The Australian Taxation Office (ATO) has identified the following most common mistakes in relation to claiming tax deductions for business expenses in the tax returns:
- If a taxpayer uses a motor vehicle entirely for business purposes, the taxpayer is entitled to claim a deduction for the total operating costs of the vehicle. This situation is rare because most vehicles have some private use. Tradesmen most commonly have wholly business use vehicles because they regularly travel from home to a range of sites; in this case, minor private usage is ignored by the ATO.
- If the motor vehicle is used partly for business and partly for private purposes, the tax deduction for the operating costs of the car must be apportioned to reflect the business proportion;
- In any ATO review of tax deductions claimed for motor vehicles, the business use percentage must be supported by a logbook that records the business kilometers travelled during a continuous 12-week period. The logbook must record the date and nature of each trip. The law requires the logbook record to be updated every 5 years or where the business use percentage significantly changes at any time. Failure to maintain a logbook may result in the ATO denying the tax deductions claimed with consequent penalties being imposed.
- Business expenses incurred by a taxpayer must be kept separately from the taxpayer’s private expenses (for example rent of home, fines, travel, food and renovations of a private residence). Ideally, private expenses should be paid from a separate bank account(s) from the bank account(s) used for business expenses – failure to do this may result in the denial of tax deductions and the imposition of fringe benefits tax;
- If the taxpayer is registered for GST, the GST exclusive income and expense amounts must be reported in the business’s income tax return. GST inclusive amounts can only be reported in the income tax return if the taxpayer is not registered for GST. Registration for GST is usually required when a taxpayer’s aggregate annual turnover exceeds $75,000 – in many cases, taxpayers with less turnover register for GST to give them commercial legitimacy i.e. customers become nervous if GST is not being charged;
- If the taxpayer’s accounting software is upgraded, the business and private expense codes should be reviewed; and
According to the ATO, the following three conditions for claiming tax deductions for business expenses must be satisfied:
- The expense must be incurred in relation to the taxpayer’s business and not for private purposes;
- If the expense was incurred partly for business and partly for private purposes, only the business proportion can be claimed as a tax deduction; and
- The taxpayer must keep adequate records for a period of at least 5 years. For capital gains tax assets, the records must be kept for 5 years after the disposal of a CGT asset – this means that records, in relation to a CGT asset such as shares or property purchased in 1995 and sold in 2019, must be retained until 2024, 19 years after purchase.
Keeping Records – Basic Rules for Small Businesses
Generally, for tax purposes records must be kept in an accessible form (printed or electronic).
- Explain all transactions;
- Be in writing (electronic or paper);
- Be in English or in a form that can be easily converted.
Penalties can be imposed for not keeping or retaining relevant records in a manner required by taxation law.
According to the ATO, keeping electronic records is better and a more comfortable solution for small businesses. Retaining records in electronic format allows the taxpayer to manage them more efficiently. Preserving electronic records is also a safer way of storing in case of unforeseeable events, such as like floods or fires. Despite the ATO’s preference for electronic records, the taxpayer must also be able to access those records for many years into the future; that is, software must be retained to read older records/data.