Increased scrutiny of home office claims

(Ref:  ATO website, 11 September 2018)

According to the ATO, a record number of claims have made for expenses incurred whilst working from home.

Reportedly, due to a high number of mistakes, errors and questionable claims for home office expenses, the ATO has recently advised that it will be increasing attention, scrutiny and education on these claims this tax time.

Last year, 6.7 million taxpayers claimed a record $7.9 billion, in deductions for ‘other work-related expenses’, which includes expenses relating to working from home.

The ATO believes that there is mounting evidence that many taxpayers do not know what they can and cannot claim with regards to additional costs incurred when working from home, and that this has purportedly resulted in amounts being over-claimed or personal costs being claimed.

The ATO has flagged its specific concerns, such as some taxpayers that are claiming expenses:

  • they never paid for;
  • expenses that their employer has reimbursed them for;
  • private expenses; and/or
  • expenses that cannot be substantiated.

Whilst additional costs incurred as a direct result of working from home can legitimately be claimed, care must be taken not to claim private expenses as well.

The ATO has indicated that one of the biggest issues it faces is people claiming the entire amount of expenses (e.g., like their internet or mobile phone), rather than just the extra portion relating to work.

Provided the taxpayer is able to demonstrate that they have incurred additional costs of running expenses (e.g., electricity for heating, cooling and lighting), then these are generally deductible.

In contrast, employees are generally not able to claim any portion of occupancy-related expenses (e.g., rent, mortgage repayments, property insurance, land taxes and rates).

Taxpayers are warned that the ATO may contact employers to verify expenses claimed for working from home.

According to the ATO, there have been instances where employers were contacted and the ATO has discovered that the taxpayer’s employer has paid for the expenses (either upfront or reimbursed), or that there was actually no need for the taxpayer to work from home at all.

In addition, the ATO expects to disallow a lot of claims where the taxpayer has not kept adequate records to prove that they have legitimately incurred the relevant expenses and that the expense was related to their work.

As with the claiming of deductions in general, taxpayers must keep supporting records when claiming work-from-home expenses, which may include receipts, diary entries and itemized phone bills.

Importantly, only the additional work-related portion of the relevant expense is deductible.

Advancement in technology has allowed the ATO to deploy sophisticated systems and analytics to spot claims that are out of the ordinary compared to others in similar occupations, earning similar income.

Finally, the ATO has reminded taxpayers of the ‘three golden rules’ to follow when claiming work-from-home deductions, being;

  • the taxpayer must have spent the money themselves and have not been reimbursed;
  • the expense must be directly related to earning the taxpayer’s income, not a personal expense; and
  • the taxpayer must have a record to prove the expense.

Still confused, contact us to help clarify whether expenditure incurred in relation to your home office is allowable as a tax deduction.

Looking at Setting Up a Business?

Setting up your business can be an exciting time, and if done correctly, rewarding also.

However, it’s important you’re aware of what’s involved before you start, to save you time and money.

That’s why Financially Sorted are here to help you along the way.

Registering your business can be confusing at times. The steps involved in registering your business are:

  1. Deciding on your business structure (see our separate brochure for more information),
  2. Applying for your Australian Business Number (ABN),
  3. Checking your chosen business name is available,
  4. Registering your business name,
  5. Registering your website domain name
  6. Let’s have a look at Step 1 in more detail.

Step 1: Deciding on your business structure

When starting a business, it’s important to choose the business structure that best suits your needs.

Your business structure, also known as the applicant or entity type, refers to the way you will operate your business.

Types of business structures include:

  1. Sole Trader – an individual trading on their own,
  2. Partnership – an association of people or entities running a business together, but not as a company,
  3. Trust – an entity that holds property or income for the benefit of others,
  4. Company – a legal entity separate from its shareholders.

Starting a successful business takes more than just a good idea and hard work. There are bureaucratic, legal, administrative and financial considerations that you should consider, even before you commence.

If you’re thinking of starting a business, it’s also a must to consider which business structure best suits your needs.

When considering which structure is right for you, 2 major considerations are:

  1. Legally minimising taxes – the business structure you choose will determine your tax obligations, including your tax rate, and
  2. Protection of your assets – the business structure you choose will also affect your assets – whether they form part of your business or they are protected from others, for example, creditors.

An overview of the options available is always a good place to start, but there’s definitely no substitute for a professional adviser (accountant) who can help you to work out the most appropriate structure.

It’s important to remember that you can change your business structure as your business grows.

Choosing the right business structure at the outset is important – need guidance? Be sure to contact us immediately to guide you to the best possible structure for your particular situation.

Tax tips for Australian small businesses

Yep, it’s that time of year again — tax time.

For the clear majority of taxpayers, it’s a scramble to gather faded receipts of deductions.

To help take some of the pressure off, here are some tips to help you get your affairs in order and your claims perfected before it’s too late.

1. Take advantage of the $20,000 instant asset write-off

Despite continual calls for the government to make the much-loved $20,000 instant asset write-off a permanent fixture, the government has continued to string SMEs along, extending the scheme for just 12 months at a time.

Regardless, it’s still around this year until June 30, and small business owners can still claim up to $20,000 worth of assets for their business up until that point. Basically, if you purchase an asset (for example, a new coffee machine or circular saw), you can immediately claim a deduction for the business portion of that asset up to $20,000.

2. Get those deductions!

A common recommendation for SME owners at tax time is to make sure you’re claiming all the appropriate deductions you can. This includes things like rent, utilities or repairs for your business, or professional, legal and accounting advice.

3. Know what’s on the ATO’s watchlist

Each year the ATO likes to let Australians know the things it’s keeping an eye on when it comes to tax time, and 2018 is no exception.

4. Get across the company tax rate changes

Unless you’ve been living under a proverbial rock, you’ll likely already know about Australia’s changes to the company tax rate – a debate that’s been ongoing since the government first proposed the changes last year.

It’s good news for incorporated small business, with a 2.5% cut in tax rate (to 27.5%) already in place for all businesses with a turnover of under $10 million. That cut is set to be extended to businesses with turnover of up to $25 million come July 1.

5. Get your super in on time

An oldie but a goodie: if small business owners want to claim a tax deduction for super payments they make for employees, the super has to be done and paid before June 30, otherwise the opportunity for a deduction passes.

“You’re required to pay super, and if it’s not paid by 30 June, no deduction”.

6. Keep strong records

More of a reminder: it’s never too late to start getting your records together for next year.

“If you have the right systems and processes in place, any time the tax office is having a look at your business, you are able to answer quickly and show you’re making no mistakes and it’s not a problem”.

For Your Calendar…

  • 11 Nov Quarter 1 (July–September) activity statements lodged electronically – final date for lodgement and payment.

  • 21 Nov October monthly activity statements – final date for lodgement and payment.