What is written evidence for substantiation purposes?

The tax law says that to deduct a ‘work expense’ it must qualify as a deduction under some provision in the tax law.  In addition, you need to ‘substantiate’ the expense by obtaining ‘written evidence’ of the expense.

This article discusses what is meant by written evidence and some exceptions to the general rule that you must have this written evidence to claim a tax deduction for the expense.

It is important to understand that the rules discussed in this article only apply to individuals or partnerships where at least one of the partners is an individual.  These rules can also apply to individuals where certain ‘withholding payments’ are made in relation to payments to the individuals.

A ‘work expense’ is an expense you incur in producing your salary or wages.  So, what is discussed here does not apply to businesses, superannuation funds, companies, trusts and so forth.  The substantiation rules discussed here are in relation to an individual who earns salary or wages as an employee.

The law treats an expense in relation to a motor vehicle as not being a ‘work expense’ unless it is in respect of travel outside Australia or is for a taxi (or similar) fare.  Motor vehicle expenses have their own substantiation provision and are not discussed in this article.

Supplier’s evidence

Except for depreciation (discussed later), you must get a document from the supplier of the goods or services for the expense.  The legislation states that the document must set out:

• The name or business name of the supplier; and
• The amount of the expense, expressed in the currency in which it was incurred; and
• The nature of the goods or services; and
• The day the expense was incurred; and
• The day the document was made out.

A bank or credit card statement will usually not show all this information.  Accordingly, generally, bank and credit card statements do not satisfy the substantiation rules.  Nevertheless, bank and credit card statements can become useful if you need to rely on the ATO exercising its discretion to allow a deduction even when the strict substantiation rules have not been complied with.  If the ‘nature and quality’ of the evidence you hold is sufficient to satisfy the ATO that you are entitled to the deduction, you may be permitted to make the claim.

Also, if the supplier’s document does not show the date on which the expense was incurred, you may use a bank statement or other reasonable independent evidence to show when the amount was paid.

If a document does not specify the nature of the goods or services, you are allowed to write in the missing details before you lodge your income tax return in which the claim is made.

The document must be in English.  However, if the expense was incurred in a country outside Australia, the document can instead be in a language of that country.

The ATO states on its website that you must have a record that shows the expense is directly related to earning your income.  The ATO considers that this is a diary or similar record that shows your private and work-related use and how you calculate the amount you are claiming as a deduction.  The legislation does not mention this requirement.

Depreciation expense

For assets that cost more than $300, you must claim a portion of the cost of the asset each year until all the business use proportion of the cost of the asset has been claimed.  This is called depreciation or, technically, a capital allowance deduction.  To substantiate the claim for such an asset, the legislation requires you to have a document that shows:

• The name or business name of the supplier; and
• The cost of the asset; and
• The nature of the asset; and
• The day you acquired the asset; and
• The day the document was made out.

Again, if the document does not specify the nature of the asset, you may write on the document those details.

Sometimes you may have purchased an asset for private purposes and then decided some time later to use it for income producing purposes.  You may not have kept the invoice or receipt.  In this case you must try to get a substitute document.  Alternatively, you may need to rely on the discretion given to the ATO to permit a deduction where the nature and quality of the evidence you have is enough to convince the ATO of the details of the claim.

$300 exclusion

If the total of all your ‘work expenses’ is $300 or less, you can deduct the amount without getting written evidence or keeping travel records.  The $300 amount includes laundry expenses but does not include expenses relating to a travel allowance or meal allowance.

Small amounts

There is an exception from the substantiation provisions for amounts of $10 or less that total $200 or less.  In this case, you can make a record of the expenses instead of getting a document from the supplier.

These amounts were set in 2001and are not adjusted for inflation.  Accordingly, this method has become less useful.

Too hard

If the ATO considers it ‘unreasonable’ to expect you to have the written evidence discussed above, you can make a record of the expense instead of getting a document from the supplier.  This expense may be more than $10 and won’t count towards the $200 limit just mentioned.

Payment summary

The substantiation rules also permit expenses to be recorded on a payment summary.  For example, if an employer records on the annual payment summary of an employee expenses the employee has incurred in earning their assessable income, this will be accepted as valid substantiation.

Penalties

The ATO does have the power to apply financial penalties to an individual that fails to keep or retain records.  The penalty, at the time of writing, is $6,600.  This can be reduced to a lower amount, including nil.  The ATO also has the power to give a direction to educate an individual concerning their record keeping obligations.