Traps and tips: Preparing your 2021 individual tax return

With the dawn on a new financial year upon us, it is now tax season. With 100’s of thousands of people preparing their tax return in July and August following the end of a financial year, we wanted to provide you some tips on common mistakes. We always recommend that you should see an accountant to prepare your individual tax return. Simple mistakes, such as forgetting to include income, can become quite costly in penalties and interest. 

1.     Leaving out income

The common types of Income that needs to be declared in your tax return includes:

• Income from employment
• Superannuation pensions and annuities (depending on your age and only where it is taxable)
• Government payments and allowance
• Income from investments, including interest, dividends and rent
• Loss/income details from the sale of a capital asset
• Business, partnership and trust income, including personal services income
• Foreign and worldwide income
• Compensation and insurance payments
• Employee share schemes
• Some prizes and awards
• Crowdfunding income and
• Income from the sharing economy

Failing to include income in your tax return can result in shortfall interest charges (currently 3.04%), general interest charge (currently 7.04%) and penalties (at 25%, 50% and 75%, with possibility of 20% uplift). 

2.     Claiming deductions for personal expenses

When preparing your tax return, deductions are only allowed where:

• The expense relates to your income earning capacity
• You paid for the expense
• You haven’t been reimbursed by your employer
• The expenses isn’t personal

Common work-related expenses include:

• Car expenses
• Clothing and laundry expenses
• Working from expenses
• Self-education expenses
• Tools, equipment and other assets
• Other work-related deductions

With many more workers continuing working-from-home (WFH) arrangements throughout the 2021 financial years due to COVID-19 restrictions, the ATO will be even more diligent about deductions claimed. 

Where an expenses is both personal and work-related, it needs to be apportioned before it is included in your tax return. Personal expenses that commonly need to be apportioned include mobile, internet, monitors used for both work and personal use, car related expenses. Where a personal expense is claimed in your tax return incorrectly, this will result in a shortfall in tax. As a result, shortfall interest, general interest and penalties may be imposed. 

3.     Not keeping receipts or records of expenses

For deductions claimed in your tax return, you must keep records and receipts to support your claims. In fact, you need to keep records for 5 years from the date of lodgement. 

It is important to keep records to ensure that:

• You have written evidence of your income and expenses,
• Assist you and your accountant in preparing your tax return
• In the case of an audit or review, the evidence can be provided to the ATO, and
• Avoid the imposition of penalties, if you have made a genuine mistake

 Type of records you need to keep include:

• Logbooks for work-related car expenses
• Logbooks/timesheet for working-from-home expenses
• Income statements or payments summaries from your employer
• Dividend, trust distribution and interest statements
• Receipts for equipment and asset purchases
• Receipts for expenses claimed
• Rental agreements and rental statements

During a review or audit, where you are unable to substantiate an expenses claimed, the deduction may be denied. This can result in a shortfall of tax, and the imposition of shortfall interest, general interest and penalties depending on the severity.

4.     Not declaring your spouse in your tax return

The definition of spouse is far broader than the traditional ‘marriage’ relationship. The ATO defines ‘spouse’ to include another person (of any sex) who:

• You were in a relationship with that was registered under a prescribed state or territory law
• Although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple. 

With more couples moving in together due to various COVID-19 lockdowns around the country, there may be more people in the situation on needing to include a partner in their tax return than previously before. Partner’s that you lived with throughout the financial year need to be included. 

 The benefits of including a spouse in your tax return include:

• Determining entitlement to a rebate for your private health insurance,
• Determining entitlement to the seniors and pensioners tax offset,
• Determining entitlement to Medicare levy reduction
• Determining whether you are required to pay Medicare levy surcharge 

With the expansion of the ATO’s data-matching capabilities, the ATO has more and more information in relation to your income and expenses, including if you are in a domestic relationship with another person. 

How can Tax controversy Partners help you?

If you are unsure about an income transaction, or whether you should claim a expense as a deduction, we can guide you through that process of determining your position. If you have already prepared your tax return, and are unsure if it was prepared correctly, we can assist you in preparing a voluntary disclosure to the ATO. 

In the situation where you have received a notification from the ATO of a review or audit, we can represent your best interests to the ATO and help manage the relationship. We are experienced in helping taxpayers who have made mistakes in preparing their tax affairs. 

 Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.