Australian Tax Deductions Guide

Tax Deduction Basics

Tax deductions reduce your taxable income, which means you pay less tax. Understanding the fundamental principles will help you maximize your legitimate claims and avoid costly mistakes.

What Makes an Expense Deductible?

For an expense to be tax-deductible, it generally must satisfy these criteria:

• You must have spent the money yourself (and not been reimbursed)
• The expense must directly relate to earning your income
• You must have records to prove the expense (receipts, bank statements, etc.)

Three Golden Rules of Deductions

The ATO emphasizes these three rules for claiming deductions:

1. You must have spent the money - You can't claim a deduction for something you haven't paid for.
2. The expense must be directly related to earning your income - Personal expenses are generally not deductible.
3. You must have records to prove it - No documentation typically means no deduction.

Understanding the Tax Benefit

The tax benefit of a deduction depends on your marginal tax rate. For example:

Work-Related Expenses

Work-related expenses are costs you incur as part of performing your job. These are typically the largest category of deductions for most employees.

Tools, Equipment, and Other Assets

You can claim a deduction for tools, equipment, and other assets you use for work:

• For items costing $300 or less, you can claim an immediate deduction
• For items costing more than $300, you must claim the depreciation over the effective life of the asset
• If you use the item for both work and private purposes, you can only claim the work-related portion

Examples include tools, calculators, computers, phones, and professional equipment.

Professional Subscriptions and Union Fees

You can claim a deduction for:

• Union fees
• Professional association memberships
• Journal subscriptions related to your profession
• Professional license fees

Phone and Internet Expenses

If you use your personal phone or internet for work-related purposes, you can claim a deduction for the work-related portion:

• Keep a diary for a representative 4-week period to establish your work usage pattern
• For minimal use, you may claim up to $50 without detailed records
• For significant use, calculate the percentage of work use and apply it to your expenses

Industry-Specific Deductions

Many occupations have specific deductions that apply only to that industry. The ATO provides occupation-specific guides for:

• Healthcare workers
• Teachers
• Construction workers
• IT professionals
• Real estate agents
• Many other professions

Check the ATO website for guides specific to your occupation.

Home Office Expenses

With more Australians working from home, home office expenses have become increasingly important deductions.

Methods for Calculating Home Office Deductions

There are three methods for calculating home office expenses:

1. Fixed Rate Method

Claim 67 cents per hour for each hour worked from home, covering:

• Electricity and gas for heating, cooling, and lighting
• Decline in value of office furniture and furnishings
• Cost of repairs to office furniture and furnishings
• Cleaning expenses

You can separately claim:

• Phone and internet expenses (work-related portion)
• Computer consumables and stationery
• Decline in value of equipment (e.g., computers, laptops)

2. Actual Cost Method

Calculate the actual expenses for your home office, including:

• Electricity and gas (calculate work-related percentage)
• Decline in value of equipment, furniture, and furnishings
• Cleaning expenses (for home office area)
• Phone and internet expenses (work-related portion)
• Computer consumables and stationery

This method requires more record-keeping but can result in higher deductions.

3. Shortcut Method (COVID-19 Special Arrangement)

For specific periods during COVID-19, the ATO allowed a simplified method of 80 cents per hour. Check the ATO website for current availability of this method.

Record-Keeping for Home Office

Regardless of which method you use, you need to keep records of:

• The number of hours you worked from home (diary or timesheet)
• Expenses you incur (receipts, bills)
• If using the actual cost method, you'll need to calculate the work-related percentage of expenses

Vehicle and Travel Expenses

You can claim vehicle and travel expenses directly related to your work, but not for the cost of normal trips between home and work.

When Can You Claim Vehicle Expenses?

You can claim when you:

• Drive between separate workplaces
• Drive from your normal workplace to an alternative workplace and back
• Drive from home to an alternative workplace and then to your normal workplace
• Perform work-related activities requiring you to use your car
• Transport bulky tools or equipment that you need for work

Methods for Calculating Vehicle Expenses

There are two methods for calculating vehicle expenses:

1. Cents Per Kilometer Method

• Flat rate of 78 cents per kilometer
• Maximum of 5,000 business kilometers per vehicle per year
• No receipts required, but you need to justify how you calculated your business kilometers

2. Logbook Method

• Keep a valid logbook for a minimum 12-week representative period
• Determine the percentage of business use
• Claim this percentage of all car expenses (fuel, insurance, repairs, depreciation, interest on car loans, registration, etc.)

Work-Related Travel Expenses

You can claim travel expenses when you travel away from home overnight for work purposes, including:

• Meals, accommodation, and incidental expenses
• Transport costs (flights, trains, taxis)
• Work-related portion of travel expenses if combining business and personal travel

You cannot claim expenses that are reimbursed by your employer or for the private portion of a combined business/personal trip.

Clothing and Laundry Expenses

You can only claim a deduction for specific types of clothing expenses.

Eligible Clothing Expenses

Deductible clothing expenses include:

• Occupation-specific clothing: Clothing that identifies you as a member of a specific profession (e.g., chef's checked pants)
• Protective clothing and footwear: Items that protect you from injury or illness at work (e.g., hard hats, safety boots)
• Compulsory uniforms: Distinctive clothing your employer requires you to wear that identifies their business
• Non-compulsory uniforms: Only if registered with AusIndustry (look for the Registered Uniform logo)

You cannot claim conventional clothing (e.g., black pants, white shirts) even if your employer requires you to wear them.

Laundry and Dry-Cleaning

You can claim the cost of washing, drying, and ironing eligible work clothes, or having them dry-cleaned:

• For laundry expenses under $150, you can claim:
• $1 per load for work clothes only
• 50 cents per load for a mix of work and private clothing
• For claims over $150, you need written evidence of all laundry expenses

Self-Education Expenses

You can claim self-education expenses when the course directly relates to your current employment and either:

• Maintains or improves skills needed in your current job
• Is likely to increase your income from your current employment

You cannot claim self-education expenses for courses that only relate to a new job or a career change.

Eligible Education Expenses

Deductible education expenses include:

• Course fees (not including HELP/HECS payments)
• Textbooks and professional journals
• Stationery and computer consumables
• Student union fees
• Home office expenses related to study
• Internet usage for educational purposes
• Travel between work and education venue
• Depreciation of assets like computers and printers

$250 Reduction

The first $250 of self-education expenses are not deductible. This is known as the "$250 reduction" and applies to certain categories of expenses. Speak to your tax professional about how this applies to your situation.

Investment-Related Deductions

If you earn income from investments, you may be eligible to claim related expenses.

Investment Property Deductions

Rental property owners can claim:

• Interest on loans to purchase the property
• Property management and agent fees
• Council rates and land tax
• Insurance premiums
• Repairs and maintenance
• Depreciation on assets and capital works
• Advertising for tenants
• Travel expenses to inspect or maintain the property (limitations apply)

Capital expenses (improvements) cannot be claimed as immediate deductions but may be claimed as capital works deductions or depreciation.

Share Investment Deductions

Investors in shares and other securities can claim:

• Interest on loans to purchase shares or investments
• Ongoing management fees
• Subscription costs for investment-related publications or software
• Internet costs related to managing investments
• Advisor fees
• Travel expenses to attend investor meetings or seminars

Charitable Donations

Donations of $2 or more to registered charitable organizations are generally tax-deductible.

Requirements for Claiming Donations

• The organization must be a Deductible Gift Recipient (DGR)
• It must truly be a donation (you receive no material benefit in return)
• You must have a record of the donation (receipt, bank statement)

You cannot claim donations that provide you with a benefit (like raffle tickets, charity dinners, or auction items).

Workplace Giving

If you make donations through workplace giving (salary sacrifice), these will already be reflected in your reduced taxable income on your payment summary and should not be claimed again.

Record-Keeping Requirements

Proper documentation is essential for claiming deductions. The ATO can deny claims without adequate supporting evidence.

Types of Records to Keep

• Receipts: Original or electronic receipts showing date, supplier, item description, and amount
• Bank statements: Can serve as secondary evidence if receipt is lost
• Tax invoices: Required for GST-related claims for businesses
• Logbooks: For vehicle expenses if using the logbook method
• Diaries: To record small expenses, usage patterns, or time spent working from home
• Evidence of travel: Boarding passes, travel itineraries, and accommodation receipts

How Long to Keep Records

Generally, you should keep records for five years from the date you lodge your tax return. For assets subject to capital gains tax, keep records for five years after the asset is disposed of.

Electronic Record-Keeping

The ATO accepts electronic records if they are clear, readable, and contain all the required information. Consider using:

• The ATO app's myDeductions tool
• Cloud storage for digital copies of receipts
• Dedicated expense tracking apps
• Spreadsheets for organizing deduction categories

Common Mistakes to Avoid

The ATO closely scrutinizes tax deductions. Avoid these common pitfalls:

Claiming Without Spending

You cannot claim deductions for expenses you haven't actually paid for, even if they seem standard for your occupation.

Double-Dipping

You cannot claim deductions for expenses that have been reimbursed by your employer or claimed elsewhere.

Claiming Private Expenses

Only the work-related portion of expenses is deductible. Personal use portions must be excluded.

Lack of Documentation

Without proper records, the ATO can deny your claims, even if they are legitimate expenses.

Round Numbers

Reporting suspiciously rounded amounts (like exactly $300, $500, etc.) may trigger ATO scrutiny. Always claim the actual amount spent.

Claiming Outside Your Occupation

Claims that don't align with typical expenses for your occupation may attract unwanted attention from the ATO.