House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Assistant Treasurer,the Hon. George Gear, M.P.)

Chapter 2 - Summary of new substantiation rules

This chapter shows how the substantiation law, as proposed to be amended by this Bill, would apply.

Meaning of some terms used in the summary

Award transport payment is an amount your employer pays you, for travel in the course of your work, as an allowance for transport expenses (other than food, drink, accommodation or incidental expenses) or a reimbursement of car expenses. Payment must be made under an industrial instrument that was in force on 29 October 1986.

Business kilometres are the kilometres a car travelled in the course of producing your assessable income. You calculate them by making a reasonable estimate.

Business travel expenses are expenses you incur on travel away from your ordinary residence for more than 1 night, in the course of producing your assessable income.

Car is a short hand expression for a motor vehicle (including a four-wheel drive vehicle) that is:

•

a motor car, station wagon, panel van, utility truck or similar vehicle (but not a panel van or utility truck designed to carry a load of 1 tonne or more); or

•

any road vehicle designed to carry less than 1 tonne or fewer than nine passengers.

The term excludes:

•

a motor cycle or similar vehicle;

•

a taxi taken on hire; and

•

a motor vehicle hired under an agreement of a kind ordinarily entered into by people who take motor vehicles on hire on a short-term basis. However, such a vehicle will be included if there has been, or it is reasonable to expect there will be, successive agreements resulting in substantial continuity of hiring.

Car expenses are expenses to do with a car. They specifically include operating expenses and depreciation.

They do not include:

•

an expense on travel outside Australia; or

•

a taxi fare or similar expense.

Laundry expenses are work expenses to do with washing, drying or ironing clothes (but not dry cleaning).

Overtime meal allowance expenses are expenses you incur for food or drink that is covered by an allowance your employer pays you for overtime that you work.

Travel allowance expenses are expenses you incur for travel away from your ordinary residence in the course of producing your salary or wages. The travel must be covered by a travel allowance paid by your employer for accommodation, food, drink or incidental travel expenses.

Work expenses are expenses you incur in producing your salary or wages. They include travel allowance and meal allowance expenses, depreciation and election expenses of candidates for Parliament or local government. Work expenses do not include expenses to do with a motor vehicle (including a 4-wheel drive), unless the expenses were for travel outside Australia or taxi fares (or similar expenses).

Summary of new rules for deducting car expenses

The general rule is:

You must use one of 4 methods to calculate deductions for car expenses, unless an exception applies.

The methods are:

1.

cents per kilometre

2.

12% of original value

3.

one-third of actual expenses

3.

one-third of actual expenses

4.

log book.

The rule applies to

Taxpayers who own or lease a car and who are:

•

individual taxpayers (but not trustees); or

•

any partnership that includes an individual taxpayer

Method 1: Cents per kilometre

How is the deduction calculated?

Multiply

•

the car's business kilometres (but only up to 5,000); by

•

the number of cents allowed for your car's engine capacity.

When can you use Method 1?

Anytime

Do you have to substantiate?

No

Method 2: 12% of original value

How is the deduction calculated?

•

Deduct 12% of your car's value. But you must reduce it proportionately for every day in the income year that you don't own or lease a car.

•

The value is the cost of the car when you acquired it, if you own it, or its market value when you began to lease it.

•

You can't deduct more than the motor vehicle depreciation limit for the year when you first used the car (if you own it) or begin to lease it.

When can you use Method 2?

If the car's business kilometres exceed 5,000 or would have if you had used the car throughout the income year.

Do you have to substantiate?

No.

Method 3: One-third of actual expenses

How is the deduction calculated?

Deduct one-third of any expense on the car that qualifies as a deduction, or would qualify if you had used the car only to produce assessable income throughout the income year.

When can you use Method 3?

If the car's business kilometres exceed 5,000 or would have if you had used the car throughout the income year.

Do you have to substantiate?

Yes

Method 4: Log Book

How is the deduction calculated?

Multiply:

•

any car expenses that qualify as deductions (or would if you used the car only to produce assessable income while you held it).

by

•

a reasonable estimate of business kilometres the car travelled in a year, expressed as a percentage of total kilometres (the business use percentage .

The reasonable estimate must take into account your log book, odometer records, changes in the number of cars you use or their pattern of use and anything else that is relevant.

When can you use method 4?

If you have kept:

•

a log book for the car, and it is still operative; and

•

odometer records for the period you held the car in the year.

Do you have to substantiate?

Yes.

What is a log book?

It is a written record of you business use of a car over a period of at least 12 continuous weeks. But, if you own or lease a car for less than 12 weeks, you only need to keep the log book for that shorter period.

When must you keep a log book?

•

In the first year you claim a deduction for your car using this method (although the 12 week log book period can overlap into the next year).

•

In any year you get an additional car for which you also want to use the log book method.

•

If the commissioner gives you a written direction to keep a log book, in the year after you receive the direction.

•

In every fifth year after the last log book was kept.

Why must you keep a log book?

To establish a proper basis for calculating a reasonable estimate of business use.

What do you need to record in a log book?

You should record in English:

1.

when the log book period began and ended;

2.

the car's odometer recordings at those times;

3.

how many kilometres the car travelled in the period;

4.

if you make a journey in the course of producing your assessable income, the day it began and the day it ended;

5.

the odometer recordings at the start and end of a journey;

6.

how many kilometres the car travelled on the journey;

7.

why the journey was made.

8.

how many kilometres the car travelled during the period on all journeys in 4, and also expressed as a percentage of the kilometres in 3.

What do you need to include in odometer records?

These details of the car:

•

the make, model and registration number of the car;

•

if it has an internal combustion engine, its engine capacity expressed in cubic centimetres;

•

if you have nominated another car to replace the car, the same details are required of the replacement car.

However, if you have a dispute with the Commissioner that is:

•

the odometer readings at the start and end of the period;

•

if you have nominated another car to replace the car from a specified day, the odometer readings for both cars at the end of the day.

How long must you retain your log book?

For 5 years, from the due date for lodging your return: or the date you lodge it, if that is later) for the last year you rely on the log book in calculating the business use percentage.

However, if you have a dispute with the Commissioner that is:

•

an objection (or a review or appeal arising from one); or

•

a request for amendment of an assessment;

then you must keep it until the dispute is resolved.

How long must you retain your odometer records?

If you keep a log book for the income year, you must retain them for the same period required for written evidence under the substantiation rules.

What if you replace your car?

You can treat a replacement car as if it were the original (and not keep a new log book) provided you record in writing:

•

the date of replacement;

•

the make, model and any registration number of each car.

Exceptions

What is the rule?

If you are covered by an exception to the car expenses rules, you can calculate your deductions under normal principles, for example sections 51 (General deductions) and 54 (Depreciation), or use one of the 4 methods.

Summary of the new substantiation rules

Substantiation affects

•

Individual taxpayers (but not trustees).

•

Any partnership that includes an individual taxpayer.

The general rules are

Written evidence

You must get written evidence of:

•

work expenses

•

business travel expenses

•

car expenses (other than fuel and oil expenses), if they are calculated using the 'one-third of actual expenses' method or the 'log book' method.

Odometer records

You must keep odometer records for car expenses if you use the 'one-third of actual expenses' method, the expense is for fuel and oil and you don't get written evidence of it.

Travel Diaries

You must keep a travel diary if you are away from your ordinary residence for 6 or more nights in a row.

Substantiation is not needed for

•

Work expenses that total $300 or less (you count laundry expenses but not travel or meal allowance expenses or expenses covered by an award transport payment).

•

Laundry expenses, if they total $150 or less.

•

An expense on a motor vehicle that is not a car (eg. a motor cycle) or is not owned or leased (eg. a borrowed car), unless it is a taxi fare or similar expense or an expense incurred in travel outside Australia.

•

Expenses covered by an award transport payment, if you don't claim more than the amount payable on 29 October 1986.

•

Overtime meal allowance expenses covered by an allowance payable under an Australian law, if the Commissioner considers the amount you claim is reasonable.

•

Expenses covered by a travel allowance, if the Commissioner considers the amount you claim is reasonable having regard to expenses it would be reasonable to incur for travel:

in Australia: on accommodation, food, drink or incidental travel expenses;

overseas: on food, drink or incidental travel expenses (but you must still keep travel records).

Travel records are not needed for

•

Travel allowance expenses covered by, and not more than, a travel allowance for travel principally overseas, if the expenses are incurred by an aircraft crew member.

You must get this written evidence

Depreciation expenses

A document from the supplier of the property setting out:

•

the name (or business name) of the supplier;

•

the cost of the property to you;

•

the nature of the property;

•

the day you acquired the property;

•

the date of the document.

Expenses other than depreciation

A document from the supplier of goods or services setting out:

•

the name (or business name) of the supplier;

•

the amount of the expense, in the currency incurred;

•

the nature of the goods or services;

•

the day the expense was incurred;

•

the date of the document.

Adding additional information later

If a document from your supplier does not show the nature of the property, goods or services, then you can add that information yourself.

Independent evidence of date of expense

If your supplier's document does not show the day the expense was incurred, then you can use a bank statement or other reasonable, independent evidence to show when it was paid.

Keeping your own record of small expenses or expenses too hard to substantiate

You can make your own record of expenses, and not get written evidence from a supplier, if:

•

each expense you want to deduct is $10 or less and all of them total $200 or less; or

•

the Commissioner considers it unreasonable to expect you to get a document from the supplier.

Group Certificates

You can use your group certificate as written evidence of a work expense if it shows the nature and amount of the expense (or the total of expenses of the same nature).

You need to keep these travel records

You should record, in a diary or similar document, details of your activities during travel in the course of producing your assessable income. If you don't, the activities can't be taken into account in apportioning your travel expenses.

The details you must record are:

•

the nature of the travel activity;

•

the day and approximate time it began;

•

how long it lasted;

•

where you engaged in it.

must you get your evidence?

Written evidence

You must have all your written evidence when lodging your tax return. If not, you can't claim a deduction. But you can amend that return (or your assessment) if you get the evidence later.

Exception 1: If you expect to get evidence within a reasonable time.

If you don't have written evidence when you lodge your return, but have good reason to expect to get it within a reasonable time, you can still claim the deduction. However, the deduction may be disallowed if you don't get the evidence.

Exception 2: Evidence of small expenses or expenses too hard to substantiate.

If you keep your own record of small expenses, or expenses that are too hard to substantiate, you must enter details of an expense as soon as possible after you incur it. However, for a depreciation expense, you must enter it as soon as possible after the end of the income year.

Odometer records

You must enter details of any period covered by odometer records as soon as possible after the start or end of a period or after the end of the specified day for a replacement car.

You must enter details of any car covered by the odometer records before you lodge your tax return. However, the Commissioner may allow you to make the entry later.

Travel records

You must enter details of a travel activity as soon as possible after it ends.

Documents must be in English

As a general rule, documents must be in English. There are 2 exceptions for written evidence from a supplier:

•

evidence of a depreciation expense can be in a language of the country from which the property was exported;

•

evidence of any other expense can be in a language of the country where the expense was incurred.

Documents must be retained for at least 5 years

You must keep a document for 5 years, from the due date for lodgment of your return (or when you lodge it, if that is later). However, if you have a dispute with the Commissioner that is:

•

an objection (or a review or appeal arising from one); or

•

a request for amendment of an assessment;

then you must keep it until the dispute is resolved.

Commissioner may require you to produce documents

The Commissioner may give you written notice telling you to produce, within 28 days (or more), any record you must keep. If so, you must also produce a summary that, for each expense for which you are required to keep written evidence:

•

notes the expense, cross references it to the evidence and summarises its particulars; and

•

shows the amount of every expense in Australian currency (even if the expense was in a foreign currency).

Relief if you fail to substantiate

You can still deduct an expense if:

•

the Commissioner is satisfied that you incurred it and that you are entitled to deduct the amount you claim; or

•

you failed to substantiate only because you had a reasonable expectation that it would not be necessary.

What if your documents are lost or destroyed?

A complete copy can substitute for the original document.

Otherwise, if the Commissioner is satisfied you took reasonable precautions to prevent the loss or destruction:

•

your deduction is not affected if the document was not written evidence (eg. it was a travel diary or log book);

•

if the document was written evidence, you must try to get a substitute document with the same information. If it is not reasonably possible to do that, then your deduction is not affected.