Work Related Expenses – What is under fire for 2022.

 Every year the ATO identifies priority areas for their attention in the upcoming lodgements.  This year (2022) with the end of the COVID-19 relief packages they are once again focusing on individual taxpayers in particular.

The four areas of focus this tax season are:

1. Record-keeping
2. Work-related expenses
3. Rental property income and deductions, and
4. Capital gains from crypto assets, property, and shares.

If you intend to claim a tax deduction there are three 'golden rules':

• You must have spent the money and not been reimbursed.
• If the expense is for a mix of work related (income producing) and private use, you can only claim the portion that relates to how you earn your income.
• You need to have a record to prove it.

We will focus on record keeping and work-related expenses here.  Rental Properties and Gains from assets (including Cryptocurrency) will be dealt with in later blogs.

 

1.       Record keeping

The key aspect working with the ATO is that you can’t claim it if you can’t prove it. If you are audited, the ATO will disallow deductions for unsubstantiated or unreasonable expenses. This applies even for those minor claims of up to $300.  They can ask how you calculated the claim and if they disagree it can be disallowed.

Records of salary, wages, allowances, government payments or pensions and annuities are usually available via Online Services for Agents however, you need to keep records of:

• Interest or managed funds.
• Records of expenses for any deductions claimed including copies of receipts, diaries for phone, internet, working from home and motor vehicle and correspondence from employers are helpful in the event of an audit.  A record of how that expense relates to the way you earn your income. That is, the expense must be related to how you earn your income. For example, if you claim the cost of RAT tests, you need to be able to prove that the RAT test was necessary to enable you to work. If you were working from home and not required to leave home, it will be harder to claim the cost of the test.
• Assets such as shares or units in a trust, rental properties or holiday homes, if you purchased a home or inherited a property, or disposed of an asset (including cryptocurrency). Keep all records from the time of purchase to maximise your potential deductions.

You need to keep your records for five years. These can be digital copies of the records as long as they are clear and legible copies of the original. If your records are digital, keep a backup.  Using the ATO App and My Deductions is a convenient way to keep records digitally.  This is free to download onto your phone and can export records at tax time.

Records can be tax invoices, receipts, diary entries or something else that proves you incurred the expense and how it related to how you earn your income.

 

2.       Work-related expenses

Once again, to claim a deduction, you need to have incurred the expense yourself and not been reimbursed by your employer or business, and the expense needs to be directly related to your current work.

What expenses are related to work?

You can claim a deduction for all losses and outgoings “to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.” There must be a connection between the expenses you are claiming and how you earn your income currently.

The expense must be related to how you are currently earning your income, not future potential income or costs incurred in applying for a job. The same issue applies to upskilling. If you attend investment seminars with the intention of building your investment portfolio the seminar is not deductible as a self-education expense unless it relates to managing your existing investment portfolio - not a future one.

The second area of confusion is over what can be claimed for work. To be deductible clothing must be protective, occupation specific such as a chef’s chequered pants, a compulsory uniform, or a registered non-compulsory uniform.  Conventional clothing and footwear is not deductible, even if you only wear it for work.

Work related or private?

A further area of confusion is where expenses are incurred for work purposes but used privately. Internet access or mobile phone services are typical.  If you use the service on more than an occasional basis for any purpose other than work, then the expense needs to be apportioned and only the work-related percentage claimed. And yes, the ATO does check usage in an audit. A diary is the way to substantiate a business % and will be required in an audit.

Claims for COVID-19 tests will be a test of this rule. COVID-19 tests are deductible from 1 July 2021 if the purpose was to determine whether you may attend or remain at work. The tax deduction does not apply if you worked from home and didn’t intend to attend your workplace, or the test was used for private purposes (for example, to tests the kids before school).

Claiming work from home expenses

Last financial year, a third of Australians claimed working from home expenses.  With the additional lockdowns in the 2021/2022 year this will once again be relevant to many people.

If you are claiming your expenses, there are three methods you can use:

• The ATO's simplified 80 cents per hour short-cut method – you can claim 80 cents for every hour you worked from home from 1 March 2020 to 30 June 2022. You will need to have evidence of hours worked like a timesheet or diary. The rate covers all of your expenses and you cannot claim individual items separately, such as office furniture, telephone, internet or a computer.
• Fixed rate 52 cents per hour method – applies if you have set up a home office but are not running a business from home. You can claim 52 cents for every hour and this covers the running expenses of your home. You can claim your phone, internet, or the decline in value of equipment (but not furniture) separately.
• Actual expenses method – you can claim the actual expenses you incur (and reduce the claim by any personal use and use by other family members). Records, including receipts and diaries will be required to use this method.  This method is for those who run a business from home, not just working from home as an employee.

It is the actual method, the ATO is scrutinising because people using this method tend to lodge much higher claims in their tax return. Ineligible expenses include:

• Personal expenses such as coffee, tea and toilet paper
• Expenses related to a child’s education, such as online learning courses or laptops
• Claiming large expenses up-front (instead of claiming depreciation for assets), and
• Occupancy expenses such as rent, mortgage interest, property insurance, and land taxes and rates, that cannot generally be claimed by employees working from home (especially by those who are working from home solely due to a lockdown).

 Each year the ATO produces guidance on record keeping and work related expenses.  The record keeping guide is available from our "Resource" tab on our Website.  If you require an occupation specific guide please contact our office.