As End of Financial Year (EOFY) is fast approaching, there is a big focus on lodging tax returns. Due to this, the ATO’s priority areas for the upcoming “Tax Time” 2022 have been announced.

The ATO will be focusing on:

• Record-keeping
• Work-related expenses
• Rental property income and deductions
• Capital gains from crypto assets, property and shares

When it comes to the ATO’s focus on record keeping and claiming work-related expenses, the ATO provides a reminder on the three rules to follow:

• You must spend the money yourself.
• You can only claim portions relating to producing income.
• You must have a record and receipts as proof.

Record keeping

The biggest thing to remember when dealing with the ATO at tax time is that you can’t claim it if you can’t prove it.

If you are audited, the ATO can reject deductions for unproven or unreasonable expenses. The ATO has a threshold of $300, where anything claimed below that does not require evidence. Even if the expense is below this threshold, the ATO might ask how you came up with that number.

In addition to the obvious records of salary, wages, allowances, government payments or pensions and annuities, you need to keep records of:

• Interest or managed funds
• Expenses for any deductions claimed, including a record of how that expense relates to the way you earn your income. For example, if you claim the cost of a Rapid Antigen Test (RAT), you need to be able to prove that the RAT was necessary to enable you to work. If you were working from home and not required to leave home, it will be harder to claim the cost of the test.
• Assets such as shares or units in a trust, rental properties or holiday homes, if you purchased a home or inherited a property, or disposed of an asset (including cryptocurrency).

You need to keep your records for five years. These can be digital copies of the records as long as they are clear and legible copies of the original.

Note: If your records are digital, keep a backup.

Records can be tax invoices, receipts, diary entries or something else that proves you incurred the expense and how it related to how you earn your income.

Work-related expenses

To claim a deduction, you need to have incurred the expense yourself and not been reimbursed by your employer or business. The expense also needs to be directly related to your work.

What expenses are related to work?

You can claim a deduction for all losses and outgoings, where there is a link between the expenses you are claiming and how you earn your income.

However, actually applying for this rule isn’t as simple as you may think.

If you’re undertaking tasks to get a job or upskill, you cannot claim a tax deduction. This is because you aren’t earning income at the current time due to these tasks – you’re aiming to earn income in the future. For example, an actor has to attend auditions to land an acting job. However, she cannot claim the cost of having her hair and makeup done as she is not generating income at that stage.

Note: The expense must be related to how you are currently earning your income, not future potential income.

The second area of confusion is over what can be claimed for work. For example, you can’t claim conventional clothing (including footwear) as a work-related expense, even if your employer requires you to wear it. To be deductible, clothing must be protective, occupation specific, a compulsory uniform, or a registered non-compulsory uniform.

Work related or private?

Another area of confusion is where expenses are incurred for work purposes but used privately. Internet access or mobile phone services are typical examples of this. If you use the service on more than an ad-hoc basis for any purpose other than work, then the expense needs to be divided up and only the work-related percentage claimed as a deduction (and yes, the ATO does check usage in an audit).

Claims for COVID-19 tests will be a test of this rule. COVID-19 tests are deductible from 1 July 2021 if the purpose was to determine whether you may attend or remain at work. The tax deduction does not apply if you worked from home and didn’t intend to attend your workplace, or the test was used for private purposes (for example, to tests the kids before school).

Claiming work from home expenses

Last financial year, one in three Australians claimed working from home expenses. Now we’re out of the pandemic, the ATO will be focussing specifically on what is being claimed. If you claimed work from home expenses last year and returned to the office this year, then there should be a reduction in your work from home claim. The ATO will be looking for discrepancies.

If you are claiming your expenses, there are three methods you can use:

• The ATO’s simplified 80 cents per hour short-cut method
• Fixed rate 52 cents per hour method
• Actual expenses method

Ineligible expenses include:

• Personal expenses such as coffee, tea and toilet paper
• Expenses related to a child’s education, such as online learning courses or laptops
• Claiming large expenses up-front (instead of claiming depreciation for assets), and
• Occupancy expenses such as rent, mortgage interest, property insurance, and land taxes and rates, that cannot generally be claimed by employees working from home (especially by those who are working from home solely due to a lockdown).

Rental property income and deductions

For landlords, the focus is on ensuring that all income received, whether long-term, short-term, rental bonds, back payments, or insurance pay-outs, are recognised in your tax return.

If your rental property is outside of Australia, and you are an Australian resident for tax purposes, you must recognise the rental income you received in your tax return (excluding any tax you have paid overseas), unless you are classified as a temporary resident for tax purposes. You can claim expenses related to the property, although there are some special rules that need to be considered when it comes to interest deductions.

Co-owned properties

For tax purposes, rental income and expenses need to be recognised in line with the legal ownership of the property, except in very limited circumstances. The ATO will assume that where the taxpayers are related, the equitable right is the same as the legal title (unless there is evidence to suggest otherwise).

Capital gains from crypto, property and other assets

If you dispose of an asset – property, shares, crypto or NFTs and/or collectables (costing $500 or more), you will need to calculate the capital gain or loss, and record this in your tax return.

Note: Capital gains tax (CGT) does not apply to personal use assets such as a boat if you bought it for less than $10,000.

Crypto and capital gains tax

A question that often comes up is when do I pay tax on cryptocurrency?

If you acquire the cryptocurrency to make a private purchase and you don’t hold onto it, the crypto might qualify as a personal use asset. But in most cases, that is not the case and people acquire crypto as an investment.

Generally, a CGT event occurs when disposing of cryptocurrency. This can include selling cryptocurrency for a fiat currency (e.g., $AUD), exchanging one cryptocurrency for another, gifting it, trading it, or using it to pay for goods or services.

Each cryptocurrency is a separate asset for CGT purposes. When you dispose of one cryptocurrency to acquire another, you are disposing of one CGT asset and acquiring another CGT asset. This triggers a taxing event.

Record keeping is extremely important – you need receipts and details of the type of coin, purchase price, date and time of transactions in Australian dollars, records for any exchanges, digital wallet and keys, and what has been paid in commissions or brokerage fees, and records of tax agent, accountant and legal costs.

Gifting an asset might still incur tax

Donating or gifting an asset does not avoid capital gains tax. If you receive nothing or less than the market value of the asset, a market value substitution rule might come into play. The market value substitution rule can treat you as having received the market value of the asset you donated or gifted for the purpose of your CGT calculations.

Donations of cryptocurrency might also trigger capital gains tax. If you donate cryptocurrency to a charity, you are likely to be assessed on the market value of the crypto at the point you donated it. You can only claim a tax deduction for the donation if the charity is a deductible gift recipient and the charity is set up to accept cryptocurrency.

Tax practitioners should also be aware that the ‘shortcut’ method for claiming home office running costs is still available for the 2022 year. While this method can potentially reduce the compliance burden for clients and practitioners, it won’t necessarily provide the best outcome for clients.

For more information on the ATO’s 2022 priority areas, click here!

Although we take care of most tax matters, we encourage all our clients to prioritise good record keeping and avoid making false claims in their tax return.

For advice on tax matters and your tax return, contact us today!