What the ATO is focusing on in this year’s tax return

by Zilla Efrat

Four key areas are set to come under the Australian Taxation Office’s microscope this tax season: record-keeping, work-related expenses, rental property income and deductions, and capital gains from cryptocurrency assets, property and shares.

But the ATO has also warned taxpayers to not engage in “asset wash sales” to artificially increase their losses and reduce gains or expected gains and to be careful on how they report COVID-19 income and deductions.

“The ATO is targeting problem areas where we see people making mistakes,” says Assistant Commissioner Tim Loh.

He advises rethinking your claims and ensuring you can satisfy the three golden rules:

• You must have spent the money yourself and have not been reimbursed.
• If the expense is for a mix of income-producing and private use, you can only claim the portion that relates to producing income. For example, you can’t claim 100 per cent of mobile phone expenses if you use your mobile phone to ring a friend.
• You must have a record to prove it.

Small businesses

For small business tax returns for 2021/22, the ATO will focus on deductions that are private in nature and not related to business income, as well as overclaiming of business expenses (especially for taxpayers running a home-based business).

It will also keep an eye out for omissions of business income – for example, from the sharing economy or new business ventures – and business record-keeping, including insufficient or non-existent records that are needed to substantiate claims.

ATO Assistant Commissioner Andrew Watson reminds small businesses to include all income, including earnings from “side hustles”.

“Almost half of the 1.9 million sole traders also have non-business income, like salary and wages or income from investments, so make sure to double check you’ve included it all before you lodge. Don’t fall into the trap of leaving out non-business income thinking we won’t notice.”

Small businesses should include all income in their income tax return, including cash, coupons, EFTPOS, online, credit or debit card transactions, and income from platforms such as PayPal, WeChat or Alipay.

“Don’t forget, eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use,” says Watson.

The ATO adds that most government payments or financial support received as a result of COVID-19 need to be included as taxable income, whereas some others are exempt and should not be included. The ATO has detailed information listing how all support payments should be treated on its website.

Be “tax ready”

When it comes to tax, it seems the early bird doesn’t catch the worm.

“We often see lots of mistakes in July as people rush to lodge their tax returns and forget to include interest from banks, dividend income, payments from other government agencies and private health insurers,” he says Loh.

“For most people, this information will be automatically pre-filled in their tax return by the end of July. This will make the tax return process smoother, save you time, and get your tax return right. If you want to lodge earlier, you must take extra time to manually add all your income.”

Loh advises checking whether your employer has marked your income statement as “tax ready” as well as if your pre-fill is available in myTax before you lodge.

“The stakes are high for early July lodgers. People who lodge in July are twice as likely to have their returns adjusted by the ATO,” says Loh.

Each year, from late July onwards, most information from employers, banks, government agencies and health funds will be automatically loaded into tax returns.

“Waiting for the ATO to upload information means people don’t have to roll the dice when they lodge, and it’s less likely an amendment will need to be made later, which could result in a tax debt,” Mr Loh said.

But while the ATO receives and matches a lot of information on rental income, foreign-sourced income and capital gains events involving shares, crypto assets or property, Loh says it doesn’t pre-fill all information for you.

Work-related expenses

Loh notes that some people have changed to a hybrid working environment since the start of the pandemic. Indeed, COVID-19 saw one in three Aussies claim working from home expenses in their tax return last year.

“If you have continued to work from home, we would expect to see a corresponding reduction in car, clothing and other work-related expenses such as parking and tolls,” he says.

“If your working arrangements have changed, don’t just copy and paste your prior year’s claims.”

From 1 July 2021, taxpayers who paid for a COVID-19 test for work-related purposes (such as to determine if they can attend or remain at work) can now claim a deduction for the test.

Taxpayers may also be able to claim a deduction for the cost of items that protect against risk of illness or injury while performing work duties. These could include gloves, face masks or sanitiser.

Capital gains from crypto assets, property and shares

If you dispose of an asset such as property, shares, or a crypto asset, including non-fungible tokens (NFTs) in your tax year, you will need to calculate a capital gain or capital loss and record it in your tax return.

Generally, a capital gain or capital loss is the difference between what an asset costs you and what you receive when you dispose of it.

“Remember you can’t offset your crypto losses against your salary and wages,” says Loh.

You must keep records of each of your crypto assets and every transaction, to work out whether you have made a capital gain or loss.

Asset wash sales

Asset wash sales are a form of tax avoidance that the ATO is focused on this year.

These typically involve the disposal of assets such as crypto and shares just before the end of the financial year, where after a short period of time, the taxpayer reacquires the same or substantially similar assets. This is a wash sale and is done to create a loss to offset against a gain already derived, or expected to be derived in a tax return.

A wash sale is different from the normal buying and selling of assets because it is undertaken for the artificial purpose of generating a tax benefit for the current financial year.

The ATO’s sophisticated data analytics can identify wash sales through access to data from share registries and crypto asset exchanges. When the ATO identifies this behaviour, the capital loss is rejected, resulting in an even bigger loss to the taxpayer. Additional tax, interest and penalties may also apply.

Rental income and deductions

If you are a rental property owner, ensure you include all the income you’ve received from your rental in your tax return, including short-term rental arrangements, insurance payouts and rental bond money you retain.

“We know a lot of rental property owners use a registered tax agent to help with their tax affairs,” says Loh.

“I encourage you to keep good records, as all rental income and deductions need to be entered manually, you can ask your registered tax agent for assistance.”

You must declare all the income you receive for your rental property (including from overseas properties) in your tax return.

This includes short-term rentals (for example, a holiday home), renting your property through a sharing platform such as AirBNB, HomeAway or Flipkey, renting part or all of your home such as a room, and formal and domestic arrangements where you rent out to family and friends at less than commercial (market) rates.

You will need to work out the monetary value of any rental income you receive in the form of goods and services.

If this year’s tax bill is bigger than anticipated, please call us to see how we can help you.

Feel free to contact us for anything that relates to your business finances so we can help with your success.

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