Every Tax Time, the Australian Taxation Office (ATO) focuses on certain hotspots where taxpayers are prone – either accidentally or deliberately – to make errors. So, what is expected to be on the Australian Taxation Office’s list this year? Well, essentially, they will look at two main areas; work-related expenses and claims made by investment property owners.
What inspired ATO to have a closer look at the hotspots?
The ATO recently claimed that there was an $9 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. In particular, they’ll be looking closely at:
- Deductions for working from home, particularly in light of the new rules introduced part way through this year for claims using the ATO’s new 67 cents per hour fixed rate, which will see many taxpayers caught out for failing to have proper substantiation to back up their claim.
- Mobile phone and internet costs, with a particular focus on people who are claiming the whole (or a substantial part) of the bill for their personal mobile as work-related. New for this year is the cross-over with home working claims as the new fixed rate per hour includes an element for both mobile phone and internet use – the ATO will be on the look-out for double dipping!
- Claims for work-related clothing, dry cleaning and laundry expenses, especially when the amount of working from home could be expected to have led to a reduction in these claims
- Overtime meal claims
- Union fees and subscriptions
- Motor vehicle claims where taxpayers take advantage of the 78 cent per kilometre flat rate available for journeys up to 5,000kms (the ATO is concerned that too many taxpayers are automatically claiming the 5,000km limit regardless of the actual amount of travel)
- Incorrectly claiming deductions under the rule that allows taxpayers who have incurred work-related expenses of $300 or less in total to make a claim without receipts (the ATO believes that some taxpayers are claiming this – or an amount just less than $300 – without actually incurring the expenses at all).
H&R Block’s 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.
What is ATO’s major hotspots in 2023?
The other main focus this year is on people who make deduction claims in relation to investment properties and holiday homes. The Australian Taxation Office (ATO) recently announced that in a series of audits, they found errors in 90% of returns reviewed.
They also announced a new data-matching protocol with 17 of the largest mortgage lenders under which the lenders will supply a whole raft of financial information on taxpayers which the ATO can then use to cross-check with information provided on individual tax returns.
So, this year, expect them to focus on the following:
- 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.
- 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. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed.
- Incorrect claims for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years.
The key tip from H&R Block is to ensure that Australian property owners keep good records. The golden rule here 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 in the first place, such as rental listings.
The ATO will also be taking a closer look at those making investments in cryptocurrencies like Bitcoin. Increasing numbers of taxpayers are 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.
To help them in their search, the ATO is collecting bulk records from Aussie crypto 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 includes crypto purchase and sale information. The data will identify taxpayers who fail to disclose their income details correctly.
The ATO estimates that there are between 500,000 to one million Aussies that have invested in crypto. Given the downturn in the markets this year, the ATO is likely to be on the look-out for taxpayers who have sold their crypto at a loss, claiming (for this year only!) to be trading – as trading losses are far more flexible in the way they can be used than capital losses.
The ATO will also be looking closely at those working in the sharing economy to ensure that income and expenses are correctly reported. Data-matching is coming here too, with a new statutory obligation on sharing economy platforms to provide information on many sharing economy participants from 1 July 2023. Examples from 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 hosts are the obvious example).
The ATO is believed to be particularly concerned about taxpayers claiming the full CGT main residence exemption when part of their residence is rented out through Airbnb; the law prevents a full CGT exemption where part of a main residence has been used to earn income.
- renting out parking spaces
- providing skilled services – web or trade services etc (Airtasker workers, for instance)
- supplying equipment, tools etc
- completing odd jobs, errands, deliveries etc
- renting out equipment such as tools, musical instruments, sports equipment etc.
Mark Chapman is the Director of Tax Communications at H&R Block. Chapman has over 25 years experience as a tax professional in both the UK and Australia, specialising in tax for individuals and SMEs. He is a fellow of the Institute of Chartered Accountants in England and Wales and CPA Australia and a member of the Chartered Institute of Taxation.