Edited version of your written advice

Authorisation Number: 1051337249281

Date of advice: 12 February 2018

Ruling

Subject: Work related expenses - substantiation discretion

Question

Can I claim a work related deduction amount in 2009 and 2010, based on an average percentage of 12.5% calculated from my later Income Tax returns 2011, 2012 and 2013 income tax years?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You were employed as a trades-person.

You have lodged income tax returns since, however some years were omitted.

You have copies of the later income tax returns which you have used as the basis to calculate an average of percentage of expense to gross income. You have used this average to estimate the expenses claimable for the missing income tax year.

You have applied for and received copies of the salary and wage income gross and withheld information provided to the Australian Taxation Office for the missing financial years.

You have stated the original records for the missing years are lost cannot be found.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 900-10

Income Tax Assessment Act 1997 Section 900-15

Income Tax Assessment Act 1997 Section 900-185

Income Tax Assessment Act 1997 Section 900-195

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Substantiation rules

In order to deduct certain losses and outgoings, section 900-10 of the ITAA 1997 requires that you must be able to substantiate the expense. Section 900-15 of the ITAA 1997 provides that you substantiate a work expense by getting written evidence of the expense.

Written evidence may be in the form of:

1. evidence from the supplier - this document should show:

a) the name of the supplier

b) the nature of the goods or services

c) the date the expense was incurred

d) the date the document was made out

2. evidence recorded by the taxpayer for small expenses (a small expense is one which must be $10 or less and the total of the small expenses is $200 or less). These records must show the same details as a document from a supplier.

3. evidence on a group certificate.

To summarise the above, a deduction is only allowable if a loss or outgoing:

a) is actually incurred;

b) meets the deductibility tests; and

c) satisfies the substantiation rules where applicable.

Failure to substantiate

In cases where a taxpayer does not comply with a request to produce written evidence of an expense, section 900-185 of the ITAA 1997 provides that the expense cannot be allowed as a deduction or, if it has already been allowed as a deduction, the Commissioner can amend your assessment to disallow the deduction.

Commissioner’s discretion to review failure to substantiate

In cases where written evidence of an expense as required by Division 900 of the ITAA 1997 is not provided, section 900-195 of the ITAA 1997 provides that a deduction may still be allowed if the Commissioner is satisfied that the expense was incurred, and that you are entitled to a deduction for it. The Commissioner’s interpretation of this discretion is outlined in Taxation Ruling TR 97/24.

Taxation Ruling TR 97/24 Income tax: relief from the effects of failing to substantiate (TR 97/24) provides guidance on the three circumstances in which the Commissioner may grant relief where expenses have not been substantiated. These are:

● where there is sufficient evidence to indicate that the taxpayer has incurred the expense and there is an entitlement to deduct the amount claimed;

● where the only reason for the failure to substantiate was a reasonable expectation that substantiation would not be needed; or

● where documents have been lost or destroyed despite the taxpayer taking reasonable precautions to prevent the loss or destruction and, if the document was written evidence, it is not reasonably possible to obtain a substitute document.

It is necessary for the taxpayer to show that reasonable precautions were taken to protect documents and the taxpayer needs to show that a bona fide attempt has been made to obtain a substitute document, or there were reasonable grounds for believing such efforts would not be successful.

Taxation Determination TD 97/19 describes how to calculate the cost of fuel and oil when using the ‘one-third of actual expenses’ method or the ‘log book’ method, if you have not kept written evidence of the expense. The Commissioner accepts a reasonable estimate of average fuel costs and average fuel consumption. This combined with kilometres travelled will allow you to calculate the fuel expense.

Application to your circumstances

Division 900 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the substantiation rules that apply to work expenses, car expenses and business travel expenses.

Subdivision 900-H of the ITAA 1997 provides relief from the effects of failing to substantiate in certain circumstances.

However subsection 900-205(4) of the ITAA 1997 states that if the lost or destroyed document was written evidence, you must try to get a substitute document that meets all the original requirements.

Taxation Ruling TR 97/24 Income tax: relief from the effects of failing to substantiate provides guidance on circumstances in which relief from the effects of failing to substantiate may apply.

A bona fide attempt should be made to comply with the record keeping requirements. That is, reasonable steps need to be made to uncover the missing information.

Steps that may help in obtaining the missing information include:

● Asking the banks for copies of bank statements and/or credit card payments to obtain details of income and/or expenses.

● Check internet banking details and/or invoices emailed to you for relevant details.

● Requesting information from relevant entities in relation to expenses paid.

● Asking previous tax agents for copies of your 2008 tax return lodged, relevant schedules and any other details of income and expenses.

● Complete a ‘Copies of tax documents request’ form from the Tax Office website www.ato.gov.au. to request a copy of your last tax return and/or BAS statements.

You may obtain a copy of your previous tax return to check what deductions have been claimed. If your tax agent cannot provide you with a copy of your tax returns, you may complete a ‘Copies of tax documents request’ form from the Tax Office website www.ato.gov.au. to request a copy of your tax returns and/or BAS statements.

When you have obtained as much information as possible, you should complete and lodge your outstanding tax returns and include the best estimate of your income and deductions based on the information obtained.

There is no evidence to show that you have tried to get substitute documents to support your expenses. If no records are available, then no deduction can be claimed.

You are unable to claim a percentage amount as there is no evidence to show that this is based on the facts of your circumstances for the relevant years.

If no evidence or documents can be obtained to show that you have incurred expenses, then no deductions can be claimed. Estimates or other average figures cannot be used to claim deductions.

For future years, please ensure you obtain and keep all invoices and documents to support the expenses incurred in carrying on your business.

In your case the commissioner is not satisfied that that you have sufficient evidence to indicate that you have incurred the expense.