In this issue: Claiming car expenses
Employment tax issues – Allowances V’s Reimbursements
Small business benchmarks – Retailer takes a hit in ATO audit
Car expenses – a very popular deduction, but you’ve got to get it right
Each year, the Tax Office reports that work-related expenses are the most common type of tax deduction claimed, and it also reports that one of the most popular of work-related claims is for vehicle expenses.Vehicles expenses are a very regulated area for claiming deductions, so good guidance on making car expense claims is essential to stay on the right side of the taxman. It is not generally allowed, for example, to claim the cost of trips between home and work, even if you do minor work-related tasks on the way (such as for example picking up the mail from your employer’s post office box).
This is also the case where you may be called into work while otherwise at home (if you were “on call” for example), or if you worked shifts that are outside usual work hours. The fact that there happens to be no public transport near where you work also generally doesn’t make a difference.
Allowable claims
The rules do allow a claim however if you need to drive in order to carry bulky items (like an extension ladder, for example) that can’t be left at the workplace, or if you have multiple sites that you travel between as part of your employment.
Claims can also be made if your home is a “base” of work (and you travelled from there to another site, such as client’s premises, to continue that work). You can also make a claim if you have a second job and travel directly from one workplace to another.
Car expenses are costs resulting from using your car for work (that is, to produce assessable income). But these deductions are only for “cars” and are not for other vehicles such as motorcycles, utes or vans (with a one-tonne capacity, or any vehicle with a nine or more passenger capacity).
Expenses for these vehicles are treated as “travel” expenses, as are costs for shorts-term car hire, bridge and road tolls, parking fees and such (but you must be eligible to make such claims – check with this office).
The methods
To claim legitimate car expenses, the first step is to work out (and record) how many of the kilometres travelled are business kilometres. After that, there are four methods to choose from, and you can take up whichever of these methods give you the largest deduction – provided you have the back-up evidence if the Tax Office asks for it.
The four options to determine car expense deductions are:
- cents per kilometre
- 12% of original value
- one-third of actual expenses, and
- the logbook method.
1. The cents per kilometre method
The cents per kilometre method can be used to claim up to a maximum of 5,000 business kilometres per year (but no more than 5,000). You do not need written evidence, but you may need to be able to show how you worked out your business kilometres.
The number of kilometres is multiplied by a cents per kilometre rate based on the engine size of the vehicle used. This ranges from 63 cents for a 1.6 litre or less engine to 75 cents for a 2.601 litre or more engine. Hybrid cars are still based on the petrol driven cylinder volume. The resulting figure is divided by 100 to arrive at the amount you can claim in dollars.
2. The 12% of original value method
The 12% of original value method takes that portion of your car’s original value as the claimable amount and you can travel more than 5,000 business kilometres in the claim period. If you bought the car, then 12% of the cost is used. If it is leased, a market value from the time you leased it is used.
But this method has a limitation applied for “luxury” cars, where a maximum cost is set and is indexed each year. It is $57,466 for the 2013-14 financial year.
3. The one third of actual expenses method
The one third of actual expenses method is just as it sounds (and does not take in purchase price or include capital costs such as improvements to the vehicle). But you will need to have receipts for fuel and oil costs, or use the odometer records to calculate a reasonable estimate.
All other car expenses need to be recorded, as will the make and model, engine capacity and registration number. You can travel more than 5,000 kilometres, but may need to show how you worked these business kilometres out. The limit of $57,466 also applies (which does not include GST by the way).
4. The logbook method
A logbook needs to be kept for at least 12 weeks and can be used for a period of 5 years unless the nature of your travel changes.
Your claim is worked out on the business use percentage for each expense. You will need to keep odometer readings and records of all car expenses, and use the logbook to work out the percentages.
Employment Tax Issues – Allowances V’s Reimbursements
When paying an expense of the employee, it is important to correctly determine whether the amount being paid is a reimbursement or an allowance. Allowances and reimbursements have different treatments for income tax, fringe benefits tax (FBT), Payroll Tax and Workcover purposes.A reimbursement is an amount which is paid to repay the employee for actual out of pocket expenses incurred for business purposes. For example, where car expenses are reimbursed to employees using the cents per kilometre deduction rates published by the ATO, the amount should be based on the actual distance that the employee has travelled during the relevant period.
An allowance is an amount which is paid in relation to anticipated or expected expenditure to be incurred by the employee for business purposes. Where for example this allowance is calculated on the cents per kilometre deduction rates, it will generally be based on a reasonable estimate of the distance that the employee will travel during the relevant period. An allowance will often be a recurring amount.
Income Tax
An allowance forms part of an employee’s assessable income and must be included on the employee’s PAYG payment summary. The employee may then be eligible to claim a tax deduction for the expenses incurred in the course of their employment.
A reimbursement is not included in the employee’s assessable income, and should not be included on the employee’s PAYG payment summary. As the employee has been reimbursed for the costs, they will not be entitled to claim any deduction for the expense.
The employer is eligible to claim a tax deduction for the amount paid to the employee regardless of whether it is an allowance or a reimbursement.
Fringe Benefits Tax (FBT)
As an allowance is included in the employee’s assessable income, it will not be considered to be a fringe benefit.
The reimbursement of an employee’s expenses will be considered to be a fringe benefit. However, where the reimbursement is solely for work related expenditure, it will be exempt from FBT. As well, FBT exempt benefits are not required to be reported on the employee’s PAYG payment summary.
Payroll Tax
Payroll tax is a State based tax. For example, in New South Wales, it applies to employers (or groups of employers) with total employee remuneration in excess of $750,000 (the threshold for July 2013 to June 2014) at the rate of 5.45%.
An allowance forms part of the remuneration paid to employees for Payroll Tax purposes. Therefore Payroll Tax may be payable on this amount.
A reimbursement will not be considered to be remuneration for Payroll Tax purposes.
As Payroll Tax is a state based tax, it is important to confirm the correct treatment of allowances and reimbursements in the state in which each employee is employed.
Workcover
An allowance is included in the employee’s wages for Workcover purposes and will be subject to the same levy rate as the wages paid.
A reimbursement is not included in the employee’s wages for Workcover purposes.
As Workcover rules differ between states, it is important to confirm the correct treatment of allowances and reimbursements in the state in which each employee is employed.
Small Business Benchmarks – Retailer Takes Hit in ATO Audit
Small business benchmarks are financial ratios developed by the ATO to help compare the performance of similar businesses in an industry. They are representative of data provided on income tax returns and activity statements in the industry and provide guidance on what figures the ATO would typically expect a business in a particular industry to report.Businesses reporting outside the benchmarks may attract the attention of the ATO. The ATO recognise that there may be valid reasons for this difference, such as higher costs or lower selling prices than other businesses in the industry, but it may also be an indication that a business is not recording and paying tax on all its transactions, especially cash transactions.
Whether or not there is a benchmark for a particular business, the taxpayer must keep proper records for a period of 5 years. Under the Corporations Act, companies are required to maintain records including financial statements, journals and asset registers for seven years from the end of the financial year.
In the recent case of Carter V FCT [2013] AATA 141, the ATO took a florist to the Administrative Appeals Tribunal (AAT) over unreported income. The case centred on the poor record keeping practices of the business which cost the taxpayer some $130,000.
The ATO applied the relevant small business benchmark for a florist business and was successful in having the taxpayer’s income tax and GST assessments amended for the relevant year, including the imposition of penalties.
Facts of the case
The taxpayer conducted a GST-registered florist business in Perth and lodged business activity statements (BASs) for the monthly tax periods from 1 July 2007 to 30 June 2008. In her 2008 tax return, the taxpayer reported “cost of sales” for the business of $259,982 and “Total business income” of $313,971.
The ATO selected the taxpayer for audit because she had reported cost of goods sold (COGS) representing 83% of her reported business income, and this was outside the COGS industry benchmark percentage range of between 44% and 54% for turnover in the $65,000 to $300,000 range.
The ATO requested that the taxpayer provide evidence that she was correctly recording and reporting her business income. In response, her tax agent forwarded certain documentation to the ATO, e.g. EFTPOS statements, a spreadsheet summary of cash register rolls, cash register roll receipts, bank account statements and several bank deposit slips. The documentation generally covered the period from April to July 2008
Following the audit, the ATO advised the taxpayer that she had not keep adequate records, and, as a result, issued default amended assessments (including penalties) totalling just over $130,000 based on the COGS small business industry benchmarks.
The taxpayer objected, and her objection was partially allowed on the penalty issue (by reducing the administrative penalty for the income tax and GST remitting the general interest component. However, shortfalls from 75% to 50%, and by partially the objection was disallowed on the amendment to the income tax and GST assessments.
Taxpayer’s poor record keeping
The florist provided the AAT with a number of reasons why her cost of sales/total turnover ratio was exceptionally high. These included:
- a supermarket selling flowers in the immediate vicinity was forcing her to cut prices;
- she was unable to walk away from the business even though it was not profitable; and
- her husband was injecting money into the business to maintain its viability.
However, the AAT ruled there was no evidence presented to support these contentions. Based on the evidence before it, the AAT considered that the taxpayer had failed to prove positively, on the balance of probabilities, that the relevant amended assessments issued by the ATO were excessive.
The AAT noted that the following deficiencies in the taxpayer’s record keeping practices:
- an apparently defective cash register; missing till (cash register) tapes for June 2008 and the fact that no reconciliations to bank deposits had ever been produced;
- that the spreadsheet summary of till (cash register) rolls for April and May 2008 was unreliable in that:
– days were missing from the summary and other evidence before the AAT indicated that the taxpayer did, in fact, trade on the those days.
– there was a difference between the total sales recorded in the spreadsheet summary and the reported G1 “Total sales” amount in the BASs for April and May 2008.
Records that should be kept
For a retail business, the ATO would as a minimum, require the following records to be kept:
- sales details, including invoices and cash register rolls;
- reconciliations of sales details/cash book to bank deposits. The reconciliation should show amounts not deposited to business accounts and amounts used for drawings, wages and other cash expenses;
- reconciliations between the cash book, bank statements and the amounts reported on the BAS at label G1; and
- copies of all bank statements.
These records must be kept for a period of 5 years as mentioned above.
In Taxation Ruling TR 96/7, the ATO accepts that cash register rolls may be discarded after one month provided that the taxpayer has reconciled the Z-totals with actual sales and bankings for that period. The reconciliation must take into consideration any cash earned that was used for other purposes (e.g. personal drawings, minor purchases, payment of wages etc).
If no reconciliation of the Z-totals is made, the taxpayer must keep the cash register rolls for 5 years.
Conclusion
This case highlights that in the event of an audit, the ATO will automatically apply the small business benchmark for that particular industry and increase the income of the business unless the taxpayer can provide proper records to explain why their trading performance falls below the relevant benchmark.
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