxpayers who have travelled more than 5,000 business kilometres.

Existing law: Taxpayers who travel more than 5,000 business kilometres in the year are not entitled to use this method of calculating car expenses deductions.

Revenue impact: Negligible gain or loss.

Compliance cost impact: Compliance costs would be reduced as taxpayers will be able to make a cost benefit decision between:

·
maintaining fewer records and claiming a lower deduction; and
·
maintaining more records to prove a higher claim.

Car expenses: $300 substantiation threshold exemption

Change: Allow greater access to the $300 substantiation-free threshold by excluding car expenses from the scope of the concession.

Existing law: Work expenses and some car expenses are included within the $300 concession. As car expenses are usually significant, when aggregated with other expenses they often exceed the $300 limit so that both work and car expenses have to be substantiated.

Revenue impact: Up to $10m cost to the revenue, but the real figure is likely to be much less.

Compliance cost impact: A reduction in compliance costs as more expenses should be exempted from the need to be substantiated.

Travel expenses

Change: Standardise the substantiation requirements for travel expenses by:

·
removing the need for taxpayers to keep a travel diary for short-term overseas travel;
·
requiring business taxpayers to get written evidence of expenses incurred during short-term domestic travel.

Existing law: The need to keep written evidence or travel diaries (or both) varies depending on:

·
whether the taxpayer is a salary or wage earner or a business person;
·
whether the taxpayer receives an allowance to cover the expenses;
·
whether the travel is domestic or international; and
·
the duration of the travel.

Revenue impact Negligible.

Compliance cost impact: Compliance costs for all short-term overseas travel and for those who receive allowances for short-term domestic travel will be reduced. There will be an increase in compliance costs for short-term domestic travel for individuals who carry on businesses.

Work expenses: Laundry expenses

Change: Allow taxpayers to claim up to $150 of deductible laundry expenses without providing receipts.

Existing law: Calculating the deduction requires numerous details to be kept, such as the cost of washing powder, water and electricity per wash, and the number of washes per week.

Revenue impact: A small but unquantifiable cost to the revenue.

Compliance cost impact: Compliance will be significantly easier for the majority of the 3.5m taxpayers (or 45% of those claiming work related deductions) who claim a deduction for laundry expenses.

Written evidence: annotating receipts

Change: Taxpayers will be able to annotate receipts from suppliers if they don't contain sufficient information to identify the nature of the goods or services supplied.

Existing law: Taxpayers are not entitled to annotate receipts which lack any of the detail required by the law. This may result in a loss of a deduction for the expense.

Revenue impact Unquantifiable, but expected to be a negligible cost to revenue.

Compliance cost impact Compliance costs will be reduced because legitimate deductions won't be disallowed simply because of the form of the receipt.

Written evidence: independent evidence of payment

Change Allow a taxpayer to rely on reasonable, independent evidence of payment of an expense if the evidence provided by a supplier does not show when the expense was incurred.

Existing law The supplier's written evidence must show when the expense is incurred. If it does not, a deduction for the expense may not be allowed.

Revenue impact Nil.

Compliance cost impact It will be easier to comply.

Signing

Change Remove the need to sign log books, expense diaries and other records.

Existing law Taxpayers must sign each entry in a log book, odometer records and each record of an expense in a diary.

Revenue impact Nil.

Compliance cost impact Compliance will be easier.

Record retention

Change Adopt a standard record retention period, for all taxpayers, of five years.

Existing law Individual business persons must keep records of car and travel expenses for seven years. Salary or wage earners must keep records of work expenses for three and a half years. The general record keeping requirement imposed on a business is five years.

Revenue impact Nil.

Compliance cost impact Business taxpayers will have a two year reduction in the period they need to keep their records. Wage or salary earners will have to keep them for an additional eighteen months.

Date of effect

So that the benefits of the improvements will be available to taxpayers in the 1994-95 income year, all of the changes in the Bill will apply to expenses incurred on or after 1 July 1994. However, a special saving provision will apply for the 1994-5 income year to ensure that any taxpayer who would be better off under the existing law can continue to get the benefit of that law.

Proposal announced

These changes have not been formally announced by the Government, but the majority of the changes were discussed in the Tax Law Improvement Project paper Substantiation - Exposure Draft No. 1 August 1994 .

Financial impact

None of the proposed changes should have any measurable revenue impact, except for the proposal which effectively widens the scope of the $300 substantiation exception. This could result in a cost to the revenue of up to $10m per annum, but the real figure is likely to be significantly less.

Compliance cost impact

Compliance with the legislation should improve as the legislation is now simpler, clearer and more certain. Compliance costs should be reduced.


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