The Australian Taxation Office (ATO) is issuing a stern warning to Aussies, urging them to cease claiming personal expenses as work-related deductions on their tax returns. Taxpayers have been caught attempting to claim everything from baby clothes and personal gifts to meal delivery services, all of which are considered private expenses and are not deductible.
With over 10 million Australians having lodged their 2024-25 tax returns so far, a staggering $31 billion has been claimed in work-related expenses, with a significant portion linked to working from home arrangements. The average claim stands at approximately $3,100.
The ATO is leveraging advanced data-matching techniques, sophisticated analytics, and artificial intelligence to scrutinise taxpayer behaviour and identify potential red flags. Anita Challen, an ATO assistant commissioner, highlighted some of the more unusual claims the office encounters annually.
Unconventional Claims and Common Errors
“Each year, we see claims that are quite unusual and have to be rejected,” Ms. Challen stated. “We’ve encountered claims for $17,000 for baby expenses, including tiny winter clothes, or even medical expenses. While these are important parts of life, they simply don’t belong on a tax return.”
Another peculiar claim involved a taxpayer attempting to deduct $20,000 gifted to a family member. “That’s definitely a no-go zone for tax return purposes,” Ms. Challen clarified.
On a smaller scale, but still inappropriate, are claims for food delivery services for virtual morning teas when working from home, or for novelty T-shirts and attire for work Christmas parties. “These are all private expenses and should not be included in your tax return,” she emphasised.
Ms. Challen also pointed out recurring errors taxpayers make each year. These include:
- Incorrectly claiming work-related expenses: This encompasses a broad range of items that don’t meet the ATO’s criteria.
- Working from home deductions: Misunderstanding what can and cannot be claimed when working remotely.
- Under-declaring income: Failing to report all sources of income, including those received “in kind” or as gifts.
She reminded taxpayers that income isn’t always just cash. “It can come in kind, it can come as gifts, and you need to ensure that all of that is covered and included in your tax return,” Ms. Challen advised.
Navigating Working From Home Deductions
When claiming expenses related to working from home, it’s crucial to remember that casual use, such as checking emails outside of work hours, does not qualify. “Make sure that you incurred additional expenses as a result of working from home,” Ms. Challen stressed.
For essential bills like internet, phone usage, or electricity, taxpayers must accurately apportion the costs. “You do need to make sure that you’re excluding the things that may be used for private purposes, like the kids using all your downloads or streaming services,” she cautioned.
Two Methods for Claiming WFH Deductions
The ATO offers two primary methods for claiming working from home expenses: the “fixed rate” method and the “actual cost” method.
The Fixed Rate Method:
- This simpler method allows taxpayers to claim 70 cents per hour worked from home.
- It covers expenses such as electricity, gas, phone, internet, stationery, and computer consumables.
- To use this method, detailed records of actual hours worked from home are required, which can include timesheets, spreadsheets, diaries, or employer rosters.
- You’ll also need at least one record for each additional running expense the rate covers (e.g., a quarterly electricity bill and a stationery receipt).
- While convenient, this method excludes claims for high-value home office equipment or furniture depreciation, which must be claimed separately. It also prevents claiming additional deductions for expenses already covered by the flat rate.
The Actual Cost Method:
- This method involves calculating the precise work-related portion of all your home office expenses.
- It allows claims for the work-related percentage of electricity, gas, internet, and phone bills, as well as depreciation of office equipment and furniture, and cleaning costs for a dedicated space.
- This method can yield higher deductions for individuals with substantial home office expenses, potentially including occupancy costs like mortgage interest or rent if the home is the principal place of business.
- However, it demands more rigorous record-keeping, including diaries of hours worked, all receipts and bills, and documentation detailing how the work-related split was calculated.
Ms. Challen advises consulting an accountant or tax advisor to determine which method best suits individual circumstances.
Car, Travel, Clothing, and Investment Property Claims
Car-related travel remains the largest category of work-related expense claims, with $11.9 billion claimed by 3.9 million people in 2024-25. “Generally speaking, employees who are just travelling from home to work and work to home can’t claim their car expenses — that is considered a private expense,” Ms. Challen stated. For eligible claims, the rate is 88 cents per kilometre, up to 5,000 kilometres.
Travel expenses, clothing, and self-education also feature prominently, with $7 billion claimed so far in 2024-25. “It’s important to note that generally speaking, expenses such as ordinary clothes and private expenses aren’t something that you can include in your tax return,” Ms. Challen noted. A direct connection to earning income is essential, and even employer-mandated clothing may not always be deductible.
Investors renting out properties are also under scrutiny. In 2024-25, 2 million individuals claimed rental deductions, resulting in an average net rental loss of $1,290. Common errors include claiming private loans as investment loans. “It is important when it comes to rental properties to make sure that you’re only claiming those deductions that are relevant to the income you’re producing through that property,” Ms. Challen urged. Property investors are also cautioned to differentiate between repairs and improvements, as significant renovations may fall under capital claims with different rules.
Cryptocurrency and ATO’s Data-Driven Approach
Hundreds of thousands of Australians engage in cryptocurrency trading annually, yet many fail to maintain adequate records. “They are treated the same as other assets such as shares, property or gold,” Ms. Challen explained. This means that gains or losses on cryptocurrency sales must be declared. Crucially, taxpayers need to record the time, date, and amount of each sale. Transferring transaction information quarterly can help avoid losing vital records.
The ATO’s robust data-matching, analytics, and AI capabilities are instrumental in identifying red flags. The office receives income data from a vast array of sources, including banks, government registries, and online platforms like PayPal, eBay, Uber, and Airbnb. This allows for pre-filling tax returns and ensuring accurate income declaration, as well as detecting fraud.
In the previous lodgement period, over 555,000 individual tax returns were adjusted through data-matching programs before assessments were issued. Ms. Challen noted that AI is used to better understand taxpayer behaviour and provide real-time alerts. For example, a tradie claiming chef knives would likely trigger a red flag.
“What you might see when you’re lodging your tax return is we try [to] nudge you and prompt to tell you that something’s looking a little bit off,” she said. These alerts serve as a valuable opportunity to “just pause and check and make sure you’re comfortable with what’s in your tax returns.”
Ms. Challen assured that all AI applications are subject to human oversight, especially when they might negatively impact taxpayers. Furthermore, taxpayers have the right to review any outcomes they disagree with.
Finally, taxpayers are advised not to lodge their returns too early. Waiting until the end of July can significantly simplify the process, as much of the return will be pre-filled by the ATO. “Also [ensure] that you pause and check the information before putting it in your tax returns,” Ms. Challen advised. She also cautioned against misinformation from AI, social media, and even well-meaning friends and family.
