In 2021 Tax Tips

With tax time just around the corner, it’s important to get your ducks in a row before it comes time to file. If you’re unsure of what documents or receipts are required for certain deductions, here are some tips to ensure you avoid getting red-flagged by the ATO. 

The ATO estimates these taxpayers cost to the system to the tune of $8.7 billion a year — more than large corporates, which are estimated to be underpaid by a combined $2.5 billion.

To avoid getting red-flagged by the tax office this year, Liz Russell, senior tax agent at Etax.com.au, has provided Business Insider with a list of ways to ensure your tax return is up to scratch, preventing any nasty penalty fees or interest charges.

Here they are.

Declare all of your income

This includes allowances, Centrelink, Uber, Airtasker and other gig jobs.

“The ATO knows about the money you received from Centrelink or earned on those occasional Uber rides and Airtasker jobs,” says Russell.

Be careful claiming all ‘receipt fewer deductions to the maximum amount

This includes work-related deductions to $300, laundry expenses to $150 and car expenses for 5,000 kilometres.

“The ATO is paying special attention to work-related deductions this year,” says Russell.

Ensure your work-related deductions are in line with industry averages

“The ATO benchmarks all people in the same occupation against each other,” says Russell.

“If you’re claiming much higher deductions than average, the ATO might take a closer look.

“That doesn’t mean you shouldn’t claim all of the deductions you’re entitled to, but you should always make sure you have evidence to support your claims.”

Clear any existing ATO or other government debt

“If you have an existing debt with the ATO, or Centrelink or the Family Assistance Office, or any other Government agency, your return may be delayed as the ATO will often use your tax refund to pay down these other agencies debts,” says Russell.

Update your details

“If you’ve changed your name since you last lodged a tax return (for example, if you’ve gotten married and changed your surname), and you haven’t told the ATO, your return could be delayed while they verify your identity, as your name no longer matches their records,” she says.

Make sure your employer has submitted your PAYG

“When the ATO receives your tax return, they check the income information matches the data provided by your employer,” she says.

“If your employer doesn’t submit your PAYG to the ATO, then they don’t have a reference point to check against and can sometimes delay your return.”

Tie up loose ends

“If you’ve been dragging your feet and have old overdue tax returns to lodge, the ATO can sometimes delay the processing of your return while they wait for you to get your affairs up to date.”

Include all capital gains events on your tax return…

“If you’ve sold shares or a rental property and didn’t declare it on your tax return, the ATO might flag your return for a closer look,” Russell says.

“Part of the ATO’s sophisticated technology allows it to data match with other government agencies and financial institutions.”

Your spouse’s details…

“If you have a spouse, you need to include their details on your tax return.”

And bank interest

“If you make any money from bank savings accounts, it needs to be included on your return,” Russell says.

“Leave it off, and you run the risk of delays with the ATO.”

How to Avoid Getting Audited by ATO

Unfortunately, not everyone does the right thing when it comes to their tax returns. Sometimes it’s an honest mistake, and sometimes it’s more deliberate – either way, it’s everyone who loses out.

The Australian tax system has been carefully designed to be fair to everyone, so we all must pay the correct amount of tax every year. To ensure things stay on track, the ATO contacts around 2 million taxpayers each year to review their tax returns, although not all of these people will be subjected to a full detailed audit.

People who deal predominantly in cash or have experienced large fluctuations in their income are more likely to attract the attention of the ATO. But anyone can be contacted, so it pays to stay on top of your paperwork and make sure you have receipts and documentation to support all of your claims because, even if you have everything in order, a full audit from the ATO can take up a huge amount of time and resources.

So if you want to avoid the hassle, then there are a few smart things you can do to avoid getting audited:

Always lodge your tax returns on time

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This is a simple one. Staying on top of your tax returns and allowing plenty of time to put together and lodge your documents means you are less likely to make mistakes. 

It also means you’re less likely to undergo scrutiny when you submit your returns later.

Review your calculations and check your deductions multiple times 

It’s not the most exciting activity in the world but checking your numbers (and checking them again) is a good way to make sure everything is correct before lodging your tax return. 

It’s easy to make mistakes, and working with a tax agent is a handy way to make sure you tick all the right boxes, as a good accountant will pick up any errors and bring them to your attention.

Declare deductions – but only ones you’re entitled to! 

You are entitled to claim many different deductions when doing your tax return, although it varies greatly depending on your occupation or industry. We have put together a handy series of checklists broken down by career that will help you work out what you can claim, and if you work with a tax agent, they will highlight any you might have missed, so you get the maximum possible refund.

But it would help if you only claimed legitimate deductions, and you need to have receipts or documentation to back up your claims. Getting creative with your deductions is a bad idea, and you won’t just have to pay it all back if you get caught, but you’ll find yourself hit with a hefty fine as well.

Keep meticulous records 

Yes, we already said this, but we’re saying it again because it’s THAT important: hold on to receipts for every single item you claim. It’s fine for these to be digital records, as long as the item’s date, vendor, cost, and details are all visible. 

Be particularly careful keeping records when taking cash 

Certain jobs and industries (such as taxi drivers, tradespeople and shopkeepers) rely more heavily on cash payments, which is fine – provided you keep careful records of all transactions.

The ATO tends to look more closely at cash-based businesses, so be warned that you might be on their radar if you mostly work with cash. But it’s easy to avoid any issues by being extra vigilant with your records to prove you’re not under-declaring your income.

Clarity is king 

Making sure every tax claim you make is clear and easy to understand will go a long way towards helping you avoid an audit if the ATO can easily understand what you’re claiming and why they are less likely to need to follow up. But if you have a lot of vague or suspicious claims in your tax return, they will probably come back to you wanting more information and possibly written proof of your claims.

There are plenty of “experts” out there who will tell you that they can maximise your deductions and get you more money using dubious claims.

But don’t forget that YOU are the one who is responsible in the end, and you’re the one that will get in trouble if you get caught. So if in doubt or if you need any assistance, contact the ATO directly to ask questions or work with a reliable, trusted source such as the team at H&R Block.

Nobody wants to be audited by the ATO, and taking a few simple steps can reduce your chances of getting the dreaded call, which means greater peace of mind, not to mention saving yourself a lot of time and hassle.

Legal and simple ways to beat the ATO

It may be only five weeks before the end of the financial year, but there are still things that can be done to minimise what goes to the taxman legally.

There are some sophisticated ways to cut the Australian Taxation Office’s take – we’ll get to those later – but the easiest and quickest fix is to make superannuation contributions.

Salary sacrificing swaps the income tax rate that would be paid on earnings with the lower superannuation contributions tax, which, for most people, is 15 per cent.

If you are expecting an end-of-financial-year bonus, consider putting it into your super.

The salary sacrificing of the bonus should be set up with your employer before your bonus entitlement is confirmed, says Kate McCallum, a financial adviser and director of Multiforte Financial Services. That is because salary sacrificing can only relate to the future income, not past income.

Another quick fix is to take advantage of the co-contribution scheme. This is where for each dollar of after-tax money that is put into the superannuation account of a lower or middle-income earner, the government pays 50 cents into the super account.

The full 50¢ is paid to the superannuation account of anyone earning less than $34,488 a year. The maximum co-contribution the government will pay is $500. At higher incomes above $34,488, the co-contribution progressively reduces until $49,488, when it cuts out altogether.

The after-tax contribution can come from anyone, not just the person who will receive the co-contribution. So, for example, a higher-earning spouse could put $1000 of their after-tax income into their lower-earning spouse’s account.

A spouse also has until the end of the year to contribute to their non-working or lower-income partner. It is called the spouse super contributions tax offset. If the partner earns less than $10,800, the spouse receives an 18 per cent tax offset in their tax return for a contribution of up to $3000, providing a maximum offset of $540. The tax benefit reduces and cuts out altogether once the partner’s income reaches $13,800.

Debt management

The interest costs on mortgages over investment properties are deductible debt. That means the interest and other investment costs can be used to reduce the income tax paid.

It is worth remembering that there is a debt repayment hierarchy, which, if followed, reduces the total interest costs by the most. That is, any available cash should be used to pay off the non-tax-deductible debt first. Thus, you pay the non-tax deductible debt with the highest interest rate first, such as the credit card, then the mortgage on the family home and, lastly, the mortgage on the investment property.

Many people forget about the tax-deductible donations they have made during the financial year, McCallum says. “Dig out your receipts and have them on hand for tax return time.”

Alternatively, if you are thinking about donating, make sure you do it before June 30 and claim it in this year’s tax return, she says.

Reduce capital gains tax

If an asset has been sold this financial year, such as shares or an investment property, and there is a capital gain, and the investment has been held for a least a year, you will be taxed at 50 per cent of the gain at your marginal tax rate.

Now is a good time to consider whether to sell any loss-incurring investments, such as shares, to help reduce or eliminate capital gains on other investments, says Peter Bembrick, a tax partner with Sydney accountants and advisers HLB Mann Judd.

Capital gains must be paid in the financial year they are realised. Losses can be carried forward, but they cannot be carried back.

Tax payable in this financial year can also be reduced by prepaying deductible interest.

Up to 12 months of prepaid expenses on investments, such as interest on investment loans and management fees, can be claimed in this financial year, Bembrick says.

This could be helpful, McCallum says, if you have an unusually large tax liability in the current financial year, such as from the sale of an asset where there is a realised capital gain.

Claim work deductions

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Make sure you claim all legitimate work-related deductions. Taxpayers can make up to $300 of eligible work-related expenses without receipts, although records should be kept.

McCallum says that work-related deductions may include mobile phone costs, subscriptions, seminars, computer equipment, calculators, briefcases, and technical books. In addition, you may be able to claim travel expenses incurred for meals, accommodation and incidentals while away overnight for work. Fees paid to a tax agent for preparing a tax return are also deductible.

Note that the Tax Office will be focusing on unusually high work-related expense claims across all industries and occupations this financial year.

Work-related expenses must be for money the employee has spent and for which the employee has not been reimbursed, says Tax Office assistant commissioner Adam Kendrick. In addition, the expenses must be related to employment, and there must be records to prove them.

Deadlines

Tax returns need to be lodged by October 31 unless you register with a tax agent when the lodgement date can be as late as May next year, as long as the taxpayer is not in dispute with the Tax Office.

For self-lodgers with specific circumstances, the Tax Office has myTax, a short form of e-tax. It can be filled out online, including on mobile devices, whereas e-tax must be downloaded and has many more pages.

This year myTax has been expanded to handle slightly more complex tax affairs, with income, offsets or deductions from superannuation pensions, lump-sum payments, managed investment funds and foreign pensions included.

To use myTax, taxpayers must first register at my.gov.au and then link to the Tax Office. It will be prefilled with your previous tax return and with the information provided by your bank, employer, government agencies and others.

The Tax Office takes until early August to gather the information, so people who prepare returns themselves should wait until then to complete them.

Paper returns are no longer available from newsagents. Instead, booklets can be ordered at ato.gov.au/onlineordering or phone 1300 720 092.

Small-business tax breaks

A centrepiece of the May budget was the immediate tax-deductibility of small businesses’ asset purchases of up to $20,000.

Only assets valued at $20,000 or less qualify for the instant deduction. 

Assets with purchase prices of more than $20,000 will need to be pooled and depreciated normally at a rate of 15 per cent in the first year and 30 per cent each year after that.

Mark Chapman, tax communications director with tax accountants H&R Block welcomes the move.

“Whether it be some new computer equipment, a new car or maybe a new coffee machine for the office kitchen, now is a great time for small businesses to go out and make those capital purchases that might have been on the wish list, but where the time just never seemed quite right.”

However, the generous tax break is likely to tempt some business owners into making mistakes, he says. “Don’t let the generosity of the tax break override your commercial instincts. This tax break is ideal for businesses planning to purchase assets anyway or have a real business need to invest, but remember, there’s no such thing as free money.

“You have to spend $1 to get 30¢ back [or 28.5¢ after July 1], so make sure those capital purchases fit your overall business plan,” he says.

“To qualify, you must be in business. So simply having an ABN isn’t enough.”

Tax office targets

The Tax Office is targeting work-related expenses and rental property deductions this financial year. It will be writing to property investors who own properties in popular holiday locations to remind them to claim only the deductions to which they are entitled.

Rental properties owners should claim only for the periods the property is rented out or is genuinely available for rent. Also, the costs to repair damage and defects existing at the time of purchase or renovation costs cannot be claimed immediately. However, these costs are deductible over several years.

The Tax Office will also focus on unusually high work-related expense claims across all industries and occupations. In past years, it has focused on particular occupations.

Kendrick says that its ability to identify and investigate claims that differ from normal is improving each year due to enhancements in technology.

“Every return is scrutinised, and it is becoming a lot easier to identify claims that are significantly higher than those claimed by people with similar occupations and employment income,” he says.

The Tax Office will pay particular attention to claims already paid by employers and claims for private expenses, such as travel from home to work.

Falling foul of the Tax Office

A railway guard claimed work-related car expenses for travel between his home and workplace in a recent case. He indicated that this expense related to the carriage of bulky tools, including a flag, safety vest, hand-held radio, torch, instructions and timetables.

During the Tax Office’s investigation, the employer advised that the equipment could be securely stored on their premises. The taxpayer’s car expense claims were disallowed because the transportation of the equipment between home and work was his personal choice.

In another case, a taxpayer who lived in Western Australia moved to Victoria to start a new job. He claimed expenses of more than $18,000, which included costs of buying a caravan and driving to Victoria.

When prompted by the Tax Office, the taxpayer amended his work-related expense claims to just over $1300, which excluded all the travel costs associated with moving to his new work location.

Repairs

A taxpayer claimed repairs and maintenance for a newly acquired rental property, significantly improved upon purchase. The taxpayer provided an invoice from an interior developer for the refurbishment of the property. Further documentation detailed the refurbishment scope, which included stripping the property and replacing old fixtures and fittings.

The large repairs and maintenance claim was disallowed because initial repairs and improvements to a property are not deductible.

Rebuild

A husband and wife demolished their existing rental property and built a new dwelling. Then, in their income tax return, they claimed an immediate deduction for their share of the entire cost of the building as repairs and maintenance.

While the cost of constructing the new dwelling for rental purposes is permitted, the correct treatment is to spread the cost over 40 years, claiming 2.5 per cent of eligible construction costs as a capital works deduction.

The repairs and maintenance claim was disallowed.

Action plan

  • Reduce your tax bill by salary sacrificing pay into super and making an after-tax contribution to your low-earning spouse in return for a tax offset.
  • Reduce any capital gains by selling loss-incurring investments, such as shares.
  • Be sure to claim all legitimate work-related expenses. Be aware the Tax Office is targeting these expenses.
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