At a glance
By Katie Langmore
As most CPA Australia members would be aware, earlier this year the Australian Taxation Office (ATO) declared it would be increasing its focus on work-related expenses (WRE). The crackdown has emerged from concern taxpayers are “pushing the envelope”, says ATO assistant commissioner Kath Anderson.
“Last year, 6.7 million taxpayers claimed a record A$7.9 billion for ‘other’ work-related expenses,” she says.
Anderson reveals that this year the ATO has already contacted one million taxpayers to address non-compliance surrounding WRE, with adjustments reaching A$100 million.
However, the crackdown isn’t only due to an increase in claims, but advancement in the ATO’s technological capabilities and data matching tools, says Robert McDowall CPA, partner at Arabon Accountants in Queensland.
“Where it used to be prohibitive to investigate smaller cases of potential misclaiming, it’s now becoming much more cost effective, especially when you review the tax agent first rather than the client directly,” McDowall says.
The new approach to work-related expenses
Claims in each area of WRE – work-related travel, vehicle usage, uniforms, training, and so on – can be measured against the average claim for the same occupation, with red flags potentially raised when claims exceed that average, leading to a total WRE risk score.
“Any individual that has claims above the average is at risk of looking suspect in the eyes of the tax office,” McDowall warns.
What do accountants need to do to protect themselves and their clients?
McDowall suggests that the most important thing is to read and understand the Code of Professional Conduct for tax agents, taking into account not just your obligations, but also your rights.
“The ATO caseworkers may say something that doesn’t actually align with our legal requirements,” he says.
“For example, they [might] suggest that you should sight all your clients’ documentation, but tax practitioners are not required to do that. We are required to take reasonable care. In certain circumstances you may choose to sight documents, such as if you recognise a change of pattern in a submission, but you’re not legally or ethically obliged to sight documents for all clients.”
Code 9 of the Code of Professional Conduct requires registered agents to take “reasonable care” in ascertaining a client’s state of affairs.
In explaining what is defined as “reasonable care”, the Tax Practitioners Board states that: “The obligation to take reasonable care does not mean that the care taken needs to be perfect or to the highest level of care possible.
“Where a statement provided by a client seems credible (and for existing clients is consistent with previous statements) and the registered agent has no basis on which to doubt the information supplied, the registered agent may discharge their responsibility by accepting the statement provided by the client without further checking.
“On the other hand, if the information supplied by a client does not seem credible (in accordance with how a competent and reasonable person, possessing the knowledge, skills, qualifications and experience of a registered agent, objectively determined, would perceive the information) or appears to be inconsistent with a previous pattern of claim or statement, further enquiries would be required, having regard to the terms of the engagement with the client.”
Keeping work-related claims clean
While laundry costs would seem to be somewhat innocuous, McDowall says it is something to keep an eye on, being one area on which the ATO may be coming down hard. It is also important to make sure claims such as travel, mobile phones and car-related expenses are correctly apportioned and substantiated.
It is also essential to ensure clients are aware of the ATO’s three “golden rules”: to claim an expense they must have paid for something and not been reimbursed; it must be directly related to earning income and not a private expense; and they must have a record to prove it.
If claims seem high, the ATO may take the opportunity to assess and possibly alter a tax return if the claim breaks one of these golden rules (see below). If the case goes to review, penalties of 25 per cent (failure to take reasonable care), 50 per cent (recklessness), and 75 per cent (intentional disregard) can be taken from the shortfall amount.
“Ensure work-related expenses are essential to the client’s employment, not just related to their work,” McDowall advises.
Diary of an ATO review
Robert McDowall CPA reveals what happened when he was contacted in February by an ATO case officer, who wanted to review his practice’s risk profile.
“I had a brief phone call with the case officer, who provided some background information about tax agent risk profiles and booked a one-hour phone meeting to review our own risk profile and a list of ‘high risk’ clients.”
“During our phone meeting, the case officer queried our processes, such as whether we sight documentation, and wanted to discuss a number of specific clients. Tax agents should ensure they have a week between first contact and the phone meeting/review to prepare adequately. We booked our next phone meeting to review our working papers and process for five specific clients, to be submitted in seven days.”
“I reviewed all of the identified ‘high risk’ clients with their respective accountants. We investigated any potential gaps in knowledge, such as specific substantiation rules and allowable claims. Each accountant then contacted their clients to give them a heads-up, discussed the criteria to claim a deduction, and offered support in reviewing and amending their tax returns where required.”
“The ATO mailed the list of clients a ‘prompter’ letter, giving them 28 days to amend [their claims], if required.”
“We had our final phone meeting. We went over the five clients in detail and I provided further details, along with the working papers.”