Tax Deductions
What are they?
Tax deductions are expenses or costs that you have incurred to earn your income.
The Australian Tax Office (ATO) allows you to reduce your taxable income by the cost of these expenses. Reducing your taxable income means paying less tax.
What are some common tax deductions?
- Work related expenses: clothing, protective clothing, work education, union fees, membership fees
- Home office: costs for working from home, phone, internet, electricity, depreciation of office furniture, computer consumables
- Vehicle and travel: Fuel, maintenance, insurance for work related car trips, travel to work related meetings/conferences
- Education: studies were work related or related to producing your income
- Gifts and donations: donations made to eligible charities (a deductible gift recipient)
Why is understanding tax deductions important?
Tax deductions are important because they save you money. Not understanding and not utilising tax deductions where possible leads to unnecessary overpayments of tax.
Case Example #1 – Concreter Jennifer claiming $5000 in tax deductions
Jennifer starts full time work as a concreter and earns $90,000.
Marginal tax rate: for every $1 over $45,000 – she pays 32c in tax (32%) (this includes the 2% medicare levy)
She claims $5,000 in tax deductions ranging from courses of how to lay concrete, protective clothing and equipment, concreting union fees and car related expenses for travelling to work sites.
Jennifer’s tax is calculated on $85,000 (Base Salary of $90,000 less $5000 tax deductions).
She pays $17,988 in income tax
Her post tax income is $72,012.
Case Example #2 – Concreter Jennifer claiming $0 in tax deductions
If she claimed no tax deductions, she would’ve paid $19,588 in income tax with a post tax income of $70,412
That’s a saving of $1,600 or 32% x $5000.
Hence the tax savings (money in your pocket) you can make is calculated by the marginal tax rate (including medicare levy) multiplied by the total tax deductions
How do I claim a tax deduction?
Using an Accountant
If you are using an accountant – they will normally have a list of common deductions for your occupation where you’ll have to provide the relevant receipts. If you unsure – I would still provide them anyway and the accountant can decide if it’s a valid deduction or not.
Lodging own Tax Return
If you are lodging your own tax return through myTax in the myGov portal, follow these easy steps
Step #1: Tick “You had deductions you want to claim” on the Personalise Return page
Step #2 Click on Add/Edit in the Deductions Section
Step #3: Add your work related expenses in the correct category and the click ‘Save and continue’
Note that you need to keep your receipts for at least 5 years from the date you lodge your tax return.
I highly recommend having a digital folder throughout the year of where you add all the receipts so it’s easier at tax time and they can be easily accessible if required by the ATO.
How do I know if what I am claiming is correct?
The ATO provides occupation and industry specific guides on their website, follow the link here: https://shorturl.at/p59Iy or google “Guides for Occupations Tax Deductions”
If you are unsure, it is best to consult a tax professional or not include it as this may trigger a tax audit.