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Most common mistakes in tax returns

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As we head towards the end of the tax year, many people's thoughts are turning to lodging their tax returns as soon as possible after July 1. At H&R Block we lodge about 750,000 returns for people from all walks of life and that gives us a good overview of the things taxpayers often get wrong when they come to lodge. Here are the most common errors and misconceptions that we encounter:

Not declaring all your income

The tax office now receives much of your income information electronically from third parties, including most institutions that pay interest and dividends, foreign income from overseas tax offices, PAYG summaries from employers and pension payments. This information is used to match what is declared in tax returns. If the income declared is not the same as the income matched, the tax office will query the difference. The items of income that are most commonly omitted are capital gains (from the sale of shares or property, for instance) and income from overseas, all of which is taxable in Australia if you are resident here for tax purposes.

tax-mistakes

Not claiming excess imputation credits

A feature of the tax system is that taxpayers who do not use all their imputation credits in reducing their tax payable to zero can claim a refund of the excess. Some taxpayers lose out since they omit to make the claim.

Incorrectly claiming deductions

Self-education. You need to be sure that the education undertaken has the necessary connection to the income you are currently earning, otherwise the deduction is not allowable. Many people try to claim for study that relates to an entirely different line of work (for instance, if they are looking at a career change) or is too general in nature to be closely linked to their current work.

Home office. Many people try to claim a percentage of rent or the interest on a mortgage if they are using their home as a home office to do work after hours. This isn't allowable. You are only entitled to claim a percentage of the actual costs incurred, such as electricity and heating costs, depreciation of office furniture and equipment and a percentage of telephone and internet use based on a logbook kept for a four-week period. It is quite common for people to have insufficient documentation to support a home office claim, particularly around the proportionate split between business and personal use.

Car expenses. You need to have the necessary records to substantiate your claim: * A log book if you are using this method (plus receipts and invoices). If you get to the end of the year and you haven't kept a log book, it's too late! * Actual record of kilometres travelled (diary or similar records) if you are claiming the cents per kilometre method. Note that this method can only be used to claim up to 5000 business kilometres per vehicle. You are not entitled to claim any expenses if the car is provided by your employer.

Claiming deductions for items that you use part for work and part personally

You are entitled to claim only that part of the expense that directly relates to your job, for instance in relation to work use of your personal mobile phone, home phone or laptop. You will need to keep a log to determine the business percentage to support your claim.

What happens if you do get it wrong?

You run the risk of big penalties from the ATO if you incorrectly claim deductions or do not declare income. If a claim is found to be incorrect, you will be required to repay any tax avoided plus interest at around 9.28% a year. If the ATO believes that you have acted carelessly, a penalty of between 25% and 95% of the tax avoided may also be charged.

Remember ... To be deductible, a claim must be necessarily incurred in earning assessable income and must not be of a private or capital nature.

You must be able to substantiate all deductions, for example by retaining invoices or receipts.

Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is the author of Life and Taxes: A Look at Life Through Tax.
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