Don’t fly the red flag: How to avoid dodgy tax claims

Steer clear of dodgy tax claims by being on top of what’s allowable and what’s not – and be aware of what the ATO is targeting this year.

While it might be tempting to put in a tax claim for last year’s expensive wedding reception (after all, you did invite some clients), it pays to know which deductions you can claim and which you can’t. The last thing you want to do is raise a red flag that grabs the attention of the Australian Tax Office (ATO).

In recent years, some of the dodgiest claims the ATO has received have included Lego sets, dental expenses and, yes, a wedding reception. If in doubt, the ATO says it’s important to remember the three golden rules about work-related expenses:

• You must have spent the money and not have been reimbursed
• They must directly relate to earning your income and not be private in nature
• And you must have a record to prove it (the best record is a receipt)

READ: Sole trader tax: What you need to know

Work expenses in the spotlight

The ATO targets different aspects of people’s tax returns each year. If you’re an individual taxpayer (including sole traders), it’s worth noting that work-related expenses are one of the three areas the ATO is targeting in 2020-21. The others are rental income and deductions, and capital gains from cryptocurrency, property and shares.

“We want to reassure the community that we will be empathetic to and understanding of legitimate mistakes where good-faith efforts have been made,” said an ATO spokesperson. “However, we will apply penalties against those deliberately trying to get away with doing the wrong thing.”

Small business focus

If you’re a small business (including sole traders), the ATO has additional focus areas. This year, they are:

• Using third-party data, such as the taxable payments annual report data, to ensure income is declared in tax returns
• Monitoring losses claims, particularly for first-time loss makers, and closely monitoring loss carry back and temporary full expensing claims
• Monitoring small businesses to ensure they are making distinctions between private and business activities
• A continued focus on shadow economy behaviours, such as deliberately not declaring income, operating outside the system and not complying with payment and lodgment obligations.

“In all our compliance activity, we will be conscious of how each business has been impacted by the current environment,” said the spokesperson.

READ: What will the ATO be scrutinising this EOFY?

Working from home deductions

If you’ve been working from home (WFH) and aren’t quite sure about how to claim your expenses, the ATO has simplified matters.

In 2019-20, it introduced a temporary shortcut method for claiming WFH expenses during COVID-19, and this method continues to be available for 2020-21. It allows individuals and small businesses with WFH expenses to claim an all-inclusive rate of 80 cents per hour, rather than needing to do complex calculations for specific items. You just need to keep a record of how many hours you work, and multiply the hours worked at home by 80 cents.

“The temporary shortcut method can also be claimed by multiple people under the same roof; unlike existing methods, it doesn’t require a dedicated work area,” said the spokesperson.

But, be wary of double-dipping: if you claim WFH expenses using the all-inclusive temporary shortcut method, you can’t also claim for specific items such as laptops or desks. The shortcut method is all-inclusive.

This information is general in nature and does not constitute professional advice. For guidance specific to your situation, MYOB suggests engaging a specialist advisor near you ASAP.