Navigating Personal Deductions: A Guide for Australian Taxpayers

Maximise your tax returns without crossing the ATO: Learn the nuances of personal, business, and SMSF deductions in Australia with this simple guide.

The ATO’s Small Business Random Enquiry Program found around 16 per cent of small businesses were either carelessly or deliberately overclaiming expenses in their tax returns.

If business assets are used for a mix of business and private use – such as vehicles and phones – the amount claimed must reflect only the business-related portion of the expense.

The ATO is urging taxpayers to remember this rule when claiming business-related deductions, including those for work-from-home expenses (such as internet and mobile phone usage), and work vehicles.

Some of the examples the ATO has noted include:

  • personal expenses claimed as a business expense (for example, rent, travel, fines, meals, alcohol, home/office expenses such as mortgage interest)
  • excessive business expenses claimed for things used both personally and for business purposes (for example, home office expenses)
  • director’s fees or drawings not recorded correctly.

Rental properties under the spotlight

Holiday home rentals are also an area where many taxpayers are failing to follow the tax rules.

Deductions for holiday home expenses can only be claimed to the extent they relate to producing rental income, so you need to apportion your expenses if the property is only genuinely available for rent part of the year.

Apportionment is also required if you use the property for private purposes during the year, only use part of it to earn rent, or if it is used by family or friends at various times during the year.

Expenses relating solely to the rental of the property (such as agent commissions and advertising costs), don’t need to be apportioned.

Avoiding mistakes

To ensure you don’t invite attention from the ATO, review your treatment of business asset expenses annually, in case your private usage has changed.

New or additional private usage of the asset means you need to recalculate the percentage of business used to determine the correct deduction claim.

Proper business records explaining all relevant transactions (including payment to and receipts from employees, shareholders and associates) need to be kept to support your claims.

Common taxpayer errors

The ATO says there are some common errors when it comes to claiming deductions.

Taxpayers are not permitted to claim any deductions against business income for expenses relating to an asset entirely used for private purposes.

An example is an asset (such as a boat or plane) purchased and used for private purposes.

Deductions can only be claimed for the relevant percentage of business use. For example, if the private use component represents 60 per cent, only 40 per cent of the expense amount can be claimed in your return.

Good recordkeeping is essential to keep track of personal and business spending.

The ATO points out that poor recordkeeping habits make it difficult for tax professionals to make sure their clients are reporting accurately.

Some of the problems noted by the ATO include expenses claimed without the necessary substantiation, poorly maintained documentation (such as logbooks not kept up-to-date) and poor document storage (for example faded receipts).

The ATO says digital recordkeeping solutions are ideal but you will need to make sure that they’re accurate. There have been examples of transactions being miscoded and double counting of records.

FBT and deemed dividends

Another common mistake is claiming a deduction for an asset giving rise to a deemed dividend. This arises when an asset is purchased through a company and used for private purposes by a company shareholder or their associates.

Under the tax rules, both the company and the dividend recipient must record such dividends in their income tax returns, as the asset is being used for their personal benefit.

Some small businesses also misunderstand the implications of purchasing an asset (such as a motor vehicle), that is used by an employee or the associate of an employee for personal purposes.

When this occurs, the benefit must be reported in the business’s fringe benefit tax (FBT) return and the resulting FBT liability paid.

Fixing lodgement mistakes

To avoid finding your business in the ATO’s spotlight, check you have correctly apportioned all expense claims before lodging your business or SMSF return.

You also need to consider whether the rules for private company benefits and FBT apply to any of your business assets.

If you make a mistake with a deduction claim, you will need to amend or lodge an income tax or FBT return to correct your tax position. There are time limits on both business and super amendments.

We can help you to correct any mistakes and to deal with the ATO to ensure your tax reporting is smooth and worry-free.

Getting it right

The ATO says good business means getting the basics right. That includes:

  • good record keeping practices and regular reconciliation processes (such as ensuring cash deposits match total sales)
  • understanding tax obligations and seeking advice when you need it
  • having the support of someone who understands your business (for example, a registered tax or BAS agent, a bookkeeper or accountant)
  • using technology that is appropriate for the size and scale of your business such as point of sale software, cloud-based accounting systems and mobile apps

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.