SMEs warned against “unreasonable” clothing tax deductions after business owner claimed $40,000 in laundry over two years

The Australian Tax Office (ATO) has warned business owners and individuals against “unreasonable” tax claims around laundry deductions this tax time, after a car detailer claimed over $40,000 in laundry expenses over two years.

Continuing its crackdown on taxpayers claiming an array of “standard” deductions come tax time, the ATO has issued a warning to Australians today, specifying that it would be focusing on work-related clothing and laundry expenses come July 1, thanks to tax claims in the area having increased 20% over the past five years.

“Last year around 6 million people claimed work-related clothing and laundry expenses, with total claims adding up to nearly $1.8 billion. While many of these claims will be legitimate, we don’t think that half of all taxpayers would have been required to wear uniforms, protective clothing, or occupation-specific clothing,” assistant commissioner Kath Anderson said in a statement.

The tax office believes that many Australians are either uninformed about what they can and can’t claim when it comes to laundry and clothing expenses, or are deliberately over-claiming.

When it comes to clothing, Anderson reminds taxpayers that claims can only be made when the clothing is specific to your work, such as protective gear, or is an issued uniform.

“Many taxpayers do wear uniforms, occupation-specific or protective clothing and have legitimate claims. However, far too many are claiming for normal clothing, such as a suit or black pants. Some people think they can claim normal clothes because their boss told them to wear a certain colour, or items from the latest fashion clothing line. Others think they can claim normal clothes because they bought them just to wear to work,” Anderson says.

“Unfortunately they are all wrong – you can’t claim a deduction for normal clothing, even if your employer requires you to wear it, or you only wear it to work”.

Furthermore, the tax office has also warned Australians off making a “standard” deduction of $150 for clothing and laundry expenses, explaining that while the $150 threshold for detailed records exists, it’s not an “automatic entitlement” for everyone.

“While you don’t need written evidence for claims under $150, you must have spent the money, it must have been for uniform, protective or occupation-specific clothing that you were required to wear to earn your income, and you must be able to show us how you calculated your claim,” she said.

An “unreasonable” $40,000 claim

With sartorial spending on the rise, the ATO has plucked out some of the more ridiculous examples of incorrect or mistaken claims from the past financial years. This includes one case of a car detailer who claimed work-related laundry expenses of more than $20,000 per year, each year, for two years.

Upon being grilled on these “unreasonable” claims by the tax office, the business owner said he calculated his laundry expense to be $227 per hour as he “valued his personal time”. However, the taxpayer then made a voluntary disclosure that his claim was too high, and his claims were reduced to $0 with no penalty.

A more reasonable, but still unacceptable case that attracted the tax office’s attention was one of an advertising manager who claimed $1,854 for clothing-related expenses – all purchases from popular fashion stores.

She told the ATO her work required her to dress a certain way for award nights and function, however as claims for conventional clothes are not deductible even if the clothing is worn only for work, the claim was disallowed and the manager was penalised.

Speaking to SmartCompany, founder of Healthy Business Finances Stacey Price says the more outlandish claims, such as the ones above, are likely due to individuals submitting their tax returns themselves rather than through a tax agent, who would likely flag a $20,000 laundry claim as “kind of absurd”.

However, she notes that laundry and clothing related claims are often misunderstood by business owners and individuals, with many instances of SME owners claiming $600 dresses and suits on tax, despite them not being eligible for deductions.

“Many people don’t go through the rules in-depth, and they see laundry and think ‘great’, and claim as much as the need. But in reality, to claim work-related uniform and laundry expenses, the clothing really needs to have a logo on it or similar,” she says.

“It’s a small detail, but it’s an important one and one that people seem to miss.”

Additionally, Price says that being pulled in front of the ATO due to an error with your laundry deductions is unlikely to be the last of your woes.

“If they pick you up on that one thing, there’s a high chance they’ll start asking about other things. It’s a can of worms, and they may not just look at your laundry deductions, but all your other deductions you’ve claimed too,” she says.

NOW READ: An “important step”: ATO moves to extend independent reviews to small businesses in tax disputes