Unveiling the Power of Tax Deductions: Keep Calm and Be ReasonableAug 30, 2023
by: Sarah Pyke, Bond Financial
The Australian Taxation Office, affectionately known (or not) as the ATO, is a somewhat mythical beast.
We all have to deal with them, play by their rules and follow their guidelines. But at the same time, we seem to know so little about what they want from us!
A lot of people worry about being audited by the ATO or getting on to their naughty list. But to be honest, the ATO is actually quite reasonable. The whole tax system is built on the premise of reasonableness and the ATO is just there to oversee that.
Within this blog we will be discussing deductions and how to ensure we are correctly claiming deductions for work and business purposes.
What is a deduction? 🙋♀️
A deduction is an expense, an outflow of money, that has a direct connection (what we call nexus) to your employment or business income. The expense must have occurred because of, or to support, the income you generate.
For example, I am an accountant and I have professional membership fees to the Chartered Accountants Institute every year. These fees are directly related to what I do and therefore I claim them as a deduction in my return. If I however had a membership to the horticultural society, because I am a budding garden enthusiast (I am, but trying to keep plants alive is my main aim at this stage!), this would not be something I could deduct. Horticulture has no connection to what I do and my income.
As an individual, an expense is only deductible once it has been physically paid (cash basis). So timing is key when it comes to your deductions and getting them in before 30 June each financial year. As a business you could be on a cash or accruals (timing of invoices) basis.
We will go on to discuss later in this blog the different categories of deductions and a checklist of things you can consider claiming in your return. But firstly, how does reasonableness then factor into our deductions?
What is: Being reasonable? 🤔
The best example of where there is a level of reasonableness to be determined, is when you are deducting home office expenses. We all have a mobile and we all have internet, both of which we use daily to generate our income from either work or our business.
Now the ATO expects this, they expect to see these expenses. But they also know that you are using your mobile and your internet to watch Netflix, to post on social media, to call friends and family and conduct online shopping. So when you put 100% of your mobile and internet expense as a deduction in to your return, the ATO does not see this as reasonable. You are not accounting for the personal use that is inherently there.
Therefore, when claiming these expenses be sure to use a percentage that best reflects the portion of work/business use and personal use.
Another example of when to apply reasonableness: You buy a laptop bag. If you were to go on Ebay you could find a laptop bag for $30. Might only last you a year, but that’s pretty reasonable! Haha
What we do often see however, is people who go out and buy a Prada laptop bag, or a Gucci laptop bag. Now both these serve the same purpose, they are laptop bags. However, paying $30 for something versus $300-$400 + raises the question around reasonableness. Similarly, if you head to a work conference overseas and choose to fly first class, when you could have flown economy.
Both of things are connected to the income you’re generating, and therefore are deductible, but they’re not necessarily reasonable. Therefore, please keep in mind that a deduction isn’t purely how much it costs, but what it is and why it was incurred. The ATO just wants you to be reasonable.
What are the most common categories of deductions to claim? 🚗👚💸
Work related car expenses:
- Cents per kilometre method, up to 5,000km business use
- Log book method: You must maintain a logbook for 12 weeks and record all your trips, business and personal, to come up with a business use percentage. This business use percentage is then applied across all your car expenses – rego, insurance, repairs and maintenance, petrol etc
Work related travel expenses:
- This includes any travel related expenses for work/business - flights, ubers, tolls, parking, car hire, meals whilst travelling etc
Work related clothing, laundry or dry cleaning:
- This deduction is limited to specific work attire, branded clothing or specific pieces of clothing like medical scrubs or protective clothing that cannot be worn for everyday use like steel cap boots, fire resistant clothing, chequered chefs pants etc. Corporate wear or anything not industry specific will not qualify here.
Other work related expenses:
- This encompasses everything else including – working from home expenses, subscriptions, memberships, small assets you’ve purchased that can be expensed or deprecation on higher value home office purchases like a laptop or mobile phone.
Interest or dividend deductions:
- These deductions pertain to expenses you have incurred in earning interest and/or dividends. This might be bank fees, investment management fees, interest on a loan that paid for a share purchase etc. Not often used, but it is a deduction category.
- For donations to be deductible they must be paid to a Deductible Gift Recipient (DGR) these are recognised and recorded by the ATO and you can search for a charities DGR status at ABN lookup. You may also make donations to international aid agencies, but they must be registered in Australia as a DGR.
Cost of managing tax affairs:
- Our fees 😊 This is the cost of your accountant, or other advisor expenses.
Personal superannuation contributions:
- If you have made any after tax contributions to superannuation, the amount you have paid will be claimed here. Please ensure however that you lodged a Notice of Intent to Claim (NOI) with your superfund, otherwise you will not be able to claim this deduction.
- Here you will include things like income protection policy expenses.
Unlock the power of tax deductions. 📚🧮
Tax season often brings a sense of dread for many individuals and businesses, but it's essential to remember that it's not all gloom and doom. There are valuable opportunities for tax deductions that can significantly reduce your tax liability. By familiarising yourself with the various deductions available to you, understanding their eligibility requirements, and planning the timing of these deductions, you can significantly enhance your tax savings.
Remember, seeking professional advice is always a wise choice, especially when dealing with complex deductions or unique circumstances. So, take charge of your tax situation, uncover the hidden opportunities, and enjoy the benefits of keeping more of your hard-earned money in your pocket!
If in doubt, talk it out!
If you need any assistance or just want to chat further about any of the above content, please reach out to me Sarah Pyke from Bond Financial.