Why you shouldn't rush into lodging your tax return

It has been anything but business as usual in the world of taxation.

"The ATO has been very lenient throughout 2020, offering payment arrangements, deferrals of lodgements, remission of penalties and general interest charges, and generally trying to accommodate the difficult financial position many taxpayers found themselves in as a result of the lockdowns and impact of international and state border closures," says Robyn Jacobson, a chartered tax adviser and senior advocate at the Tax Institute.

"But as our economic recovery continues, the ATO is now shifting its focus onto debt recovery and collection, and following up outstanding lodgements, moving back to a 'business as usual' stance."

Given that state of play, here are some expert tips to help you navigate your tax affairs this financial season.

Get it right

Optimising your tax refund means maximising your deductions while being sure not to overcook it and draw the ire of the ATO.

It should go without saying - you can only claim what you've spent.

"Don't inflate deductions in order to get a bigger refund and only claim for costs you can prove you spent by producing an invoice, receipt or bank statement, for instance," cautions Mark Chapman, director of tax communications at H&R Block.

"Self-lodgers using the ATO's myTax program are monitored as they prepare their return by the ATO's computer systems to ensure they're not over-claiming."

Jacobson says common errors include claiming for home-to-work travel, non-work clothing and the flat $300 deduction (or slightly less than this amount) without actually incurring the expense.

Your deductions will be cross-referenced with those claimed by others like you, and discrepancies can raise a red flag. If that happens, you'll have to pay the piper.

"If your deduction claims are found to be incorrect, you will be required to repay the tax avoided, plus pay interest of about 9% per annum," says Jacobson.

What's more, if the ATO believes you have acted carelessly, a penalty between 25% and 95% of the tax avoided may also be charged.

Nor should you rely on pre-filled data from the ATO. 

"Particularly if you are lodging early, always use your own information as the key source data," says Chapman.

"This year most employers won't provide payment summaries to their employees. Instead, they'll report your year-end wage information direct to the ATO from where it can be pre-filled into your tax return."

Getting it right also means not rushing it.

"It may be tempting to get it done as soon as possible, but the fact is that jumping in too early can cause problems if other parties, like your bank or public companies, haven't yet filed their information," says Jacobson.

"So my tip is to wait a week or three, make sure everything is in order and then get started on filling out your tax return."

Capital gains and  losses

If you make a capital gain on an asset you sell, such as an investment property or shares, you'll need to pay tax on that. But this tax can be minimised or even eliminated by claiming any capital losses.

"If a taxpayer has an unapplied capital loss of $100,000 from 2019-20, from the sale of shares in a public company, and they make a capital gain of $300,000 on the sale of an investment property in 2020-21, then they reduce the amount of the capital gain by the amount of the unapplied capital loss: this reduces the capital gain to $200,000," explains Jacobson.

"However, if the individual made the capital gain of $300,000 on the sale of the investment property in 2020-21, then made a capital loss of $100,000 from the sale of shares in 2021-22, they cannot reduce the amount of the capital gain, which is taxable. The unapplied capital loss of $100,000 can be carried forward."

Capital gains can be reduced by capital losses either arising in the same year or in an earlier year.

"So, if you have brought forward capital losses, these can be used up against this year's capital gains and if you have any capital losses arising from this year, these too can be utilised."

Adrian Raftery, from the accounting and tax service Mr Taxman, points out that capital gains tax is reduced by 50% if you hold the asset for more than a year.

Deducting expenses

You've always been able to deduct expenses related to your job.

"The cost of clothing that is mandated by your job, such as a uniform, is deductible and so is the cost of any journey that is related to your job, such as travelling between offices or traveling to meet a customer or supplier - travelling from home to work and back again is generally excluded - as well travel and accommodation incurred whilst travelling away from home, meals and incidentals," says Chapman.

Add to this tools and equipment, courses and training as well as the travel, internet fees and textbooks associated with it.

"The golden rule is that the expense must have a direct connection to your job, the expense must have been personally incurred and not refunded by your employer and you must have proof that you actually incurred it - a receipt or an invoice, for instance."

Pandemic claims

COVID-19 has then added some additional expenses that you can claim. You can deduct costs of working from home using either the ATO's 80¢ per hour rate, its 52¢  per hour rate or actual costs.

"The 80¢ per hour rate might sound like the most generous but it covers all expenses that you might incur," says Chapman.

You simply claim 80¢ for each hour you work from home, and this covers all your expenses, such as phone, internet, the decline in value of computer equipment and furniture, electricity and gas for heating, cooling and lighting.

If your expenses fall outside this time frame, you can apply the fixed rate method, which is a deduction of 52¢ for each hour you work from home, but this rate excludes the cost of your phone, home internet and depreciation of any computer equipment. These can be claimed separately.

"If you claim those separately the 52¢ is often the better option," says Chapman. But this will require a log of hours worked.

The third option is the actual costs method.

"Actual costs are the best option, but using that method means you have to retain proof of incurring expenditure like gas and electricity, cleaning costs, phone and internet, computer consumables, and the cost 
of home office equipment," says Chapman.

Of course, it's not a free-for-all to claim regular household expenses.

"Remember that you'll not only need to keep a log of the hours you work from home, but also calculate what percentage of these expenses are work-related," says Jacobson. "You can't claim 100% of your internet bill if only 60% of your internet use is for work purposes.

Property, meanwhile, can be structured in a tax-effective way.

"They're not always easy to get, but if you're able to get an interest-only loan facility on an investment property, then that can maximise deductible interest on that loan," says Peter Bembrick, a tax partner at HLB Mann Judd.

"You're better putting extra repayments against your private property and leaving the investment loan intact."

He suggests prepaying expenses such as your income protection premiums (if held outside your super), management charges on investments and professional membership fees.

"You can usually pre-pay deductible expenses for up to 12 months, so you can get those in early if you want deductions this year."

Caps and contributions

The annual cap for concessional contributions to super is $25,000 ($27,500 from July 1, 2021).

"This includes the amount paid on your behalf by your employer - the superannuation guarantee," says Jacobson. "If you believe that you're not receiving all the superannuation you are entitled to, you can report your employer to the ATO. You can also check with your fund and your myGov account."

Those who haven't fully utilised their concessional cap can carry forward the unutilised part for up to five years, as long as their total superannuation balance at the end of the previous income year is less than $500,000.

Meanwhile, the non-concessional contributions cap is $100,000 ($110,000 from July 1, 2021).

"Individuals aged less than 65 can bring forward three years of non-concessional contributions, meaning a non-concessional contribution of $300,000 can be made in 2020-21, assuming that you have not already triggered the bring-forward rule in 2018-19 or 2019-20," says Jacobson.

"If your income for surcharge purposes (broadly, equal to your taxable income, plus reportable fringe benefits, plus reportable superannuation contributions, plus total net investment losses) exceeds $250,000, you are liable to division 293 tax, which effectively taxes your contributions at the higher rate of 30% (in the fund) rather than the concessional rate of 15%."

Get professional advice

"There's a reason 70% of Australians use a tax agent to prepare their tax return - tax is complicated," says Chapman.

"Get your tax return wrong and the comeback is on you, either with a lower refund or ATO penalties, and most people will find it far less stressful to simply pass on all their information to a tax agent and leave it to the agent to complete their return, safe in the knowledge that it will be accurate and complete."

Raftery likes to use a motoring analogy.

"We can all change a tyre on a car, but it takes a trained mechanic to spot deeper issues, and it's not different with tax."

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