How do tax deductions work?
When submitting a tax return you are entitled to claim deductions for expenses incurred while working – known as work related deductions. To be able to claim work related deductions you must meet the following criteria:
• you must have record to prove it
• you must have spent the money yourself
• you must not have been reimbursed for the cost
• the expense must be related to your job.
If the expense you are claiming is for both work and private purposes, you can only claim the work portion of the cost.
What are the different types of deductions you can claim?
Vehicle and travel expenses
Using your car for work
If you’re required to use your car for work, you are entitled to a deduction for the costs which you incur whilst at work. This specifically excludes the cost of the commute from home to work, except in very limited circumstances (see below).
Typical situations where you might be able to claim for using your car for work include:
- Traveling between workplace sites during the working day
- Traveling directly from one job to another where you have a second job (provided you don’t go home first)
- Traveling to a business related meeting with a client, supplier or prospect
- Traveling to a work-related course
You can’t claim a deduction for home to work travel. This is regarded as private expenditure. The only exception to that rule is if you are required by your employer to carry bulky tools in your vehicle which cannot be safely secured at work. Take great care on that point – the ATO looks very closely at such claims and disallows lots of them.
Other travel expenses
To the extent you incur a cost which isn’t reimbursed by your employer, there are lots of other items you can claim. Remember all these must be work-related and mustn’t be connected to your journey from home to work:
- Bridge/tunnel tolls
- Public transport fares
- Car parking
- Taxi fares
You can’t claim the cost of fines for speeding, parking infringements or other motoring offences.
Overnight meals and accommodation
If you’re required to travel away from home overnight for work purposes, on an interstate trip perhaps, you can claim a deduction for any meals, accommodation or incidental expenses which you incur, to the extent you are not reimbursed by your employer.
Some people who travel extensively are paid an allowance by their employer to cover those costs. Those allowances are taxable but a deduction can then be claimed for costs incurred.
Work related clothing and laundry expenses
Do you need to wear a suit to work? Or perhaps you need to wear a uniform emblazoned with your company’s logo? Perhaps you work in a clothes shop and have to come to work wearing clothes bought in that store?
Whatever the case, you have to conform to your employers dress policy so there might be an expectation that you’ll be treated the same way by the taxman when it comes to claiming tax deductions for your work clothing.
What clothing can be claimed?
Clothing can only be claimed if it is specific to your occupation. For example, chef’s pants. You cannot claim the cost of purchasing or laundry for clothes that are not specific to your occupation. These include black pants and white collar shirts.
You can however, claim clothing and footwear you wear to protect yourself from injury or illness. For example sun protection can be claimed if you work outdoors.
Uniform specific clothing can be claimed if it has your company’s logo attached or if it sits inside your employer’s uniform policy.
Working from home deductions
If you’ve set up a home office in your study or converted a spare bedroom into a work space, you need to be aware of the potential tax deductions you can claim when you come to complete your 2018 tax return in a few weeks time. Here’s my list of the top five deductions you could be eligible for.
Heating, cooling and lighting bills
You have to heat your home office in the winter and keep it cool during the summer. You also need light to see what you’re doing! That means that you can claim a proportion of the various household utility bills which relate to the time you spend working in your home office. You can’t claim for periods where the home office space is being used for other purposes and nor can you claim for the element of your bills that relates to the rest of your home.
Depreciation of home office furniture and fittings
If you kit out your home office with furniture such as desks, shelving and cupboards, you can claim a deduction for the decline in value of that furniture to the extent that it relates to your work activity. That’s likely to lead to a write-off of the cost over a period of several years (the “effective life” of the asset).
Depreciation of office equipment and computers
Similarly, if you purchase items of technology for use in your home office, you can depreciate them over their life and claim a deduction each year for the work-related element. That might include:
- Mobile phones
Low-cost capital items
Capital items such as furniture and computer equipment costing less than $300 can be written off in full immediately (they don’t need to be depreciated). That could include some of the cheaper tablets and mobile phones, as well as many printers.
Make sure you claim for the work-related proportion of other costs such as:
- Computer consumables (like printer ink)
- Telephone and internet costs
- Cleaning costs
What you can’t claim
Many people try to claim a percentage of rent or the interest on a mortgage if they work from home using a home office. This isn’t allowable.
Diary method/actual running expenses
Keep a diary to work out how much of your running expenses relate to doing work in your home office or other workspace. The diary needs to detail the time you spend in the home office compared with other users of the home office. Keep your diary record for a representative four-week period. The ‘work-use proportion’ you come up with over that four week period can then be applied to all your actual expenditure over the course of the year. Of the two methods this usually produces the larger deduction but the record-keeping requirements are more stringent.
You’ll also need to work out how big your home office is compared to the rest of your house (using floor area as a guide). This will enable you to work out the split between costs which relate to the office and costs which are domestic in nature.
Mobile phone use
If you use your own phone for work purposes, you can claim a deduction if you paid for these costs and have records to support your claims. If you use your phone for both work and private use, you will need to work out the percentage that reasonably relates to your work use. You can’t double-dip and claim for phone expenses that have been reimbursed by your employer.
To work out your deduction, you need to choose a typical four-week period from some point in the tax year.
If you have a phone plan where you receive an itemised bill, you need to determine your percentage of work use over that 4-week period. You can then apply that to the full year.
You need to calculate the percentage using a reasonable basis.
Professional associations, magazine subscriptions and trade union fees
As a part of your profession, you may be a member of an association – the good news is, you can claim your subscriptions. If you’re part of a trade union, your fees are also deductible.
Magazines can make a dent in your return, as can subscriptions to mags associated with your line of work. If you’re an investor, financial publications and research services are claimable. Think ahead and prepay next year’s fees before June 30 and claim your deduction now.
Gifts and Donations
Gifts or donations can only be claimed if the organisation you donated to has the status of deductible gift recipients (DGRs). There are four key criteria to claim a tax deduction for a gift:
- The gift must be made to a DGRs
- Whatever you are gifting it must truly be a gift
- It must be money or property and includes financial assets
- The gift must comply with any relevant conditions. Some DGRs have different conditions so it is always best to check
The amount that can be claimed depends on the type of gift. For money, it must be $2 or more. For property the rules vary depending on the type and value.
How much to claim
For gifts of money, you can claim a deduction where the amount of the gift is $2 or more. For gifts of property, there are different rules, depending on the type of property and its value.
You can claim the deduction in the tax return for the income year in which the gift is made. Your receipt – which you will need to substantiate the deduction – should tell you whether or not you can claim a deduction.
If you used the internet or phone to make a donation over $2, your web receipt or credit card statement can be used to substantiate the deduction. If you donated through third parties, such as banks and retail outlets, the receipt they gave you is also sufficient. If you contributed through ‘workplace-giving’ your payment summary shows the amount you donated.
Interest and investments
Deductions can be claimed for expenses incurred earning interest, dividends or other types of investment income. For interest income expenses, you can claim account keeping fees for investment purposes. Something to be mindful of though is if you have a joint account, you can only claim your share of the fees.
For shares and dividends, you can claim a deduction for interest charged on money borrowed to purchase shares. If the money borrowed was used for both private and income producing purposes you must portion it between each purpose.
Income protection insurance
Insurance premiums that you take out against loss of income can be included in your deductions. But don’t make the mistake of incorporating life insurance, critical care insurance or trauma insurance because these are not eligible elements for deduction. Policies paid for out of your superannuation contributions are also not allowed.
Self-education expenses can be claimed if your study is directly linked to your work. The course you undertake must lead to a formal qualification that meets the below criteria:
- the course must maintain/improve skills and knowledge required in your current job
- result in or is likely to, an increase in your income
You cannot claim self-education expenses that does not have a significant enough connection to your current employment.
You can claim the following expenses in relation to your self-education:
- accommodation and meals (if away from home overnight)
- computer consumables
- course or tuition fees
- decline in value for depreciating assets (cost exceeds $300)
- purchase of equipment or technical instruments costing $300 or less
- equipment repairs
- home office running costs
- internet usage (excluding connection fees)
- parking fees (only for work-related claims)
- phone calls
- student union fees
- student services and amenities fees
- trade, professional, or academic journals
- travel to-and-from place of education (only for work-related claims)
If an expense is partly for your self-education and partly for other purposes, you can only claim the amount that relates to your self-education as a deduction.
Tools and equipment
You can claim a deduction for some or all of the cost for tools and equipment if you require it for work purposes. If the work is used for both work and private expenses you need to divide what you can claim. The cost of the asset will affect the type of deduction you can claim:
- items that cost $300 or less and don’t form part of a set you can claim an immediate deduction
- items that cost over then $300 or form part of a set, you can claim a deduction for their decline in value. You can also claim the cost of repairing and insuring tools and equipment if need be.
Tax preparation fees and travel to see your accountant
Last year, if you were smart enough to enlist a tax professional to complete your return, you can claim for that this year. You can also declare your travel costs in getting to and from these consultations.
Always remember to prove your purchase
It is important to remember that anything you spend money on to earn income you can usually claim it, either as an immediate deduction or over time. That said it has to be a legitimate claim. You must be able to prove purchase, use the item at work and the expense is not private or domestic.