9 July 2021 by Tax and Exchange Control Alert

International insights into judicial treatment of taxpayers claiming work-related expenses

The deduction of an individual’s work-related expenses for tax purposes was considered in the recent Australian judgment of Munkayilar and Commissioner of Taxation (Taxation) [2021] AATA 1839 (22 June 2021), which was delivered by the Taxation and Commercial Division of the Australian Administrative Appeals Tribunal. In particular, the tribunal reflected on whether the taxpayer had met the requirements under Australian tax law to claim the relevant expenses as a deduction and whether an administrative penalty ought to be imposed to the extent that such expenses did not qualify for deduction.

Facts

In his 2018 tax return, the taxpayer claimed, as a tax deduction, work-related expenses amounting to AUS$15,492. The expenses claimed by the taxpayer included:

  • clothing expenses (the cost of laundry and shoes);
  • self-education expenses (the cost of course fees, a study loan and depreciation on a computer, as well as travel expenses incurred pursuant to his self-education); and
  • other expenses (the cost associated with the use of his cell phone and the cost of specialised hand cream necessary for his occupation as a social worker).

On 3 June 2019, the Australian Commissioner of Taxation notified the taxpayer that an audit was being conducted in respect of the work-related expenses that he had claimed in his 2018 tax return. To this end, the commissioner requested that the taxpayer provide supporting documentation in order to substantiate the work-related expenses that had been claimed as deductions.

The taxpayer’s tax agent responded to this request by informing the commissioner that the taxpayer was unable to find the receipts and other documents on which the claims were based, and further that the deductions that were claimed in respect of the self-education course fees had been incorrectly claimed on the basis of incorrect information provided by the taxpayer. The taxpayer then submitted a voluntary disclosure form which sought to reduce the work-related expenses claimed by the taxpayer for the 2018 year.

In the subsequent finalisation of audit letter and amended assessment that was issued by the commissioner, the taxpayer’s work-related expenses claim was disallowed in full and an administrative penalty of 50% on the shortfall amount was imposed. The administrative penalty was imposed on the basis that the taxpayer had made false or misleading statements in his tax return as a result of the taxpayer and his agent’s recklessness in preparing the 2018 tax return.

The taxpayer first lodged an objection to the amended assessment, which was unsuccessful, following which he lodged an application to the tribunal for a review of the commissioner’s decision to disallow the objection. 

During the tribunal proceedings, the taxpayer was able to provide only a copy of his bank statements (on which he had made handwritten notes describing what the relevant amounts were spent on) as documentation supporting his deduction claims.

Judgment

In terms of Australian tax law, losses and expenses which are actually incurred in the course of gaining or producing assessable income are deductible, unless those losses or expenses are capital, domestic or private in nature. Work-related expenses may only be claimed if they are deductible in terms of a legislative provision contained in Australian tax law, and if they can be substantiated by written evidence. To this end, if a taxpayer cannot comply with a request to provide written evidence of the expense, then that expense cannot be allowed as a deduction.

In determining whether the commissioner’s additional assessments had been incorrect or excessive, the tribunal considered each type of expense that was claimed by the taxpayer and ultimately identified three fundamental issues with the taxpayer’s claim for deductions.

The first significant issue was that some of the expenses that he had claimed were not actually incurred or paid by him. While giving evidence, the taxpayer conceded that he had not actually paid any amounts towards his course fees (which were covered by the government) or his study loan during the 2018 year of assessment. As no amounts were expended by the taxpayer in respect of these items, the tribunal found that the taxpayer had not been entitled to a deduction of the amounts that had been claimed (but not paid) and the tribunal therefore upheld the commissioner’s amended assessment in this regard.

The second issue that the tribunal highlighted was that the taxpayer had been unable to establish a sufficient link between some of the expenses incurred and the production of his assessable income. In this regard, the tribunal considered the taxpayer’s travel expenses and the depreciation claim in respect of his computer. The taxpayer’s overall inability to demonstrate a close enough link between the expenses and his income-producing activities, and more particularly his inability to show precisely how he calculated the particular amounts of the expenses that actually pertained to his income producing activities, led the tribunal to find that he had not been entitled to claim the travel and computer expenses.

The last issue that the tribunal focused on was that the taxpayer had been unable to provide the necessary written evidence that the expenses had actually been incurred. It was the taxpayer’s submission that he previously had receipts and other documents that would have substantiated his claims, but that he had subsequently lost them and had made little to no effort to obtain replacement documents. In respect of the bank statements that the taxpayer had produced, the tribunal noted that the written descriptions included thereon did not indicate exactly what items were purchased or how these purchases were incurred in the production of the taxpayer’s assessable income. As there were no other documents before the tribunal that could substantiate the taxpayer’s claims, it was held that the expenses could not be claimed as a deduction.

On the issue of the administrative penalty, the tribunal found that the taxpayer had not discharged his obligation to show that he had taken reasonable care in preparing his 2018 tax return. It was held that a reasonable person in the same circumstances would have exercised greater care and would have made reasonable inquiries into the correctness of the tax position before lodging their tax return. In coming to this finding, the tribunal took into account the taxpayer’s circumstances, including his knowledge, education, experience and skill. The amount of the penalty imposed by the commissioner was, however, reduced by the tribunal on the basis that the taxpayer had made a “genuine attempt to meet his tax obligations and made an effort to do the right thing despite recklessly including false and misleading statements in his tax return”. This finding was made in large part due to the voluntary disclosure that the taxpayer had made.

Ultimately, the tribunal accepted the commissioner’s amended assessment and reduced (but did not fully remit) the administrative penalty that had been imposed.

Comment          

There are significant differences between the types of expenses that may be claimed by individuals in terms of South African tax law and in terms of Australian tax law. However, the principles laid down by the tribunal in this case are noteworthy for those South African individuals, and more particularly South African employees, who are considering claiming deductions in respect of the expenses that they have incurred pursuant to their employment.

In our Tax & Exchange Control Alert published on 20 May 2021, the types of deductions that may be claimed by employees, and the requirements that must be met in order to claim them, were discussed in detail. To the extent that individuals in South Africa intend on claiming these types of deductions, they should be aware that the onus to prove that they are entitled to the deductions rests on them and the following fundamental principles that were highlighted by the tribunal should be borne in mind:

  • The expenses that are claimed as deductions must have been expenses that were actually incurred by the individual in the relevant year of assessment.
  • There must be a connection between the expenses that are claimed and the employment functions carried out by that individual (in a South African context one would consider whether the “close connection” requirement laid down in the PE Tramway case was met).
  • It is critically important that documentary evidence of the expenses incurred be retained by the individual. To this end, individuals must be able to show that the expenses were incurred and must be able to demonstrate how they calculated the relevant deductions.

In a media statement issued on 2 July 2021, the South African Revenue Service advised taxpayers to carefully consider any claims in respect of home office expenditure as these claims are likely to be selected for verification or audit. In the event of verification or audit, the taxpayer will need to provide the necessary proof that they are entitled to the deductions. To the extent that taxpayers are not legally entitled to claim the deductions, they may face penalties.

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