Beware the mirage of the substantiation concession

When preparing client tax returns, it is important to remember the significance of substantiation when claiming deductions in your income tax returns. With increased scrutiny from the ATO on the eligibility of deductions claimed on individual tax returns, we’ve found a commonly recurring issue for taxpayers under ATO audit is in in their ability to substantiate their deduction claims, and what level of substantiation is required.

Substantiating deductions

In order to substantiate deduction claims, the onus is on the taxpayer to provide receipts, records and other written evidence to the ATO if requested.

Substantiation requirements for some common expenses include:

• Work-related Car Expenses: A logbook (12 weeks) or reasonable estimate (cents/km method) and records of car expenses.
• Work-related Travel Expenses: Receipts are required, as well as a travel diary for trips over 6 nights to show travel was work-related.
• Work-related Clothing, Laundry and Dry-cleaning Expenses: A diary is required if claiming up to $150, with full substantiation required for higher claims.
• Work-related Self-education Expenses: Receipts for course costs and materials directly related to work duties, plus supporting evidence regarding how the education assists in your current role.
• Work from Home Expenses: Records of hours worked and bills.
• Other Work-related Expenses: Receipts or invoices showing direct connection to earning income.
• Low-value Pool Deduction: Purchase records and depreciation calculations for assets under $1,000.
• Gifts or Donations: Receipts showing donation amount and that it was made to a DGR.
• Cost of Managing Tax Affairs: Invoices and records for tax agent fees and related costs.

Records of the expenses are not required to be submitted along with your tax return. However, you must keep records for 5 years from the lodgement date of your return. The ATO may also request explanations on what the expenses are for and how they are related to the production of your income. Such explanations may benefit from supporting documents, so the required documentation to be kept is broader than merely the invoices/receipts.

Valid receipts

Additionally, it’s important that you are keeping correct and valid forms of receipt. This includes legible tax invoices that are issued/addressed to the taxpayer, the supplier’s name and accurate dollar amounts against the expenses claimed. A common area where the ATO disallow deductions are where receipts provided are not valid due to being illegible, issued to someone other than the taxpayer or missing information on the receipt regarding what was purchased. They can also ask for proof of payment, so bank records should also be retained.

No substantiation requirement?

The ATO has provided some exemptions to the full substantiation requirement (i.e. do not need to provide specific receipts) for some deductions. However, the taxpayer is still required to provide evidence that they satisfy the circumstances for them to be claiming the deduction. There is an inherent contradiction here – in order to be exempt from substantiation you need to substantiate the expense.  Below are some examples of such deductions and the level of evidence required.

Work-related vehicle expenses

Where expenses are claimed for a vehicle that is not a car, the standard “logbook method” cannot be used. As such, substantiation by way of a logbook is not a requirement to claim these deductions. However, the taxpayer still has to provide evidence on how the work-related portion is derived and receipts for the cost claimed (e.g. insurance costs, fuel, servicing) – inevitably this can be best proved by having a logbook. For vehicles which are towed (e.g. a trailer used to transport work items), as they can in theory be also used privately, it may be of benefit for the logbook to record when they are used as well (which could be difficult to do if using an electric logbook).

Work-related Laundry Expenses

If the claim for laundry expenses is $150 or less, and for eligible work clothing, then there is no requirement for the taxpayer to provide receipts of the laundry expenses.

However, the taxpayer must be able to show how the amount claimed was calculated (e.g. number of loads/week × $ rate).

Travel expenses using Commissioner’s reasonable amounts

Where you travel overseas for more than 6 nights in a row, you can claim travel expenses using the Commissioner’s reasonable amounts based on the region you’re travelling to. This removes the requirement to provide receipts for all meals, accommodation, flights and incidentals.

However, there is still a number of documents that would be required to be supplied if the ATO audits the taxpayers return. This includes evidence to show the travel expenses have been claimed (e.g. bank statements, costs of meals, booking confirmations) and a list of expenses claimed, as well as information regarding what the taxpayer did on each day to show that they were working. The effect of this is effectively to take the taxpayer back to full substantiation.

Increased ATO scrutiny

Work-related deductions have historically been on the ATO hit list as an area of focus and we have seen a number of clients hit with audits and reviews for prior years, particularly where the deductions have been high. The issues seem to arise where the substantiation concessions are accessed, as the ATO in practice require full proof before allowing a claim. So, it’s important when claiming deductions in your tax return that you keep records of the claims and can explain/provide evidence for the expenses or risk the ATO disallowing claims resulting in an unexpected tax position.

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