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Errors and over-claiming for work related expenses and the Tax Gap (Part 2)

In case you missed it, Tax Commissioner Chris Jordan made a public address on the 5th of July 2017 in which he spoke about the ATO’s plans moving forward, especially concerning tax gaps. Let’s take a brief rundown of the situation as it stands:

  • The ATO, for the first time is going to publish estimates for corporate tax and income tax gaps for different segments. They were previously publishing estimates for GST based gaps.
  • Their first release of these numbers was for the corporate tax gap calculated based on 2014-15 data, which is approximately $2.5 billion (a tax gap is the difference between what the ATO has collected and what it should have collected, were everyone compliant with the existing laws.)
  • This $2.5 billion tax gap shows that the ATO has collected about 94% of the corporate tax they should be receiving, 91% voluntarily declared and 3% through compliance intervention. While this is around global best practice, the ATO will continue to closely watch the 1400 businesses in that segment.
  • Their current aim for corporate tax is to work with taxpayers to encourage voluntary compliance and move away from the necessity for increased intervention.
  • The ATO is now dedicating more resources to other markets they believe, from their initial findings to have higher tax gaps. Namely; small businesses, the black economy (the cash economy) and the individuals market.

What does this mean going forward for small and cash based businesses?

  • For small businesses, especially those operating under cash basis, they can expect more scrutiny from the ATO. As the Commissioner explained, they would like to increase the use of community referral information (dob-ins) and increase visits to cash only business premises. Their initial aim is to ensure that these businesses are registered correctly and understand their tax obligations. However, if they do not comply, this could lead to audits and penalties. The biggest risk within the cash industry is that these businesses are at a higher risk of not reporting their sales correctly.
  • There is also increased attention towards PAYG and super payments made by employers as the number of dob-ins from employees has increased. In addition to this, the ATO, regulators and Fair work Ombudsman have also pledged to increase monitoring of super payments as well as trying to provide a reliable estimate of the superannuation gap.
  • Therefore, it is important to understand all your obligations as a small business owner in terms of taxation and other employer payments and be prepared to provide evidence of your accounts to the ATO should they come knocking.

What does this mean for Individuals? What are the common misunderstandings when it comes to work related claims?

  • The ATO will now be identifying excessive work related expense claims by comparing taxpayers against their peers in similar jobs that are earning similar amounts of income.
  • The most common work – related expenses are for; car expenses, travel – meals and accommodation, clothing and self - education

These are the following things to remember in regards to claiming work – related expenses:

  • Trips between home and work cannot be claimed unless your house can be regarded as a place of employment and you had to travel to different workplace for the same employer. If you see a travel allowance amount on your payment summary, it has to be claimed as income.
  • You can only claim costs for accommodation and meals if you are required to work away from home for at least one night or more and you can only claim petrol and parking for work trips. Any private/ personal spending on these trips cannot be claimed.
  • Claims can only be made for uniforms and protective gear that would not be worn outside the workplace like uniforms with company logos. Plain clothes like white shirts/ black trousers cannot be claimed even if you are required to wear them by your employer.
  • Self education claims must relate to your current job. You cannot claim expenses for jobs that you want to apply for, etc.

Lastly, what tools will the ATO be using to help close the gap and what does that mean for me?

Two tools that the ATO will start utilising to help combat the tax gap are online applications and evidence based claims.

  • The ATO will start providing online applications to make the process easier and we may soon see that some information is already pre-filled. This would require access to third party information on behalf of the ATO but it would mean that individuals only have to confirm that the information is correct and move on.
  • They will also require evidence for claims made going forward. This essentially means that if you provided the documents you used for your calculations to the ATO they should be able to come to the same amount as what you have calculated. So remember to keep all your records to prove your claims!

Finally, remember to heed the ATO’s message during tax time!

  • Declare all your income
  • Don’t claim a deduction when you didn’t spend the money
  • Don’t claim a deduction for private expenses and
  • Keep records to prove your claims!