We often talk about the need to keep records, particularly when claiming deductions in your tax return. The “self assessment” system used by the Australian Taxation Office (ATO) means that only a fraction of returns get closely examined by the ATO. However, they have very sophisticated analysis software that reviews each tax return for obvious discrepancies and mistakes. If flagged, your tax return could cause you a whole bunch of trouble and even attract significant fines.

Saward Dawson’s Tax Consultant Cathy Braun says, “I work with very well intentioned people and organisations all the time. But good intentions do not impresses the ATO. It has to look right… your records need to be the evidence that you did what you say you did.”

A very costly tax return

In a recent case, the Administrative Appeals Tribunal (AAT) upheld a substantial penalty to a taxpayer for “recklessness” in claiming deductions that could not be substantiated.

In the 2011/12 year, the taxpayer made the following claims for tax deductions in relation to his work as a salesman (figures have been rounded):

• Work related car expenses $23,000
• Work related clothing and laundry expenses of $650
• Phone expenses and licence to operate in business $10,600.

This tax return was flagged for an audit and subsequently, the amounts were reduced to nil, $150 and nil respectively. Once the return was re-assessed, there was a shortfall in tax paid of $12,184 and the ATO imposed a fine of 50% of the shortfall; a hefty $6,092.

It is worth noting that there has been a significant increase in the number of cases in front of the AAT, due to the ATO challenging unsubstantiated claims or insufficient evidence. The ATO is becoming more vigilant in this area.

Reasons for the decision

The AAT found that, in this case, the taxpayer had been “grossly negligent” with the claims. However, even assuming that he was genuine (which of course is questionable) it is easy to see that proper record keeping, not just referring to invoices and bills, would have avoided this expensive outcome.

It was established that:

• he had not maintained a logbook in relation to the car expenses
• the expense of the business operating licence was not incurred in the relevant financial year
• laundry expense records were not maintained and in fact, there was no requirement from his employer to wear specific clothes
• phone records indicated that he had claimed for the use of two mobile phones, one used by his wife, and the account had included internet charges and non-work related international calls.

As you can imagine, the taxpayer claimed that his conduct was unintentional and felt harshly penalised. But we know that good intentions are not good enough. You need to be able to backup your claims with hard evidence. The ATO is getting much more adept at finding abnormalities in claims. Talk to Saward Dawson if you are in the slightest doubt about thresholds and what documentation you need to substantiate your claims.