The last thing you need is to get into trouble with the Australian Tax Office (ATO) and, given how much access they have to your information through data-matching platforms and technology, exaggerating or inaccurately declaring income, expenses and deductions at tax time is a sure-fire way to land in trouble.
To avoid trouble at tax time, and a possible investigation by the ATO, here’s the top five mistakes to avoid when lodging your annual tax return.
What does the ATO have access to?
The ATO uses data matching to identify people who aren’t being honest in their income declarations at tax time. They can access data about:
- Bank accounts
- Centrelink payments
- Health insurance
- Child support
- Bank interest
One thing they don’t have access to, though, is your tax deductions. However, over declaring deductions or failing to provide verification of them can trigger an investigation into your tax affairs.
What will the ATO investigate at tax time?
The ATO may flag your tax return for investigation if:
- It isn’t accurate, either in income or expense claims
- It includes expenses that appear to have been exaggerated or estimated
- There is a lack of evidence and receipts to support it
Given the data access that the ATO has available to it, filing an accurate and complete return at tax time is critical, and there are five mistakes you need to avoid in order to avoid the red flags that will trigger an investigation.
What to avoid doing at tax time
1. Guessing income and tax paid
The ATO has records of your income, so will compare this against what you include in your tax return, so take the time to get it right.
While the ATO may not have details for income relating to consulting or other contract work, they can still see the money coming into your accounts. Money without declaring where it has come from can lead to them taking a much closer look into your return.
2. Failing to declare overseas income
Failing to declare income from work conducted overseas is a mistake, and one you need to ensure you don’t make.
Even if you’re working and living outside of Australia, if you’re an Australian resident for tax purposes, you need to lodge a tax return in Australia annually. Ensure you’re declaring all income received from work conducted overseas and within Australia. This includes income from:
- Business activities
- Capital gains on overseas assets
- Pensions and annuities
3. Estimating tax deductions
Being creative when declaring your deductions is inadvisable, as the ATO will look over each item claimed and benchmark it against other deductions claimed against others in similar:
- Types of employment
- Location areas
- Age groups
Keep your receipts handy in a secure place and be wary of claiming deductions that you can’t provide evidence for – you may very well be asked to provide this if the ATO think they look unrealistic.
4. Not keeping your receipts to verify deductions
Forgetting to keep the receipts for expenses related to items you’re using in the course of your work can be a costly mistake.
If you don’t have a receipt, you can only claim up to a maximum of $300 of genuine work-related expenses overall. Bear in mind also that if you overclaim on deductions, you get a bigger refund at tax time. While this may seem like a good thing, the ATO can enforce either a partial or full repayment of this (plus interest and penalties!) should it come to light that you have overclaimed or can’t verify the deduction.
5. Overclaiming expenses for investment properties
If you own investment properties, including rentals or holiday homes, there are stringent parameters around what you can and can’t claim as tax deductions each year.
The ATO keeps a close eye on investment property income and deductions, so it’s important declare rental income accurately, and only claim for expenses that are permitted.
Work with your trusted tax adviser
Tax returns don’t need to be stressful when you have a trusted tax advisor.
Here at Clarity Taxation, we work with you on tax strategies to maximise your deduction capabilities and reduce your tax burden, while remaining compliant with the ATO’s stringent requirements. Contact us today for help with your personal and business tax returns.