It doesn’t matter whether you work from a home office or are an employee of a large organisation, most Australians hope to get some money back from the Australian Taxation Office (ATO) when they prepare and lodge their annual tax return.
While bigger companies are likely to have a team of accountants working on their tax reporting, individuals and sole traders often have to manage it themselves. Before you begin putting your tax return together for the financial year, get to know the tax deductions you could claim.
What is a Tax Deduction?
The ATO points out that to claim a deduction as a small businesses:
- The expense must have been for your business, not for private use
- If the expense is for a mix of business and private use, you can only claim the portion that is used for your business
- You must have records to prove it
To claim a work-related deduction as an employee:
- You must have spent the money yourself and weren’t reimbursed
- The expense must directly relate to earning your income
- You must have a record to prove it (usually a receipt)
You’re entitled to claim deductions for expenses that relate directly to earning your income, says Joanne McCauley, managing partner at Jigsaw Tax & Advisory, a CPA firm that provides business tax and advisory services to small businesses. Be aware that what you can claim will depend on your circumstances, so she recommends seeking professional advice from your accountant or registered tax agent first.
“I have certainly seen some imaginative linkages between business income and expenses over the years. If audited, you need to convince the ATO that the claim is legitimate, so if the claim is a little unusual, you need a good argument.”
Given that the definition of what can be deducted is so broad, sometimes it’s better to consider what you can’t claim, she adds. “Costs for items like your driver’s licence cannot be claimed.”
To help, we’ve compiled a list of some of the tax deductions you may be able to claim on your taxable income – but don’t forget to check in with your accountant before you prepare and lodge your tax return. You can also check the ATO occupation guides for job-specific work-related expenses you can claim at tax time.
Tax Deduction Tips for Employees
1. Claiming Home Office Expenses
Given that COVID-19 (coronavirus) has driven so many of us to remote working, it’s likely you’ve invested in some new home office equipment, whether that’s furniture, tech or stationery. So that fancy new sit-stand desk, ergonomic mouse/keyboard combo or second monitor that has changed your working-from-home life – these are potentially claimable.
There are three methods you can use to claim your working from home expenses. Take the time, or consult a tax professional, to work out which method applies to your circumstances and then determine which gives you the best outcome.
- The 80 cents an hour shortcut method. This temporary measure, available for the whole 2020-2021 tax year, is an hourly rate for each hour worked from home during this period and includes ALL deductible running expenses.
- The 52 cents an hour fixed rate method. If you use this method, you need a dedicated work area, such as a home office, and a diary of a four-week period that represents your pattern of home-office use over the income year. This rate covers your heating, cooling, lighting, cleaning and the decline in value of home office equipment and furniture. You can additionally claim the work-related portion of phone and internet usage, computer consumables, stationery and computer decline in value expenses.
- The actual cost method, meaning you claim the cost or decline in value of each expense. To do this you must have detailed records.
2. Claiming Mobile Phone Calls
If you’re making calls that relate to your work, you can generally claim these as a tax deduction. To do so, make sure you keep the phone bills as a record. Other possible claimable expenses include internet connection costs for your home office. But beware: if your company reimburses you for mobile calls or your internet, you can’t claim it. And if you are working from home and use the 80 cents an hour shortcut method, you cannot claim this since it is already included in the rate.
Remember: you need to have spent the money yourself and haven’t already been reimbursed to claim a deduction.
3. Claiming a Work Bag
If you use a bag for work purposes, such as carrying a laptop, iPad, phone, calculator or anything else you need to do your job, you may be able to claim a tax deduction for the cost of the bag, says H&R Block’s director of Tax Communications, Mark Chapman. Be careful though: you’d struggle to claim that new Gucci clutch, he warns. “The handbag needs to be fit for work purposes, like carrying a laptop, and actually be used for work purposes.”
4. Claiming Gym Memberships
The ATO takes a hard line around tax deductions relating to personal health, fitness and gym expenses which generally cannot be claimed. In very limited circumstances some people may be entitled to claim gym memberships, where they require an extremely high level of fitness well above the norm.
5. Claiming Accounting Costs
Individuals can potentially claim accounting costs. If you went to see an accountant to prepare and lodge your tax return last year, you could claim it. Make sure you keep the receipt for this year to claim it next year, too.
6. Claiming Membership Fees
If you’re part of a professional organisation, such as a union or industry body that relates to your profession and you pay fees, you could claim these fees as a tax deduction.
7. Claiming Car Expenses
If you’re required to use your own car for work reasons, you can usually claim the expenses as a tax deduction. There are two ways to calculate this deduction – you either use a logbook for at least 12 weeks, or you can claim cents per kilometre. But you can’t claim normal trips to and from work.
8. Claiming Rental Property Expenses
Most people who own a rental property know they can claim deductions but some of these are overlooked, Chapman says. Tax deductions need to be claimed in the year they occur and can include things like bank fees, insurance, pest control, maintenance and repairs, letting fees, marketing costs, security fees, gardening and lawn mowing costs and bookkeeping fees. There are also other expenses you could claim over several years, such as depreciation.
9. Claiming Travel Expenses
If you travel away from your home overnight in the course of performing your employment duties, you can claim travel expenses such as meals, accommodation, fares and incidental expenses. Note: you can’t claim a deduction if the travel is paid for or reimbursed by your employer or another person. Receiving a travel allowance from your employer doesn’t automatically mean you can claim a deduction. You still need to show that you were away overnight, you spent the money, and the travel was directly related to earning your employment income.
Tax Deduction Tips for Business Owners
10. Claiming Insurance
If you pay for insurance premiums against loss of income, those amounts are also potentially tax deductible. Bear in mind that doesn’t include life insurance, critical-care insurance or trauma insurance, says Chapman. “It also excludes policies paid for out of your superannuation contributions,” he says. Businesses could claim the costs of insuring their property and, if you run a business from home, you may be able to deduct a portion of your home insurance premium.
11. Claiming Office Supplies &Equipment
For small business owners, specialist equipment can be a legitimate expense. For example, if you're in hospitality or retail and invest in new POS (point-of-sale) equipment, it could be deducted. And while stationery and workspace supplies are things you probably think to deduct, remember other items like milk for the work kitchen are also possible deductions. Why not get organised and schedule regular deliveries of milk and fruit for the next 12 months, which could also be claimed against your tax.
It Pays to Keep Tax Receipts Organised
Receipts for a whole year’s worth of expenditure can seem pretty overwhelming, regardless of whether they’re digital or paper. But simple document box files and expanding files can make a huge difference to prepping your return. Start a new box file or folder for each month, so when tax time comes around, everything is already filed in the one place. Remember, too, that you’re expected to keep files for five years, whether you’re an employee or a business, so if you do have lots of paper records, archive boxes are just the ticket.
Another clever way to keep track of receipts is by digitising. You can photograph or scan the receipts to file on your computer. If space is an issue, use a separate hard drive or cloud software to manage the snaps. Or consider a Receipt Management system, which takes on the hard work for you, and even uploads the information into your online accounting software.
There are many ways to keep your receipts and invoices organised for tax time, from physical filing systems to the free myDeductions tool in the ATO app, which is easy to use for employees and sole traders alike.
Don’t Forget! There Are Benefits to Claiming Tax Deductions
If you’re wondering whether it's worth the effort of claiming, the answer is yes. Some of the claims might seem small but they add up pretty quickly. In recent years the ATO experienced a dramatic surge in individuals lodging their tax returns early. Just three weeks after the end of the 2018/19 financial year, it had returned a total of $3.1 billion to taxpayers. On average, each person received a refund of $2391 – which is a lot of spare cash to splash on new office supplies and work-related items to set you up for the year ahead.