ATO tax deductions: these murky moves will be watched closely

Every move you make, every tax deduction you fake, the ATO will be watching you. Here’s how to avoid getting into hot water.

Tax time has two months to run, and people hoping to grab a bigger refund through murky tax deductions are being urged to think again.

Even an honest error on your tax return can lead to investigations and potential penalty interest, thanks to Australian Taxation Office technology that monitors mistakes and catches cheats.

“There are certain deductions that consistently seem to attract the attention of the ATO,” says H&R Block director of tax communications Mark Chapman.

William Buck business advisory manager Braden Schwark says cars and clothes are among the key areas where people can find themselves in hot water.

“The ATO has significant data matching capabilities to reference when assessing personal tax returns,” he says.

“Individuals who claim inflated or ineligible deductions as well as those who fail to declare all eligible sources of income risk significant penalties if they are found in breach.”

Here are 10 types of dodgy tax deductions that can attract ATO attention, and possibly a dreaded audit.

1 CLOTHES THAT WON’T FIT

There are strict rules around claiming deductions for buying and cleaning work uniforms. The ATO says only compulsory uniforms for work can be claimed, and must be distinctive to your workplace “so that a casual observer can clearly identify you as working for a particular employer”.

Business suits don’t cut it, and shoes, socks and stockings are not generally deductible.

“Excessive clothing deduction claims that don’t match up with the occupation standard will come under scrutiny,” Schwark says.

The ATO uses data matching and other technologies to track taxpayers’ moves.

2 COUNTING CAR COSTS

Tax deductions for work-related motor vehicles must be justified and substantiated, and remember that you cannot generally claim the cost of driving between home and work.

“Claiming the cost of travel when the car isn’t registered in your name or when you have a company vehicle and petrol tab is likely to raise a red flag with the ATO,” Schwark says.

Chartered Accountants Australia and New Zealand tax leader Michael Croker says the ATO will be looking closely at people who claim deductions for travel during Covid-19 lockdown periods.

“It’s an easy one for them to cross check when borders were closed and there were severe travel restrictions in place,” he says.

3 DOUBLE DIPPING

“The most common mistake most people make is in claiming a deduction for an expense your employer has already reimbursed,” Croker says.

“Remember that you can’t double dip.”

4 EDUCATION TRAPS

“Claiming a self-education deduction for your initial qualification, or postgraduate study totally unrelated to your current job, is also something that the ATO will be scrutinising,” says Croker.

5 WONKY WFH DEDUCTIONS

Millions of Australians have been legitimately claiming deductions for working from home, but if your job doesn’t involve it – think emergency services workers or security guards – don’t test the ATO.

Croker says “our advice is to play it with a straight bat”.

6 DONATION MISTAKES

H&R Block’s Chapman says charity donations above $2 are tax-deductible but “if you don’t have a receipt, you can’t claim”.

“Also, the cost of things like raffle tickets or tickets to charity dinners aren’t deductible, because you’re getting something in return – namely the chance to win a prize or a nice dinner, respectively,” he says.

7 GROOMING DOESN’T CUT IT

You might need to look your best for work but that doesn’t mean that the money spent on hair care, make-up and even cosmetic surgery is tax deductible, Chapman says.

“Such costs are regarded as private in nature and not claimable.”

Braden Schwark says cars and clothes are key problem areas.

8 INTEREST OVERLOAD

Interest on investment loans for real estate, shares and other assets is deductible, but don’t make the mistake of claiming your total repayment, because it may also include a loan principal amount that is not deductible.

9 RENTAL PROPERTY VISITS

Travel expenses haven’t been deductible for most real estate investors since 2017, when the government stamped out the practice of people claiming their holidays to Queensland and elsewhere to check on rental properties.

Today, even if your investment property is a few suburbs away and you legitimately drive there to check on it, the travel component is not deductible.

“Many taxpayers haven’t yet got the message and still seek to make travel claims – there can be few faster ways to get pushback from the ATO,” Chapman says.

10 PROOF IS PARAMOUNT

If you can’t prove your deduction, it isn’t legal.

Chapman says one of the areas frequently picked up by the ATO is when deductions don’t have invoices or receipts to justify them.

Originally published as ATO tax deductions: these murky moves will be watched closely