Claiming legitimate tax deductions can help reduce your taxable income, but claiming an expense is only part of the process. You also need to be able to support your claim with appropriate records if the Australian Taxation Office (ATO) asks questions.

For many taxpayers, this becomes particularly important during an ATO review or audit. John Saade of Latitude Accountants has highlighted the importance of substantiation when discussing a real ATO audit letter, where the taxpayer was asked to provide evidence supporting a significant amount of work-related expenses.

So, what happens if you cannot prove your deductions? The outcome depends on the circumstances, the type of expense, and the evidence available, but an unsupported claim can potentially be reduced or disallowed.

Why Does the ATO Require Evidence for Tax Deductions?

The Australian tax system allows taxpayers to claim eligible expenses against their assessable income. However, deductions must meet the relevant requirements and be supported by appropriate records.

For work-related expenses, the basic rules are straightforward. Generally, you must:

• Have paid for the expense yourself.
• Have a direct connection between the expense and earning your income.
• Keep records that demonstrate the expense.

If an expense has both work and private elements, you generally need to claim only the work-related portion.

This means you should not simply assume that an expense is deductible because you paid for it or because it was related in some way to your job.

What Does “Prove Your Deduction” Actually Mean?

Proving a deduction means being able to provide evidence showing that the expense was genuinely incurred and that your claim is accurate.

Depending on the deduction, this may include:

• Receipts and invoices
• Bank or credit card records
• Employer documentation
• Vehicle records
• Travel records
• Mobile phone bills
• Home office calculations
• Work-use calculations
• Diaries or usage records
• Evidence that you were not reimbursed

The evidence required will depend on the type of expense and the method used to calculate your claim.

A receipt by itself may not always explain why an expense was work-related. In some circumstances, you may also need to demonstrate how you calculated the work-related portion.

What Happens If You Cannot Provide a Receipt?

Losing a receipt does not necessarily mean that every deduction automatically disappears. However, you need to consider what other records may be available and whether they adequately support your claim.

For example, other documentation may help establish that an expense was incurred and the amount involved.

The important point is that you should not simply invent or estimate information because you cannot find the original receipt.

If the ATO asks for evidence and you cannot adequately substantiate the claim, the deduction may be challenged.

Can the ATO Reject Your Tax Deduction?

Yes. If the ATO determines that a deduction does not meet the relevant requirements or cannot be adequately substantiated, it may disallow or adjust the claim.

This can increase your taxable income and potentially result in additional tax becoming payable.

Depending on the circumstances, other consequences may include:

• An amended tax assessment
• Additional tax to pay
• General interest charges
• Administrative penalties where applicable

The specific outcome will depend on why the deduction was rejected and the circumstances surrounding the claim.

This is why maintaining good records throughout the year is generally much easier than trying to recreate evidence after an ATO review begins.

What If You Made a Genuine Mistake?

Not every unsupported deduction is the result of deliberate behaviour.

You may have accidentally claimed an incorrect amount, misunderstood a deduction rule or failed to keep the necessary documentation.

If you discover that your tax return contains an error, the appropriate response is to address the issue rather than attempt to justify a claim that you cannot support.

Depending on the circumstances, you may need to correct your tax return or consider whether a voluntary disclosure is appropriate.

Before taking action, it can be worthwhile speaking with an accountant or registered tax professional who can assess your individual circumstances.

Which Tax Deductions Often Require Detailed Evidence?

Some deductions naturally require more documentation because they involve calculations, mixed private and work use, or multiple expenses.

Car and Motor Vehicle Expenses

Vehicle expenses can require detailed records, particularly where a vehicle is used for both work and private purposes.

Depending on the method used, you may need records such as:

• Odometer readings
• Logbook records
• Details of work-related journeys
• Fuel and servicing receipts
• Registration or lease documentation
• Evidence explaining the work-related percentage

Simply owning a vehicle or travelling to work does not automatically make all vehicle expenses deductible.

Work-Related Travel

Travel claims may involve accommodation, transport, parking, tolls and other expenses.

You should retain receipts and other documentation demonstrating the work-related nature of the travel and the expenses incurred.

Private travel generally cannot simply be included alongside legitimate work-related costs.

Working From Home

Working-from-home deductions also require appropriate records and calculations.

Depending on the method used, you may need to maintain records of hours worked from home and evidence supporting the relevant expenses.

Mobile Phone and Internet

If your phone or internet service is used for both work and private purposes, you generally need to calculate the work-related portion.

Your bills may support the overall cost, but you may also need evidence showing how you determined the percentage relating to work.

Work Clothing and Laundry

Clothing claims can be particularly misunderstood.

Ordinary clothing worn to work is generally not automatically deductible simply because your employer expects you to dress a certain way.

Claims involving uniforms, protective clothing or occupation-specific clothing have specific requirements, so retaining receipts and relevant documentation is important.

What If You Cannot Prove a Large Deduction?

The larger the deduction, the more important it becomes to ensure that you can explain and substantiate the amount claimed.

In the real ATO audit letter discussed by John Saade, a management consultant had claimed $36,911 in work-related expenses, compared with an average of approximately $2,178 for management consultants.

The high amount did not automatically mean the taxpayer’s claim was incorrect. However, it provided a reason for the ATO to ask questions and request supporting evidence.

This demonstrates an important principle: a large deduction is not necessarily wrong, but you should be prepared to demonstrate why it is legitimate.

If you cannot substantiate a significant deduction, the potential tax impact can be much greater than losing a small expense claim.

How Can You Protect Your Tax Deductions?

The best way to deal with an ATO evidence request is to prepare your records before one ever happens.

Keep Receipts and Invoices

Save receipts and invoices electronically where practical. Make sure the records remain readable and accessible.

Record the Purpose of Expenses

For expenses that are not self-explanatory, make a note of why they were incurred and how they relate to earning your income.

Keep Work-Use Calculations

Where an expense has both private and work-related use, maintain records showing how you calculated the work-related percentage.

Keep Records for the Required Period

For many work-related expenses, the ATO generally requires taxpayers to retain relevant records for five years from the date the tax return is lodged.

Good record-keeping can make an ATO review considerably easier to manage.

What Should You Do If the ATO Has Already Asked for Evidence?

If you have already received an ATO letter requesting evidence, do not panic and do not ignore it.

Start by:

1. Reading the letter carefully.
2. Identifying the specific deductions being reviewed.
3. Checking the response deadline.
4. Gathering all relevant records.
5. Reviewing how each deduction was calculated.
6. Identifying any areas where documentation may be missing.
7. Seeking professional advice if you are unsure how to respond.

It is important to provide accurate information. If you discover a mistake, getting advice before responding can help you understand the appropriate way to address it.

How Can an Accountant Help With Unsupported Deductions?

An accountant can help you assess your tax position and determine what evidence may be relevant to the deductions being questioned.

At Latitude Accountants, John Saade and the team provide practical taxation and accounting guidance for individuals and businesses.

Professional assistance can help you:

• Review deductions being questioned by the ATO
• Identify relevant supporting documentation
• Check your calculations
• Determine whether claims contain private components
• Prepare information for an ATO review
• Address potential errors appropriately
• Understand your tax obligations going forward

The goal is not simply to claim as many deductions as possible. It is to make legitimate claims that accurately reflect your circumstances and can be properly supported.

Frequently Asked Questions About Proving Tax Deductions to the ATO

What happens if I cannot prove a tax deduction?

If you cannot provide sufficient evidence to support a deduction, the ATO may challenge or disallow the claim. This could result in additional tax becoming payable.

Can the ATO reject a deduction without a receipt?

A missing receipt does not necessarily mean a deduction will automatically be rejected in every circumstance. However, you still need appropriate evidence to substantiate the expense and meet the relevant requirements.

How long should I keep tax deduction records?

For many work-related expenses, records generally need to be kept for five years from the date you lodge your tax return. Specific requirements can vary depending on the type of transaction or claim.

What if I accidentally claimed a deduction incorrectly?

If you discover an error, you should address it rather than provide inaccurate information to the ATO. Depending on the circumstances, you may need to amend your return or consider other options with professional advice.

Can an accountant help if the ATO is questioning my deductions?

Yes. An accountant can review your tax position, help identify relevant evidence and guide you through the ATO’s questions and requests.

Can a large deduction be legitimate?

Yes. A large deduction is not automatically incorrect. However, you should be able to demonstrate that the expense meets the relevant requirements and provide appropriate evidence supporting the amount claimed.

Need Help With Your Tax Deductions or an ATO Review?

Worried about whether your tax deductions are properly supported, or has the ATO asked you to provide evidence? Latitude Accountants can help you review your tax position, understand what documentation you need, and respond to ATO enquiries with greater confidence.

Our experienced team provides practical accounting and taxation advice for individuals and businesses, helping you stay compliant while making informed financial decisions.

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Disclaimer

This article provides general information only and does not constitute financial, legal, tax, or business advice. You should obtain professional advice relevant to your individual circumstances.