We are sharing the top 5 mistakes made by tax payers in claiming deductions, recording the right details & claiming personal expenses. Also read what is LAMITO, how it works and what are the offset limits for different salary brackets.
It’s Tax Time!
Restoring and enhancing faith in the tax profession. According to the ATO, the top 5 mistakes that are made by taxpayers are:
Mistake 1: Leaving out income, either deliberately or inadvertently:
This often includes income from casual or temporary work and money earned though the sharing economy.
Mistake 2: Claiming deductions for personal expenses which cannot be claimed even though they may have some remote connection with work:
This would include travel from home to work, in respect of which there is much case law to indicate that such expenses cannot be claimed; normal clothes, which would not qualify as uniforms which can, in certain circumstances, be claimed; and phone calls made that relate to their personal affairs, albeit on a phone which is also used for work related purposes. In that latter case, an apportionment on a reasonable basis is almost certain to be accepted by the ATO
Mistake 3: Not having records of an appropriate kind to substantiate expenses which exceed the minimum amount for which expenses must be substantiated:
This can include not obtaining an appropriate receipt or record of the expense, or having obtained such a receipt or record and not keeping them appropriately in case they are asked to be produced at a later time.
Mistake 4: Claiming an amount for something which was never paid. There are some taxpayers who believe that everyone is entitled to a standard deduction, usually in the amount of $300:
This is incorrect!! In relation to an expense where substantiation is not required, because the amount in question in total is less than $300, it does not mean that a taxpayer can never be asked to prove that the expense was incurred or indeed that it was incurred for purposes related to your work. It simply means that a detailed tax invoice or receipt is not necessary.
The ATO can still challenge a $200 expense, in relation to which substantiation was not required, on the basis either that no expense was incurred, the amount claimed was more than the expense that was incurred, or that the expense that was incurred had nothing to do with work. At the very least, you should be able to show a bank debit in the name of the taxpayer who has claimed the expense and some evidence, even if it is flimsy, of the connection to work. I repeat, there is no such thing as a standard deduction under Australian law.
Mistake 5: Claiming personal expenses for rental properties:
You cannot claim a deduction for rental expenses in relation to a property where, during certain times of the year, that property is being used by the taxpayer for their personal use. In such a case, an appropriate apportionment of the rental expenses is essential.
LAMITO: What is the Low and Middle Income Tax Offset, and how does it work?
From 1 July 2018 until 30 June 2022 (for only 4 years), a new tax offset takes effect, called the Low and Middle Income Tax Offset (LAMITO). Announced in this year’s budget and passed thru parliament in the last week of June, the LAMITO will provide tax relief of up to $530 a year for those taxpayers affected, that is, for Australians with a taxable income of less than $90,000. Australians with a taxable income of up to $125,333 will receive a part LAMITO.
Although the new tax offset, LAMITO, only applies for 4 financial years, LITO continues indefinitely, but will take a different form from July 2022 (refer to LITO article in previous paragraph). LAMITO is applied when you lodge your annual income tax return for 2019. If eligible, you will receive a lump sum on assessment by the ATO.
How does LAMITO work?
Information released by Treasury shows, for the 4 years over which LAMITO applies:
- if you earn less than $37,000, you will receive LAMITO of up to $200
- if you earn more than $37,000, but less than $48,000, you will receive LAMITO of between $200 and $530
- between $37,000 and $48,000, LAMITO will increase at a rate of 3 cents per dollar until reaches maximum amount of $530
- if you earn more than $48,000 or more and up to $90,000, you will receive maximum LAMITO of $530
- if you earn more than $90,000 and up to $125,333, your LAMITO will gradually reduce at a rate of 1.5 cents per dollar, phasing out from $530 to $1
Note: LAMITO is also available to trustees if they are taxed on a share of net income of a trust on behalf of an Australian resident beneficiary that is under a legal disability, provided the amount of that share does not exceed $125,333. According to Treasury, “If a trustee is taxed in relation to the shares of multiple beneficiaries of the trust, the trustee is separately entitled to the offset in respect of each share of a beneficiary for which the trustee is taxed.”
Important: LAMITO is non-refundable and cannot be carried forward or transferred. Also, LAMITO will not be taken into account when the ATO determines PAYG withholding schedules for income tax.