Private ruling: Substantiation requirements
Published: November 2013
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you required to keep written evidence for your expenses incurred? | A1: Yes. | Q2: Are you entitled to a deduction for small expenses where no records have been kept? | A2: No. | Q3: Are you required to keep records to show your income producing use of your internet? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Division 900 | Income Tax Assessment Act 1936 Section 262A

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it. A deduction is only allowable if an expense: § is actually incurred, § meets the deductibility tests, and § satisfies the substantiation rules. That is, a deduction is not allowable if the substantiation requirements are not met. Under section 8-1 of the ITAA 1997, a deduction is only allowed to the extent it is used for income producing purposes. Therefore, where an expense has deductible and non-deductible components, the portion that is deductible needs to be determined. Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances. If an undissected outgoing has an income-producing component, but there is no evidence on which to base an apportionment, a deduction may be disallowed: AAT Case Re Carlaw and FCT (1995) 31 ATR 1190. In AAT Case 4063 (1987) 19 ATR 3073, the AAT said that an otherwise deductible premium, which was "mixed" in a lump sum with non-deductible expenditure, would not be deductible unless the taxpayer could establish a proper apportionment of that premium between its deductible and non-deductible components. That is, for any allowable tax deduction, the relevant documents must be kept to support the amount claimed. As outlined in Practice Statement PS 2001/6, individuals who claim home office expenses are required to be able to prove that they have incurred such expenses. The Commissioner will accept an estimate of the extent of income producing use where it is based on a diary record of the income related and non-income producing use of that equipment covering a representative four week period. Such a diary record would need to show the nature of each use of equipment, whether that use was for an income producing or non-income producing purpose and the period of time for which it was used. Normally, a taxpayer would have to keep a complete diary recording the duration and purpose of each use of their home office during the year. However, as this imposes an unreasonable high compliance cost, the Commissioner accepts a four week diary. A new diary must be kept for each financial year. Therefore to determine the income producing portion of your internet and other home office expenses, you are required to keep a four week diary showing the relevant income producing and other use. This can then be used to determine your income producing percentage. To claim an estimated X% of your internet without any supporting documentation to show how this percentage was calculated is not acceptable as there is no evidence to support your claim. Taxation Ruling TR 96/7 provides general principles on record keeping under section 262A of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 262A(1) of the ITAA 1936 imposes an obligation on a person carrying on a business to keep records that record and explain all transactions engaged in by them that are relevant. Relevant records to be kept include documents that are relevant for the purpose of ascertaining a person's income and expenditure. Division 900 of the ITAA 1997 outlines the record keeping requirements for work expenses, car expenses and business travel expenses. Work expenses is defined in subsection 900-30(1) of the ITAA 1997 to be a loss or outgoing you incur in producing salary or wages. Although you are not in business or incurring expenses from the production of salary and wages the principles in TR 96/7 and Division 900 of the ITAA 1997 are relevant. Section 900-125 of the ITAA 1997 outlines the written evidence requirements for small expenses. Under this section, if your expense is small and you have a small total of small expenses, you can make a record of the expenses instead of getting a document from the supplier. Each expense must be $10 or less and the total of all your expenses that § are each $10 or less, § and incurred in the income year and wish to deduct, and § you must get written evidence for under Division 900 must be $200 or less. However, you must get a document with the same information as required by section 900-115 of the ITAA 1997 except that you may create the document and record all the details yourself. You must do so as soon as possible after incurring the expense. Therefore in applying section 900-125 of the ITAA 1997, you need to have a record of · the name of the supplier, · the amount of the expense, · the nature of the goods or services and · the date the expense was incurred. Division 900 of the ITAA 1997 provides relief from effects of failing to substantiate in certain circumstances. Where there is no supporting documentation or factual material evidencing the expense, relief is not generally granted and therefore no deduction is allowable. A person should make a bona fide attempt to comply with the record keeping requirements. Taxation Ruling TR 97/24 provides guidance on circumstances in which relief from the effects of failing to substantiate may apply. To claim a deduction for stationery or office items, you need to keep written evidence to support your claim. In preparing your tax returns, you should use the available records and documents to ascertain your income and expenses. Should your tax returns be reviewed, it is necessary for you to have and keep the relevant records to show how your expenses were calculated and what they relate to. You need to have sufficient evidence to show that you have incurred an expense and are entitled to a deduction.

Relevant facts: All your assessable income is from your investments. | You have shares, a rental property and cash. | You operate from home and incur home office expenses. | You use a room to manage your investments. This room has a desk, computers, printer, filing cabinet, reference books and files. This is the only place where you manage your investments. | For the relevant income year you estimate that you incurred a small amount for home office, stationery and office items. You expect these expenses to be similar in the years to come. | Other higher costs such as phone, internet computer upgrades and computer repairs can be quantified. | You estimate the income producing use of your internet to be X%. You do not have a diary to show your income producing use.