Do’s and don’ts of work-related expenses

Intro:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for businesses and accounting professionals.

Elinor Kasapidis:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need-to-know information for business and accounting professionals. Hello, I'm Elinor Kasapidis, Senior Manager of Tax Policy at CPA Australia. It's Monday, the 6th of June, and the end of financial year is fast approaching. As many taxpayers and tax agents finish up their 2021 tax return, lodgements, tax time 2022 begins. Over the next four episodes, we'll be talking with Assistant Commissioner Tim Loh from the ATO's individuals and intermediaries area, who is the official face and voice of tax time. Welcome, Tim.

Tim Loh:
Thanks Elinor. Thanks for having again this year.

Elinor Kasapidis:
Our series with you last year was very popular, particularly the podcast on work-related expenses. So, we'll revisit that topic for common mistakes, what people get wrong, and how tax agents can help get it right. We also have a dedicated episode for tradies. We will also be talking about investments and tax in our third podcast, and finish up with a chat on side hustles and multiple income streams. But for today, our focus is on work-related expenses. With over-claimed work expenses, estimated to cost the government $3.7 billion a year, the ATO is on the case and has been checking work-related expenses for quite a few years now. Tim, what are some of the things that have improved, and where might employees be getting confused about where the line is?

Tim Loh:
Yeah, good question, El. Look, COVID has certainly shifted the work-related expenses landscape. Over the last couple of years we've focused a great deal on educating taxpayers about the changes, the support measures in place, and the need for registered tax agents to speak with your clients about their current working arrangements. So, in anticipation of people claiming what they were entitled to, we expected to see a decrease in claim for work-related car and travel expenses last year. And today, overall, in tax time 2021, the trend for tax agent clients reflect a reduction at these levels, which was predicted. Now, we're pleased to report that downloads of our occupation guides and posters continue to increase, which I think are fantastic sources for CPA professionals. And we regularly review and update these products to ensure they're user-friendly and contain relevant examples for you to help your discussions with your clients.

Tim Loh:
In terms of employees getting confused about where the line is, I guess one of the key issues, which we know CPA professionals know about is where taxpayers try to claim a deduction for a work-related expense where there isn't a sufficient connection to their income-producing activities. And look, we know sometimes these are general mistakes, but others we know are deliberate, and in those cases we do take firmer action. Now, some of the examples that we see mistakes being made are the normal travel between home and the regular workplace. We all need to travel to our place of work, but the act of getting there is not an activity that produces our income, and that's considered to be a private expense.

Tim Loh:
Another example is taxpayers counting conventional clothing they wear while working, such as business at the time when you go into the office. But we've also had people try and sneak a deduction for active wear, the trackies and the PJs. And I think I've said this before, but there are only two people who can claim for their PJs, and that's B1 and B2 from Bananas in Pyjamas. The other thing we see people making a mistake on is private or domestic expenses that relate to the home, so food, drink and shelter. So, common examples are the Tim Tams, which we'll talk about a bit more, but they're just not a deductible expense for employees.

Tim Loh:
So my advice to CPA professionals and registered tax agents is to continue to have those in-depth conversations with clients about their circumstances and ask them, "What has changed over the last financial year?" They may be entitled to claim for things this tax time that they couldn't last year and vice versa, especially if they've changed jobs, which you can understand, a lot of people have done so over the last year. And when your client's position doesn't make sense, it's really important to ask that extra question. As I mentioned before, our occupation guides and posters are a really good help and support for your conversations with your clients, and they cover those common misconceptions and contemporary examples.

Elinor Kasapidis:
Thanks, Tim, and I am a fan of those occupation guides.

Tim Loh:
They're great. Yeah, they're great. Just great complementary source of information to support those discussions with your clients.

Elinor Kasapidis:
And tax can be complicated, and we're running with the line, CPA Australia's running with the line this year about, "Yeah, nah." So, lot of the time you'll come with a receipt or an expense and think, "Can I claim this?" And deep down you know in your heart, probably not, and it's about following that gut instinct and certainly not trying to game the system. So, those general rules for deductibility haven't changed, but there was new legislation passed to allow COVID-19 tests purchased from 1st of July, 2021, to be deductible. What are the rules to claim these amounts?

Tim Loh:
Yeah, that's right, El. Look, taxpayers can claim a deduction for a COVID-19 test from 1 July, 2021 provided they satisfy these four conditions. So, it was used for a work-related purpose. So, if you bought a COVID-19 test to work out if you can go to Byron Bay with your mates, that's not a deductible expense for a COVID-19 test. The second condition is you paid for a qualifying COVID-19 test, so it's a PCR or a RAT. You paid for the COVID-19 test as the employee, so you didn't get it reimbursed by the employer for the cost. And most importantly, and something that we're really focused on at the ATO, is you kept a record, such as a receipt, to prove that you incurred the cost and it was for work-related purposes.

Elinor Kasapidis:
So Tim, because the law was only changed in March this year, many employees may not have kept receipts. What approach to recordkeeping is the ATO taking?

Tim Loh:
Look, at the ATO we always say to people to keep your receipts for anything that's work-related. That makes the job easier for registered tax agents, including CPA professionals. But look, if an employee's paid for a qualifying COVID-19 test that was used for work purposes, prior to the law change, and they no longer have that receipt, we will accept reasonable evidence of that expense. So, in terms of what that reasonable evidence is, reasonable evidence from our perspective is documents that show the cost of the test and the requirement to take it for work purposes. So this may include banking credit card statements, which can show that the expense was for a COVID-19 test, or a diary or other documents, including receipts, that show a pattern of buying COVID-19 tests after the law change in March that could reasonably have applied from 1 July, 2021.

Elinor Kasapidis:
And it'll be interesting, I think, to see, because like you say, most of the time, my advice to people is just keep your receipts, and then at the end of the year, you can go to your tax agent or work your way through them to decide which are actually deductible. It's really difficult to go back in time. So, I guess one tip is from the 1st of July, it's like a new financial year's resolution. "I'm going to set my recordkeeping up each year and make sure I capture everything, so then I can make the decisions when I need to." So Tim, while mandates have been lifted across Australia, many employees are now continuing to work in a hybrid environment with more days at home. Will the shortcut method for home office expenses continue to be available after the 30th of June this year?

Tim Loh:
Well, we introduced the temporary shortcut method at short notice as a response to COVID-19, and to support the significant number of people required to work from home, many of them for the first time. And it's really simplified the process for a large number of people. Now, we're mindful that many Aussies continue to find themselves working from home, and as a result, we are assessing the working from home methods for the 2022/2023 financial year with a view to modernising it, and expect to provide some more information about this early in the new financial year. Now, I'm going to sound like a broken record by the end of this, but whatever methods are available in the new financial year really depend on the records that you have. You really need to have the records in play, whatever the methods available are for the next financial year.

Tim Loh:
So, it's really important that you let your clients know that they keep the record of all hours that they've worked at home, they have receipts for all depreciating assets or equipment used for when working at home, and they've recorded their personal and work-related use of assets. Now, if your clients are claiming working from home expenses in this year's tax return, it's really important that they use one of our current methods to calculate their deduction, and make sure that they complete or satisfy the eligibility and recording keeping requirements.

Tim Loh:
As many of CPA professionals would know, the available methods include the temporary shortcut method, which is that all-inclusive rate of 80 cents per hour, in terms of how many hours you've worked from home. If your clients do use this method, they can't claim additional working from home amounts, including the depreciation of furniture and equipment and technological items. The other two methods are the 52 cents per hour fixed rate method, which currently requires a dedicated home office area, and you can claim for phone and internet expenses, and the decline for some depreciating assets like your technological items. And the final method is the actual cost method. Both those two methods, the 52 cents per hour fixed rate method and the actual cost method, they're more complicated methods and you need really good records to use those particular methods.

Elinor Kasapidis:
Thanks, Tim. The key message I get from that is shortcut won't be available, start keeping your records. So, for a lot of people who, a couple of years ago rarely worked from home, but probably do maybe three, four days a week now, they need to think, "From the 1st of July, what is it that I need to do for my expenses this year?" Because it's not a diary anymore, is it?

Tim Loh:
That's right, El, and I think your advice before was absolutely spot on. From 1 July, it's a new year, and make sure you've got those great records to support the deductions you can claim for next year.

Elinor Kasapidis:
Fantastic. Now, that's a really important change I think, that when people come in for their tax time conversations, like you said, it's part of having that conversation about work, about expenses, about recordkeeping. You mentioned so many great examples, but they're so popular. Do you have any other weird and wonderful attempts to claim work from home expenses that have come across your desk?

Tim Loh:
Yeah, look, unfortunately we do sometimes see people who try to make weird and incorrect claims, and it's not just when it comes to working from home expenses. So, I noticed a media article recently telling people that they could claim toilet paper. That's obviously incorrect. It's the same for other private expenses, like the Tim Tams you mentioned, or decorative items for the desk, like a plant. These can't be claimed as a tax deduction, because they're considered to be private expenses.

Tim Loh:
Across the ATO's desk, we also see some other weird claims, like people claiming their food, and their justification for that is that they won't be able to work if they can't eat. We've also seen a salesperson claim high heel shoes as protective equipment. Not sure how that's protective equipment. We've also seen outsourcing of laundering claims due to working full-time, because they've got a small child and they've got another bub on the way. Again, that's something that you just can't claim as a tax reduction. And then we had another taxpayer trying to claim the purchase of a birthday gift of $6,000. So, these are some of the weird claims that we sometimes see come across the ATO's desk.

Tim Loh:
Now, then we also see some other claims where the taxpayer needs a little bit more education, because they may not understand that none of these items can be claimed. So, another example we have is a taxpayer claiming a blue flamingo shirt as part of their uniform as a general manage. For that particular case, we also reported them to the fashion police as well. And then, we also see dental surgery work claimed with the job's description outlining they must always be presentable. Again, that's an expense that's considered to be private in nature. You can't claim that as a tax deduction.

Elinor Kasapidis:
I wish I got $6,000 birthday presents and could deduct all of my clothes. But yeah, I think that's the nuance that has really been challenged with work from home, because private and work have become so blended that in people's minds, you're not necessarily thinking in terms of tax. So, those are some really good examples and some great tips. You've talked a lot already around tax agents and professionals sitting down with their clients, things about, "What has changed in your work year? How are you actually spending your time?" And that would help them understand what kind of claims would be expected and what might be reasonable. Do you have any other further tips or pointers for our listeners today?

Tim Loh:
Yeah. Look, when it comes to these conversations tax agents are having with their clients, I think first thing's first. It's really important to keep the skills and knowledge up to date, and aligned to your client base, and as my second commissioner Jeremy [inaudible 00:14:05] says, in order to provide advice that hits that Goldilocks spot of an informed basis and making sure that it displays high practise and professional standards. So I think first and foremost, it's having that technical knowledge in place. Again, what I'd encourage you to do is to have those continued, in-depth conversations with your clients about their circumstances, and whether their prior year deductions have changed. As I mentioned before, many people have changed jobs, so there's an opportunity there to ensure the deductions match the different job types that they have over the course of the year.

Tim Loh:
Some common mistakes we see every year, and I'm going to sound like a broken record, but it's the recordkeeping. Taxpayers having no records, or the incorrect records. It's really important clients know what records they need to keep, and not accept deductions if they don't have the records. The key thing to remember is if there's no record, you just can't claim the deduction. And the next is another point, if the work-related deduction is not directly related to the income year your client earned, then it can't be claimed as a work-related deduction. And similarly, if it's not directly related to the job or the earning, the income that you're earning, it can't be claimed as a deduction.

Elinor Kasapidis:
The nexus one's always interesting because people have an amazing way of rationalising certain expenses. So, thank you so much, Tim, for the updates and messages on the topic. Next week, we'll be taking a closer look at work-related expenses for tradies, who often have to think about a few extra things when it comes to their tax. If you've got a question about any of the topics we've discussed today, or any of our policy and advocacy work, please email us at [email protected]. Thank you for joining us today. If you've enjoyed what you've heard, please tune in again next week for tax time, episode two, and tell your friends. From all of us here at CPA Australia, thanks for listening.

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