How good records can overcome tax problems

The tax law can be accused of many things. Being easy to understand and apply is not generally one of them.

The tax law essentially requires that deductions for expenses incurred in gaining one’s assessable income be substantiated, ie. that proof of the expense be kept such as a receipt or log book. The principle rolls off the tongue easily, and seems logical and reasonable enough, but the practical implications of the principle are another thing.

A case in point was a recent decision of the Administrative Appeals Tribunal (AAT) concerning a truck driver’s claim for deductions for the cost of meals he had while travelling.

The man was a long-distance truck driver employed by Toll Linehaul. He was based at their Smithfield depot in Sydney and his route mainly consisted of Sydney, Adelaide, Perth and back.

He was paid an allowance for food and drinks by Toll (called a “living away from home allowance”) which is shown on his payment summary at the end of the financial year. The allowance received in the 2007 year was $6,516 and in the 2008 year was $6,889. The truck driver claimed deductions (for the cost of meals consumed by him at roadhouses along highway routes) of $19,314 in respect of the 2007 year and $19,998 in respect of the 2008 year. Those deductions were claimed as work-related travel expenses.

However, the allowance was in fact paid in accordance with an enterprise agreement which stated that the only necessary qualification to receive the allowance was that an employee drove more than 500km in a 24 hour period. Under the enterprise agreement, it was not necessary for the employee to actually sleep away from home.

For the 2007 and 2008 years, the taxpayer provided his tax agent with information regarding his estimated nights living away from home. The tax agent then calculated the meal deduction according to that information and the Commissioner’s daily rates contained in Taxation Determinations for the relevant years.

The Tax Commissioner conducted an audit and disallowed the meal deductions as the taxpayer could not produce documentation to substantiate the deductions. Further, the Commissioner imposed a 25% shortfall penalty for failing to take reasonable care. The taxpayer argued that he was entitled to a deduction for meal expenses as they were incurred in the derivation of his allowance. Secondly, the taxpayer contended that the allowance he received was a travel allowance, therefore the exception to the substantiation rules in the tax law applied.

On a fundamental level, the AAT said that while most meal expenditure is private in nature, some of the expenditure could have an employment-related character, but in the case before it, due to the lack of of reliable information as to the amounts actually incurred, it could not determine how much of the expenditure was within one category rather than the other. Therefore, the AAT held that the taxpayer had failed to establish that the ATO’s assessments were excessive.

It is significant that the driver was not able to produce any evidence to substantiate his meals expenditure. His evidence indicated that, by and large, he took his meals at the same restaurants on a regular basis; he explained that the size of his vehicle was such that parking it was possible only at a limited number of venues. On this basis, the AAT considered that evidence might have been available from the restaurants concerned for what in all probability the driver might have spent during the relevant years, but this was not provided.

The Tribunal was of the view that the driver was not concerned with the acquisition and retention of suitable vouchers simply because he did not think it necessary to do so. That said, the Tribunal accepted that during the relevant years, the driver did spend some amounts on meals consumed while driving but at the same time, it said it could not form any view as to how much was spent and when it was spent. As the driver had the onus to prove his case, and as there was no evidence whereby any meal vouchers would have been available, the AAT found against him.

The AAT said the truck driver would be entitled to a deduction for meals only when on a trip which required him to sleep away from home. In the absence of such a requirement, the meal expenses would necessarily be regarded as private in nature and therefore not tax deductible.

The Tribunal examined the enterprise agreement between the taxpayer and his employer, and held that the allowance was simply a “loading” paid to drivers for travelling long distances, ie. more than 500km. That being so, the AAT said the taxpayer did not incur “travel allowance expenses” because there was no loss or outgoings incurred by him for “travel that was covered by a travel allowance”.

The general position is that a taxpayer must get “written evidence” to substantiate work expenses, and must keep “travel records” for expenses related to travel of six or more nights in a row. In the present case, there was no written evidence in relation to the deductions claimed by the truck driver in the 2007 and 2008 income years.

In relation to the 25% shortfall penalty, the Tribunal held that the truck driver’s approach to his taxation obligations was reasonable. The AAT remarked that the truck driver’s approach to his taxation obligations seemed “to be entirely acceptable” – he provided information to a registered tax agent and relied on that agent to prepare his tax returns for him. The AAT was of the view that it could not “reasonably be expected of a long-distance truck driver (who has engaged a registered tax agent to prepare his tax returns) that he, the driver, should undertake a detailed analysis of the taxation law and Commissioner’s rulings to determine whether a draft return prepared for him by his agent contains accurate information”.

The AAT also held that the truck driver’s tax agent had failed to take reasonable care in the circumstances and found the imposition of the 25% penalty correct. However, the Tribunal remitted the penalty to nil as it considered its imposition to be harsh in the current case – the driver had done all he could to comply and engaged a tax agent to prepare his returns.

This case again illustrates the need for taxpayers to keep records. While the tax law in the area of allowances and meal expenses is somewhat complicated, the keeping of good records can help overcome potential problems.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .