Proper record keeping for tax deductions
If you have ever lodged a tax return, you would know the pain in keeping records to substantiate your tax deductions. While it may be possible that some receipts are lost, perhaps it is a fuel receipt that is lost in the glovebox (or beneath the car seat!), or simply faded over time, it is important that you keep all the receipts as evidence that you have made the purchase as the receipt will include detailed line items of what was purchased.
There is a recent case where the Administrative Appeals Tribunal (AAT) knocked back a taxpayer’s claim for deductions. One of the reasons was that the claims were based on his bank statement transactions rather than on actual receipts/invoices.
PSJF and Commissioner of Taxation (Taxation)  AATA 678 (20 March 2018)
In PSJF and Commissioner of Taxation (Taxation)  AATA 678 (20 March 2018), the taxpayer was employed as a photographer. He claimed some travel expenses as tax deductions in his tax return. The AAT found that some of his deductions are disallowed.
During the Discussion, there were a few issues that were raised. However we would like to bring to your attention on the matters about the tax deductibility of expenses:
- For an expense to constitute an allowable deduction in the production of salary or wages income, a two-pronged test must be satisfied: first, that expense must come within the definition of a deduction pursuant to s 8–1 of the ITAA97. Secondly, such claimed deduction must be substantiated with written or receipt-based evidence. There is no other way for any claimed expense to be allowed as a deduction against assessable income.
- Put another way, element (1) above must, to quote the requirements of s 8–1 of the ITAA97, “be incurred in gaining or producing [the Applicant’s] assessable income” and cannot be an “outgoing of a domestic or private nature”. Element (2) above requires that the claimed expense must be substantiated by written evidence – most usually in the form of a tax invoice and accompanying receipt – from “a supplier”. That paperwork must identify the supplier and “the nature of the goods or services” provided by the supplier in order to meet the requirements of s 900-115 of the ITAA97.
To put it simply, for an expense to be tax deductible, it needs to satisfy the following:
- have a link between the expense and the income that was earned, and
- have sufficient evidence to prove the purchase – and the evidence they require is a tax invoice and receipt.
This means that merely having a bank statement showing the transactions is not a valid form of evidence to claim them as your tax deduction.
There are various ways to keep record of your work or business-related receipts. If you would like to hear about our options in keeping proper records of your receipt without having a shoebox, feel free to have a quick chat to us and we can work with you to find you a best solution.
If you are interested, or are unable to sleep at night, check out the full document here.