You probably know you need to save your receipts so you can claim as many tax deductions as possible. But do you know what a tax deduction is or how it works? Never fear – we’ve condensed all the complex info into a simple report that avoids confusing jargon and gets right to the point. In a few minutes, you’ll be able to explain tax deductions to your friends like a pro!
How Do Tax Deductions Work?
To answer this question, it’s important to quickly cover the basics of the Australian tax system. Every working Australian resident who earns more than $18,200 in a financial year must pay tax. Australia’s tax system operates on a progressive scale, meaning the more you earn, the higher the percentage of tax you’ll need to pay.
Your employer will withhold an amount each pay period and deliver it to the Australian Taxation Office (ATO) on your behalf. This is known as Pay-As-You-Go (PAYG) tax withholding. Your employer should also pay at least 10.5% of your Ordinary Time Earnings (OTE) into your superannuation account. If you don’t have a superannuation account, your employer will open one for you.
With the foundations established, let’s dive into the specifics of tax deductions. During the year, you may have to pay some work-related expenses out of your own pocket. When tax time rolls around, you’re entitled to claim these expenses as tax deductions. Doing so will lower the gross (aka total) income from which your tax is worked out, thus reducing the amount of tax you have to pay.
Since your PAYG withholding doesn’t factor in your work-related expenses, there will be a difference between what you paid and what your tax return says you owe. That difference is your tax refund. The more deductions you can legally claim, the higher your refund will be.
Tax deduction example:
Sally earns $60,000 per year and has paid $9,967 in income tax and a $1,200 Medicare levy, leaving her with a take-home pay of $48,833. Sally calculates that she is able to claim $1,500 of tax deductions. This lowers her taxable income to $58,500, meaning she can look forward to a $520 tax return.
Pro Tax Tip: Want to know how much tax you’ll need to pay this year? Try our income tax calculator.
Note that the example above is very simple. Many factors contribute to the amount you’ll arrive at on your tax return, and an accountant can help you achieve the largest refund possible.
What Tax Deductions Can I Claim?
There are plenty of perfectly legal tax deductions that most Australians have the right to claim. It’s a good idea to thoroughly understand what you can claim at the start of the tax year so that you don’t miss out. Knowing precisely what you can and can’t claim will help you keep more accurate records and maximise your tax refund each year. Why pay more tax than you have to, right?
To ensure you’re all over the claimable tax deductions in Australia, we’ve broken them down into their categories below.
Home Office Expenses
Do you ever finish reports at home or phone clients before or after business hours? Have you been working from home since the pandemic? Maybe you have a side hustle or even run a business from home. If your home office helps you earn an income, there are a number of expenses you can claim to reduce your taxable income dramatically.
Commonly claimed home office expenses include:
- Running costs – heating, cooling, electricity
- Occupancy costs – rent and insurance
- Capital equipment
- The depreciating value of office equipment and furniture
- Repairs and cleaning
- Phone and internet costs
From the 2022-2023 tax year on, the ATO offers two options for claiming your home office expenses: the revised fixed rate method or the actual cost method.
Still working on tax returns for previous financial years? You can claim home office costs using the 80 cents per hour short-cut method, the 52 cents per hour method, or the actual cost method for the following financial years:
- 2019–20 (but only from March 2020 to 30 June)
- The full 2020–21 financial year
- The full 2021–22 financial year
If you still need to lodge tax returns from these years, we highly recommend contacting ITP without delay. Our accountants can help you tackle this stressful task efficiently, getting it off your mind while minimising penalties wherever possible.
Pro Tax Tip: You will need to keep a work diary detailing when you’ve worked from home, the hours worked, the reason for your work, and receipts. When it comes to claiming tax deductions, the more you can back yourself up, the more certainty you’ll have that you’re legally able to claim.
Car and Vehicle Expenses
Have you had to take a trip to a client’s premises during work hours after arriving at the office? Did you have to work at another location that’s not your usual place of work? Have you attended a conference and not only driven to the event but had to pay for parking while you attended? When it comes to claiming car expenses, nothing should be overlooked, no matter how small you might think the costs are. They all add up, and even the smallest tax deduction can be all it takes to drop you down a tax bracket!
Car expenses such as petrol, oil, road tolls, parking, cleaning and repairs are all valid expenses. You can claim these expenses using the actual cost method only if you have maintained a motor vehicle logbook for three months. This is crucial in determining the business percentage of travel. If you wish to use the simpler cents per kilometre method, you’ll simply need to keep a logbook or diary of the number of kilometres travelled for work purposes.
Pro Tax Tip: You don’t need to keep a logbook for every journey. You can log the details of your journey, the reason for your trip, and the odometer reading for a consecutive 12-week period and then average that out for the year. You can do this every five years if your travel is consistent. Note that you should keep a logbook for each vehicle used for work, along with receipts to back your claims.
In most cases, you can’t claim the cost of travel from your home to your workplace. The ATO deems that a personal expense and does not accept it as a tax deduction.
Work-Related Travel Expenses
Did you have to travel for work? Perhaps you stayed interstate for work or had to make an overnight trip? Any costs you incurred for travel, accommodation, or meals away from home, even if it’s just overnight, are tax deductions.
Some deductible travel expenses include:
- Air, bus, taxi, train, rideshare, and car hire costs
- Road tolls
- Any bags you purchased to accommodate your travel
Pro Tax Tip: Keep a travel diary that details the reason for your trip, the costs incurred, and the dates of travel to back your claims. It’s a good idea to log your travel as you go so you don’t forget when it’s time to claim your expenses at the end of the financial year.
Bonus Tax Tip: You can only claim the work portion of your expenses. If you’ve travelled and incurred expenses for personal reasons – for example, you’ve gone to a show or movie on your own time – then these are your own costs. In other words, you’ll have no luck trying to claim them.
Tax Deduction Rules
You can’t claim everything. The expenses you claim as a tax deduction must directly relate to your employment or how you earn your income. You can’t claim any personal expenses. If the expense is a mix of business and personal costs, then you’ll need to apportion the business cost and only claim that part of the total. You must also have records to back your claim.
Valid records to back up tax deductions include receipts, logbooks, bank receipts, tax invoices, contracts, and other financial documentation. Records must be in paper or electronic format. They must be in English, and you must keep them for five years.
There are so many tax deductions that it wouldn’t be helpful to list them all here. That would only be confusing since not everyone qualifies for every deduction. The best course of action is to contact your local ITP tax accountant, who can help you find all the deductions you’re entitled to claim. Our friendly tax agents will help you organise your records and offer advice on tracking your expenses. You can also seek advice before you incur expenses to ensure you’re taking the best strategic approach. Every cent counts towards a bigger tax return! Phone 1800 367 487 and chat with a friendly tax professional today.