On the face of it, ‘What can I claim on tax?’ may seem like a simple question with a simple answer. But, as with many tax-related tasks, complications can arise. At Etax, it’s a common question we get from our clients. And it’s not surprising, as tax deductions are often the single biggest way that taxpayers can boost their tax refund each year.
In this article, I cover a range of return-related topics, including the different types of deductions, expenses people often miss or forget, the rules for claiming, and some common mistakes people make that might even lead or contribute to trouble with the Australian Taxation Office (ATO). You can find out about:
How do tax deductions work?
You don’t get a dollar-for-dollar increase in your tax refund for each deduction you claim. Instead, each deduction you claim on your tax return reduces your taxable income. This means that you’re required to pay tax on less of your income, and you get the difference back in your refund. Here’s a hypothetical example to illustrate.
Susie earns $75,000 per year from her job and paid $17,500 of tax during the year. With no deductions on her return, her refund estimate is $1,158. However, Susie has $1,500 of work-related deductions to claim on her return this year. Once they are added to her return, her ‘taxable income’ drops to $73,500 and any additional tax she paid on that $1,500 of income is added to her refund. In Susie’s case, her refund improves by $517 to $1,675.
Keep in mind that not everyone gets a refund. Even with deductions, you may not get one. Some Australians, instead, may have less extra tax payable in their tax return due to tax deductions.
What types of tax deductions are available?
There are several types of deductions you might be eligible to claim if you want to boost your refund, such as work-related deductions, investment deductions and other types of deductions.
As the name suggests, these are any out-of-pocket expenses you pay for that are related to doing your job. They can include:
- Car expenses
- Travel expenses
- Uniform expenses
- Self-education expenses
- Work from home expenses
- Phone expenses
- Union fees
- Sun protection
4 golden rules for claiming work-related deductions
Not sure if you are allowed to claim a work-related deduction? Remember these four golden rules of thumb:
- The expense must be directly related to your job.
- You must have paid for the item yourself.
- You must not have been reimbursed for the item from your employer.
- You must have evidence to support your claim.
If you invest in the share market or property, then you may be eligible to claim expenses related to those activities. Common deductions include:
- Interest deductions (for money you borrowed to invest)
- Account-keeping or management fees
- Real estate fees
- Investment property expenses, including:
- Body corporate fees
- Capital works (expenses related to wear and tear of the structural parts of a property, or items permanently fixed to a property)
Find out more: What investing in shares and ETFs means for your taxes
Other types of deductions
Finally, there are also some other deductions not covered above. If you had any of these during the year, make sure to include them on your return:
Top forgotten deductions
Here are some common deductions people often claim, but forget or don’t know about:
- Tax agent fees: If you’re like many Australians and you use a tax agent each year, the fees you pay are tax deductible on next year’s return.
- Work from home expenses: These are even more common now that COVID-19 is part of everyday life. The tricky part is knowing which method to claim. The ATO’s new 80c ‘shortcut’ method sounds attractive, but can often lead to lower claims for taxpayers.
- Mobile phone expenses: If you use your personal phone to make (or take) work-related calls, you can often claim a portion of the bill at tax time.
- Internet expenses: Same goes for internet bills. If you use your personal internet to work at home, you can include a work-related portion as a deduction on your return.
3 common tax deduction mistakes
The ATO is taking an increasing interest in the deductions taxpayers claim, and is looking more closely than ever at what people include on their return. Be sure that you’re across these three common errors we see time and time again, to reduce the chances of ATO troubles at tax time.
- Claiming an incorrect uniform. Just because you are required to wear specific clothes to work does not automatically mean those expenses are claimable. Generally, a compulsory uniform must also have a company logo on it or be protective in nature to be allowed. Items like general business clothes do not qualify.
- Failing to apportion an expense. This is common when you live with someone else, like a spouse, and have shared bills. When calculating a claim, you can only claim work-related expenses from “your share” of the bill, not the entire amount. For example, if you live with your spouse and your internet bill is $120/mth, in the ATO’s eyes your share would be $60 and that’s the amount you calculate your work-related claim from.
- Not having evidence to support claims. Even if you have a legitimate expense, if you don’t have evidence to support the deduction, the ATO won’t allow it. If it audits you down the track and you can’t provide supporting documents like a receipt or diary, you’ll be forced to pay back the incorrect claim and could even face financial penalties on top of that.
Is it worthwhile claiming tax deductions?
Whether claiming tax deductions on your tax return is worth the time it takes for you will depend on your circumstances, but the short answer is it can definitely be worth looking into, as you may be able to save money, and sometimes, a significant amount of it. While some tax deductions seem small initially, they can add up. That’s why it’s important to sweat the small stuff and keep good records if you can.
To illustrate this point, here’s another hypothetical example with two taxpayers earning the same income:
George earned $70,000 this year and paid $16,000 in tax. George keeps good records and therefore can add $1,200 worth of deductions on his return this year. His refund is $1,797.
Max also earned $70,000 this year and paid $16,000 in tax. Max doesn’t keep many records of his expenses and can only claim $300 of deductions on his return. His refund is $1,486.50.
The difference is $310.50, with George receiving a higher tax refund.
My advice is simple: save every receipt and ask your accountant if you’re not sure. If you use an accountant, it’s their job to help you ensure you claim everything you’re entitled to. And remember that if you choose to go it alone and lodge your return directly to the ATO: their job is to collect tax revenue, and you aren’t paying them to help you get a better refund.
Cover image source: Indypendenz/Shutterstock.com.