Earlier in the year, the ATO issued a warning, telling people to keep appropriate receipts and other documentation, particularly for what they call "other work-related expenses". And that warning is accompanied by ATO staff being directed to undertake random audits to make sure people are following the rules when it comes to work-related expenses. So, what can you do to ensure you aren't hit with any fines of extra payments to the ATO?
Consequently, Australians are now officially "on notice" to have their receipts ready for inspection."]
What are legitimate work related expenses?
In order for a deduction to be a legit work-related expense it needs to satisfy three criteria.
- You must have paid for it and not been reimbursed
- It must be directly related to earning your income and not a private expense
- You must have a record to prove it
If you've been claiming things that don't satisfy those criteria then it's time to clean up your act.
You've still got time
The good news is the ATO has issued the advice now. So, if you've been squirrelling away deductions that you're planning to add to your tax return for 2017-2018, you can remove those from whatever system you use for managing deductions.
If you're in doubt about what's a legitimate claim and what might be considered "creative accounting", the ATO has a list of what's OK and what's not. For example, if you've been claiming car expenses for the trip between home and the office, there are some situations in which that's OK and others where it's not.
The ATO's advice is written in clear English so you shouldn't have any trouble understanding the difference between valid and dicey deductions.
Record keeping is key
If you are audited by the ATO, it's really important to have good records of what you've claimed as a deduction, why it's justified and appropriate documentation like receipts.
The ATO requires you keep all receipts for five years after you lodge your return. In the old days, that meant a shoebox filled with little slips of paper that were a pain to sort through. However, the ATO is OK with you storing copies of documents electronically.
I do that using a Fujitsu ScanSnap scanner and Evernote. Every receipt is scanned and Evernote makes them searchable. So, if I need to find a receipt for an audit or a warranty claim, I can search for it easily, rather than rustling through a box of tiny, and often faded, slips of paper.
The Fujitsu ScanSnap S1300i is not a new product. It's been around for a while and I've been using one on my desk for the last couple of years. It is an essential part of my office workflow and has reduced the amount of paper I need to retain to almost (but not quite) zero. Here's what I've learned along the way and why I recommend the ScanSnap S1300i.
As long as you've been following the first couple of rules about the expenses being within the rules and directly related to work, then having easy access to documentation will make the audit process much smoother.
How does an audit work
If the ATO decides to conduct an audit, they'll call and make a time to see you, providing an agenda for what they'll be discussing and what they'll need from you. However, while they do define the scope of the audit at the start, if they spot anything untoward, they receiver the right to expand the breadth of their investigation.
The entire process is documented and the ATO provides everything they do in writing. That's important as you won't get official correspondence regarding an audit over email.
Alternately, the ATO has rights to conduct audits electronically through the imaginatively named e-Audit process. This is where the ATO uses their rights to examine electronic records they hold in their systems and look for items that raise their attention.
When to comes to communications from the ATO, they say:
The ATO uses a variety of methods to engage with taxpayers or their agents, and in some circumstances we will contact a taxpayer by letter, phone, email, or SMS.
If you receive a call, letter, email, or SMS that you weren’t expecting, you can check whether it is genuine through your tax agent, or by calling the ATO scams hotline on 1800 008 540.
But the main thing is...
Be honest in your dealings with the ATO. It might be tempting to try and put one over the auditors but if you're caught out the penalties can be significant.
And, for most individuals, we're probably talking about saving just a few bucks. Even if you add $1000 of phoney or dubious deductions to your tax return, unless you're on the highest tax bracket you're only likely to save a couple of hundred bucks.
If you want to reduce your tax bill, you need to claim as many legitimate deductions as you can. While most people know about travel expenses and charitable donations, there are many additional deductions you might be able to claim. Some of these items may surprise you - from video game consoles and Netflix subscriptions to pet dogs and sex toys.
This story has been updated from its original publication.