SUBSTANTIATION OF WORK RELATED EXPENSES

The Australian Taxation Office allows taxpayers to claim deductions for work related expenses they
necessarily incurred while performing the duties of their salary and wage employment (generally
Individual Payment Summary income), providing that they can substantiate the expenses with relevant
documentary evidence.

Work related expenses include car expenses, travel expenses, uniform expenses, self education
expenses and other work related expenses incurred only in relation to salary and wage income.

Please note that the substantiation requirements do not apply to non-salary and wage expenses.
Therefore, claims for the following types of expenses do not have to be substantiated in accordance
with the following guidelines e.g. all business income expenses, donations, interest and dividend
income expenses, tax agent fees, superannuation contributions, etc.

WHEN CAN A CLAIM BE MADE FOR WORK RELATED EXPENSES?

To claim a tax deduction for work related expenses, taxpayers must satisfy a two step process. Firstly
taxpayers must establish that the expense was incurred as a direct consequence of the terms and
conditions of their employment i.e. there must be a direct and tangible link between the expense and
your current source of income. Secondly taxpayers must be able to verify the expense with appropriate
documentary evidence, pursuant to Division 900 of the ITAA 1997.

The basic rules to consider before you decide to make a claim for a deduction include the following:

• you must have incurred the expense between 1st July and 30th June;
• generally, a work related expense is incurred when you have actually expended the money or
paid by cheque or credit card. In some cases, you will have incurred a work related expense when
you received a bill or invoice for the expense which you are liable for and must pay;
• you cannot claim an expense which has been or will be reimbursed to you by your employer
or any other person;
• you must have incurred the expense in the course of earning your assessable income and it
must not be of a private, domestic or capital in nature. For example, the costs of normal travel to
and from work (unless you are carrying your tools of trade) or buying lunch each day or purchase
of conventional business clothing are considered to be private expenses;
• you must be able to substantiate your claims with written evidence if the total claimed is
greater than $300.00; and
• you need to be able to show how you worked out your claims if the total claimed is
$300 or less - although you do not need to have obtained/retained written evidence.

Receiving an allowance from your employer does not automatically entitle you to a deduction - you
must still meet the above rules to make a claim. Further, you can claim only the total amount you
incurred even if the amount of the allowance is greater than your expenditure.

CLAIMS OF MORE THAN $300 - RECORDS YOU NEED TO KEEP

If your total claims for deductions exceed $300.00, you must keep written evidence to prove the total
amount, not just the amount over $300.00. The $300.00 limit does not include claims for car
allowance, meal allowance, award transport allowance and travel allowance expenses. There are some
exceptions to the written evidence rule in relation to these items. Basically, if the ATO accepts that the
amount is reasonable, and the amount is paid pursuant to an industrial award and the amount is shown
on your group certificate claims for deductions will be accepted.

Tax law imposes a reverse onus of proof on the taxpayer – that is you are guilty until you prove your
innocence – having appropriate documentary evidence is the means by which you can prove your
claim. So remember that in the event of an ATO review or audit of your tax return – no receipt means
no deduction !
WRITTEN EVIDENCE

Examples of appropriate written evidence include: A document from the supplier of the goods or
services; Your group certificate - for example, it may show your total union fees or allowances;
Evidence you have recorded yourself for small expenses or for expenses that the ATO considers are too
hard to substantiate (i.e. undocumentable expenses).

To be considered an appropriate substantiation document, your written evidence should generally

incorporate the following features:

the document from a supplier of goods or services must be in English unless the expense
was incurred outside Australia; and
the document must show: the name of the supplier; the amount of the expense the nature of
the goods or services; the date the expense was incurred; and the date of the document.

If the document does not show the payment date, you can use independent evidence - for example, a
bank statement that shows when it was paid. If the document the supplier gave you does not show what
the goods or services were, you can write in the missing details yourself before you lodge your tax
return.

ELECTRONIC EVIDENCE

The ATO have relaxed the substantiation requirements as from 1 July 2004, where they will exercise
discretion and now allow the use of electronic receipts instead of hard copy receipts as valid evidence
of transactions. Therefore, so called new age evidence such as online banking and credit card
statements, email receipts, BPAY references etc combined with bank statements or tax invoices will
now be acceptable proof of incurring a work related expense. The exact details of the Commissioners
change in approach can be viewed in the ATO Practice Statement Law Administration (PS LA 2005/7)
available on the ATO website at www.ato.gov.au.

SMALL OR UNDOCUMENTABLE EXPENSES

For small or undocumentable expenses, you can keep your own records (e.g. a diary entry) of the
expenses. If you have incurred an expense of $10.00 or less per item and the total of these expenses is
$200.00 or less each year; or where you have been unable to obtain documentary evidence (e.g. for toll
or parking fees where you cannot get a receipt) and it would be unreasonable to expect to have a
documentary evidence of your expenses. Your record of the expense must show the same details as a
document from a supplier, as outlined above.

MOTOR VEHICLE EXPENSE CLAIMS

You can claim for work related motor vehicle expenses for using a car that you (or your legal spouse)
owned or leased, during the financial year.

When can motor vehicle expenses be claimed for the use of your car for work?

You cannot claim the cost of normal trips between home and work as the expense is considered to be
private in nature. Such travel is private and cannot be claimed even if: you do minor tasks - for
example, picking up the mail on the way to work or home; you have to travel between home and work
more than once a day; you are “ on call “ - for example, you are on stand-by duty and your employer
contacts you at home to come into work; there is no public transport near where you work; and you
work outside normal business hours - for example, shift work or overtime

You can, however, claim the cost of trips between home and work where: you use your car because you have
to carry bulky tools or equipment that you use for work - for example, an extension ladder or cello
- and you cannot leave them at work; your home is a base of employment - you start your work at home and
travel to a workplace to continue the work or you have shifting places of employment – i.e. you
regularly work at more than one site each day before returning home; you use your car to travel directly
between 2 separate places of employment - for example, when you have a second job.

Methods of calculating motor vehicle expenses

You can claim motor vehicle expenses under any one of four different methods. You are free to change
the method of calculating your motor vehicle expenses each financial year. The record keeping
requirements differ for each of the methods.

Method 1 - Cents per kilometre method. Most claims for work related motor vehicle expenses are
based on this method. You can use this method to claim a maximum of 5000 business kilometres per
car, even if you have travelled more than 5000 business kilometres, your claim is limited to a
maximum 5000 kilometres. Joint owners of a vehicle can each claim up to the maximum 5,000
business kilometres. You do not need written evidence if you use this method but you may need to be
able to show how you worked out your business kilometres. For financial years prior to 1 July 2015,
each year the ATO publish a list of the appropriate per kilometre rates for three different engine
capacities; from that date a single rate applies to all engine capacities. The current rate of $0.68 per
kilometre is claimable.

Method 2 - Logbook method. Using the logbook method, you work out the business use percentage of
your car. You can then claim this percentage of each car expense.

To make a claim under this method you must keep: a logbook for a continuous 12 week period;
odometer records - write them in your logbook; written evidence for all your car expenses - except for
fuel and oil costs.

To establish the business use percentage, you need to utilise information in your log book and
odometer record. From your records, work out the total kilometres travelled. Then work out how many
were business kilometres. Divide the number of business kilometres by the total number of kilometres
travelled. Multiply this amount by 100 to establish the business percentage.

Your logbook is valid for 5 years. If this is the first year you are using this method, you must have kept
a logbook during the financial year. The logbook must cover at least 12 continuous weeks. If you
started to use your car for business purposes less than 12 weeks before the end of financial year, you
are able to continue to keep a logbook into the next financial year so that your logbook covers the
required 12 weeks. If you want to use the logbook method for 2 or more cars, the logbook for each car
must cover the same period.

Please note that these rules do not apply to motorcycles and similar vehicles, taxis, commercial
vehicles designed to carry more than one tonne, and lease or hire vehicles.

For the 2015 and earlier financial years two additional methods were able to be used by taxpayers re:

Method 3 - 12 per cent of original value method. You can use this method if you used your car
to travel more than 5000 business kilometres during the financial year. This method is also
available if you would have used your car to travel more than 5000 business kilometres if you
had used it for the whole of the financial year. You do not need written evidence to use this
method but you may need to be able to show how you worked out your business kilometres.

If you bought a car, you can claim 12 per cent of the cost of the car. If you leased the car, you
can claim 12 per cent of its market value at the time that you first leased it. The maximum
deduction you can claim is 12 per cent of the depreciation cost limit in the year in which you
first used or leased the car. This method can only be used for the 2015 and earlier financial
years.

Method 4 - One - third of actual expenses method. This method allows you to claim one-third
of each component of your car expenses. You can use this method if you used your car to
travel more than 5000 business kilometres during the financial year. This method is also
available If you would have used your car to travel more than 5000 business kilometres if you
had used it for the whole financial year. Whilst you do not need to record a log book record,
 you may need to be able to show how you worked out your business kilometres and any
reasonable estimate you made.

You must have kept odometer records and written evidence for all your car expenses - except
for fuel and oil costs. There are two ways to work out your fuel and oil costs: Use your fuel
and oil receipts, if you have them; or Make a reasonable estimate based on your odometer
records.

Odometer records need to show the odometer readings of the car at the start and end of the
period that you owned or leased the car during financial year. They should also show the
vehicle engine capacity, make, model and registration number. This method can only be used
for the 2015 and earlier financial years.

You can also make claims for certain expenses for cars not owned by you, but made available for your use
during the financial year.

WORK RELATED HOME OFFICE COSTS

Employees who are provided with a place of work by their employer but choose to work at home can
claim a deduction for part of the running costs of their home office. A claim can be made for part of the
total cost of heating, cooling, lighting, power, cleaning and depreciation of furniture and equipment.
The ATO expect a diary to be maintained for a continuous 4 week period (as detailed in PS LA 2001/6)
to determine the percentage of usage related to work activities. Claims would then be limited to that
percentage of total expenses. Alternatively, the ATO will accept a fixed 52 cents per hour for home
office expenses (The ATO have announced that for the period of the pandemic when more people are
working from home they will accept claims under a simplified method of 80 cents per hour to
compensate workers for all home office running costs [including gas, electricity, phone and internet
costs so separate claims cannot also be made for these costs under the simplified method] for hours
worked between 1 April and 30 September 2020).

RECORDS FOR COMMON TYPES OF EXPENSES

The ATO have advised that the following documentary evidence should be held to claim certain work
related expenses:

a) In relation to the use of home or mobile phones, taxpayers wishing to claim more than $50 for
these expenses need to substantiate the work related calls from an itemised account or
estimated based on diary entries of calls made over at least a 4 week period and supported by
the relevant accounts (if you wish to claim less than $50 you can use the following costs can
be used to calculate your claim i.e. $0.25 for calls made from your landline, $0.75 for calls
from your mobile, and $0.10 for text messages sent from your mobile).

b) In relation to claiming the costs of home telephone rental costs, taxpayers must be able to
show that they are either on call or are required to make / receive work related calls on a
regular basis whilst away from the workplace. Taxpayers can only claim the business usage
portion of the total cost by establishing the percentage of work related calls from the total cost
of all calls. The cost of installing a telephone at home used for work purposes or the cost of
maintaining a silent number are not tax deductible.

c) The cost of computer and internet usage, taxpayers wishing to claim more than $50 for these
expenses, should be based on diary entries of actual usage over at least a 4 week period and be
supported by relevant accounts. The diary record should detail the nature of each use, whether
the use was for work or private purposes and the period of time that it was used. The work
related proportion of total usage would then be deduced and applied to the total cost.

d) The costs of running a home office may be claimed as a tax deduction. The amount claimed
for depreciation of fixtures, fittings and equipment together with heating, cooling and lighting
may be based on either actual costs per an itemised diary for at least a 4 week period of time
 spent in the office on work related activities or can be claimed at a rate of 52 cents per hour
that the home office is utilised. A new diary must be maintained every financial year.

e) The costs of occupancy and running costs of a home as a place of business may be able to be
claimed as a tax deduction. The running costs would be substantiated as per d) above and the
occupancy costs based on a floor area basis. To be eligible to claim occupancy costs (e.g. rent,
mortgage interest, rates, home insurances, etc) the taxpayer must be able to establish that an
area of the home is either clearly defined to be a place for business (i.e. not just using the
kitchen table of coffee table in the lounge), the area is not readily adaptable for private use
purposes, the area is used exclusively for carrying on a business or the area is used regularly
for client visits or by customers.

HOW LONG YOU NEED TO KEEP YOUR RECORDS

Generally, you must keep your written evidence for 5 years from either 31 October each year if you
lodge your own tax return by that date or for 5 years from the actual date you lodge you tax return
(amended tax return). If at the end of this period you are in a dispute with the ATO that relates to a
work expense, you must keep the relevant records until the dispute is resolved. For depreciation
expenses, you must keep records for the entire period over which you depreciate an item. You must
keep your records for further 5 years from the date of your last claim for depreciation.

CONSEQUENCES IF YOU CANNOT SUBSTANTIATE DEDUCTION CLAIMS

In the ATO review your claims, and you are not able to satisfactorily substantiate your claims for work
related expenses, in addition to denying a deduction for unsubstantiated amounts and reclaiming the
refund received (alternatively increasing liability otherwise payable), the ATO may also impose / seek
to impose a range of penalties. Those penalties include imposing a financial penalty for making a false
or misleading statements / not taking reasonable care; imposing shortfall and general interest on the
amount backdated to when the return was due (as opposed to date it was lodged); and in extreme cases
a custodial sentence through the Courts.

So the message is simple, only make claims for expenses related to your employment that you have
actually incurred, and that you have appropriate documentary evidence to support.