Where taxpayers claims go wrong, from ‘edible undies to dog food’

As expected, the most area people tried to expense claims were within anything work-related, with many issues arising around over-claimed expenses where there was a weak or indirect connection to income-earning activities.

Chapman said he continued to see inflated home office claims, private travel “dressed up” as work-related, and ongoing apportionment issues with mobile phones, internet and vehicles.

In addition, Chapman outlined another recurring category where taxpayers tried their hand at getting away with inflated claims: clothing.

“Many taxpayers still assume that anything worn to work is deductible, despite long-standing rules around compulsory uniforms and protective wear,” he said.

“We are also seeing a growing number of claims driven by online misinformation, with people relying on social media advice rather than the law or ATO guidance. Clothing and home office expenses remain the most misunderstood deduction types, even after years of ATO clarification.”

According to Chapman, many taxpayers continued to struggle with the idea that convenience didn’t mean equal deductibility, which was also evident with the motor vehicle category – another “problem area”.

Motor vehicles were noted to be a problem area as there was confusion between the cents-per-kilometre method and actual expenses, and the assumption that owning a work vehicle automatically entitled someone to a deduction.

Chapman said self-education expenses were also confused as the study was seen as “career improving” rather than directly related to current income.

“Cost-of-living pressures are clearly influencing claim behaviour. We are seeing more taxpayers attempting to push the boundaries on marginal claims, particularly small recurring expenses that feel “unfair” to absorb privately,” he said.

“There is also increased sensitivity around refunds, with clients more focused on maximising deductions, sometimes without appreciating substantiation and nexus requirements. This makes the adviser’s role in expectation management more important than ever.”

When claims failed, it was often not because the expense itself was unreasonable, but rather because record-keeping fell short.

This included missing receipts, bank statements without sufficient detail, or estimates that cannot be reconstructed are common issues, as well as poor apportionment being another frequent failure point.

Chapman said this was due to taxpayers not being able to explain how they arrived at a business percentage or where the percentage was inconsistent with their work pattern.

“There must be a clear, defensible basis for apportionment supported by evidence. If the private element dominates, the deduction may be minimal or nil. Apportionments should also be reassessed regularly as work patterns change,” he said.

“The ATO’s approach to risk profiling is increasingly data-driven and comparative. Claims that are high relative to income, industry norms or previous years are more likely to be flagged.”

Chapman said in this instance, it was important to return to three simple tests when resetting unrealistic expectations, those being:

·         Would you still incur this expense if you were not earning income?

·         Could you clearly explain how this expense helps you earn that income?

·         Could you prove it to a third party with evidence?

“If a claim fails any one of these tests, it is not usually deductible, or at least not in full. Framing deductions as a matter of evidence and nexus, rather than entitlement, is often the most effective way to guide clients.”