Excerpt from speech by Jennie Granger, Second Commissioner of Taxation at the CPA Australia (NSW) Public Practitioners Conference:

Work-related expenses continue to be an area requiring attention from us.

Deductions for work-related expenses are one of the largest categories of claims made in tax returns.

We are concerned that the difficult times may tempt more people to inflate their claims.

As of May 2009, we had carried out more than 5400 audits and reviews this financial year, resulting in a total of $9.7 million raised.

In selecting our work, we will as usual focus on:

• occupations with a pattern of large and/or rising claims
• returns which do not fit the pattern for a particular occupation, and
• claims in returns lodged by tax agents that are outside the norm for their client base.

Based on our profiling this year we will be focussing on people employed as:

• truck drivers
• sales and marketing managers
• sales representatives, and
• electricians.

The most common incorrect claims by people in these occupations include:

• insufficient documentation available to support motor vehicle and travel expenses
• claiming the Living Away from Home Allowance without proper documentation and verification from the employer that the claimant must live away from home as a condition of their employment
• motor vehicle expenses on the basis that the claimant is carrying bulky equipment required for work. It’s important that the claimant can verify that their employer requires them to carry this equipment as part of their employment and there is no alternative storage solution at the workplace, and
• home offices, mobile phone and internet expenses.

Excerpt from speech by Jennie Granger, Second Commissioner of Taxation at the CPA Australia (NSW) Public Practitioners Conference:

Refund fraud is always high on our radar and this year we will be using new technology to enhance our detection capability.

This year, to complement our normal checks, lodgments through e-tax and other channels will be reviewed using automated analytic models designed to identify potentially unregistered preparers and cases of identify theft.

A significant concern to us is people who prepare returns for others without being a registered tax agent.

We have found that where an unregistered preparer claiming to be a tax agent is used to prepare income tax returns, there is an increased likelihood of the return containing inaccurate information leading to inflated refunds. Knowing this, we target our investigations to those particular ‘tax practitioners’. An example of our concern in this area is: 98% of the returns that were lodged by unregistered preparers that we have audited have required adjustment.

As part of the Tax Office Compliance Program for 2008-09 they will expand coverage with a more focused cash economy strategy.

Data matching is increasingly being used to detect unreported income, along with checking for inconsistencies between household and personal assets and reported income levels.

Micro enterprises attempting to avoid their tax obligations are brought to account so they do not have an unfair advantage over those who do the right thing. While data-matching from third party sources continues to be a part of this process, the ATO uses profiling to identify potential tax risks; especially businesses operating outside industry or economic norms.

Earlier this year the ATO started publishing benchmarks that businesses in cash economy industries can use as a guide (you can be sure the Tax Office will be!).  In our upcoming Quarterly Newsletter, I’ll be providing a case study on how these benchmarks were used during an ATO audit…. needless to say it did not go well for the taxpayer taking regular cashies.

No matter how honest the person, taxpayers working in these industries (labourers, tradespeople, etc) tend to draw attention to themsmelves by failing to keep on top of the books/paperwork. It’s understandable; you’ve worked hard all day and the last thing you want to do is come home and do bookkeeping all night. From a Tax Office perspective, however,  poor record-keeping is often a symptom of poor compliance with tax and other obligations. If you have consistently been late with Activity Statements, tax returns or paying your tax liabilities, you are a potential risk.

Something to think about

• The Tax Office wrote to, phoned or visited more than 68,000 businesses during the year to check for non-compliant cash economy behaviour. These compliance activities established more that $100 million in total liabilities.
• The Tax Evasion Hotline (1800 060 062) received more than 30,500 reports from people in the community willing to ‘dob’ about suspected failures to meet tax obligations.

Each year the ATO publish their Compliance Program as a heads-up to taxpayers of what they will be focusing on and how they’ll be checking into returns. The idea behind this approach is one of  ‘prevention is better than cure’. It is the nice way of letting you know that ‘You’ve been warned.’

Incorrectly-claimed work-related expenses

It’s no surprise that work-related expenses has made the compliance list yet again with taxpayers increasingly claiming work-related expenses. In fact, at 30 June, 83% of you had made work-related expense claims on your previous tax return to the tune of  $13.6 billion!

Occupations of particular interest

Based on their analysis of claim patterns for the previous year, the ATO will be paying special attention in 2008-09 to claims from:

•  - nurses
•  - medical practitioners,
•  - and chefs.

Employees need to be able to substantiate the value and eligibility of claims in excess of the first $300. The ATO review any claims that are outside normal work-related expenses claim patterns and, if necessary, request additional information to substantiate them.

Claims of particular interest

More generally – not just in these occupations – the Tax Office have stated that they will be looking at anomalous or ‘out of pattern’ claims for self-education, car and travel expenses.

Increased Follow-up

Increased government funding has allowed the Tax Office to focus more on income tax compliance of individuals; it’s not just the big fish who gets looked at anymore. During 2007-08 the Tax Office wrote to 76,200 individuals asking them to either review their work-related expenses claims or to provide further information. Around 19,100 reviews or audits were completed resulting in revenue adjustments of $14.7 million.