From a record keeping perspective, certain records are expected to be maintained, Subdivision900-H may apply to allow them to deduct an amount despite the fact they do not hold a written record of the asset. The invoice is one such record.  The invoice must be set out as mentioned above but if this is not the case then the written evidence will still be valid in the following circumstances:

If the nature of the gods and services is not specified, the taxpayer may write in the missing details prior to the lodgement of their tax return; if the taxpayer doesn’t get the document before lodgement of their tax return, or because they only start using the asset for a taxable purpose several years after acquisition, subdivision 900-H provides relief from the substantiation rules. Broadly, if a taxpayer did not reasonably expect that they would deduct an amount for the asset

Capital Gains Tax Assets

The substantiation requirements for capital gains tax (CGT) assets are set out in Subdivision 121. The basic requirement is that a taxpayer must retain records relating to a CGT event for five years after the CGT event. This five year time limit is extended where it is reasonably likely that the records will be required to substantiate a future CGT event. Section 121-20 requires records to be kept in relation to every event that could reasonably be expected to be relevant to working out the capital gain or loss of a taxpayer. Pursuant to that section, if the records do not exist, they must be reconstructed.

The substantiation requirement for CGT events may be satisfied if the relevant details from the records obtained relating to the CGT asset are entered into an asset  register and the asset register is certified by a registered tax agent as a true  and correct copy  of those records. Note however the records summarised in the asset register must still be retained for at least five years after the record is entered into the asset register if this option of complying with these requirements is chosen.

EXCEPTIONS TO THE RULE

As with everything there is always an exception to the rule and with substantiation there are exceptions to having written evidence. A couple of weeks ago we looked at general work related expenses, well the exceptions that apply here are: (a) – Motor vehicle expenses specifically Fuel and oil, no written evidence is required however you must, repeat must, have a record of odometer readings at the start and end of the financial year. (b) where the total work expenses, including laundry expenses but excluding travel expenses is $300 or less. If the total is over $300 then the total expenditure needs to be substantiated, not just the portion over $300. Subject to the satisfaction of certain conditions, the allowance received by crew on international flights does not have to be substantiated.

More next week, but then again there may be another tax increase if Julia and Kevin don’t kiss and make up.

Last week we started to look at what is needed to support tax deductions, this week we look at how long we need to retain these records.

Subdivision 900-G contains the rules for retaining and producing records. According to s900-165 the records substantiating an expense must be retained for five years. Under division 900 or Division28, the retention period is automatically extended if one of the following types of dispute relating to the expenses is unresolved before the five years period ends: i) an objection ii) a review or appeal arising from an objection and iii) a request for an amendment of an assessment. The extension lasts until the objection is resolved.

Although the record retention period is five years, the Commissioner only has two years in which to ask for those documents if you are an individual  taxpayer or a micro business. The two year period starts from when the Assessment Notice is issued.

If the taxpayer is required to produce documentation for review by the Commissioner of Taxation, the taxpayer must also produce a summary for each expense that (a) notes the expense, (b) has a cross reference to the written evidence of the expense, (c) summarises the particulars set out in the written evidence, and (d) if the expense was in a foreign currency shows the amount of the expense in Australian currency. It also states that the summary must be in English in a form approved by the Commissioner. If the taxpayer does not comply with a notice for a particular expense, the taxpayer cannot deduct the expense.

Where the taxpayer has already deducted the expense, the Commissioner may amend the taxpayer’s assessment to disallow the deduction.

The Commissioner, under s900-195 has a discretion to review a taxpayer’s failure to substantiate their deductions. Not following the rules in Division 900 does not automatically disqualify a taxpayer from claiming a deduction where the nature and quality of the evidence available to substantiate their claim satisfies the Commissioner that: a) the taxpayer incurred the expense and b) the taxpayer is entitled to deduct the amount claimed. Not substantiating a claim does not affect the right of a taxpayer to deduct an amount where there is reasonable expectation that substantiation was not required.

If a document is lost or destroyed, relief from substantiation exists under s900-205. This relief can be relied upon in the following circumstances: If the taxpayer has a copy of a document that is lost or destroyed during the retention period, the copy is treated as the original.

If the taxpayer does not have a copy but the commissioner is satisfied that they took reasonable precautions to prevent the loss or destruction, the following rules would apply: if the document was a log book or travel record, there is no need to recreate the document; if the lost or destroyed document was written evidence, such as an invoice, then the taxpayer must try to get a substitute document that meets all the original criteria. If it is not reasonably possible to succeed then the taxpayer’s deduction is not affected by failing to produce the original document. If it is reasonably possible for the taxpayer to obtain a substitute document but the taxpayer does not obtain one, then claim may be disallowed. An example of this would be the recent floods or bush fires. If both you and the supplier had their records destroyed then it would be unreasonable to expect a copy invoice to be produced but if the supplier is not affected by the disaster then it would be reasonably expected that they could provide a copy invoice.

Over the next few weeks I will look at various tax deductions. I have covered this in the past but it is always good to revisit areas that are targeted by the Tax Office and in which taxpayers tend to listen to their mates rather than the experts. 

The rules relating to both substantiation and record keeping requirements are contained within the Income Tax Assessment Act 1936 (ITAA36) and the Taxation Administration Act 1953 9TAA). The maintenance of complete and accurate records should ensure that any Tax Office audit is completed in a timely manner and without adverse consequences for the taxpayer. A thorough understanding of the legislative requirements is necessary for taxpayer’s to properly discharge their taxation obligations. In order for this to happen, the taxpayer either needs to undertake a University course in taxation or engage the services of a competent tax-agent.

WORK RELATED EXPENSES

In claiming a work related expense, the ITAA97, requires written evidence as provided by the supplier. This evidence must set out: the name or business name of the supplier, and the amount of the expense (expressed in the currency in which it was incurred) and the nature of the goods or services acquired, and the day the expense was incurred (date).

 As with everything, there is always an exception. In this case the following exceptions apply: if no date appears on the document, a bank statement or reasonable independent evidence may be used  to show when it was paid, and if the nature of the goods or services is not specified, the taxpayer may write in the missing details prior to the lodgement of their tax return. These general rules about the requirements to have written evidence also apply to contractors and businesses, however additional requirements apply to businesses.

Travel Expenses

If a taxpayer is required to travel away from their ‘ordinary residence’ for six or more consecutive nights, then they are required to keep travel records. This takes the form of a travel diary and the detail required to be recorded includes, the nature of the activity, the day and approximate time when it began, how long the activity lasted and when the activity took place. According to ITAA97, the activity must be recorded before it ends or as soon as possible afterwards and each entry must be in English.

As mentioned above, there are again exceptions to the rule. There is a Taxation Ruling TR2004/6 ‘substantiation exception for reasonable travel and overtime meal allowance expenses’ which explains in detail the way in which these exceptions operate. For the exception to apply the allowance paid by the employer must qualify as a travel allowance. This means that the allowance must be paid to cover work related travel expenses incurred or to be incurred for travel away from the employee’s ordinary residence and be undertaken in the course of performing duties as an employee.

To qualify as a travel allowance the allowance must be: paid to cover the cost of accommodation, food or drink, or incidentals; paid to cover specific journeys; paid as an allowance. For a bona fide travel allowance the amount paid must be an amount that could reasonably be expected to cover accommodation, or meals or expenses incidental to the travel.

The Commissioner publishes annually, reasonable amounts for accommodation, meals and deductible expenses incidental to travel. It is worth noting that where a taxpayer receives a bona fide travel allowance and the allowance is not shown on the employee’s payment summary, and does not exceed the reasonable amount, and has been fully expended on deductible expenses there is no requirement for the taxpayer to disclose it as assessable income in their tax return.  More next week.

Earlier this month the Tax Office provided information in relation to its credit and debit card data matching program designed to identify taxpayers who may be participating in the cash economy. This is good news for the honest folk and a bit of a worry for the not so honest folk.

The Tax Office obtains data from banks that identifies credit and debit card sales made by Australian businesses. This data is matched against taxpayer records to identify those participating in the cash economy, and who are potentially skimming some or all of their cash takings or in other ways not reporting all of their income.

The credit and debit card data-matching program identifies transactions conducted for all merchants with a turnover of less than $10 million in the 2010-2011 financial year.

To date, the Tax Office has indicated that it has obtained data from the following banks:

Commonwealth Bank of Australia; St George Bank ; American Express Australia Limited; Diners Club Australia; Westpac Banking Corporation; Australia and New Zealand Banking Group Limited; National Australia Bank Limited; Bendigo and Adelaide Bank Limited; Bank of Queensland Limited and BWA Merchant Services Pty Ltd.

What data is collected? The Tax Office has asked the banks to provide details of all transactions processed on behalf of certain businesses. For example the corner store may have an eftpos machine so that customers who shop there can pay for their goods by debit or credit card. The transaction is processed directly through to the shopkeeper’s bank account. These transactions are then totaled and reconciled against Business Activity Statements and tax returns lodged. With more and more people using eftpos, the amount of cash available to the small shopkeeper is diminishing and the ATO is trying to ensure that every last cent is accounted for.

What is the Tax Office going to do with this data? The Tax Office uses bank data to improve compliance with tax obligations by identifying businesses that are not reporting any or all of their income, or may be running a part of their normal business activities off the books or operating underground by avoiding their obligations to register and lodge returns. The data collected also allows the Tax Office to increase its understanding of the behavior and compliance profile of businesses in receipt of credit and debit card income, and therefore allows the Tax Office to improve fraud detection models. One of the problems encountered with this is where customers buy an item for $10 and ask for ‘cash out’ of $100. The transaction to the shopkeepers bank account shows $110 but there is only a $10 sale.

The Tax Office has indicated that those taxpayers identified as being at risk of potentially skimming some or all of their cash takings, running part of their business ‘off-the-books’, or in other ways not reporting all their income, should contact them to make a voluntary disclosure of any under-reported amounts.

In cases where businesses fail to comply with their obligations, even after being reminded of them, the Tax Office may take other appropriate action, including consideration for default assessments of a business’s tax liabilities.

 Welcome to 2012 and a Happy New Year to you all. I had a terrific Christmas and I hope you did too.

It is amazing in the world of Accounting and Taxation how the more things change the more they stay the same.

With any business, be it the corner store, a self employed plumber, Harvey Norman or the State or Federal Government if you do not look after the dollars correctly then you will go broke.

It is getting harder for the small business owner to make a quid these days because the rule makers have no idea on how to run a business or manage the economy. If a bank loses millions, then they put up fees or interest rates and you pay (no help from the Bureaucrats). If the big business has a problem then they put up prices or move offshore (no help from the bureaucrats).  If the Government stuffs up they just put up taxes and tell you it is for your own good. The small business person however is not is a position to increase prices or relocate, they must stay and bear the brunt of the price rises and increasing cheap imports.

 Over the break I was reading different articles about what a great job politicians are doing in spending our money on overseas holidays ( oops they say it is research). To pay for this they have increased the amount of tax payable for some 400,000 small businesses by removing a tax break known as the Entrepreneurs Tax Offset. This entitled small business with a turnover of less than $75,000 to a 25% tax reduction on the profits they made. The Gillard Government decided that it was wrong to allow small business this tax break so they abolished it thus increasing the tax payable by some small business owners by up to $830 per year.

Now spending money on items that generate no return is not a good idea when in business. This may be in buying new tools when there is nothing wrong with the tools you use. It may be changing your vehicle because the guy next door has a new toy. The only reason you should update your motor vehicle is because your current vehicle is costing you money to keep it on the road.  Remember, tax deductions are over rated.

 This brings me to the main point about wasting tax dollars. The Macarthur Chronicle reported the closure of the Hope Christian School at Narellan, a small school which opened in 2006 and through cash flow problems could not re-open in 2011. On page 5 of the newspaper was a photo of staff and students celebrating the opening of the new $850,000 library complex in 2010 funded through the Federal Governments Building the Education Revolution. WOW, what idiot approved the spending of $850,000 (which was probably 3 times as much as it should have cost) on a library for a school that would have been aware of the financial difficulties it faced.  Where was the due diligence? Where was the concern for the taxpayer’s money? Why was the school not consulted on the best use of this amount of money? The problem we have here is that the people dealing with the biggest business in the country have no idea how to run a business.

 As any self employed business person or owner of a small business will tell you, It is not easy being in business and it is important that you get the best advice when looking at spending those hard earned dollars so always get a second quote. Why should it be any different for a Government bureaucracy?

It is our role as Accountants to look after you and your business, and provided you listen to the advice given you should be able to continue in business. So our New Year wish for you is that you will still be here at the end of the year and hopefully, with less debt, despite the efforts of our politicians. Happy New Year!