Tax Update - Deductions for work related expenses

The AAT has held that a taxpayer is not entitled to deductions for various work-related expenses and donations, finding the taxpayer failed to meet the substantiation requirements.

The taxpayer was a real estate salesperson who was the managing director and 50% shareholder of The Vines Real Estate (WA) Pty Ltd (Vines Real Estate). The taxpayer was also a director and 50% shareholder of Copley & Associates Pty Ltd. For the 2018, 2019, and 2020 income years, the taxpayer derived income from his employment with Vines Real Estate and received director’s fees from Copley & Associates of $5,400 in each year. The taxpayer also claimed various tax deductions in his personal income tax returns for each of those years. Before issuing a notice of assessment for the 2020 income year, the Commissioner commenced an audit and requested supporting documents from the taxpayer’s accountants. The documents were not provided, and the Commissioner proceeded to issue amended notices of assessment for the 2018 and 2019 years and a notice of assessment for the 2020 income year. The notices of assessment did not allow any of the deductions claimed by the taxpayer. The taxpayer’s tax agent objected to the notices of assessment on the basis that the taxpayer should be permitted to deduct expenses incurred in his role as “Real Estate Person and Licensee” of Vines Real Estate. The taxpayer also claimed further work-related expenses in the objection and attached supporting documents that included bank and credit card statements, vehicle expenses, and telephone bills. The additional claims significantly added to the amount of expenses originally claimed as a deduction. The Commissioner allowed the taxpayer’s objection in part and issued notices of amended assessment to give effect to the objection decision. Director’s fees of $5,400 and rental expenses were allowed in full for the 2018 and 2019 income years. The Commissioner disallowed work-related car expenses, other work-related expenses, and donations in full for the relevant years. The taxpayer appealed to the AAT for review of the objection decision. At issue was whether the expenses claimed by the taxpayer were deductible under s 8-1 of ITAA 1997. This involved consideration of whether the taxpayer could substantiate the expenses under the record-keeping requirements of Divs 28 and 900 of ITAA 1997. The Commissioner argued that the taxpayer had failed to establish that the expenses were incurred by him. The taxpayer had also failed to establish a nexus between the wages that he derived from employment with Vines Real Estate or from the director’s fees and the expenses claimed. Accordingly, the Commissioner submitted that the taxpayer had not discharged the burden of proving that the amended assessments were excessive or otherwise incorrect under s 14ZZK of the Taxation Administration Act 1953. The taxpayer argued the expenses claimed in the relevant years were legitimately incurred to earn his income. His evidence was that he paid for all the expenses claimed, regardless of whether they were in the name of Vines Real Estate or Copley & Associates. The only supporting documentation for the majority of expenses was bank transaction statements. Concerning credit card interest claimed, the taxpayer explained that he used credit cards as business loans, with the debt attributable to paying creditors from previous business dealings, work expenses, and payment of costs associated with the ownership of Vines Real Estate. The taxpayer had also claimed phone expenses based on an estimated work-related usage of 40% to 50%.

The AAT affirmed the decision under review, finding that the expenses claimed by the taxpayer were not deductible under s 8-1. The taxpayer had failed to discharge the burden under s 14ZZK of proving that the amended assessments were excessive or otherwise incorrect and what they should have been. The AAT said that the taxpayer failed to meet the substantiation requirements, having kept inadequate records to support expenses claimed and to apportion personal and business use. The way the taxpayer structured his employment and his corporate entities further added confusion as to who incurred the expenses. Letters from the taxpayer’s accountant stating that the expenses were incurred personally by the taxpayer and incurred in the operation of his business were also insufficient in assisting in discharging the burden under s 14ZZK.

Source:  CCH Tax Week - Copley v FC of T [2024] AATA 8, 8 January 2024.