As we head towards the end of the financial year, many people will be thinking about deductions to reduce taxable income. But, as always, it is important to be prudent and avoid mis-claiming to avoid an audit from the Australian Taxation Office.

The ATO has previously said that a small number of individuals over-claim expenses, amounting to losses of around $8.7 billion dollars in taxation revenue.

The following areas are currently being targeted by the tax office:

  • individuals claiming high work expenses
  • landlords over-claiming interest costs on investment property loans
  • failure to properly declare capital gains on property sales.

The ATO uses sophisticated data matching to scrutinise financial transactions and expense claims. Together with state revenue authorities, the tax office receives information from various organisations including employers, banks, share registries and other government agencies about taxpayers’ transactions and assets.

For workers, the ATO has also developed benchmark statistics for average deductions for different occupations and uses this data to identify taxpayers whose claims are well above average, which may trigger an audit, says Bruce Brammall of Bruce Brammall Financial. He suggests the ATO tends to target taxpayers in the top 10 per cent of claimants for a given profession.

“So, if you are a lawyer, for example and your work-related deductions are around $10,000 and the 10th percentile claims are $25,000, then the ATO may target lawyers claiming $30,000 or $40,000,” says Brammall.

The ATO might also decide to audit the tax returns of clients of accounting firms. In these instances, it may look at a particular firm that has clients who tend to claim a lot more than the average and therefore audit several clients of that firm,” says Brammall.

How COVID-19 affects tax claims

For many of us, working from home expenses will be greater this year. The ATO expects a substantial jump in people claiming deductions for working from home or for protective items required for work. But at the same time, the ATO expects to see lower travel expenses and laundry costs.

The tax office has introduced a temporary "short-cut method" that applies from 1 March 2020 to 30 June 2020 which can be used by Australians who have incurred expenses for working from home because of COVID-19. It covers all deductible expenses, so taxpayers cannot claim for any other working from home expenses. If taxpayers prefer, they can use other existing methods to decide claims.

“What you can claim really depends on your circumstances. Whilst we are trying to make it easier for people to claim what they are entitled to; we are also asking people to take a bit of extra care if their circumstances have changed this year,” says Assistant Commissioner Karen Foat.

However, particularly large claims may still prompt the ATO to ask questions, such as substantiating the number of hours worked using a diary or timesheet, says HLB Mann Judd Sydney tax partner, Peter Bembrick.

“The ATO has made it clear that they will be examining claims for such items as protective clothing and work-related travel where the COVID-19 restrictions would suggest that in some cases such claims should be reduced.”

Property investors ‘a perennial target’

As for workers, the ATO applies a similar method in deciding which landlord claims to scrutinise depending on the size of deductions.

“People who tend to claim average deductions related to rental properties probably won’t attract attention. But for those people sitting in the top 10 per cent of deductions in terms of the amount claim, then the ATO might target those taxpayers. It may only be 2 per cent who are mis-claiming and the other 8 per cent may have large deductions for valid reasons such as depreciation.

“But property investors must be aware of what they're claiming. It is a perennial target for the tax office,” says Brammall.

Another area which commonly attracts the attention of the ATO is "debt recycling" to boost deductions of interest costs, says Brammall.

“The ATO is always on the lookout for debt recycling. So, if, for example, you have $100,000 of BHP shares and just before June 30 you sold them and you use the $100,000 to pay down your home loan, then take out an investment loan and soon after buy back those $100,000 worth of BHP shares, then the ATO may see this as debt recycling. You may get into trouble if you are just trying to change your tax position to get a benefit to avoid paying tax,” says Brammall.

“One way to avoid that is to space out the transactions, so, for example, if there is two months between your sale of the BHP shares and buying them back, or if you use the $100,000 proceeds of the new investment loan to buy Rio Tinto shares instead of BHP. If you buy different assets or space the transactions apart or buy back a different amount, then the ATO is less likely to view this as debt recycling,” he says.