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Tax Law Improvement (Substantiation) Bill 1994
House: House of Representatives
Commencement: Royal Assent. Note: The amendments will apply from the 1994-5 financial year.
To re-write the taxation substantiation provisions relating to allowable deductions. The changes are the first part of a project to simplify the taxation laws and contain minor alterations relating to the substantiation of expenses relating to:
* motor vehicle expenses;
* business travel; and
* laundry expenses.
This Bill is the first legislation resulting from the work of the Tax Law Improvement Project (TLIP). The establishment of TLIP was announced by the Treasurer in December 1993 and followed a recommendation by the Joint Committee of Public Accounts in November 1993 that a broadly based group be established to rewrite and simplify tax legislation. The aim of the project was to make tax legislation more comprehensible through better wording and structure, and so reduce compliance costs. An examination of the Income Tax Assessment Act 1936 (ITAA), which is over 5 000 pages long, will rapidly expose the need for such a project. It is estimated that the TLIP will continue for three years. The TLIP team comprises members from the Australian Taxation Office, Treasury and Parliamentary Counsel staff and consults with private sector tax experts. Further outside input is achieved by the use of exposure Bills inviting public comment. This procedure was used in relation to this Bill, with an exposure draft being released in August 1994.
While the TLIP is not responsible for changes in tax policy, this Bill contains minor changes to the substantiation rules which will be examined below. Substantiation refers to the need to maintain records to verify expenses claimed as deductions. Under the self-assessment system, the records do not have to be provided with a taxpayer's return but must be retained for production in the case of an audit.
The calculation of car expenses for self-employed people and employees who use their car for the purpose of gaining assessable income is currently dealt with in sections 82KT -82KZBB of the ITAA. As with the proposed simplification provisions, there are four methods of calculating the deduction available. A comparison of the current and proposed provisions follows:
1. Log books:
Current treatment: If a taxpayer elects to use this method of calculation, a log book of business journeys must be kept for 12 continuous weeks during the year of income in which this method of calculation is used. The log book is to include information of the date of the journey; odometer readings at the start and end of the trip; the purpose of the journey; the name of the driver; the date of the entry; the name of the person making the entry which must be signed; and the total distance covered during the period. Once this has been done, the log book percentage of business use will remain valid until the user determines that their estimated business use has varied from this percentage by more than 10%. This requires the user of the vehicle to form an estimate of their business use of the vehicle and whether this has varied by more than 10%. If the 10% variation is a result of a fall in business use, a new log book must be kept for a minimum of 12 weeks. If the deduction claimed is based on an increase in usage of more than 10%, a new log book will also have to be kept. If the car is held for less than 12 weeks, a reasonable percentage of business usage will be acceptable. Records must be retained for seven years.
Evidence of car expenses for the year must also be retained. These include the date of the expense; the goods/services supplied; the name of the supplier; and the amount of the expense. Details in the evidence must be noted by the supplier of the goods/services and the taxpayer cannot note these matters. Alternatively, for fuel and oil expenses, the kilometres of business use may be provided together with a reasonable estimate of fuel and oil costs.
Proposed treatment: The main differences between the current and proposed schemes are:
* Once a log book percentage has been ascertained it will remain in force for five years - as a result the 10% estimated variation rules will not apply;
* the 12 week period during which a log book must be kept may extend over two financial years;
* the name of the driver and the name of the person making the entry are not required and the entry need not be signed;
* records must be retained for five years; and
* if the supplier has not noted the nature of the goods/services supplied, the taxpayer may note this on the documentary evidence.
2. One-third of total car expenses
This method may be used where business use is more than 5 000 kilometres in the year of income and, as the name implies, allows a deduction of one third of the total car expenses incurred in the year. Car expense records must be kept and the requirements are the same as if a log book is used. The only difference in the proposed rules is that relating to the taxpayer noting the nature of the goods/services supplied (see above).
3. 12% of the cost of the vehicle
This method may be used if business travel exceeds 5 000 kilometres in the year. It is based on the depreciated value of the vehicle, with the maximum value of the vehicle being the depreciation limit for cars. If this method is used, there is no need to maintain records of expenses or a log book. If the vehicle is used for less than a full year, a proportional amount of the 12% is deductible. The Bill makes no substantive changes to this method.
4. Rate per kilometre
This method may be used where business travel is 5 000 kilometres or less in the year. In this method, there is no requirement to maintain a log book of odometer readings, with travel being based on a reasonable estimate of business travel. The kilometres of business travel are multiplied by the rate of deduction per kilometre, which is based on engine size and type, to calculate the allowable deduction. Currently, this method may only be used if business travel is 5 000 kilometres or less per year. Under the proposed scheme, taxpayers who travel more than 5 000 business kilometres per year may elect to use this method up to a maximum of 5 000 kilometres, with no deduction being allowable in respect of the additional kilometres. This may be of use where business travel is marginally over 5 000 kilometres.
There is a general exemption from the substantiation rules for deductions up to $300 and vehicle expenses are included in this amount so that no documents need be kept if the deduction is $300 or less.
Travel expenses for overseas business travel and domestic business travel for a continuous period of over five nights require to be substantiated to be deductible. To substantiate such expenses taxpayers need a record of travel expenses. This is defined to be an outgoing incurred in a domestic trip that involves an absence from home for more than five nights or an overseas trip.
Taxpayers are also required to keep a travel diary that is to include the date the entry was made; the place the activity occurred; the date and time the activity commenced; and its duration and nature. This applies where the trip is an overseas trip or a domestic trip that extends over more than five nights. (This occurs because the diary need only be kept where a record of travel expenses is required to be kept.) Where a trip involves both business and private purposes, the allowable deduction will depend on the facts of each case, but is generally not calculated on a strict time basis, with the object and purpose of the travel being taken into account. Records must be kept for seven years.
The main changes in the simplification Bill are:
* a record of travel expenses must be kept for trips that involve an absence of one night or more (this is achieved by altering the definition of travel expense);
* a travel diary need not be kept for overseas trips that involve an absence of less than six nights (this is also achieved by the change to the definition of travel expense);
* only the approximate time of the business activity need be recorded;
* the date of the entry need not be entered; and
* records need only be retained for five years.
Laundry expenses are deductible when they relate to deductible clothing (generally occupation specific clothing and protective clothing and footwear). It should be noted that the substantiation rules will only apply where total work related deductions exceed $300, as deductions up to this amount do not need to be substantiated. If laundry expenses need to be substantiated, they are calculated according to the method laid down in an Income Tax Ruling. This involves maintaining for a period a diary of the use of appliances involved in the laundering and the detergents etc. used. The ruling contains a table listing the estimated costs of the use of various appliances. Once the pattern of laundering has been established, it is used for future deductions.
Section 2-6 of the Bill provides that up to $150 of laundry expenses may be claimed without substantiating the expenses. However, this will not increase the $300 limit on business expenses that may be claimed as a deduction without substantiating them. It means that if more than $300 is claimed the normal rule that all deductions must then be substantiated will not apply to a maximum of $150 for laundry expenses.
Item 8 of Schedule 2 of the Bill deals with when the amendments will apply. This will be for the 1994-5 financial year and later years.
Chris Field (Ph. 06 2772439)
Bills Digest Service 3 February 1995
Parliamentary Research Service
This Digest does not have any legal status. Other sources should be consulted to determine whether the Bill has been enacted and, if so, whether the subsequent Act reflects amendments.
Commonwealth of Australia 1995.
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Published by the Department of the Parliamentary Library, 1995.