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Property owners trying to claim illegal tax deductions can land you in hot water

The black economy affects all of us giving some an unfair competitive advantage over everyone who is doing the right thing. It also means there’s less money to improve our schools, hospitals and roads.

Taxpayers need accurate records when they’re lodging their tax returns and rental property claims. Plumbers and other tradespeople play a key role because they provide documentation about the type of work they’ve carried out.  

Good records mean taxpayers can claim exactly what they are eligible for and provide evidence to support the claim. This evidence may be relied upon when a taxpayer is audited, and even in court.

Sometimes taxpayers might think they can get an advantage by claiming deductions for work done on their main residence by reporting that it was done on a rental property. They might ask a tradie to change an address or a date to help them out. This is unfair to other taxpayers and places the tradesperson in a difficult position. The ATO doesn’t want tradies who are trying to do the right thing getting caught up in inaccurate claims.

The new and improved Tax Integrity Centre will provide a single point of contact for reporting all known or suspected phoenix, tax evasion, or black economy activity. From 1 July, you can make a tip off to the ATO online at ato.gov.au/tipoff, by using the Tip-Off form available in the ATO app, or by calling the Black Economy hotline on 1800 060 062.

Case study- when it goes wrong

Most tradespeople correctly reflect the work carried out and keep their records up to date. Occasionally the ATO sees invoices where work has been incorrectly reported, which can have significant consequences. Take this example:

A taxpayer had 3 rental properties located in the city, and a main residence located on the Esplanade. The ATO’s data matching technology detected unusually high deductions in the taxpayer’s return for repairs and maintenance of the rental properties, so an audit of the taxpayer’s affairs was started.

A sewerage pump was claimed as a repair at one of the rental properties. Purchase documentation for the pump showed the installation address as one of the rental properties.  The properties were cottages built around the early 1900’s.

The ATO used publicly-available resources such as Google Maps but couldn’t see any obvious signs of the pump being used at that address. Driving by the properties didn’t help, and there were no development application lodged for the rental properties with the local council.

On the other hand, during the same period the taxpayer’s main residence was being substantially renovated and a review of council development applications for the main residence revealed some $800,000 worth of works on the family home.

The renovation included the installation of a self-contained apartment. The sewage pump was installed as part of that fit out. The plumber who completed the work told the ATO that the real location of the job was the taxpayer’s residence – not the rental property.

The taxpayer received significant penalties, interest and was referred for prosecution.

The plumber wasn’t prosecuted because he cooperated with the ATO. The falsification of documents can carry penalties under Crimes Act. There could be other implications on professional registrations and insurance too.

Your record keeping responsibilities

Plumbers must also keep accurate records for their own tax obligations.

Follow our top tips to help you get your record keeping right and get a more accurate picture of your business:

  • Make sure you keep records of all of the income you receive, including through cash and electronic payments.
  • Keep records that support your claims for expenses and show how you worked out the business portion if you purchased something for both business and private use.
  • Make copies of your paper receipts to avoid them fading – scan them, take photos, or use the myDeductions tool in the ATO app.
  • Keep your records electronically if possible – many accounting software packages  can help with your reporting.
  • Keep your business and personal records separate.
  • Keep your records for at least five years.

Claiming deductions on payments made to your workers: changes ahead

Businesses will no longer be able to claim deductions for payments they make to their workers from 1 July 2019, where they have not withheld and reported their PAYG withholding amounts to the ATO.

Claiming deductions for non-compliant payments is a behaviour that directly fuels the black economy. It means businesses gain an unfair advantage as they undercut competitors by not following the rules. This change will encourage businesses to stop doing the wrong thing by denying them deductions.

This new measure will take effect for payments made to workers from 1 July 2019 for income tax returns lodged for the 2020 income year onwards.

Payers who attempt to do the right thing but make a mistake do not need to worry; they will not lose their deduction. For more information visit ato.gov.au/PAYGWdeductions

Article supplied by Australian Taxation Office - June 2019

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