When tax season is upon you, your thoughts naturally focus on how much tax you’ve paid throughout the year and how you can reduce that tax bill. After all, it’s about reclaiming as much money as you can.
When claiming tax deductions, the ATO has three golden rules:
- You must already have incurred the expense
- The expense must be a direct expense related to earning your income
- You must have the records to prove your expense.
In order to lodge your tax return as easily as possible, and to be able to claim all of your eligible deductions, it’s important to get your paperwork in order. Not only will your accountant love you for it, but you’ll be assured you’re maximising your tax deductions. If you don’t have the records, you won’t be able to claim the expense.
Keeping good records reduces the cost of managing your tax affairs. If you’re prepared, your tax accountant won’t have to add up your expenses, giving them more time to ensure you get what you’re entitled to.
Before claiming any tax deductions, you’ll need to make sure you’ve got the correct records. Not all of them need to be in paper format. The ATO recognises electronic copies of your records as long as they are a true and correct representation of the original, but they must be in English, except under certain special circumstances.
You’ll also need to keep your records for five years from the date you lodged your tax return. In more specific situations, you’ll need to keep your records from the date of your last claim of decline in value to calculate depreciation.
If you acquire or dispose of an asset, you’ll need to keep your records for five years after the tax return is lodged in which the asset was disposed of.
If you’ve been in a dispute with the ATO, you’ll need to keep your records from five years from the date you lodge your tax return or five years from the date the dispute was resolved.
It’s All In The Proof
There are certain types of records you’ll need to keep. Most people think a receipt is all you need, but sometimes it takes more than that to substantiate your claims. As a rule, it is best to keep a record of all income and expenses and any paperwork you have received, including invoices.
If you’ve incurred any private expenses then the amount shown on your records will need to show how you’ve worked out your business and private portion as you’ll only be able to claim the business-related portion of your expenses. Apart from receipts, you’ll also need to keep bank statements and credit card statements; lease, hire purchase, chattel mortgage or other loan agreements to your business; BAS and Instalment Activity Statements and working papers; Stock evaluation papers; logbooks and diaries.
Salary, Wages and Allowances
Your salary or wage will be shown on a yearly income statement by your employer. It used to be known as a group certificate and was given to you by your employer. With new Single Touch Payroll (STP) reporting obligations your employer must report your income electronically with the ATO. You’ll receive an income statement (this is equivalent to a PAYG summary) that will be marked as ‘Tax Ready’ that your ITP Tax Accountant will be able to access on your behalf.
Interest from Dividends, Managed Funds or Rental Properties
You’ll need to declare any income you have earned from bank interest, dividends, managed funds and rental properties. In the eye of the ATO, these are taxable income streams. Evidence can include:
- Statements, from your financial institution showing the amount of interest you have received
- Statements from the company, corporate unit trust, public trading trust or corporate limited partnership that pays dividends or makes distributions to you. These records should show:
- The amount of franked and unfranked dividends
- The amount of franking credits
- Any tax file number amounts being withheld from unfranked dividends
If you’ve received statements or advice from funds showing the distributed amount, the statement should show the amount of the primary production or non-primary production income, any capital gains or losses, any foreign income and your share of any credits.
Any rent you’ve received should be documented by a statement from your property agent, a rent book or bank statement showing your rental payments and records of any bond money retained.
Government Benefits and Pensions
Some government pensions, government benefits or annuities are taxed and some are non-taxed, however you’ll still need to include the information on your tax return if they are taxed or not. This is to work out if you’re entitled to other payments or tax offsets. In much the same way as your wages or salary, you’ll need to show your PAYG income summary or ‘Tax Ready’ income statement, and a letter from the agency that pays you showing the amount you have received if required.
There are a range of tax deductions that can be made in the way of work expenses. If you’ve used your vehicle, worked from home, studied for your job, bought specialised clothing, stationery and incurred any other work-related cost, you’ll be able to claim a deduction.
There are two ways you can claim your car expenses. The ‘logbook method’ and the ‘cents per kilometre’ method. Both ways require you to know or estimate the business kilometres you have travelled and costs such as petrol, oil, repair and maintenance, parking, and / or tolls. Other expenses for your car – for example, registration, insurance, lease payments, services, tyres, repairs, interest charges can be claimed. To do this, you’ll need to keep a detailed log book or travel diary showing the date, odometer reading per trip and the total kilometres travelled and the reason for your trip. When you keep a log book, you’ll need to do this for 12 consecutive weeks that can then be averaged throughout the year. Separate logbooks per car you’ve used for work purposes can be kept. Keep your log book for five years.
When you calculate your travel expenses, you’ll need to work out the business-related expenses and claim only those. A detailed travel diary which shows the length of your stay and your travel movements and activities (what you were doing, where you were and the start and end times of your activities). You’ll need to back up your diary with invoices, receipts or other documents showing your expense, records of any travel allowances you have received, costs such as petrol, repairs and maintenance, and receipts for fares for air, bus, train, tram, taxi, share ride, bridge and road tolls and car-hire.
Clothing and Laundry
If you’re out of pocket for your work-related gear, keep your receipts. The ATO has strict rules to claiming any work-related clothing, but clearly identifiable uniforms and safety gear, glasses, high-vis vests – even sunglasses and sun-protection in some cases can be claimed. You’ll also be also to claim the cost of laundry fees to clean and repair your work-related clothing.
Have you studied to improve your skills for your current job? Tuition fees, travel expenses, stationery, computer, internet and phone related costs are some of the expenses you can claim. Keep the receipt for your computer or any capital items you might need to purchase as they can be depreciated.
Home Office Expenses
If you’ve had to work in your home, or work-from-home, you’ll need to keep a work-diary detailing your business hours, as well as your utility, phone, internet invoices and any other expense you’ve incurred to run your home office. If you’ve bought any capital equipment which is over $300, you can work out the depreciation expenses and claim those costs over a number of years.
Gifts, Donations and Contributions
If you’ve done your civic duty, or perhaps donated to your favourite cause, the types of donations you make will impact your tax.
If you donate $2 or more to a Not-For-Profit Entity that is a deductible gift recipient (DGR) you may be able to claim a tax deduction. A gift of money less than $2 is not tax deductible. A series of gifts can be added to a DGR in an income year to work out whether your gift is $2 or more. It can be given to the DGR in various ways, including by cash, cheque, credit card or electronically.
Your ITP Tax Accountant will advise if you’ve been the recipient of a donated gift or have made a gift and how you can claim.
For an extensive list of what you’ll need to bring, click here for our detailed list:
During your appointment, your ITP Tax Accountant will work through every possible tax deduction available to you and your business. Don’t forget to ask what tax incentives or offsets may be available to you in order to increase your tax deductions.
If you’re a client of ITP, you’ll be able to ask your tax accountant for advice throughout the year. One big part of claiming all of your deductions is in the planning throughout the year. If you are fully prepared and understand your deductions and what records to keep, you’ll be able to maximise all of your tax deductions.