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Can you substantiate your tax deduction ?


So what is substantiation ? Simply its that you can prove that your incurred the deduction being claimed. There are a number of ways the ATO allows this to take place and we will explore some of these in this article, that said its our recommendation that you always keep a receipt and pay for deductible costs through your bank account or credit card. Also consider recording your receipts and claims using the ATO phone app.

By law, you are required to keep your records for five years from when you lodged your tax return in case the ATO ask you to substantiate your claims. That said if you receive an audit and the ATO suspects tax evasion, the audit is not limited in how far back they can go. So yes keep all receipts indefinitely.

If you’re unable to prove your claims, possible repercussions can include:

  • Penalties Charged – from not taking reasonable care/making false or misleading statements

  • Shortfall and General Interest – backdated from when you tax return was due

  • And in severe cases, possibly Prison

Should you make a material mistake in your tax work which results in a large over claim of expenses, you may need to amend your tax return.

So what are the ATO looking at when conducting an audit ? Some examples are:

  • Phone bills marked up showing for a 4 week period the calls for business use. Dollars are then used to calculate the %.

  • Tolls. Photo’s are being accessed on the day a claim are being made to determine if your travel notes align and if the motor vehicle registration aligns.

  • Log books. Service records are being accessed to cross check recorded Kms at time of service against the same date on the logbook. If there is a discrepancy the entire log book is rejected.

  • International travel. Customs records are accessed to confirm the tax payer left the country on that date being claimed

  • Purchases. Suppliers and retailers are being phoned to confirm a purchase.

  • Cash Payments. In the absence of an invoice or receipt these are rejected.

  • Home Office rent/interest. We always get asked for a professionally scaled drawing of the home floor plan so the ATO can calculate the actual floor space ratio.

  • Overnight travel & Meal Allowance. Even if you are paid an allowance by your employer and you claim the “reasonable” rates not requiring substantiation, you will still be asked to show proof that you spent the money. So again bank statements are the best source here.

Further the ATO uses data analysis to compare your industry code (Make sure your code is correct) against your surrounding post codes to assess if your claim is high and worth auditing. General other work related deductions above $10,000 are high in our experience and we do suggest taking up audit insurance if you fall into this category.

Our Suggestions Are

Understand Substantiation

  • You must have written evidence to prove your claims if the total claims exceed $300. The records must prove the total amount, not just the amount over $300.

  • The $300 limit does not apply to claims for car expenses, meal allowance, award transport payments allowance, or travel allowance expenses. There are specific requirement rules in the form of written evidence for substantiating these types of expenses.

Have written evidence ?

The following constitute written evidence:

A document from the supplier of the goods or services that shows the:

  • name of the supplier

  • amount of the expense

  • nature of the goods or services – if not shown, you may write this on the document before you lodge your tax return

  • date the expense was incurred

  • date of the document

Another document or combination of documents containing the information listed above; examples include:

  • Bank and other financial institution statements

  • Credit card statements

  • BPAY reference numbers (may be receipt numbers or transaction numbers) email receipts

  • PAYG payment summary (may show union fees)

  • Electronic copies of documents – must be true and clear reproductions of the originals evidence recorded by you:

for expenses of $10 each or less, providing the total of these expenses is not more than $200 if you have been unable to obtain written evidence, for example, for toll or parking fees where a receipt cannot be obtained Each of these items of evidence must show the same details as a document from a supplier as described at the top of this list.

Exclusions from record-keeping requirements

Specific exclusions from record-keeping or substantiation requirements are available for certain work expenses. These include:

  • total work-related expense claims of $300 or less

  • laundry ($150 or less)

  • travel expenses that are covered by a travel allowance and are within the reasonable allowance amounts published by the ATO. However, you may still be required to show the basis for determining the amount of your claim, that the expense was actually incurred, and that it was for work-related purposes (refer to Taxation Ruling TR 2004/6)

  • award transport payments where the claim is limited to the amount payable under an award as at 29 October 1986. If you have a claim for any additional kilometres not covered by the award transport payment, car expenses can be claimed but only by using either the logbook method (you will need written evidence) or the cents per kilometre method

  • small expenses ($10 each or less and not more than $200 in total).

Find out more

Practice Statement PS LA 2005/7 Substantiation of deductions claimed by individual taxpayers for work and car expenses incurred in the course of earning non-business and non-investment income

Taxation Ruling TR 97/24 – Income tax: relief from the effects of failing to substantiate


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