SELF-ASSESSMENT & PERIODS OF REVIEW

Our taxation system works by a process of self-assessment. In broad terms, this means that the ATO will generally accept the contents of a tax return and process it and issue and assessment without any alterations to the information submitted. However, the ATO can legally require you to provide the information and records used to prepare a return. Your return may be selected by the ATO for a review or an audit.

Where tax has been underpaid the ATO may amend a return if they do so within the amendment period, known as the “period of review”. The period of review is the timeframe within which the ATO has the power to amend a tax assessment and a taxpayer can request and amendment or object to a tax assessment.

The period of review for small business entity taxpayers and most individuals is 2 years from the date of issue (or deemed date of issue) of the relevant Notice of Assessment.

The period of review is 4 years from the date of issue (or deemed date of issue) of the relevant Notice of Assessment for:

  • non-small business entity taxpayers;
  • nil income and loss taxpayers;
  • individuals receiving distributions from non-small business entity trusts or partnerships (other than public trading trusts and corporate unit trusts).

In cases where tax fraud or evasion is considered to exist the period of review is unlimited.

RECORD RETENTION RULES – HOW LONG DO YOU NEED TO KEEP YOUR TAX RECORDS?

The minimum period to retain your tax records will depend initially on:

  1. The nature of the transactions involved, and
  2. The type and status of the taxpayer (e.g. individual, company, small business etc)

Record retention periods for tax purposes are generally between 2 to 5 years but can be longer for specific matters such as capital gains tax and where recoupment of losses is involved.

Records may be held in paper form or in electronic format if they are readily accessible, in English (or convertible to English) and unable to be altered.

Records supporting work related expenses, car expenses and travel claims by employees and self-employed persons must generally be retained for 5 years from the later of the record date or transaction completion date.

Every taxpayer carrying on a business must keep all relevant records (including GST, FBT, fuel tax, contractor payments and employee records) for 5 years from the later of the record date or transaction completion date.

It is advisable to keep relevant capital gains tax records (whether the gain is exempt or not) for at least 5 tax years after the asset has been disposed of.

Where income tax or capital losses are being carried forward for future use or have been used, records must be maintained evidencing the original loss incurred for 5 years after the loss has been fully recouped.

Despite the above, there is a requirement under s.286 of the Corporations Law for a company’s financial records to be retained for at least 7 years after the transactions covered by the records are complete.

SUBSTANTIATION RULES FOR DEDUCTING EXPENSES

The key principal when deducting expenses is that you must be able to substantiate them by obtaining written evidence of the expense, either from the supplier ideally or alternatively from a third party (e.g. bank/credit card statement or BPay record).

The written evidence must contain the name of the supplier, the amount of the expense, the nature of the goods or services supplied, the date of the expense was incurred and the date of the document. If the document does not show the nature of the goods or services, the taxpayer may add that detail to the document before tax return lodgment.

Electronic records and copies of electronic records are accepted for substantiation purposes.

Following is a selection of some of the more common substantiation rules for employees. Please note that this is not an exhaustive list and you should contact us if you would like to discuss the substantiation requirements applying to your particular circumstances.

Work Related Expenses (WREs)

  1. The taxpayer does not need to obtain a document from a supplier if the expense is $10 or less and the total of all such expenses is $200 or less. The taxpayer can instead make a record of the expense
  2. A taxpayer’s record of an expense will also be sufficient if it would be unreasonable to insist on a supplier document. Examples include tolls and parking meter fees
  3. Annual payment summaries can be used as evidence of certain expenses such as annual union fees
  4. While documentation is not necessary where WREs do not exceed $300, taxpayers must still be able to demonstrate that such expenses have been incurred
  5. Where clothing is considered to be tax deductible, related laundry expenses of up to $150 can be claimed without written evidence (laundry costs include washing, drying and ironing, but not dry-cleaning)
  6. The cost of meals covered by overtime meal allowances paid under an industrial award that do not exceed reasonable amounts published by the ATO do not need written substantiation.
  7. The cost of an employee’s food, drink, accommodation and incidentals for which a travel allowance is received still require written evidence that the costs were incurred and travel records such as a travel diary, unless:
    1. The allowance is in relation to travel within Australia and the amounts claimed are within the Commissioner’s published reasonable amounts (n.b. once the reasonable amounts are exceeded, the whole claim must be substantiated as set out above, not just the excess amount/s)
    2. The allowance is for food, drink and incidentals (but not accommodation) relating to travel outside Australia and the amounts claimed are within the Commissioner’s published reasonable amounts (n.b. once the reasonable amounts are exceeded, the entire deduction amount must be substantiated as set out above, not just the excess amount/s). Travel records must be kept if the taxpayer is overseas for 6 or more consecutive nights.
  8. An employee’s domestic or overseas travel expenses (including car expenses), where no travel allowance is received are not deductible unless:
    1. Written evidence is obtained regardless of the duration away from home, and
    2. Travel records (i.e. a travel diary or similar) must be kept where the taxpayer is away from home for 6 or more consecutive nights
  9. Car expenses may be claimed using either the logbook method or the cents per kilometre method.
    1. Logbook Method
    –  expenses must be supported by written evidence (see above)
    –  a valid logbook must be kept for at least 12 weeks in the first year
    –  a new logbook is then required after 5 years have passed
    –  in years 2 to 5, the taxpayer is still required to keep odometer records to establish total kilometres travelled during each year
    –  where a valid logbook is not kept, no deductions are available
    2. Cents Per Kilometre Method
    –  While substantiation records are not required, the number of business kilometres must be arrived at via a reasonable estimate.
    –  The ATO expects a taxpayer making the claim to be able to demonstrate that the car did travel on business and how the number of kilometres was arrived at

Business Expenses

Substantiation of business expenses follow the general principals outlined above. The same rules for substantiating passenger vehicle expenses (at point 9 below) apply to both businesses and employees. However, written evidence for business travel expenses is only required if the travel involves at least one night away from home.

PENALTIES

  1. Late Lodgement

    There is strict penalty regime in place for late lodgement of income tax returns which is based on penalty units. The current base penalty unit is currently $210 for each late period of 28 days (or part thereof) up to a maximum of $1,050.

    However, where your assessable income exceeds $1million the base penalty unit can increase to $420 for each late period of 28 days (or part thereof).

    Penalties imposed by the ATO are not tax deductible.

    Please provide your relevant information to us in time for us to lodge your return by the due date to avoid the possibility of these late lodgement penalties applying.

    There appears to be an unwritten administrative practice of the ATO not to impose late lodgement penalties on tax returns that ultimately result in tax refunds. As it is unknown whether this approach will continue we do not recommend relying on it when considering the timing of having your returns prepared. It remains prudent practice to have your returns lodged prior to the due date in all cases.

  2. Incorrect Returns

    The ATO can apply penalties and interest where tax has been underpaid due to an incorrect return being lodged by the taxpayer (e.g. a tax return containing deductions that cannot be substantiated or omitting assessable income).

    Penalties do not apply where there has been reasonable care applied in preparing the return.

    Penalties of 25% of the tax shortfall can be imposed where there has been a lack of reasonable care. Larger penalties can be imposed where the taxpayer engages in specified categories of culpable conduct:

    –  50% of the tax shortfall where the shortfall is caused by the taxpayer acting recklessly in relation to the correct operation of a tax law
    –  75% of the tax shortfall where the shortfall is caused by the taxpayer acting with intention disregard in relation to the correct operation of a tax law (e.g. excluding income from a return when it is known by the taxpayer that the income is assessable or claiming a deduction for an expense knowing that it is not allowable).

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