Although the shoebox has (hopefully) been relegated to the pages of quaint tax history, the principle of taxpayers needing to keep adequate records and receipts lives on. But the better organised and ordered tax recordkeeping is, the better a tax agent or accountant will be able to do what they do best — to make the most out of a client’s financial circumstances and work effectively towards a better tax outcome.
For taxpayers expecting a refund, or who have their fingers crossed for one, the sooner they get organised the sooner they will see the money. But as the government has withdrawn its proposal to allow a no-questions-asked “standard deduction” for work-related expenses, taxpayers are still expected to be able to back up claims for deductions (if claims are for more than $300, although the Tax Office will still expect there to be a justifiable basis for lesser claims).
The basic rule is that claims can be made for expenses incurred as part and parcel of earning assessable income. There are limited exceptions, which is where the expertise of a tax agent or accountant will quickly sort out what is allowable or not. But proof of expenditure is necessary, and this is where good record-keeping practices are essential. And remember, although a taxpayer may be getting essential help and advice from their accountant or tax agent, the ultimate responsibility, and liability, rests with taxpayers themselves.
On the ATO radar
Professions. The Tax Office has singled out certain professions for greater scrutiny for claims made for the 2011-12 income year. Its compliance program singled out deductions claimed by people employed as earthmovers, flight attendants, carpenters and joiners (including apprentices) and real estate employees. It says these occupations have been found to be at higher risk of making deduction errors, so anyone falling into one of these categories needs to be sure of the work-related expenses they are entitled to claim.
For 2012-13, it says it will double-check deductions made by people employed as plumbers, information technology (IT) managers, coffee shop proprietors, plasterers and non-commissioned Defence Force personnel. A further problem it will focus on is the blurring of the distinction between the status of employee or contractor (for workers in the industries where contracting is prevalent). It should be noted however that even though these areas are flagged for attention over the income year ahead, it is not uncommon for the Tax Office to scrutinise the current batch of tax returns for similar problems.
Data matching. Of course a large part of the Tax Office’s compliance armoury is its use of data matching, which as its name suggests involves comparing information that it has been given by taxpayers with data that others hold. Sources of third party information include banks and financial institutions, which are required by law to pass on information, as well as welfare organisations and of course employers. The list includes Centrelink, WorkCover, land title offices and planning authorities, property title transfers, tenancy agreements, share registers, managed investment funds, building contractors – and many more.
This can help identify people who appear to be living beyond their means – where their reported income is inconsistent with their spending. The Tax Office for example can compare a person’s reported income to information from government licensing bodies for luxury cars or boats.
Superannuation. Another hotspot for Tax Office scrutiny will be over-contributing to superannuation. The contribution caps were made a lot tighter from July 1, 2012, and a last-minute rush to boost superannuation before the cap was lowered could well have put many pre-retirees in danger of over-contributing for the 2011-12 year. The Tax Office seems to be taking a hard line on super contribution caps, so if calculations were incorrect, or the contributions were recorded by the super fund after deadline (not helped this year by June 30 being a Saturday), the ensuing excess contributions tax can be punishing. One saving grace is the recently legislated ability to have any inadvertent over-contribution amounts reallocated to ordinary assessable income (up to a value of $10,000, available once-only, and only for concessional contributions).
Split loan arrangements — a combination of an investment loan, a home mortgage and a credit facility — are also in the taxman’s sights. These schemes have been promoted as “mortgage management plans”, and are marketed as a way to pay off one’s home loan faster. But the Tax Office takes the view that these schemes are essentially a tax avoidance mechanism and has stated that interest deductions relating to split loan arrangements may be denied after a surge in such schemes last financial year.
Share dividend income is also under scrutiny, as the Tax Office reports a growth in investment tax return mistakes over recent years. But as with all of the above, keeping adequate records will give tax agents the best chance to keep tax returns compliant. Include records of reinvested dividends, bonus share details, any gifting (in or out) of equities or inherited shares.
Rental property. Statistics have also exposed rental property loss claims as a growing concern, therefore expect the Tax Office to keep a close eye on these. Remember the purchase cost of land bought on which to construct a rental property is not deductible, but forms part of the cost base for capital gains calculations, as are initial repairs carried out to a property in order to lease it out. Again, it is advisable to keep all records of transactions to do with rental property.
Giving a tax agent all the relevant facts will certainly help ensure taxpayers stay on the right side of the tax laws. But should anyone’s tax affairs stray from the straight and narrow, the penalties can be onerous. While there are several categories of tax misdemeanours, and various levels of fines applied, the general (but not the only) method of determining the penalty is to base this on an allocation of “penalty units”.
Currently a penalty unit is given a value of $110 (the ATO increased penalties on 28 December 2012…. a penalty unit is now $170), and depending on the “crime” a multiple of units may be assigned. For example, not retaining required records can invite a 20-unit penalty; not providing access to a tax officer may cost another 20 units, or not paying an amount electronically on time could be hit with a five-unit penalty. The penalty for failing to lodge a tax return is also made worse by the passage of time it is overdue, as it has more units added after 28 days overdue, more after 56 days and so on. Interest can also be charged on penalty amounts.
Depending on financial circumstances, here is a checklist of the sort of paperwork that may be needed to ensure tax agents are given a smoother tax return task:
PAYG summaries, or Centrelink statements if any. Include any foreign sourced income
Eligible termination PAYG summary for superannuation and redundancy payments
Details of all bank interest, including any withholding tax; also provide branch, BSB and account number
Dividend distribution payment advices (generally two each year), trust distribution statements and/or deceased estate payments
Purchase and/or sale documentation regarding assets for capital gains calculations (shares, rental property, land, trust units etc)
Rental property income and expense details, including loan and agent statements
If claiming motor vehicle expenses, logbook or diary of business travel undertaken. If logbook, include speedo reading at June 30. If not claiming a rate per kilometre, include details of all expenses (repairs, lease or loan payments, registration, insurance, fuel etc)
Details of work-related expenses (professional subscriptions, travel, self education, journals, stationery, friendly tax agent’s fee etc). Capital items costing more than $300 each require date of purchase and description
Home office expenses; include size of office (eg one room of 10sqm in a 200sqm house), or claim using 34-cents per hour (ask our office for details on this) with a log recording one month’s data
All gifts and donations made
Medical out-of-pocket expenses over $2,060 for the 2011-12 year
Partner’s income (include Centrelink statement for family payments, child support, and tax-free pensions)
Private health insurance statement for year ended June 30, 2012.
While much of the above will apply to individuals and sole traders, business-specific records may also include details of PAYG paid and copies of income and business activity statements.