ATO targets work expenses and CGT

You know it’s tax time again when the ATO starts sending out reminders of the issues it will pay close attention to this year. And those issues include two perennial favourites – work-related expenses and capital gains.

Work-related expenses

With over eight million people claiming around $16 billion in work-related expenses each year, the ATO pays close attention to claims to make sure they are legitimate.

People must keep records for work-related expense claims totalling $300 or more. If they cannot prove their claim, they will not be entitled to the deduction.

This year, the ATO says it will be paying close attention to claims from people employed in the following occupations:

Earthmoving plant operators.
Flight attendants.
Carpenters and joiners, including apprentices and trainees.
Real estate employees.

Of course, that’s not to say the ATO will ignore all other occupations – it won’t!

The most common mistakes made by people in these occupations include:

Not having sufficient documentation to support motor vehicle and travel expenses, eg. log books (where required) and travel diaries.
Incorrectly claiming motor vehicle expenses on the basis of carrying bulky equipment.
Incorrectly claiming home office, mobile phone and internet expenses. If a direct link can be made between incurring these expenses and deriving income, they may be deductible. Most commonly however, only part of the expenses may be deductible, so they need to be apportioned between private and tax-deductible (ie. work-related) use. If the expense has been reimbursed by a person’s employer, it cannot be claimed as a deduction.

For an expense to be tax deductible in the year ending June 30, 2011, it must have been incurred in that year.

Another common misconception arises where an employee receives an allowance from his or her employer. Receiving such an allowance does not automatically entitle the person to a deduction. Generally, a person must have incurred an expense related to deriving income for it to be deductible.

Capital gain tax issues

The ATO is continuing its focus on capital gains tax (CGT) this year. Last financial year, it reviewed or audited more than 400 individual CGT claims, resulting in revenue adjustments in excess of $7 million. CGT issues continue to be one of the great “sleepers” in the tax system.

The CGT regime might have been around for over 25 years now, but that doesn’t mean people understand it any better!

And the Government itself is concerned about people correctly claiming capital losses because that affects the revenue it receives. My recent SmartCompany article Tax loss claims: Government concerns send a warning flagged how and why the Government is concerned, and how the ATO is taking action. So, no wonder the ATO looks closely at capital gains and losses.

Assets which attract CGT include: real estate, shares and units in managed funds and unit trusts. It may also apply to paintings, antiques and collectables such as coins or stamps.

People should also not forget that if they purchase or inherit an asset, or receive an asset as part of a divorce settlement or as a gift, they may need to pay CGT when they sell or otherwise dispose of it.

Also, the ATO says it will continue to pay particular attention to claims for capital losses this year to ensure people correctly claim only what they are entitled to. There are specific rules that govern the claiming of such losses, so good advice is essential.

The ATO matches information with state and territory revenue offices, managed funds, the Australian Stock Exchange and share registries, so it has a vast trail of information at its disposal to track capital gains (and losses for that matter).

Perhaps the most important point to remember about capital gains or losses is the need to keep accurate and detailed records when a person purchases, acquires, sells or disposes of any asset which may attract CGT. The failure to do this leads to one of the greatest problem areas that arise in the tax system. The records that should be kept should show things like:

The date the asset was acquired (that basically starts the CGT clock ticking) and its cost or market value.
Costs associated with acquiring and selling the asset, eg. stamp duty, commissions, advertising and legal fees – these costs can affect the cost base of the asset for CGT purposes.
The date the person disposed of the asset and what they received for it or its market value.
Costs associated with holding the asset that are not tax deductible, including improvements, rates, land tax, insurance, repairs and interest on money borrowed to acquire the asset.
Market valuations of the assets if required. This is an oft-forgotten element. Basically, a cost base for an asset must be established, so sometimes it is necessary to get an independent valuation to effectively set that cost base.

In a tax sense, it doesn’t get much more basic than claiming work-related expenses or working out capital gains or losses. But basic doesn’t mean simple – after all, this is the tax system we’re talking about! By all means use the guides the ATO helpfully provides on its website, but if in doubt, it’s prudent to seek professional advice.

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