Australia: Work-related expenses in the firing line by the ATO

Last Updated: 7 September 2015

With Tax Time 2015 in motion, the Tax Office has flagged that it will pay particular attention to work-related expenses. It says it's an area that adds up to about $19.5 billion in tax deductions each year.

In previous years, the Tax Office has tended to focus on work-related claims made by particular professions, such as real estate agents or airline pilots for example. But this year the emphasis seems to be on certain expense claims that it deems to be "high risk" as opposed to targeting certain professions.

The Tax Office's intentions are spelled out in its recently released Building Confidence webpage, which replaces the previous annual Compliance in focus publication. The new webpage is an improvement in that it broadcasts the Tax Office's compliance concerns on a more regular basis.

The Tax Office indicates that this season it will be paying particular attention to the following work-related expenses:

  • overnight travel
  • expenses for transporting bulky tools and equipment between home and work, and
  • the work-related proportion of use for computers, phones and other electronic devices.

Overnight travel
The Tax Office is concerned about excessive claims made for overnight travel costs such as transport, accommodation and meals. As a general rule, employees can claim a deduction for travel expenses they pay where:

  • their employer requires them to perform their work away from their usual workplace for a short period, and
  • it would be unreasonable to expect them to return home each day, which means they must stay away from home while they are doing that work.

Note that as a rule of thumb, the Tax Office considers that an individual is "travelling" for work purposes (compared to "living-away-from-home") when the period away does not exceed 21 days. In some cases, the employer may provide a travel allowance to help cover the costs of such overnight travel (more on this below).

Overnight travel expenses can include costs such as meals and accommodation, parking, tolls and transport costs. Note that for car expenses, this excludes operation costs such as fuel, as well as depreciation, but these can be claimed through a different tax rule.

Importantly, all travel expenses must be actually incurred (i.e. paid) before a claim can be made and appropriately apportioned between business and private expenses.

Substantiation exception
Generally, all travel expenses must be substantiated otherwise the claim will be denied in the event of a review or audit. There is however a "substantiation exception" available under tax law for particular travel claims. Under this exception, individuals can claim a deduction for the full amount of their overnight travel expenses without keeping all records if: they receive a "bona fide" travel allowance that could reasonably be expected to cover their accommodation, meals or expenses incidental to travel, and the overnight travel expenses are equal to or less than the reasonable allowance amount that the Tax Office sets (ask this office about how much these are). However, there are certain rules that operate under the substantiation exception, which are set out in the table below.

Situation

Outcome

Where the deduction claimed is more than the reasonable amount.

The whole claim must be substantiated with written evidence, not just the excess over the reasonable amount.

Where the allowance received:

·   is not shown on the employee's payment summary

·    is not greater than the reasonable amount, and

·   it is fully expended on deductible expenses.

The allowance received is not required to be shown as assessable income in the employee's tax return.

A deduction for the expense cannot be claimed in the tax return if it is not shown.

 

Where the allowance paid by the employer is greater than the reasonable amount.

The taxpayer may still use the substantiation exception if the claim is not greater than the reasonable amount. But the allowance must be shown as assessable income. Written evidence is not required to support the claim.

Where the deductible expense is less than the allowance received.

The taxpayer must show the allowance as assessable income in the tax return, and claim only the amount of the deductible expenses incurred.

Situation Outcome

Where the deduction claimed is more than the reasonable amount. The whole claim must be substantiated with written evidence, not just the excess over the reasonable amount.
Where the allowance received:

  • is not shown on the employee's payment summary
  • is not greater than the reasonable amount, and
  • it is fully expended on deductible expenses. The allowance received is not required to be shown as assessable income in the employee's tax return.

A deduction for the expense cannot be claimed in the tax return if it is not shown. Where the allowance paid by the employer is greater than the reasonable amount. The taxpayer may still use the substantiation exception if the claim is not greater than the reasonable amount. But the allowance must be shown as assessable income. Written evidence is not required to support the claim. Where the deductible expense is less than the allowance received. The taxpayer must show the allowance as assessable income in the tax return, and claim only the amount of the deductible expenses incurred.

Where the substantiation exception does not apply, written evidence (such as an invoice or receipt) and/or a travel diary must be maintained for work-related travel. This can include invoices, receipts or other documents showing the travel expense and travel allowance details, and receipts or other documents (such as travel diary entries) for transport costs. A travel diary is a document that shows the dates, places, times and duration of the individual's activities and travel. Each diary entry must show the date the expense was incurred, the name of the supplier and the amount and type of expense. A travel diary is required for tax purposes when the travel is for six nights or more in a row.

Transporting bulky tools and equipment
As a general rule, expenses incurred by an employee for travelling from their home to their workplace and back are not deductible as this is considered to be a private expense, although there are some exceptions. One of these is where an individual transports bulky tools and equipment required for their work, provided that certain requirements are met.

This would apply to individuals whose work is typically carried out off-site – for example, trade and sales people whose roles require them to travel. The Tax Office's concern is whether such expenses have been correctly claimed within established requirements. It has set out some guidelines for such travel, including:

  • a deduction is not allowable if a secure area for the storage of equipment is provided at the workplace
  • if the equipment is transported to and from work by the employee as a matter of convenience or personal choice, it is considered that the transport costs are private and no deduction is allowable a deduction may be allowable if the transport costs can be attributed to the transportation of bulky equipment rather than merely private travel between home and work – that is, it is expected by the employer for such equipment to be transported
  • the extreme bulk of the equipment is also a decisive factor in determining deductibility, or
  • the requirement to incur transport expenses to carry bulky equipment is a reflection of the practical necessity for the employee's tools of trade to be readily available at each work site.

Computers, phones and similar devices
Another issue of concern is whether individuals have correctly calculated the extent of work usage for their computer, tablet, mobile phone or other electronic device when claiming deductions.

Employees may be able to claim their expenses incurred in relation to operating their land line telephone, mobile phone, computer and tablet to the extent that its use relates directly to their employment. The same applies to individuals who are business proprietors. The cost of the device itself however is on capital account and is generally not deductible; however depreciation deductions may be available (if eligible).

For mobile phones, the cost under a standard 12 or 24 month "lock-in" contract typically contains the monthly cost of calls and data (plus any monthly phone repayments). The monthly call and data costs will need to be apportioned on a reasonable basis for work/private use. Under a typical monthly phone repayment plan, the phone is owned by the individual with interest-free monthly instalments paid for the duration of the contract. In this regard, the monthly repayments should not be immediately deductible, however the total value of repayments owed under the repayment plan should reflect the cost of the device for depreciation under the capital allowance provisions (see below). As a general rule, the cost of phone expenses are deductible for employees who can demonstrate they are either "on call" or are required to contact their employer on a regular basis while they are away from the workplace.

According to the Tax Office, the work-related portion of telephone calls can be identified from an itemised account, or can be estimated by maintaining diary entries made over a four week period and claiming the relevant percentage of costs.
Home internet expenses are also apportioned for work/private use. Receipts or other documentary evidence of the total cost must be maintained.

The cost of connecting or installing a telephone, mobile telephone or other telecommunications equipment and expenses incurred for the early cancellation of a mobile telephone contract are not allowable deductions as they are not incurred in gaining assessable income and are of a capital nature.

Cost of the device
As noted, the cost of a computer, laptop, tablet or mobile device is not generally deductible. A deduction can be claimed over its effective life (as prescribed by the Tax Office).

However, an immediate deduction can be claimed under the following circumstances:

  • a small business may be eligible to claim an immediate deduction for a computer or a device which costs less than $20,000 under the new (and temporary) immediate asset write-off rules, and
  • individuals who are not conducting a business (salary and wage earners) can claim a deduction for the full cost of the device if it does not exceed $300 provided that the device is used predominantly for work purposes.

Claims should be based on a reasonable estimate of the individual's business or work-related usage. The Tax Office will accept an estimate based on a diary record of both private and work-related usage that is maintained. Receipts or other documentary expenses must be maintained to support claims.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.

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