The ATO requires that you keep records for at least five years to substantiate any deductions you claim on your tax return. This applies to all work-related expenses, including home office use, car expenses, and other job-related costs. However, it’s not enough to simply have bank statements or credit card receipts. The records must clearly demonstrate that the expenses were directly related to earning your income.
Common misconceptions
One of the biggest misconceptions among taxpayers is the belief that you can automatically claim a $300 deduction without keeping any receipts or documentation. While it’s true that the ATO allows you to claim up to $300 without providing written evidence, this doesn’t exempt you from needing to prove that these expenses were incurred.
If the ATO audits your return, you must be able to show that the expenses were genuine and directly related to your work. The $300 threshold is not a free pass for deductions without evidence but rather a simplified process for small, legitimate expenses.
Specific record-keeping requirements
To avoid issues with the ATO and ensure you can claim all eligible deductions, it’s essential to understand the specific record-keeping requirements for different types of expenses:
- Work-From-Home expenses: With the rise in remote working, many people claim work-from-home expenses. However, the ATO expects you to maintain a detailed log of the hours you’ve worked from home and the associated costs, such as utility bills, internet expenses, and the depreciation of office equipment. These logs must be accurate and reflect your actual work patterns.
- Car expenses: A logbook detailing your business-related travel is essential if you're claiming car expenses. This logbook should include the date, distance travelled, and the purpose of each trip. The ATO uses this information to determine the proportion of work-related car use, ensuring that only the correct percentage of expenses is claimed. Remember, your car expenses could be disallowed without a properly maintained logbook.
- General work-related expenses: Work-related other expenditures, such as tools, equipment, and uniforms, also require careful documentation. Keep all receiptsand ensure that each expense is clearly related to your job.
Consequences of Poor Record-Keeping
Failing to maintain proper records can lead to significant issues, including the disallowance of deductions and potential penalties.
The ATO has sophisticated data-matching programs that can identify discrepancies between your tax return and the records held by third parties, such as financial institutions and employers. If discrepancies are found, the ATO may issue a “please explain” notice, leading to a potential audit.
In addition, if you are found to have claimed deductions without proper evidence, you may be required to pay back the amount with interest, and in some cases, additional penalties may be applied. The reputational damage and financial costs associated with an audit can be significant, making it all the more important to keep detailed and accurate records from the start.
Best Practices
To ensure compliance and maximise your deductions, here are some best practices for record-keeping:
- Keep all relevant receipts and invoices: Whether in physical or digital form, ensure you retain every piece of evidence related to your work-related expenses. Digital records can be particularly useful as they’re easier to organise and less likely to be lost.
- Use dedicated apps or software: Many tools are available to help you track and categorise your expenses. These apps can automate much of the process, making it easier to maintain accurate records.
- Regularly update your records: Don’t wait until the end of the financial year to organise your receipts and records. Regularly updating your records throughout the year can avoid a last-minute rush and reduce the likelihood of errors.
- Consult with a Tax Professional: If you’re unsure about what records to keep or how to claim certain deductions, it’s best to seek professional advice. A tax professional can help you navigate the complexities of tax law and ensure that you’re fully compliant with ATO requirements.
- Understand the ATO’s expectations: Familiarise yourself with the ATO’s guidelines for record-keeping and deductions. The more you understand the rules, the better equipped you’ll be to comply and avoid potential pitfalls.
Maintaining good records is essential for maximising your tax deductions and ensuring compliance with ATO regulations. By staying organised and proactive, you can avoid potential issues, make the most of your tax situation, and reduce the risk of an audit.
If you need assistance with your record-keeping or have any questions about your tax obligations, the team at Lead Advisory is here to help. Let’s work together to ensure you’re fully prepared and compliant for the next tax season.
