Here’s how to optimise your tax returns without falling foul of the tax office

Rental property returns and working-from-home expense claims are at the top of the ATO’s areas of scrutiny this year, so you have been warned.

Making legitimate claims to minimise tax is fine, but just remember that the ATO has multiple sources of data if you’re trying to hide something.

We are told to not lodge our tax return during the first few weeks of July as the Australian Taxation Office is busy pre-filling our profile with information relating to wages, dividends, interest and private health insurance data.

But what many people are not aware of is the extent to which the ATO has data collection powers and the wide variety of places it sources data.

So when it comes to completing this year’s tax return this is what you need to know.

The first thing is to visit the tax office website. Each year the ATO publishes the areas it will target. For both the previous tax year and this year, working-from-home expenses and rental properties are top of the list.

On working from home, the ATO says: “In 2023 more than eight million people claimed a work-related deduction, and around half of those claimed a deduction related to working from home.

“Copying and pasting your working-from-home claim from last year may be tempting, but this will likely mean we will be contacting you for a ‘please explain’.

“Your deductions will be disallowed if you’re not eligible or you don’t keep the right records.”

Three things to remember are:

YOU cannot claim a tax deduction on an expense for which you have been reimbursed;

THE expense must directly relate to earning your income;

YOU must have a record to prove the expense.

The ATO says that nine out of 10 rental property owners are getting their tax returns wrong.

In its warning to property investors it says: “This year, we’re particularly focused on claims that may have been inflated to offset increases in rental income to get a greater tax benefit.” In other words, if you claim the full cost of a renovation in your tax return rather than depreciate it over several years then you are inviting an ATO audit.

NSW-based accounting firm Shuriken Consulting’s general secretary, Andrew Jeffers, says: “There are some basic tax principles that do not change from year to year. Keep all of your receipts regardless of whether you think they may be deductible or not and be aware of the ATO data matching powers.

“For instance, if you sell an investment property the ATO will expect you to declare this in your tax return having already been notified by the relevant state land titles office that the transaction occurred.”

It is not just investment property data which the ATO receives. Australian Transaction Reports and Analysis Centre (Austrac) sends data to the ATO as well 126 countries under the Common Reporting Standard (CRS) agreement whereby foreign financial account information is shared with the ATO. The saying “out of sight out of mind” definitely does not apply when it comes to income and assets generated overseas. If you are an Australian tax resident, worldwide income is expected to be reported.

For local investments, the key is that no matter how big or small the transaction, if you earned income or bought or sold an investment, it needs to be reported in your tax return.

The ATO gets data from the ASX and share registries as well as data from cryptocurrency exchanges and a wide range of other financial sources – so there is little room to hide.

Although we are gradually moving into a cashless economy, the ATO knows there is still a “shadow” economy costing billions of dollars each year in lost tax revenue due to cash-in-hand services, under-reporting of income and more illicit activities such as money laundering.

To combat this, the ATO’s data gathering tentacles extend to places such as insurance companies, online selling platforms and monitoring banks merchant facilities.

If you declare $20,000 per year taxable income but have an insurance policy on a more than a $1m yacht, or buy and sell tens of thousands of luxury goods online, then there is a strong likelihood that you have triggered a red flag against your file at the ATO.

You get the message – declare all of your income and gains.

But on the flip side, you should also declare all of your legitimate tax deductions to legally minimise tax. Investors should speak with their tax agent regarding the deductibility of investment seminars, investment courses and investment advice.

On capital gains tax, property and shares, investors can often forget to claim all of the expenses that increase the cost base and consequently reduce a capital gain event. Stamp duty, legal fees, agents’ fees, renovations, marketing costs and incidental expenses such as valuation fees should all be taken into account when working out capital gains and losses.

And, if at the end of the process you are feeling a little down with the outcome of your tax return, just remember the philosophical advice from Jeffers: “We are all very lucky to live in Australia where the parks are clean, the schools are great and the sick and elderly are looked after if they cannot afford to look after themselves.

“And the sole reason for this is because of the taxes that we all pay.”

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au