Hi, it’s that time of the year again… ready to do your 2020/21 tax return, but not sure you will be complying with ATO’s record-keeping rules for the expenses that you intend to claim? I have put this quick guide together to just help you with that.
How long and what format?
Let’s get this out of the way first: it’s generally five years from the date you lodge your tax return.
But if you claim a deduction for decline in value (i.e. depreciation) of depreciating assets, keep records for the five years from the date of your last depreciation claim. For example, you purchased a laptop for $1,000 for work in the 2020/21 income year, as the laptop cost more than $300, you have to depreciate it over its effective use life (3 years for a laptop), meaning only part of the cost can be claimed each year. Therefore, you have to keep the invoice/receipt for a further five years from your last claim date, in this case, which would be from the 2023/24 tax return lodgement date.
The format of your records can be either paper or digital. To avoid paper clutter, I usually recommend keeping electronic records. Make sure you back up (in a separate hard drive or cloud storage) to keep your records safe.
Highly recommended: ATO’s myDeductions section in the ATO app is a great place to keep your records digitally.
Documents qualified as proper records
If you claim a deduction, you must have records to show how you work out your claims. Records are usually a receipt/invoice which must show the:
- name of the supplier
- amount of the expense
- nature of the goods or services
- date the expense was paid
- date of the document
If the document doesn’t specify the nature of the goods or the day the expense was incurred, you can write in the missing details before lodging your tax return. The ATO also accepts the following alternative documents (or combinations of documents) as acceptable evidence of expenses:
- bank statements
- credit card statements
- BPAY reference numbers, combined with bank statements, or
- BPAY reference numbers, combined with tax invoices.
Let’s look at a few examples to help you understand it better:
Alan, who works as an accountant in a CA firm, received a bill for his annual CA membership fee, which he paid using his credit card. His credit card statement bears the date of the transaction, the name of the professional association (CA) and the amount paid. Before he lodged his income tax return, Alan made a note on his credit card statement to the effect that the transaction related to his membership fee. (sufficient evidence)
Chris bought a cordless drill set from a local hardware store for work. He paid for it using EFTPOS, withdrew some cash and kept his receipt. The receipt contained the relevant details required, showing $199 for the drill set and $100 for the cash withdrawal. (sufficient evidence)
Note: for most EFTPOS transactions, a bank statement alone would not be sufficient evidence to substantiate a claim. This is because bank statements don’t generally show a cash withdrawal separately from the amounts associated with the item(s) purchased in the transaction, nor do they usually show the nature of the items purchased.
Keith, a music teacher, purchased a second-hand keyboard for work for $500 from a private individual who advertised it for sale on the local community board. Keith paid cash for it and didn’t obtain a receipt but he kept the advertisement paper. The advertisement includes a description of the keyboard, the price and a contact phone number for the seller. Unless Keith could obtain a receipt by calling the seller, the advertisement paper alone is not sufficient evidence to substantiate her expense. (insufficient evidence)
We love exceptions. Do you?
Total work-related expenses $300 or less
If the total of your work expenses claimed is $300 or less (including laundry expenses but excluding car, travel and overtime meal allowance expenses) you can claim the amount expended without keeping records. However, you can only claim the amount you spend and if ever asked, you need to show how you have come up with the total of your claim.
Laundry expenses $150 or less
If laundry expenses for your deductible work-related clothing are $150 or less, you can claim the amount you incur on laundry without providing written evidence. This is even if your total claim for work-related expenses is more than $300. However, this $150 substantiation exception does NOT increase the $300 work-related total expenses substantiation exception to $450. When asked, you also need to be able to show how you have come up with the total of your claim.
How to estimate your laundry expense? ATO considers that a reasonable basis for working out your laundry claim is:
- $1 per load if the load is just made up of work-related clothing, or
- 50c per load if other laundry items are included.
For example, if you wash your protective clothes twice a week and the loads are separate from your other private washings, your estimated annual laundry costs would be: $1 x 2 x 48 weeks = $96
No substantiation for reasonable amount of overtime meals
If you receive an overtime meal allowance under an award or enterprise agreement, you may not be required to keep written evidence of your expenses. If the expenses you intend to claim for your overtime meals are no more than the reasonable amount, you do not need to keep written records.
However, you can only claim a deduction for the amount you have actually spent on food and drink that was consumed during the overtime. You can only claim a deduction if the allowance is shown on your income statement and you have declared the allowance in your return.
If you claim more than the reasonable amount, you need to keep written evidence for the whole amount, not just the excess.
What if you don’t receive a meal allowance? You can still claim it if you keep proper receipts and note down the overtime hours and date to justify.
Exceptions for travel allowances
When you receive an allowance to cover your overnight travel expenses, you may not have to obtain or keep receipts and a travel diary. You can still only claim expenses you actually incurred.
Each year, the ATO publishes reasonable amounts (click for 2020/21 figures) for the exceptions to substantiation for travel expenses. These reasonable amounts are only used to work out the exceptions for substantiation: you cannot claim more than the reasonable amount unless you have receipts for all your overnight travel expenses.
The exception applies only to substantiating expenses that your allowance covers. For example, if you are paid an allowance for food and drink, you cannot rely on the exception for your accommodation or incidental expenses, and you need to substantiate them.
Further, for the exception to apply, your allowance must be paid for a specific work journey. It can’t be a fixed amount that you receive regardless of how much you travel. In addition, the allowance must be an amount that could be reasonably expected to cover your expenses and not merely a token amount.
An amount for travel expenses folded into your normal salary or wages – under a workplace agreement, for example – is not considered to be an allowance. Therefore, the exception from substantiation does not apply.
You would find below ATO tables helpful to quickly know your substantiation requirements for travel expenses:
- you must keep your records for five years from the date you lodge your tax return or the last claim date of your depreciating assets.
- you don’t have to keep the paper records once you’ve scanned/saved an electronic version of it.
- if the receipt of an expense doesn’t include all the information required, you can use other forms of documents, such as bank statements, to jointly substantiate the expense.
- key substantiation exceptions to help you minimise paperwork and maximise your claim:
- simple deductions: total work-related expenses less than $300
- laundry expense $150 or less
- reasonable overtime meals (must receiving an allowance)
- reasonable amount travel expenses (must receiving an allowance)
If you are still unsure if you have sufficient records to claim an expense, you may want to consider speaking to a tax professional or contact us.
Please note that this post is intended to be a general guide only, and should not be seen to constitute legal or tax advice. Where necessary, you should seek a second professional opinion for any legal or tax issues raised in your personal or business tax affairs.