You decided to pay for pre-school fees from the business account. It is obviously a business expense, as I couldn’t go to work if the kids weren’t being looked after. The question is, does the ATO agree with your thoughts?

How can you find out?

Is there a formula to apply to expenses that instantly lets you know what is in and what is out?

Genuine business expenses are those that allow your day-to-day operations to generate a profit. Easy, right? Well, the Commissioner and you may disagree. You may be asked to justify meals, education and personal development expenses, not to mention texts, online courses and uniforms. Bending the letter of the law is a game that has been played for centuries in Australia, immortalised by Sir Kerry Packer before the Senate Estimates Committee in the words, “If anybody in this country doesn’t minimise their tax they want their head’s read…”

So it comes as no surprise that the big black boundaries of what is in and what is out are decidedly grey. A coffee meeting is deductible if you have it at your place of business, but not if you have it at a café. A car trip is deductible between two clients, but not your regular trip to work or home at the end of the day. Your business attire doesn’t qualify unless you are a flight attendant. A uniform with your name on it is probably not allowable as it doesn’t comply with the ‘occupies 80% of a 4cm square space and be visible at a distance of 2 metres’ rule for business logos.

Fake Expenses

Fake expenses are a different class altogether. You simply pay for something that you think should be deductible without knowing whether it is or not. So the problem really begins. Somewhere the deduction shows up in your reportable deductions. The ATO questions it.

The only area of the law you are guilty of and need to prove your innocence is taxation law. The ATO doesn’t dig too deeply at first, simply requiring you to provide a tax receipt and the purpose of the expenditure. Where expenses fail this test the ATO flags your file for further checking. You may not hear anything for a whole year; then a letter arrives demanding you justify all expenses claimed in a given period. Generally, the ATO targets industry sectors where they have found a higher level of non-compliance. Cash businesses, trades, laundries, hairdressers and cafés / restaurants are regular targets.

The Magic Formula

Whilst there is no set formula to determine deductibility, the ATO provides accountants with considerably detailed expense items and how to categorise them or what to include or not.

Regular Tax Rulings applying to individual cases set precedents that the ATO then adopts. The Rulings form part of updates to ATO legislation under which accountants operate. Furthermore, accountants must maintain a stringent regime of professional development to ensure they are up to date with legislation that may well have changed since the end of the previous financial year.

Claiming fake expenses can be a very costly habit. Not just in terms of penalties or repayments, but the hours that have to be spent gathering and submitting information to the ATO as requested.

Getting Help

We find errors in almost every set of financial reports we review. Errors that take money from your pocket and profit, giving your hard-earned cash to the ATO. That’s why we offer a 2^nd Opinion Service. Book online to determine how much our team can save from your tax payable or outstanding.