Individuals beware with tax deductions this year

Individual tax payers – the onus of truth lies with you each and every tax year. The requirement to actually have incurred or spent the money on the item you are claiming as a tax deduction must be adhered to.

There is also certain exemptions for items that are personal in nature which are exempt from being tax deductible. We have all heard of the retail clothing worker wanting to claim the cost of their employer’s clothes to be “on trend” with the new fashion or the professional wanting to claim a suit they wear to the office as they are required to wear “professional business work attire” under the policies for their employment. Put simply these types and many others that are personal in nature can not be claimed as a tax deduction.

This financial year, we have an extra layer of complexity in COVID-19 which has truly created unprecedented and uncertain situations for everyone. Which is why it is more important than ever to claim the right deductions this tax time.

We outline some key areas all individuals should review if you – like 99% of the world – is working remotely or from home.

There is a summary of issues all rental property owners – especially holiday rental properties – should consider this financial year.

Working From Home

There are a range of tax return options for those who are now working from home. There is a Shortcut method and the Fixed Rate Method.

New Shortcut Method for Working from Home Deductions

The ATO have introduced a shortcut method to help simplify how you calculate your deduction for working from home. However, the shortcut method is only temporary and will only be available between 1 March to 30 June 2020. But all employees working from home during this period can use this method. It allows you to claim 80 cents per hour for each hour you work from home.

You can choose to use the 80 cents rate if you:

  • Are working from home to fulfill your employment duties (not just carrying out the bare minimum tasks, such as checking email or taking calls)
  • Have incurred additional running expenses as a result of working from home

The Shortcut or 80 cent method covers all working from home expenses, including:

  • Internet expenses
  • Phone expenses
  • The decline in the value of equipment and furniture
  • Electricity and gas for heating, lighting and cooling

However, if you choose to use this method you can’t claim any other expenses for working from home. You don’t need to have a dedicated work are to use this method, either. But you will need to keep a record of the number of hours you have worked from home. This could be a roster, timesheet, diary, or documents that set out the hours you worked.

You also don’t have to use the Shortcut method. You can choose one of the existing methods to calculate deductions. Use which ever method will give you the best outcome, as long as you meet the working criteria and record keeping requirements. Further, if you had a work from home method prior to 1st March, 2020, you will need to use the existing methods to calculate your deduction for the period 1 July 2019 to 29 February 2020.

Motor Vehicle Deductions

It is important to revisit your logbook every 5 years or if there is a significant change in circumstances – like COVID-19. If you use your own car to perform work-related duties, you may be able to claim a deduction for car expenses using either the cents per kilometre or the logbook method.

However, if your travel was partly private, you can only claim the work related portion. You will also need to substantiate your claims, especially with general road travel significantly decreased due to COVID-19, meaning many of us are working from home and avoiding in-person meetings.

WARNING – the same issue arises where you are required to work from home and needed to attend the business premises whether it is to collect the mail or supplies due to the COVID-19 restrictions. This travel is still consider private in nature and not business use motor vehicle travel.

Rental Properties

Those rental property owners who have had their mortgage repayments deferred due to COVID-10 can still claim the interest on their tax bills – i.e. actually paid. However, you can only claim interest and expenses on properties that are genuinely for rent. Further, insurance payouts for lost income due to coronavirus or bushfires are taxable. And deductions for vacant land are generally no longer available, even if you are building on it to rent it out.

Interest still accumulating on a loan is still a legitimate tax deduction for those renting out their property, even if the bank defers the repayments. BUT, you can only claim what has been paid in an income year.

You still need to include rent as income, at the time it was paid, even if you are offering tenants a reduced rate. If payments by your tenants are deferred until the next financial year, you don’t need to include these payments until you receive them, for example. Any rental insurance that covers a loss of income must be included in your tax return.

If you PERSONALLY decide to use a property – including short term lease properties for the use of Airbnb and similar – you can’t claim deductions. If a property is not genuinely for rent, you need to limit your deductions to only the days when it was available for rent.

You also need to avoid common mistakes, including:

  • You can’t claim deductions for travel to inspect rental properties
  • Claim interest on loan money for living expenses or holidays
  • Claim capital works as a lump sum rather than spreading the cost over a number of years

You will need to substantiate your deductions, now more than ever, so it is important to keep your records. You will need to produce receipts or other documents to support your claims and have spent the money. There will be increased scrutiny regarding rental deductions and claims this year.

Wondering what deductions you are entitled to this end of financial year? A little lost with what to claim and what you can’t claim? The team at MKS Group are here, ready to help, this tax time.