The traps of work-related tax deductions

The maxim ‘be prepared’ holds true, upon pain of pecuniary penalty, when claiming tax deductions. TERRY HAYES runs through the dangers.

By Terry Hayes

The maxim ‘be prepared’ holds true, upon pain of pecuniary penalty, when claiming tax deductions.

A decision recently handed down by the Administrative Appeals Tribunal (AAT) serves as a useful reminder to those claiming work-related tax deductions. The case involved tax penalties and certain deductions claimed by a taxpayer for the 2000 to 2004 income years.

The claims for deductions were for self-education expenses, car and travel expenses, uniform/laundry expenses, union fees, telephone expenses, cleaning supplies, and an amount described as an “initial customers” fee, which the taxpayer claimed was to be payable on the commencement of a cleaning business franchise.

The tax office had audited the taxpayer’s tax returns for several financial years and had denied his claims for certain deductions and then imposed penalties.

The taxpayer had claimed almost $11,000 in self-education expenses during the 2000 to 2003 financial years. In largely losing his claim for these expenses, the taxpayer was unable to show how any of the courses related to his employment, as was required by the law.

Also, he could not explain how he had originally calculated the amounts claimed as deductions and he had no evidence of the fees he had paid for any of the courses. He also did not have any receipts for items related to the courses that he said he had purchased.

Although the man also claimed around $10,000 in travel expenses, he could not explain the method he had used to calculate the amounts claimed. The tribunal ultimately allowed some claims based on a calculation method set out by the tax office, but the taxpayer was not able to substantiate his full claim.

The taxpayer claimed just over $2000 in uniform/laundry expenses, but was unable to satisfactorily substantiate the claims.

The taxpayer could also not provide any evidence to support most of his claims for union fees, so deductions of $1813 were disallowed. An amount of $312 for 2001 was verified and therefore allowed.

The taxpayer also claimed an amount of $13,850 for what was described as an “initial customers” fee. The background is that the taxpayer had purchased a cleaning franchise around 30 June 2003. An invoice from the franchisor detailed as one of the amounts payable, apparently on the commencement of the franchise, $13,850 opposite the description “initial customers”.

The AAT said it was not able to establish a connection between the so-called “initial customers” fee and any of the terms in the franchise agreement, or any of the amounts specified as payable under that agreement. The taxpayer could not explain what the fee represented and nor could his tax agent. The AAT agreed with the commissioner’s decision to disallow the claim.

The commissioner had initially imposed a 75% penalty for “intentional disregard” of the law, but this was downgraded. Before the tribunal, the commissioner proposed penalties that comprised a 50% penalty for “recklessness” for shortfall amounts relating to omitted income, overclaimed deductions for self-education expenses and cleaning supplies; and 25% penalty for “failure to take reasonable care” for shortfall amounts relating to the remaining “unsubstantiated” claims.

The taxpayer argued that the penalties should be removed, or at least be reduced. The taxpayer submitted that he was “unfamiliar with the tax laws” and that the penalties were “harsh”. However, the tribunal upheld the commissioner’s decisions as to penalties.

The tax law has specific requirements as to how claims for work-related tax deductions must be substantiated. The taxpayer in this case may well have incurred the expenses he claimed, but he could not prove that in accordance with the tax laws. Ignorance of the law is no excuse.

Tax office audits will expose any shortcomings in a taxpayer’s failure to keep adequate records or not being able to explain the reasons for deductions claimed in accordance with the law. Taxpayers need to be aware of this and be prepared in case the taxman calls.

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