As tax time 2018 kicks off this weekend the Australian Taxation Office (ATO) has profiled the five most common mistakes and the personalities most likely to have tax time troubles.
Assistant Commissioner Kath Anderson said it’s often simple mistakes and misunderstandings that trip people up.
“While we know most people want to get it right, our audits and reviews show that there are five main areas where taxpayers are most likely to get it wrong.”
The top five mistakes include taxpayers who are:
leaving out some of their income – maybe forgetting a temp job or money earned from the sharing economy
claiming deductions for personal expenses – home to work travel, normal clothes or personal phonecalls
forgetting to keep receipts or records of their expenses
claiming for something they never paid for – often because they think everyone is entitled to a ‘standard deduction’
claiming personal expenses for rental properties – either claiming deductions for times when they are using their property themselves or are claiming interest on loans used to buy personal assets like a car or boat.
Ms Anderson says many of the mistakes are avoidable and there are a few things taxpayers can do to make sure their tax time experience is stress-free.
“Know what you can legitimately claim. There are three golden rules for work-related expenses. You must have spent the money yourself and not have been reimbursed, it must be directly related to earning your income, and you must have a record to prove it,” Ms Anderson said.
“This tax time we will be paying close attention to claims for private expenses like home to work travel, plain clothes, and private phone calls. We will also be paying attention to people who are claiming standard deductions for expenses they never paid for.”
Tax can sometimes be tricky, but it’s not tricky to keep good records.
“Around half of the adjustments we make are because the taxpayer had no records, or they were poor quality. Yet it’s so easy to keep your records, using the myDeductions tool in the ATO app. Just take a photo, record a few details and then at the end of the year upload the information to your agent or to myTax.”
Another tip is to include all your income. “A temp job, cash jobs, capital gains on cryptocurrency, or money earned from the sharing economy is all income that must be declared. We are constantly improving our data matching tools and even a one-off payment may be enough to raise a red flag.
“We know some people lodge early because they want their refund, and that’s fair enough. But we amend returns for thousands of taxpayers that leave out some of their income. This can delay your refund or even see you owing money to the ATO. If you wait until mid-August, we will have pre-filled most of your income information for you, to help you get it right to start with.”
Pre-fill is available whether you choose to lodge online with myTax, or with a registered tax agent.
For those intending to push the boundaries, or perhaps fudge some parts of their return, the ATO has you in its sights.
“We are increasing our investment in education and assistance, as well as reviews and audits. This year we are expecting to make contact with more than 1 million taxpayers either directly or through their agents,” Ms Anderson said.
Finally, if you make a mistake, don’t panic.
“We know people sometimes make mistakes or forget to include something on their return. If you’re in that situation, try to fix it as soon as you can to minimise any interest and penalties. Either contact your agent or lodge an amendment online.
“Remember: Whether you use a tax agent or lodge it yourself, you are responsible for the claims you make. Take the time to check your deductions are legitimate and you have listed all your income before lodging.”
You can also check your tax time readiness with the ATO Tax Time Quiz
The five most likely to get it wrong this tax time
Emily the early lodger
Emily likes to be on top of things, and is pretty keen to get her return as soon as possible, so lodges her tax return in early July. Unfortunately for Emily, she’s much more likely to forget to declare income from a two week temp job last year.
By waiting until pre-fill is available in August the ATO will automatically input most of your information from employers, financial institutions, and government agencies. Just check the details are correct and add any missing information. If you’re lodging before pre-fill is available make sure you include all your income to avoid penalties.
Fiona the freeloader
Fiona likes to look her best, so spends lots of money on the latest fashions and make-up to wear to work. When it comes to tax time, Fiona decides to claim a deduction for the cost of her clothes and make-up as a work-related expense to recoup some of the costs. When the ATO looks into Fiona’s claims, they’re denied as they’re a private expense and she has to pay back the money plus a penalty.
Work-related expenses must have a direct connection to earning your income. However, if you have an expense that has both a private and work-related component, you can claim the work-related portion. For example, if you use your personal mobile phone for work-related calls, you need to figure out the percentage that relates to your work use, and only claim a deduction for that portion.
David is a plumber with a bunch of deductions he can claim at tax time. Sadly, for David, his tax time experience is a lot harder than it needs to be because he has forgotten to keep records of his expenses, meaning he can’t claim deductions he is otherwise entitled to.
You must have evidence to prove your claims, and you typically need to keep any documents relevant to your tax affairs for five years after you lodge your tax return. The ATO may ask you to substantiate your claims – even after your tax return is processed – and you could find yourself in hot water if you don’t have the records you need to back up your claims.
The ATO myDeductions app lets you keep track of your work-related expenses on the go and then upload them to your tax return or tax agent at tax time. Check out ato.gov.au/myDeductions.
Terri the tax cheat
Terri isn’t entirely honest in her tax return, and claims a number of deductions that she is not entitled to. Despite working a corporate job in an office where she doesn’t wear a uniform, Terri put in a $150 deduction for clothing and laundry, as she has heard that anyone can claim $150 without receipts. She also claimed 5000km on car expenses for work, despite not undertaking any work-related travel.
Unfortunately for Terri, the ATO can check all this data, either by matching against other taxpayers in similar industries or by contacting her employer when a red flag is raised.
Perhaps you’ve heard that you can claim $50 for work-related phone and internet expenses without written evidence? Or maybe you’ve been told you can claim up to $150 for laundry without having to keep records? While these statements are true, you must have actually spent the money. This is on the ATO’s radar, so if you’re audited you’ll need to show how your expenditure was calculated and prove it was directly related to earning your income.
You are responsible for the claims you make in your tax return, whether you prepare it yourself or use a tax agent, so make sure you can demonstrate you actually spent the money.
Rob the rental rorter
Rob has a holiday home on the South Coast. He claims it’s for rent but he doesn’t make any real effort to rent it out and only makes it available for a few months in the winter, when he knows not many people will be interested in it. He also charges rent at a rate significantly over market rates, although he lets his family and friends stay at “mates rates”. Rob declares $5,000 in income on the property but claims $69,000 in deductions, which is the total of all the expenses on the property for the full year.
As Rob’s property is not genuinely available for rent for the whole year, he isn’t entitled to claim all his deductions for the whole year either. His claims are highly likely to raise a red flag for the ATO to investigate.
If you own a rental property, remember you can only claim deductions for times when your property was rented or genuinely available for rent. To be considered genuinely available for rent, you must have made efforts to advertise to a wide audience. It must be in a location and condition that will mean tenants will want to rent it, you must charge rent that is in line with market rates and you must accept potential tenants unless there is a good reason not to.