Government considers $1000 cap on work-related tax deductions: What you need to know when making claims

Business owners are urged to keep one key question in mind when claiming work-related tax deductions on their personal returns this June, amid speculation that there’s appetite from the government to place tougher limits on the amount individuals can claim as earlier as next month’s budget.

According to Fairfax, a parliamentary inquiry into tax deductibility has fuelled the government’s desire to consider placing caps on the amount individuals can claim for work-related purchases on their personal income tax returns, potentially moving to a universal cap, of $1000 per person, for example.

Individuals can currently claim an automatic $300 amount without documentation, and further expenses provided they have records of these. In 2015 $22 billion in work-related tax claims were made, reports Fairfax.

In its submission to the inquiry, Treasury highlighted that “Australia’s system is relatively generous in terms of work-related deductions”, outlining how other nations have more stringent rules around when an item is a legitimate deduction. It pointed to the United Kingdom, where there are tighter definitions on what constitutes a “work-related” item, and taxpayers are only allowed to claim items that are used exclusively for their work and no other purpose. Part of this expenses test involves proving that all members of a workforce need to use an item in order for it to be considered a tax deduction.

A submission by the Parliamentary Budget Office on the issue also pointed out that differentiating between private and workplace deductions in the Australian tax system is “not always simple”.

However, amid speculation that there might be a limit on the amount individuals can claim, financial adviser Stacey Price, of Healthy Business Finances, told SmartCompany taxpayers should keep detailed records not only of purchases but of why they made them. Taxpayers should understand any claims made on their personal returns will have the tax office asking why that expense wasn’t covered by their business or employer.

“If it’s a genuine work deduction, then why is your employer not paying for it?” Price asks.

In general terms, small business owners should not be affected by any caps to work-related tax deductions, because expenses should be covered through their businesses, Price says. If these are not, you better have an explanation ready about why the business hasn’t covered that expense.

While sole traders are able to claim workplace-related deductions against their annual personal income, the Australian Tax Office advises that in order for a claim to be considered a genuine work-related deduction, it must meet certain criteria: you must have spent the money for the item yourself; you must not have been reimbursed for it by your employer or business; it must be directly related to your job; and you must have evidence to prove it.

Members of the small business community have previously warned of the flow-on effects of limiting how much an individual can claim for work-related purchases. Last year Small Business and Family Enterprise Ombudsman Kate Carnell wrote for SmartCompany that small business owners may be stuck filling the gap left by any reduction in allowable work-related claims.

“This may be problematic because often employers choose not to fund certain expenses because the goods or services purchased can be carried on to other employers if the employee moves jobs,” Carnell said at the time.

SmartCompany contacted the Minister for Revenue and Financial Services for comment on potential changes, but did not receive a response prior to publication. A spokesperson for the ATO said the tax office is unable to comment on any potential policy changes.

Read more: ATO continues spotlight on business owners who wrongly claim travel deductions

Be careful on courses and training

Meanwhile, Price says one area where business owners need to exercise caution is around claiming training and courses undertaken throughout the year, because there could be a temptation to look back and make claims for education that don’t directly relate to your business and earnings.

“For example, I can’t go to a beauty therapy course and claim that for my business — I mean, I might like beauty therapy but it’s not related to what I do,” Price says.

While many have come to believe that a bank statement is enough to prove a potential claim, Price says it will save time and make any concerns much easier to resolve if business owners and individuals keep detailed records of their expenses throughout the year, along with details about why these were made.

“Whatever the thing they’ve bought is, they need to keep the receipt. We have an electronic diary — it also includes what training we have had, what staff have had,” Price says.

The value of keeping a record of the ‘why’ is that it will make it easier to explain the relevance of a tax claim when asked, says Price.

“Cover yourself. The first question you will be asked is ‘prove it’, and it’s better if you can prove it [not once but] five ways,” she says.

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