Welcome to the second AH Jackson & Co Newsletter in which we will be covering work related deductions and rental properties.
If you have any questions about our newsletter or anything to do with your taxation affairs, we’re here to help and would love to hear from you.
Ben, Emmanuel and Leo
Work related deductions
Last financial year, more than 8.8 million taxpayers claimed $21.98 billion in deductions for work-related expenses. It’s an area under intense review by the ATO.
AH Jackson & Co partner Emmanuel Georga said tax deductions must take into consideration the direct connection to your income, the private portion of the expense and must legitimately maximise the full potential of the deductibility of the costs like home office and business travel.
“If you claim work-related deductions, it’s important to ensure that you are able to substantiate any claim you make,” Emmanuel said.
“In most cases you need a record, such as a receipt, proving you incurred the expense, and the expense has to be directly related to how you earn your income – that is, the expense is directly (not sort of) related to your work.
“This also means ensuring that you only claim the work-related portion of items you use personally, such as mobile phones or internet services.”
When you don’t have to keep records
Emmanuel explained that there are certain situations where you don’t have to keep records.
“If your claim for work-related deductions is below $300 you do not have to keep a record of the expense,” he said.
“Work-related clothing has a $150 record keeping limit. However, the ATO is concerned that taxpayers are ‘automatically’ claiming these deductions without incurring any expenses because of a belief that you don’t have to support the claim.”
Emmanuel said if you have claimed an amount up to the record keeping threshold, you may find that the ATO will ask you to explain how you came to that amount.
“If you don’t have diary entries or a good explanation, your claim might be denied.”
Working from home
Depending on your circumstances, you may be able to claim expenses related to working from home, but there are a variety of rules you must follow if you plan on doing so.
AH Jackson & Co partner Ben Odgers said the rules changed depending on whether you have a dedicated work space or if your home is also your principal place of business.
“If you don’t have a dedicated work area but you do some work on the couch or at the dining room table, you can claim some of your expenses like the work-related portion of your phone and internet expenses and the decline in value of your computer,” Ben said.
“If you have a dedicated work area, there are a few more expenses you can claim including some of the running costs of your home, such as a portion of your electricity expenses, and the decline in value of office equipment.
“If your home is your principal place of business, you might be able to claim a range of expenses related to the portion of your home set aside for your business. What the ATO is looking for is an identifiable area of the home used for business,” he said.
Ben said it is important to ensure any claims are in proportion to the work-related use.
“For example, you can’t claim all of your internet expenses because you do a bit of work from home in the evenings and need the internet.”
Many people believe that it is possible to claim the cost of work clothes in your tax return.
AH Jackson & Co partner Emmanuel Georga said that while it was possible to claim some work-related clothing, in general, you cannot claim the cost of your work clothes or dry cleaning expenses unless the clothes are occupation specific.
“For example, you may be able to claim occupation specific clothes such as chef’s whites or a uniform with a logo, or protective gear because your workplace has hazards (jeans don’t count as protective wear),” he said.
“Remember though, just because you have to wear a suit to work does not make it deductible.”
Rental property deductions
In the 2017-18 financial year, more than 2.2 million Australians claimed more than $47 billion in deductions and the ATO believes that is too much – one in ten is estimated to contain errors.
AH Jackson & Co partner Ben Odgers said what you can claim for your rental property has been significantly curbed.
“For example, you can no longer claim deductions for the cost of travelling to inspect the property. Also, you can no longer claim depreciation deductions for second hand plant and equipment,” he said.
“Previously, you could, for example, buy a rental property from someone else and then claim depreciation on the assets already in the property, such as the kitchen appliances and carpet. From 1 July 2017, you can only claim deductions for new assets you purchase and install in the property.
“This year, 4500 audits of rental property deductions will be undertaken with the focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing.”
Ben said rental property owners should be aware that deliberate cases of over-claiming are treated harshly with penalties of up to 75% of the claim.
When you own a share in a property
For tax purposes, rental income and expenses need to be recognised in line with the legal ownership of the property, except in very limited circumstances where it can be shown that the equitable interest in the property is different from the legal title.
Ben said the ATO will assume that where the taxpayers are related, the equitable right is the same as the legal title (unless there is evidence to suggest otherwise such as a deed of trust etc).
“This means that if you hold a 25% legal interest in a property then you should recognise 25% of the rental income and rental expenses in your tax returns even if you pay most or all of the rental property expenses (the ATO would treat this as a private arrangement between the owners),” he said.
“The main exception is that if the parties have separately borrowed money to acquire their interest in the property then they would claim their own interest deductions.”
Earning money from the sharing economy
More and more, people are earning money from the sharing economy (AirBNB, Uber, AirTasker etc). However it is important to remember that income earned from the sharing economy must be declared in your tax return.
AH Jackson & Co partner Ben Odgers said it may be possible for you to claim proportional expenses associated with providing the service.
“Ensure that any deductions you claim are related to providing the service itself (not just switching on the app or making yourself available),” Ben said.
“Another thing to remember is that if you are a driver with Uber or another ride-sharing platform, you will need to be registered for GST regardless of how often you drive.”