The ATO is focusing on a range of claims that have come into greater attention this tax year, from changing work-related expenses to the sharing economy and digital currencies, said H&R Block.
Speaking to Accountants Daily, H&R Block director of tax communications Mark Chapman, said the ATO would take a stronger compliance approach this tax time.
“For the past couple of years, the ATO’s compliance activities have been relatively ‘light touch’ because their own resources have been stretched by COVID-19 and also because the ATO recognised that the community was in no place to deal with full-on compliance activity,” he said.
“But this year, the ATO has returned to a more normal pattern of working, meaning resources have been freed up to undertake compliance work including audits and reviews.
“The items on the hit list have all been the subject of ATO external communications (press releases, etc) over the past year which indicates that the ATO regards these as being high-risk areas with considerable dollars at stake.”
It was essential that accountants do the “hard yards” with their clients this year.
“Particularly with new clients, accountants need to question clients and do their own research into the client’s background – not simply take the client’s word for it,” Mr Chapman said.
“They need to stand back and ask themselves how credible is it that their client has these particular claims?
“For example, if a client is claiming the full 5,000 km at the cents per kilometre rate, but they have a job that doesn’t involve them moving from their own office (or even from home!), you must question that deduction.”
In addition, accountants would need to ask questions that aren’t necessarily the ones they would have asked in the past.
This would encourage clients to come clean about activities that they may not realise had tax consequences.
Mr Chapman said the ATO was looking to close the $8.7 billion shortfall between the tax individuals are expected to pay and the tax they actually are paying.
“The ATO believes that work-related expenses claims are the biggest element in that ‘tax gap’ and have signalled that they’ll be looking closely at these deductions this year,” he said.
“In particular, they would be looking closely at claims for COVID related tax deductions, such as quarantine expenses and protective equipment along with work-related clothing, dry cleaning and laundry expenses, especially when COVID-19 (and working from home) could be expected to have a reduction in these claims.
“Deductions for home office use, including claiming for ‘occupation’ costs like rent, rates and mortgage interest, are also in the scope which are not allowable unless you’re actually running a business from home.”
Mr Chapman said the focus on home office, mobile phone and home internet costs was likely to be particularly pronounced with so many people still working from home since COVID-19.
“The top tip before making any claim is to be confident that you understand what you can and can’t claim and that you have the necessary proof (invoices, receipts, diaries, etc) that you actually incurred the expenditure and that it was work or business related,” he said.
The other main focus this year is on individuals who make deduction claims in relation to investment properties and holiday homes.
Mr Chapman said the Tax Office recently announced that in a series of audits, they found errors in 90 per cent of returns reviewed.
“Expect them to focus on excessive interest expense claims, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property,” he said.
“This also includes incorrect apportionment of rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly.”
Holiday homes that are not genuinely available for rent also need to take caution.
Mr Chapman said rental property owners should only claim for the periods the property is rented out or was genuinely available for rent. Periods of personal use can’t be claimed.
“The focus on investment property owners is likely to be particularly pronounced because rental losses are likely to be bigger than normal this year due to the hit that rental returns have taken during the COVID-19 crisis,” he said.
“The key tip from H&R Block is to ensure that property owners keep good records.
“The golden rule is; if you can’t substantiate it, you can’t claim it, so it’s essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.”
Cryptocurrency and the sharing economy
The ATO was also taking a closer look at the booming market in investments in cryptocurrencies like bitcoin this tax time.
Mr Chapman said increasing numbers of taxpayers were jumping on the bandwagon and the ATO believes that some of them are failing to declare the profits (and in some cases the losses) they are making on their investments.
“Remember, investing in cryptocurrencies can give rise to capital gains tax on profits. Traders can be taxed on their profits as business income,” he said.
“To help them in their search, the ATO is collecting bulk records from Australian cryptocurrency designated service providers (DSPs) as part of a data matching program to ensure people trading in cryptocurrency are paying the right amount of tax.
“Data to be provided to the ATO will include cryptocurrency purchase and sale information. The data will identify taxpayers who fail to disclose their income details correctly.”
The emerging sharing economy would also be in the scope to ensure that income and expenses are correctly reported.
Examples quoted by the ATO include services such as ride-sourcing – transporting passengers for a fare (such as Uber drivers), renting out a room or house for accommodation (Airbnb).
Mr Chapman said the ATO was particularly concerned about taxpayers claiming the full CGT main residence exemption when part of their main residence has been rented out through Airbnb.
“The law prevents a full CGT exemption where part of a main residence has been used to earn income,” he said.
“This includes reting out parking spaces, providing skilled services, supplying equipment, tools along with completing odd jobs, errands, deliveries and renting out equipment.”
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.