Are you flying blind when
it comes to tax deductions? Ignorance can leave you with costly accounting and
legal bills — not to mention a hefty tax bill.
For simple and straightforward deductions, the Australian Tax Office (ATO)
provides booklets stating what can and can't be claimed. However, for the many
grey areas the process is convoluted, confusing and costly. There are many grey
areas in working out your tax, and mistakes can be expensive.
Clear as mud
The issue was highlighted when someone asked me about his special
circumstances. He owns a public relations business involved in sponsorships for
a prominent sports stadium. Not only do his clients have a strong presence at
the venue, they also conduct business and other events there. The consultant
believed his business would benefit if he became a member of a club associated
with the stadium. And, of course, he wanted to know if his membership would be
tax-deductible.
Chartered accountant Neil Wickenden, from HLB Mann Judd, says the ATO stopped
many membership deductions around the time that the Hawke government disallowed
entertainment expenses, to the chagrin of restaurant owners, in 1985. That
said, some loopholes — sorry, I should say exemptions — remain.
“A 1976 ruling concerned with race clubs, where the principal purpose of the
club was to operate a public amenity, could provide a tax deduction”, Wickenden
says. “However, the person's business or income would have to be aligned
closely with the club.”
So a freelance, self-employed racing journalist might be able to argue that
membership of the Australian Jockey Club was important for finding stories and
making connections. A football agent might be able to argue that membership of
a related organisation where footballers congregate is an acceptable
deduction.
However, it is not an open and shut case. Small businesses have to pay to
investigate the legality of deductions and it can be expensive. And
recreational clubs, such as league, RSL or golf clubs, could spell trouble for
those seeking deductions.
Rare exceptions
There are exceptions. For example, a tax tribunal found that an art gallery
and theatre association did not represent a “recreational club”, so membership
was deductible.
Wickenden thinks a PR consultant wanting to join a footy club would probably
have no case for a deduction, but there could be exceptions. “It's a borderline
case”, he says. “If the PR consultant specialised in sporting team sponsorships
at the stadium and it could be shown that there is a nexus between his income
and the facility, then there could be a case.”
If the consultant wants to reduce his anxiety, he could seek a tax barrister's
opinion, Wickenden says. “If the consultant was ever challenged, he could show
that he has acted in good faith and sought expert advice. Otherwise, he could
opt for a private ruling from the tax office.”
However, accountants say this can be even more costly than using a legal
eagle.
The tax office does not comment on specific cases, but the Deputy
Commissioner of Small Business sheds some light on the subject. “The tax law
allows you to claim deductions for costs you necessarily incur in carrying on
your business”, he says. “However, you cannot claim for things of a private or
domestic nature such as child care. The tax law expressly stops or limits
deductions for some outgoings, such as fines or entertainment, for
example.”
Can you afford the risk?
He says taxpayers in doubt should go to the ATO website or call 13 28 66 to
discuss business tax matters. The ATO website does provide information on
deductible expenses for small businesses, but it doesn't help with the really
curly questions. Accountants say that the assistance offered on the help lines
is of varying quality and can leave the taxpayer exposed.
A private ruling from the tax office provides certainty. At the end of the
day, anyone trying to work out whether an expense is deductible will either
have to fork out a lot of money to experts — or take an expensive punt.
Where to find out more
More advice
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