Let's start with a telling statistic: about 88 per cent of 700,000 claims made for 'other expenses', during the 2017 financial year, needed to be amended, according to a review by the ATO
What this indicates is that, in general, we Australians struggle to understand what we can claim and what we can't. If you run your own business, it can be even harder to work out what's allowable and what's not.That's why we've put together this quick guide, so you can avoid some of the common pitfalls.
Let's start with what you CAN claim
As a general guide, if you have your own business; you are entitled to claim expenses that contribute to the running of that business. If it's a legitimate business expense you're likely fine to claim it. The catch is, of course, that you need to be able to provide receipts to prove your purchases plus, you may also need to demonstrate the expenses were legitimate through log book or diary records.
Legitimate business expenses can include some let's say, unusual items, depending on what line of work you are in. For example, salsa classes might be a legitimate business expense (if you work as a dancer) or, a top-of-the-range sound system may be a legitimate business expense (if you work as a music producer). You get the picture; it's all about being able to prove the item is necessary for your work. That leads us to what you really can't claim.
What is NOT a legitimate business expense?
Some expense you really just cannot claim and you shouldn't even try. A common mistake is to attempt to claim travel expenses to and from work. This is considered a private expense. But there's much more outlandish claims made too. Did you know people have sought to claim such items as cigarettes, edible underwear, breast implants and food for their pet dog? It seems someone; somewhere has tried to claim just about everything under the sun! This even extends to such things as dental expenses - the rationale being that you need a nice smile to land an interview.
We're sharing these examples not because we think you would attempt to claim them yourself, but merely to demonstrate the key point raised above - that the business expenses you claim must be legitimately related to your employment. The link can't be too tenuous or the ATO will challenge you!
Determining what a legitimate expense is can sometimes be a little subjective; if in doubt, seek guidance from an accountant.
What happens if I make an absurd or downright fraudulent claim?
As we've discussed above, the ATO is very used to receiving outlandish and or fraudulent claims on tax returns. If you claim an illegitimate business expense you could face consequences, depending on the severity of your breach:
If you make an absurd claim - You'll likely find your claim is challenged by the ATO and your tax return held up. Depending on whether you're a repeat offender; you may find your future tax returns also come in for a higher degree of scrutiny than is standard.
If you make a fraudulent claim - Making a fraudulent claim is tax fraud and the ATO unsurprisingly takes this very seriously. If you're caught, the ATO will penalise you. In cases where you've deliberately sought to deceive; like claiming that your son's wedding was an overseas conference business expense, you'll be slugged a minimum fee of 75% of the shortfall amount. And of course, your next tax return will be scrutinised very carefully!
Unsure about what to claim? Contact Hilary Wijeratne today.