Mainstream media last week was full of reports about the ATO taking a dim view (or dimmer, this year) of the abuse of work related expense claims for individual taxpayers. The total value of such claims rose to a record $21.2 billion in 2017, and reports contend that the ATO is concerned about over-claiming and even outright fraud.
ATO advice to the profession was that tax practitioners, before including claims for work related expenses at label D5 for the 2018 tax time, should consider making sure clients can show:
- they spent the money themselves and were not reimbursed
- the expense was directly related to earning their income
- they have a record to prove it.
The push on work related expenses (WREs) comes on the back of the release by the government of a House of Representative Economics Committee’s report on its inquiry into tax deductibility.
Where it all started
Readers may recall that the inquiry was in part triggered by the identification of $100 million of abuse of WREs in a single year through a review by the ATO (see page iii) of the WRE claims of about one in 1,000 taxpayers, and that the review was then extended to cover deductions more broadly, including interest deductions.
On an international level, the report found that the Australian tax system is relatively generous in providing for WREs. By way of comparison, the report looked at the treatment of WREs by other jurisdictions.
International comparison of deductions for WREs.
Finding the nexus
A related fact that came out of the inquiry was that most WRE claims, including car and self-education expenses, increased with income. At first glance this fact may seem to hold some incongruity, in that expenses for a vehicle or a vocational educational course should not increase if the taxpayer enjoys a boost in their salary.
However it can be an accepted factor that the nexus between income and expenses incurred is not always obvious. In regard to vehicles, if a taxpayer has a bigger pay packet it’s a natural tendency for them to get a better car, and with that the running costs and other expenses can increase as a result — a Mercedes can cost a lot more to maintain than a Mazda.
Where to next?
A further feature identified by the review was the wide variation in the WRE claims among individuals with identical occupations and incomes. This issue was partly explained by taxpayers interpreting expenses differently and some employers paying for a particular expense while others do not.
The paper noted that Canada, which has a similar tax system and administrative arrangements to Australia, estimated that 10% to 15% of WRE claims are invalid. The government concluded that if this was a similar order of invalid claims in Australia then this would have amounted to an over claim average of between $1 and $2 billion.
In conclusion, the review made the following three findings in relation to WRE deductions:
- The scope of work-related expenses for which a tax deduction can be claimed is broad by international standards.
- Deductibility for work-related expenses adds a great deal of complexity to the personal income tax system and imposes high compliance costs on taxpayers.
- The scope and number of claims significantly limits opportunities for fully automating the preparation of tax returns using pre-filling.
In other words, watch this space.