‘These are All Work Related Expenses I Promise!’

We always say when it comes to tax deductions and tax avoidance be reasonable and the Taxman will be too. Be unreasonable and so will the Taxman. That’s because if you are unreasonable, they think you think they are stupid. And no one likes to be thought of as stupid. Especially if you happen to be the taxman.

That means they get upset but instead of acting like a child throwing their toys about they go for the jugular vein and bleed the taxpayer.

You see if they think you think they are stupid in one area, they assume you think they are stupid in all areas and before you know it, everything is on the line.

Tax audits are stressful. I have seen grown men physically and mentally strong as Hercules wither and cry when the taxman gets serious. Once in the UK when the tax office thought income was being mis-allocated HMRC asked the taxpayer to justify why they needed to buy so many toilet rolls. And there was no pandemic in sight. I’m serious. It’s true.

Family life is put under strain mentally and financially and when it’s all over every single one of my clients say they never want to go through that again.??

Small claims such as mobile phone deductions and internet deductions is not something the ATO gets too excited about. But in a recent case they did.

And that was because other claims were made which the tax office considered high. So, they decided to look at everything.

It was ruled that internet costs of $179 in one year and $730 in a second year were disallowed. In addition, they also disallowed mobile costs expenses of $930 over two years. You would think it was not worth the trouble for the ATO to go after such small claims, but it was not about the money. It was because the taxpayer thought the ATO would not check (or that they are stupid) and that they would get away with claims.

There’s more.?

You see the taxpayer had not kept records for the internet claims, so the taxpayer attempted to justify his claims by producing his internet browsing history. Although some websites visited were related to his job but ruled that others, such as Facebook, were unrelated to his employment.

His claim was denied but the ATO did allow a $50 deduction for each year even though he had failed to produce “reliable contemporaneous records.”?

His claim for mobile phone expenses was also rejected on the basis that he failed to keep a record of his usage.

The audit was started because the ATO was concerned about the taxpayer claiming the maximum 5,000 business kilometres under the cents per kilometre method. At the time they did not give two hoots about internet and mobile phone costs. You see 3.6 million taxpayers claimed the popular deduction claiming a whopping $7.2 billion. And this just in personal returns. Business returns claims are much higher. You can see why the ATO is looking into motor claims whether these claims are in personal or business returns.

Once they determined that the taxpayer had made inaccurate and false claims for mileage claims they decided to check everything else – which meant the internet and mobile came into play.

If those excess car claims had not been made, the ATO probably would never have looked at the internet and phone claims.

So, the claims were disallowed and the ATO decided to charge penalties and interest on top which meant the taxpayer ended up paying more than 100% of what they saved. Now if the savings were $10,000, that’s a $20,000 tax bill. Not great but manageable.?

But most medical professionals pay tax at the highest rate and try to maximise expenses or push income to lower tax entities or family members. The tax savings start becoming a big figure. But then so do the penalties and the interest.

This case is about worked related claims. But they operate in the same way when it comes to business expenses. The problem with business expenses is that they tend to be a lot of them (many transactions) and different types. And the ATO is quite clear. You need evidence and they need to be reasonable.

We believe medical professionals need to be careful.

They are not known for accurate or good record keeping especially when it comes to keeping receipts or invoices. Claims tend to be higher too especially travel (although much of that has stopped during Covid19), conferences where the whole family go, motor vehicle claims, income splitting by not following PSI and the use of bucket companies.

We hear all the time from clients who tell us that all their colleagues are doing it, so there should not be a problem.

But here’s the thing. Just because everyone binge drinks it does not mean it does not damage your body. In the same way underpaying taxes can result in damage to longer term wealth creation because you must pay the tax plus penalties and interest. And you must pay it to the tax office quickly.???

We know many medical professionals where the ATO have picked up claims of income splitting using families or bucket companies and excess claims. And none tell their colleagues they now have a $350,000 tax bill because no one likes to tell their colleagues they got caught by the taxman. It’s embarrassing.

Here’s what you need to do

• Be reasonable.

If it sounds too good to be true it probably is. As a specialist tax agent for medical professionals’, I have probably seen every trick in the book to reduce taxes. Most of what you think is allowable, probably isn’t.

• Keep records especially receipts.
• If you are claiming worked related internet and phone use you need to keep a record for 4 weeks and this will be used as a basis for your claim.
• Only make genuine car claims.

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