It is possible to deduct it. It depends

Overview

Tax professionals can prepare for a flurry of client tax returns in the coming months, with Tax Time 2022 just a few weeks away. Clients may feel motivated to lower their taxable income for a tax refund. Tax agents are often required to play the ‘goalie” role to ensure that no non-deductible expenses slip by. Practitioners must understand the client’s workplace to determine what expenses can be claimed and how to get the best tax outcome.

While the concept may seem simple, practitioners spend a lot of time and effort administering and complying with work-related expense rules. ATO compliance activities are increasing in focus on work-related expense claims year after year. Due to the ATO’s data analytics and compliance activities, it is becoming more difficult to understand the rules and limitations of deductions for work-related expenses. It is crucial that taxpayers can justify and justify the deduction of expenses claims, especially those with more contentious issues.

This article will discuss the rules governing work-related expenses, common errors made, and ‘contentious deductions’ that may be deductible in the right circumstances.

This article focuses only on deductions available for employees and not for the self-employed.

The golden rules

The ATO sets three ‘golden rules” of the deduction for work-related expenses. To claim a deduction for work-related expenses, the taxpayer must:

• They have used the money and are not being reimbursed. The taxpayer has incurred the expense.
• Show that the expenditure is directly related to income. There is a relationship between expenditures and assessable income.
• A record should be kept to prove that the expense was incurred. Substantiation.

These golden rules are based upon the applicable legislative provisions, primarily the general deduction rule in section 8-1 and the proof rules in Div. 900 of the ITAA97.

The general deduction provision — section 8-1

To determine whether a work-related expense can be deducted under the Tax law, you first need to consider whether the expense meets the requirements of s. 8-1. Then, make sure that it is not exempted from any negative limbs. Many provisions in the Tax Acts allow deductions for certain types of work-related expenses, but s. 8-1 is where most work-related expenses fall.

Certain deductions

Even if they are not eligible for deduction under section 8-1, certain types of expenses may still be deductible under a statute. These provisions apply to certain types of expenses:

• Travel between work — s. 25 to 100 of the ITAA97
• COVID-19 Tests — Section 25-125 of ITAA 1997
• Car expenses — Div 28 ITAA 1997
• Depreciation — Subdiv 40 and Subdiv. 328-D of ITAA 1997
• Limitations on self-education expense deductions — Section 82A of ITAA 1936.

Common mistakes

The law does not allow you to claim deductions for failure to understand the rules incorrectly. However, motives may impact penalties. Recently, the ATO warned taxpayers about double-dipping deductions. Common errors include:

• You can use the “cents per km” method to claim car expenses. Then, claim fuel, car insurance, registration and other expenses.
• The quick shortcut method (80c/hour) can be used to claim home-based expenses. You can then claim additional expenses for mobile phone and internet bills as well as the decrease in value of equipment or furniture. This method is all-inclusive.
• When the taxpayer is reimbursed by their employer, you can claim work-related expenses.

The ATO’s vast and expanding compliance and data matching capabilities mean that incorrect work-related expense claims will be more easily detected and disproved. If they are found to disregard the tax law deliberately, taxpayers could face audits or penalties of up to 75%.

Can I claim it? It depends.

Understanding how the client makes their income is crucial as it will affect what expenses they can claim for work-related expenses. If the client’s job situation allows, expenses that appear to be private may be deductible. An expense that appears prima facie to be deductible may not have the necessary nexus with the taxpayer’s assessable income. A business course that is too general if you examine the course syllabus. Here are some examples of ‘contentious deductions’ that might be allowed in certain situations.