ATO and TPB maintain the rage on tax agents and work-related expense claims
The ATO has released its latest ‘best estimate’ of the net income tax gap for ‘individuals not in business’ based on the 2016 income year lodgements as being 6.4%, or $8.4 billion. This is an estimate of the difference between the total amount of tax collected from individual taxpayers (excluding people who are running a business), and the amount the ATO estimates it would have collected if every one of these taxpayers was fully compliant with tax law. Yet again, the ATO’s random sample indicated a higher adjustment rate (i.e., 80%) relating to agent-prepared returns, as compared to 61% for self-preparers.
Since the original publication of these tax gap figures, the ATO has consistently highlighted work- related expense (‘WRE’) claims as being one of the primary contributors to the shortfall.
In particular, the ATO has increased its focus on claims such as car expenses and laundry and uniform expenses, as well as extra surveillance on the (possibly incorrect) use of substantiation exceptions, such as claims relying on the $300 WRE substantiation exception. Refer to S.900-35 of the ITAA 1997. As a result, the ATO’s ongoing review of WRE claims and whether tax agents are taking reasonable care by tax agents in this area will continue throughout and beyond the 2019 tax season. This has been evidenced by an increase in ATO publications in relation to WREs (such as the recently issued Draft Taxation Ruling TR 2019/D4 and other online support material), as well as an increase in ATO audit activity.
Tax agents have also found themselves directly in the line of fire following an October 2019 announcement from the Tax Practitioners Board (‘TPB’) that it would vigorously target 2,000 tax practitioners identified as being of the highest risk, so as to better protect ethical practitioners and their clients. In particular, the TPB advised its early analysis of 2018 tax returns alarmingly suggested these higher risk agents were involved in the overclaiming of WREs of around $1 billion.
Additionally, in a recent Administrative Appeals Tribunal (‘Tribunal’) decision, Reid v FCT [2019] AATA 4624, the importance of correct substantiation was once again highlighted. In particular, the taxpayer in this case missed out on benefiting from legitimate claims primarily because they failed to provide the correct supporting documentation for both car expense and home office claims.
Therefore, in light of these recent developments, it appears that tax practitioners have been effectively ‘put on notice’ for the need to increase vigilance and take reasonable care when it comes to advising clients of their WRE deduction entitlements and substantiation obligations.
As a result, common questions currently being asked by tax practitioners include:
- exactly how thorough is a tax agent expected to be when validating a client’s WRE claims? and
- how far must an agent’s questions go when ascertaining the appropriateness of a claim?
TAX TIP – TPB updates substantiation guidance for tax practitioners
Under the Code of Professional Conduct, registered tax practitioners are required to take reasonable care in ascertaining a client’s state of affairs (i.e., under Code Item 9), at least to the extent that ascertaining the state of those affairs is relevant to a statement they are making or a thing they are doing on behalf of the client. In its recently updated TPB Information sheet TPB(I) 17/2013, the TPB provides further information regarding its position on the application of S.30-10(9) of the Tax Agents Services Act 2009 (‘TASA’) and Code Item 9.
The following segment of the notes will consider these latest developments both in relation to the ATO’s and TPB’s increased focus on WRE claims, and address what tax practitioners should focus on when they or their staff are advising clients in relation to the deductibility of such expenses and their substantiation obligations.
Unless stated otherwise, all legislative references are to the ITAA 1997.