Personal living expenses

Example 1: Concise personal living expenses analysis

Jack is a concreter who runs his own business. He meets with his tax agent to discuss his annual tax returns. Because Jack's business records are not complete his tax agent suggests they look at his personal living expenses using the concise worksheet.

Jack is married and has two school-aged children. He lives with his family in a home they are paying off. He recently obtained a mortgage to purchase a second home where his parents, who are pensioners, live rent-free. He also provides assistance to his brother who lives overseas.

Using both business and personal records Jack completes the concise personal living expenses worksheet with the help of his tax agent (as shown in sample worksheet 1). The analysis shows a reported annual household income of $50,829 for both Jack and his wife.

The family's outgoings are $65,900, which exceeds their reported income by $15,071, without taking into account basic household expenses such as food, clothing and entertainment.

As Jack's household outgoings significantly exceed his incoming funds, he must be prepared to explain the difference.

After explaining the effect of non-cash items in his tax return such as depreciation, his tax agent recommends Jack review his invoices and business expenses to ensure nothing has been missed. He also offers Jack help with record-keeping for his business.

Example 2: Comprehensive personal living expenses

Amy, who owns a small painting business, visits her tax agent to discuss her annual tax returns. Amy has recently purchased a boat and is concerned about being selected for audit as a result of our data-matching program.

Amy's tax agent advises that her reported income is low compared to similar painting businesses and suggests she complete a comprehensive worksheet about her family, their income, assets and expenses.

Amy lives with her husband, who doesn't work, in a home they paid off 10 years ago. They have three children aged 16, 20 and 24. The youngest lives at home while the eldest lives in a property Amy and her husband purchased with an interest-only mortgage.

Using both business and personal records, including bank and credit card statements, Amy completes the personal living expenses comprehensive worksheet and records a household income of $36,275 for the year. The family's expenses are $81,275, which exceeds their reported income by $45,000, as shown in sample worksheet 2.

As Amy's household outgoings exceed incoming funds, she must be prepared to explain the difference. Her tax agent calculates that some of the difference is due to non-cash items in her tax return such as depreciation. However, there is still a significant difference.

If Amy was audited and asked to complete a personal living expenses questionnaire during an audit, we would question her about the accuracy of her reported income and household expenses, as $600 for clothing and footwear for a household of two adults and a teenager is low. She would be required to produce detailed documentary evidence to support this. If she couldn't fully explain the difference and produce suitable supporting evidence, we would reassess her income to a higher figure.

Amy would have to pay tax on any shortfall of omitted income plus penalties and interest.