Logbooks – Tax Savings vs. Tax Headaches
Travelling for work often means tax deductions – great news at tax time, especially if you aren’t keen to line the tax man’s pockets with any more money than absolutely necessary. But what happens when you get it wrong? Intentionally or otherwise, the Australian Taxation Office (ATO) is becoming increasingly vigilant when it comes to people claiming kilometres travelled when they haven’t really made those journeys, are embellishing smaller trips, or claiming deductions for non-business-related trips. While we covered car-related expenses in a previous article, a recent case coming out of the Administrative Appeals Tribunal (AAT) brought issues to light around a taxpayer’s logbooks, slugging him with a hefty fine and denying a large proportion of his claimed deductions. As such, it’s timely to look at what happened in the case and how you can ensure your logbooks are up to scratch.
Recent Case: Reid v Commissioner of Taxation
A recent case before the AAT involved a taxpayer, “Mr Reid”, having unsubstantiated claims for car expenses using the logbook method (more on that logbook method later). Mr Reid claimed almost $72,000 worth of car-related deductions over three separate tax years, along with approximately $34,000 worth of other work-related expenses. The home-related deductions he claimed included his home office (as a proportion of his rent, gas and electricity costs), printer cartridges and paper, telephone and internet, and newspapers and magazines. He failed to provide a diary for 4 weeks showing his usage pattern for the office space, and he was also unable to provide evidence around the rent he paid or the payment of heating/cooling and lighting bills; nor receipts corroborating the other expenses he sought to claim.
As far as the car expenses are concerned, Mr Reid failed to keep his logbook for work related car trips in accordance with the relevant legislation, namely Section 28-125(2) of the Income Tax Assessment Act (ITAA) 1997. This was due to inconsistencies in the logbook which indicated the entries were not fully legitimate, were made too long after the end of the corresponding journey and were otherwise inconsistent with various information and documentation provided to the ATO.
Mr Reid was allowed a deduction using the cents-per kilometre method, however only up to 5,000km per year (per the rules around that method). This amount would be roughly $11,000 – around $60,000 less than originally claimed. The fallout from this case was that in addition to the tax on the denied deductions, a fine to the taxpayer to the tune of 25% of the shortfall was enforced – a significant sum considering the initial claims.
How can you Remain Compliant?
To ensure that you stay off the ATO’s radar, it’s important to understand the difference between the two different methods of claiming business-related car travel. The cents-per-kilometre method is the simplest of the two (just multiply the number of business kilometres travelled by 68 cents per km – the current prescribed amount). If you’re going to be using that method, though, be aware that it is capped at 5,000 km per annum. Therefore, if you are travelling regularly for work and your total distance is likely to be greater than that, consider using the logbook method instead. Here is what needs to be included in a logbook:
- The start and end points of the journey
- Odometer readings at the start and end of the journey
- Number of kilometres travelled
Also note that in the first year in which car expenses are claimed, the logbook must be kept for a continuous 12-week period, unless the car is held for less than 12 weeks. In that case, the logbook must cover the entirety of the period you had it.
The MP+ Difference
At McKinley Plowman, we’ve been helping clients for over 20 years to keep their records in line with legislation and help them legally maximise their deductions and minimise their tax liabilities. The FREE MP+ App also features a logbook to help you keep track of all business-related car trips – without the need for messy pen and paper; and our tax team are on hand to ease the burden of lodging your tax return. For more information or to book a consultation, contact us today via our website or call us on 08 9301 2200.
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