Archive for the ‘Tax Deductions’ Category

The tax Office has gone to print in order to assist taxpayers in identifying what is or is not Work Clothing. This is an attempt to guide taxpayers and to take the guess work out of claiming legitimate expenses in tax returns.

Work Uniforms can either be compulsory or non compulsory. If the uniform is compulsory then you may be able to claim for a single item of distinctive clothing such as a jumper, if it is compulsory for you to wear it at work. You cannot claim expenses incurred for non compulsory work uniforms, unless your employer has registered the design with Ausindustry. Check with your employer who should be able to confirm this information for corporate wear at www.ausindustry.gov.au. Shoes, sock and stockings can never form part of a non compulsory work uniform, and neither can a single item such as a jumper.

Generally, you cannot claim a deduction for the cost of purchasing or cleaning a plain uniform or conventional clothing worn at work, even if your employer tells you to wear them, as this is deemed a private expense.

According to the ATO, if you receive an allowance from your employer for clothing, uniforms, laundry or dry cleaning you cannot automatically claim a deduction. Clothing expenses you can claim are related to compulsory uniforms comprising a set of clothing that, when worn, identifies you as an employee of a specific organisation having a strictly enforced policy that makes it compulsory for you to wear the uniform whilst at work.

You may be able to claim a deduction for shoes, socks and stockings where they are an essential part of this distinctive compulsory uniform, the characteristic of which are stated in your employer’s uniform policy.

You may also claim for a single item of distinctive clothing, such as a jumper, where it is compulsory for you to wear it at work. Generally clothing is distinctive where it has the employer’s logo permanently attached and the clothing is not available to the general public.

If you wear a non compulsory uniform you cannot claim for stockings, short socks or shoes as these items cannot be registered as part of a non compulsory uniform. Your employer can tell you if your uniform or wardrobe is registered. If your employer requires you to wear a distinctive uniform or wardrobe, but does not enforce the wearing of the uniform, the design of the uniform must be registered before you can claim a deduction.

You can claim a deduction for the cost of occupation specific clothing, eg checked pants worn by chefs. The clothing would be specific to your occupation and is not everyday in nature. It is unlikely that a building worker would have occupation specific clothing.

More next week on protective clothing.

Taxpayers can claim deductions for work related expenses (WRE) incurred while performing their job. You can incur a work related expense when you receive a bill or invoice for an expense that you are liable for and must pay or you receive a good or service and pay for it. The fact that you have not yet paid for the goods does not stop you claiming a tax deduction in the year the debt was incurred. WRE’s include travel, protective clothing, laundry, telephone, self education, union fees, reference material, depreciation of tools of trade, income protection insurance, etc.

The basic rules associated with work related expenses are: (a) you must have incurred the expense in the current tax year; (b) you cannot claim an expense that your employer (or any other person) has or will reimburse for you; (c) you must have incurred the expense in the course of earning your assessable income and (d) it must not be private, domestic or capital in nature. For example, for most people, travel to & from work each day is private expenditure and not tax deductible.

You must have written evidence to prove your claims if your total claims exceed $300, the records you keep must prove the total amount, not just the amount over $300.

The $300 limit does not apply to claims for car, meal allowance, award transport payments allowance and travel allowance expenses. There are special written evidence rules for these claims which are explained on the ATO Website. If the amount you are claiming is less than $300.00 you need to be able to show how you arrived at that figure but you do not need written evidence ie receipts, bank statements, etc. The ATO advise that it is best if you retain all receipts so that in the event of you claiming more than the $300.00 you can justify the full claim.

Many taxpayers believe that they are entitled to a tax deduction of $300.00 whether or not they have actually spent anything.  This is totally wrong. The only tax deduction available is one whereby the taxpayer has actually incurred an expense or paid for one. Aligned with this is the fact that the expense must be related to the earning if income.

You can claim to $300 without receipts, but once your total deduction for WRE exceeds $300 you must have receipts for everything you are claiming. So if you pay $400 Union fees and spend $25 on a work related item, you must retain that $25 receipt.

Generally, tax deductions for work related expenses are similar irrespective of the occupation undertaken, whether you are a building worker, teacher, truck driver, nurse, shop assistant or defence force member. No matter what the occupation, you may be able to claim for work related travel, protective clothing or uniforms, reference material, tools of trade, self education expenses and overtime meal allowances. I say ‘you may be able to’ because although you are required to spend money in order to work, the Tax Office does not see that spending as being an integral part of earning your income.

In the coming weeks we will look at specific deductions.

In past articles we have looked at self education expenses but they are always an interesting topic. Any one going to Uni or TAFE, and working at the same time, feels that they are entitled to a tax deduction for their education expenses. The sad case is that in most instances there is no tax deduction.

I read an interesting article on this subject and felt it appropriate to share it with you to help clarify a few points. The article concerned a Uni student studying to become a Pharmacist. The taxpayer was working part time as an assistant chemist whilst attending Uni.

Decided cases on deductibility of self education expenses revolve around full time employees who undertake a course of study. Where you have a full time student undertaking part time work it is difficult to make the nexus between the course of study and the employment. The study must be related to “current income earning activities”.

The principles enunciated in the various tax cases suggest that self-education expenses are only deductible where the study is ancillary to current employment,  and not the other way round. Comment by a learned Judge, Windeyer J in Federal Commissioner of Taxation v Finn (1961) 106 CLR 60 at page 70 said that “ a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling”. As a full time student you cannot argue that you are engaged in a “profession or calling’, particularly if you need completion of the course being undertaken in order to enter that profession.

The Tax Office views are set out in Taxation Ruling TR 98/9. All 25 pages of the ruling can be viewed on the ATO website.

It is important to remember that each case is viewed on its merits and to make a blanket judgement may mean that a valid tax deduction is lost. A good example, also found on the ATO website is ATO Interpretive Decision ID 2002/517 which looks at the tax deductibility of driving lessons.

The question raised in this case was: Is the taxpayer, an apprentice mechanic, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for self-education expenses in respect of a Heavy Vehicle Driver training course? The result in this case, Yes, as there is a clear relationship between the course and the taxpayer’s existing duties.

The facts in the case were:  The taxpayer was an apprentice mechanic who road tests heavy vehicles before and after repairs on the employer’s premises. Road testing is an essential part of the taxpayer’s normal duties. The taxpayer attended a Heavy Vehicle Driver training course and gained a Heavy Vehicle licence at his own expense. The course was conducted by a Heavy Vehicle Driver training school. The course has allowed the taxpayer to perform their duties more safely and with a higher level of skill. The course may also give the taxpayer increased opportunity for pay increases and promotion.

The ATO found that the Heavy Vehicle Driver training course will clearly result in improved efficiency in the performance of the taxpayer’s existing duties and enhance his income earning capacity. Thus, a clear connection can be found between the cost of the course and the gaining of the taxpayer’s assessable income. There is even a case whereby training to get a pilots licence was tax deducible. So remember, when in doubt, ask the experts.

A recent Federal Court decision in Antsis v The Commissioner of Taxation was an unexpected win for the taxpayer and a loss for the Tax Office.

The taxpayer was a full time student completing a teaching degree. During the 2005-06 tax year the taxpayer derived assessable income of $14,946 working as a part time sales assistant and $3,622 from Youth Allowance. The taxpayer claimed expenses of $1,170 consisting of travel, administration fees, stationery and depreciation of a computer.

In order to be eligible for the Youth Allowance the taxpayer was required to satisfy certain conditions, which were: (a) The person must be enrolled in a course at an educational institution; (b) must be studying at least 75% of the normal full time program, and (c) must be making progress towards completing the course. It was also mentioned that no income was derived from working as a teacher.

At the hearing, the applicant was represented by her father, Mr M Antsis, a legal practitioner. Mr Antsis argued, in essence, that the applicant had expended money on her education in order to ensure that she continued to make satisfactory progress towards completing her teaching course and remained eligible to receive assessable income in the form of Youth Allowance. Therefore, it was submitted, the applicant was entitled to a tax deduction pursuant to s 8-1 of the Income Tax Assessment Act.

The Commissioner of Taxation argued that:” – the expenditure incurred by the taxpayer was not “relevant and incidental to” the receipt of the Youth Allowance income; – the primary motive of the taxpayer in undertaking study activities was to gain employment in the future as a teacher; – the expenditure was incurred by the taxpayer at a “point too soon” to the derivation of assessable income as a qualified teacher and – as the youth allowance was a fixed payment from the Government, the expenditure incurred by the taxpayer could not be seen as being incurred with the prospect of increasing the income earning capacity of the taxpayer or to improve or maintain the taxpayer’s skill and knowledge.”

Following arguments by both sides, Justice Ryan, of the Full Federal Court, agreed that there was a nexus between the Youth Allowance income and the self-education expenditure:

“The outlay of fees to enrol in a course to qualify for Youth Allowance and incurring other expenses to satisfy the activity test and so preserve the qualification is not akin to the travelling expenses discussed in cases like Lunney. The claimed expenses in this case were not outlaid to put the applicant in a position to receive Youth Allowance, rather, they were incurred as a necessary incident of pursuing a particular course of study.”

Later in the judgement, Justice Ryan went on to conclude:

“The derivation on income in the form of Youth Allowance is one of the alternative ways in which the occasion of the outgoing is to be found in what is productive of the assessable income.”

In regard to the taxpayer’s motivation to studying and incurring expenditure, the taxpayer conceded that the primary purpose for undertaking the course was to become a teacher. However. The taxpayer stated that while the primary purpose of undertaking study was not to gain Youth Allowance, the primary purpose of the self education expenditure was to meet the satisfactory progress requirement. Mr Antsis went on to argue that the connection of the expenditure to future teaching income does not deny the fact that the expenditure was also relevant to gaining the youth allowance, which itself represented a form of assessable income.

Following on from this Justice Ryan concluded that “The taxpayer’s ultimate purpose or motive in undertaking their course was to acquire a qualification leading to future employment as a Teacher is irrelevant to the characterisation of the expenditure. It is sufficient to say that the expenditure was incurred as a necessary incident of deriving Youth Allowance.

Full facts of the case can be found on the ATO Website at www.ato.gov.au, Antsis v Federal Commissioner of Taxation 2009 ATC 20-098

The FBT year runs from 1st April to 31^st March. Rumour has it that when this tax was introduced it was so regressive that it had to be an April Fools joke. Unfortunately after some 24 years it is still with us. Thank you Mr. Keating.

A fringe benefit is when you receive a benefit from your employer and have not paid tax on that benefit. The ATO believes it to be unfair that you get something they do not, so they tax you, at the top marginal rate.  Most times the employer pays this tax but if you are self employed, you must pay. There are dozens of fringe benefits, including expense payment benefits, airline transport fringe benefits, living away from home allowance fringe benefit, entertainment fringe benefit, property fringe benefit, housing benefit and so the list goes on. Employees in the Health industry or employees of charitable organisations have it easy where fringe benefits are concerned as special rules apply to them and they get exemptions from paying the FBT up to a certain amount.

The most common fringe benefit is the use of a company motor vehicle and this is what applies to most self employed people whose business is conducted through a family company.

This tax is too complex to cover in the 500 words that will appear here but as the tax applies from 1^st April there are certain things that must be done so as to meet legislative requirements.

With motor vehicles, the tax can be applied in several ways, it can be on distance travelled, ignoring the business/ private use of the vehicle, it can be on a percentage basis, identifying how much business use the vehicle gets as opposed to private use or it can be based on a simple 12.5% calculation of the cost base of the vehicle.

With any of these methods of calculation, the distance the car has travelled during the year must be identified. To do this an odometer reading should be taken. This information should be forwarded to your employer and the appropriate declaration signed. If you are self employed, and use a car (sedan) in your business you should forward the number to your accountant. The FBT act defines whether the motor vehicle is a car or not. If your motor vehicle is not a car then you may not be liable for FBT. The ATO web site identifies motor vehicles that are not cars and provided they are designed to carry a load of one tone or more,  more than 8 passengers or if having a load capacity of less than one tone they are not designed for the principal purpose of carrying passengers, then they are exempt from FBT.

The important point here is if your company has sedans on its books, it must prepare a Fringe Benefits Tax return. So what you need to do is go outside, get the odometer reading, send it to your accountant and ask him/her, what is the next step. If the response is a dumb look, then you need to change accountants.

For more on FBT refer to our website at www.coulcher.com.au/taxnews