Sep 19, 20183 min read

Is the deduction substantiation threshold an ‘80s anachronism?

Every tax time, the ATO is in the habit of pointing out the most common mistakes or misconceptions that regularly come to its attention — see its Tax myths busted! here.

Generally leaving out some item of income is high up on the ATO’s list of taxpayer errors, as is trying to claim deductions for personal expenses or not keeping receipts or other proof of expenses.

But also making a regular appearance is that taxpayers keep incorrectly claiming for something that they never actually paid for, operating on the assumption that there is a “standard” deduction that somehow negates having proof that such a transaction occurred (or in some people’s minds, even doing away with the need to actually hand over the money).

Where a lot of taxpayers trip up is on the $300 threshold for the requirement to substantiate work related claims. Assistant Commissioner Kath Anderson said in a recent media release: “Many taxpayers don’t have a good understanding of what deductions they can claim, and believe they can claim for items which they in fact can’t. Some taxpayers even think that you can make a standard claim of $300 without having spent the money. You don’t need receipts for claims up to $300 but you must have actually spent the money, and be able to show us how you worked out your deduction if asked.”

The fact is, however, that this figure of $300 has been set at that limit for quite some time.

📷Senior tax specialist at Tax & Super Australia, Michael McCarthy (pictured at right), has also been a member of the organisation for longer than he would like to admit, perhaps evidenced (when pressed for an opinion on claim substantiation) by his reference to the 1986 edition of the Tax Summary.

“One point of interest was that the 1986 edition included a page on the 1985-86 ‘negotiated claim limits’ for employees,” Michael says. “This was a schedule that showed that certain work-related claims were generally allowable up to a limit, where claims in excess of the amounts agreed to being in need of substantiation, and that costs must be shown as necessary in earning assessable income.”

An extract of the section of that year’s Tax Summary showed the following examples of these limits:

📷

“Back in 1986, this was likely seen as a common sense approach, when the ATO employed assessors to review income tax returns prior to issuing an assessment,” Michael says.

“On 1 July 1986, the self-assessment substantiation rules were introduced, where work-related claims exceeding $300 required supporting records.”

The trouble is, decades later this threshold is still the same. “Fast track over 30 years later to 2018 and that limit remains at $300,” Michael says. “It wouldn’t appear that Tax & Super Australia is asking for too much in supporting a standard work-related deduction of $2,000 that is exempt from substantiation rules.” (See page 8 of Tax & Super Australia’s pre-budget submission to the 2017-18 Federal Budget).

A recent poll conducted on Tax & Super Australia’s newsroom page indeed found that most respondents believed that the $300 threshold for not requiring substantiation of work-related expenses was insufficient. The poll found that 67% of respondents believed it should be more, while 33% thought the incumbent level was adequate.

Readers are welcome to write in with their own view, with comments posted below unless you advise otherwise.