The tax deductions the ATO is cracking down on this year

Every tax time, the ATO focuses on certain hotspots where taxpayers are prone - either accidentally or deliberately - to make errors.

So, what is on the ATO's list this year? Expect them to be looking in particular at:

• record-keeping
• work-related expenses
• rental property income and deductions
• sharing economy income; and
• capital gains from crypto assets, property, and shares.

Let's take a look at each of those areas in turn in an attempt to understand why they receive so much attention from the ATO.

Work-related expenses

The ATO recently claimed that there was an $8.7 billion shortfall between the tax individuals are expected to pay and the tax they are actually 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. Expect them to focus in particular on:

• Deductions for working from home expenses. The way these could be claimed changed last year, with the introduction of a new 67 cents per hour fixed rate and enhanced substantiation requirements. We expect the ATO to check claims thoroughly, particularly to verify whether taxpayers have a record of all their working from hours over the entire tax year, in the form of timesheets, a diary or copy of work rosters.
• Similarly, in relation to working from home, deductions for "occupation" costs like rent, rates and mortgage interest are under the spotlight as they are not allowable unless you're actually running a business from home.
• 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 and people who are potentially "double dipping" (ie, claiming the 67 cents per hour working from home rate - which includes an element for mobile phone costs - as well as claiming their mobile costs separately).
• Claims for work-related clothing, dry cleaning and laundry expenses
• Overtime meal claims
• Union fees and subscriptions
• Motor vehicle claims where taxpayers take advantage of the 85 cents per kilometre flat rate available for journeys up to 5000kms (the ATO is concerned that too many taxpayers are automatically claiming the 5000km 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).

My 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 (look at the first focus area - record keeping!) and that it was work or business related.

Property spotlight

The other main focus this year is on people who make deduction claims in relation to investment properties and holiday homes.

The ATO recently announced that in a series of audits, they found errors in 90% of returns reviewed. 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 is to ensure that property owners keep good records (which ties into the first of those focus areas again!).

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.

Sharing economy

The ATO is convinced that many people in the sharing economy are not properly declaring their profits and gains.

So, if you obtain work through Uber, Airtasker or any of the many sharing economy platforms which allow you to rent out assets or your personal services, take heed. The ATO is now receiving reports from many platforms (including Uber), which it can use to highlight data mismatches.

Similarly, if you rent out a property (or part of one) through Airbnb and Stayz, you will be under the spotlight.

The ATO has numerous third-party sources of data which it can use to identify if you are receiving rent and they are on the look-out for mismatches with the tax return data that you report.

Cryptocurrency

The ATO will also be taking a closer look at the booming market in 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 (CGT) 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 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 provided to the ATO includes cryptocurrency 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 Australians that have invested in crypto-assets.

Shares

When you dispose of shares, assuming you are an investor, not a trader, you will normally have to pay CGT on any profits.

Typically, CGT arises when you sell shares but can also happen if you give them away or you stop being an Australian resident. CGT taxes any increase in value from the time the share was acquired.

Sometimes the proceeds and cost base of the share are not what was actually paid and/or received, but rather, the market value of the asset. This is typically to prevent people from minimising their tax by, say, selling the share to a relative for a low price.

If you dabble regularly in buying and selling shares, you could be deemed a share trader, rather than a share investor. If that's the case, the tax you pay could look very different.

A share trader is someone who buys and sells shares purely for short-term profits. Signs that you're a trader include:

• Lots of transactions
• A clear profit-making intent
• You run your activities in a business-like manner (eg, a large investment of capital, a well-developed business plan, extensive research and properly maintained books and records).

Someone who buys and sells shares as part of a business will treat those shares as trading stock, and gains or losses on them will be taxed as ordinary income (effectively as business profits) rather than capital gains.

You can see from the above that there is ample opportunity to get the tax treatment wrong or mischaracterise income in a way that gives you a tax advantage, hence the ATO interest in this area.

Make sure that you have the necessary information about all your share sales so you can report this to the ATO. You'll need details of the original purchase cost, the sales proceeds, the dates of acquisition and sale and any associated costs (e.g. brokerage fees).

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