Getting a Tax Refund

We give you a simple plan that will help you to maximise your tax deductions throughout your life.

Kinkajou : The most important aspect of getting a tax refund, is simply to decide that you are going to claim all your deductions and adjust how your life is running – a little – to maximise your deductions. If you plan to maximise your deductions – you must DOCUMENT.

Goo : 2 to 4 weeks after making many purchases – you have forgotten the reason for those purchases. You are likely to have forgotten what you have bought – especially in complex purchases such as at a supermarket. All too often the names or descriptions on the receipt do not prompt you to remember the actual items you have purchased – terribly well. There is usually an odd name on the credit card statement, related to the item you have purchased. But it is a name on a credit card statement you have never seen at any time – making it impossible to prompt yourself as to what you have purchased.

Tax Refund

Kinkajou : For example, if you see a receipt on a credit card statement mentioning “Fang Pty Ltd”, what is it? Is it a receipt from a purchase of car materials, a donut shop, a variety store, stationery, or from a supermarket. It could be just about anything. So, if you keep all your receipts in a shoebox and look at them once a year, you are going to have problems trying to work out what item the receipt relates to.
Kinkajou : In short, to maximise your deductions, you need to document. To document you need a system. You need to do some work documenting – regularly. Simple systems are best. Do things that fit easily into your life and which have low time involvement/maintenance issues.

Erasmus : My favourite system is to “keep every receipt” and to put these in a shoebox or folder. Every two weeks, give every receipt a number – and just record the deductibles in a journal. There’s not a lot of point in creating records for things that you have no intention of claiming for. If you have a code number on the receipt, then you know that you have looked at this receipt and at some stage in the past have judged that it is invalid or inappropriate to claim this is a tax deduction. You do need to have the system tell you that you have looked at this receipt and made that judgement. Simply recording your own receipt number on the receipt will tell you this. And you can just keep a record of the ones that are deductible – only.

Erasmus : I think a minimum data set for receipts that you are going to claim as a deduction should be:
Code (receipt number).
Account (For Example: Paid from a credit card or debit card.
This allows for tracing or checking).

Date (of transaction).
Name (Entity from which this item was purchased) and a description of the item.
Amount (Total on the receipt and a breakdown of items from the receipt).
Reason. You may need to record as to what category you are going to be claiming this tax deduction under and what is the reason of the purchase which validates the making of this item a tax deduction. For complex receipts containing many items, you may need to allocate the items to a tax-deductible category. E.g., tools. E.g., stationery. E.g., office supplies. E.g., travel. E.g., car. E.g., parking.

Receipts in Shoebox

Erasmus : Now consider, parking fees are tax-deductible if used in the context of earning your income, but are not tax-deductible if used privately, (unless you are receiving a fringe benefit and paying a tax for the benefit).

So, story is everything. It is not obvious from the receipt, why a particular expense is tax-deductible – you will need to include your “story” as well – so you remember that the basis of your deduction claim. Going shopping in general is not tax deductible. But if you went shopping to purchase stationary for your home office- it is all tax deductible, even the parking fees, and the car travel or public transport charges.

This can then get quite complicated. Travel to purchase stationary for your home office is deductible. Travel to visit your investment house, is not.(The government in Australia has removed tax deductibility for travel to investment properties. Hence you need to have some familiarity with the tax rules.)

To fail to claim a deduction of $100, means you will need to earn $200 of income at the marginal rate to pay this bill. You will be $200 out of pocket. If you claim a tax deduction, the government pays up to 50% of your deducted item (at the marginal rate). You will be only $50 worse off/out-of-pocket. The government does depend on you for laziness. It loves it if you are sloppy and have poor documentation. If you stuff up – it wins big. Make the government pay its share. Document!.

Goo : Summary:
Keep a shoebox or a folder for receipts. Number the receipts every two weeks, and keep a record of the code/account/date/name/amount/reason – allocations in a journal- for deductible items. You need this minimum database to help you make a valid and defensible claim. Add a story as necessary to confirm the expenses are tax-deductible. Remember the story is everything. You are often the only witness. A good story is difficult to challenge. A good story with documents is essentially unassailable.

Kinkajou : Finally:
Read some tax stuff. Many companies/accountants send out emails about tax issues. They are often simple and light reading and keep you updated with how the Tax Office/Revenue Department is thinking. In short, educate yourself. Your knowledge will grow with time. Things change with time. Commit the time and energy to make the government work for you – at least some of the time.

You spend time and effort going to work. You will earn more money learning about tax and documenting than you will earn working.

Goo : Interesting! Looking after your own interests is actually more profitable than working.

Erasmus : Very much anything associated with earning your income is tax-deductible. But this can be at several levels. Normally you should aim to maximise your immediate deductions.
Capital items will need to be depreciated. If it takes you 10 years to depreciate an item, and the inflation rate is 2%, you have in effect lost 20% of your tax deduction over time. (Tax Office/ Revenue Department wins) And there is also the time cost of money. If you have kept the money in your pocket and invested it, you would have earned even more money – not lost money to the tax office.

Erasmus : Many people work in the black economy. If you don’t document your income, you cannot claim all your deductions. It is fairly easy for the tax office to look at the materials you have purchased and to calculate that you could not have used them all in the job you have declared to them. The Tax office uses data matching to assess ratios of expenses to income for a number of people. If you fall outside the acceptable ratios, it is fairly obvious that you are not declaring all your income.

Kinkajou : That still means you can get away with things. Just not get away with blatant and stupid claims with inadequate story or documentation.

Black Economy

Erasmus : Try to fulfill all your obligations. The system will penalise you severely if you fail to obsessively undertake all the paperwork required. For example, if you pay wages you need to declare tax held and super payments made to these people. Otherwise, you can find you are not allowed to claim valid deductions for your expenses because you have not met your “paperwork” reporting obligations.

This is very unfair because there are many people who earn small amounts of income under the black economy. It is almost impossible to fairly declare this or to operate in the normal economy because of the complexity of the paperwork required – to operate honestly. In short many small fish are kept out of the system due to the inability to navigate the administrative complexity of the system.

Tax Obligations

Definitely do not get involved in rorts. Rorts attract “flies” which can be visible or heard buzzing around for long distances. It means the Tax Office is likely to pay you attention. You win most by keeping off the radar, not by attracting attention or fighting over things. The4 ATO / IRD can afford to spend money for legal and accounting people to hound you, but you probably cannot. You also lose the peaceful aspects of life if you engage in conflict as well. The tax office is not all-powerful and can even be quite stupid in many ways. If you are lucky they will not pursue you. If you are unlucky they will crucify you.

There has been a recent spate in Australia of people lodging GST (Goods and Services Tax) returns, lodging a number of these back over a period of time and then claiming for the full refund. The tax office is incredibly stupid because they are giving significant refunds to people who have previously stated they have minimal wages bills. It just doesn’t add up. Eventually the tax office wakes up and contacts the people involved to get their money back. Unfortunately, these people have spent all the money and have no assets to pay the bills anyway.

To avoid the political backlash and to avoid seeming stupid to the general public, the government elected to hide the issue under the carpet. The government elected not to attempt to take these people through the courts process to recover monies owed. In short they just forgot about, and wrote off the debts.

Goo : You cannot guarantee that is how they will treat you when they discover what you have been up to.

To summarise:
Document: Keep receipts and record a minimum dataset of information: just on your deductions.
Code (receipt number).
Account.
Date (of transaction).
Name.
Amount.
Reason.

Read some tax stuff.
Fulfill your obligations.
Don’t get involved in rorts. Keep off the radar.

As I said before,
looking after your own interests is actually more profitable than working.