There are many misconceptions about what is tax deductible to an individual (non-business) taxpayer. In 2018 the ATO have outlined that they believe there is an $8bn shortfall in tax revenue from individuals over-claiming expenses - which tells us that the ATO will be looking at individuals much more than they ever have.
To assist you in understanding what items are claimable, we have our "plain english" guidelines on the most common types of deductions below.
The general premise for motor vehicle claims to be deductible is that you own or lease the car, the travel is required for work, and you are “on duty” while traveling.
There are exceptions to these rules for when you are carrying bulky tools that cannot be left at work (i.e. too heavy or big to transport any other way), or if you are an itinerant worker (multiple workplaces per day).
For the 2017 year onwards, there are 2 methods of calculating your motor vehicle claims: the cents per kilometer (CPK) method, and the log book method.
The CPK method is the more relaxed of the two in terms of the records and substantiation required. You need to have reasonable evidence of your work trips, which could simply be a diary of relevant trips across the year, and the kms of each trip. This method is limited to 5000kms, and it covers all motor vehicle costs (such as depreciation, interest, fuel, registration, maintenance, etc).
The log book method is more onerous, but in general achieves a better result. You must maintain a log of all trips across a 13 week continuous period (work related and private), and detail dates, purpose, odometer readings at start and end, etc. From this log we work out what % of your travel is business related, and then apply that across all expenses. This also means that you need to keep records of all expenses, such as fuel, maintenance, registration, insurance, etc. You cannot estimate your work related %, or your expenses under this method.
Travel to and from home
In most cases, travel from home to work is not deductible because it is travel before (and after) you start your work day. Even if you stop at the post office or supermarket in the middle, that travel is still not claimable.
Being “On Duty”
This means that you are under the control of your employer, and in most cases it will be a requirement that you are being paid for this time. Again, this rules out home to work travel because you are not under your employer’s control during this time, and not being paid.
Convenience vs Necessity
Travel performed out of convenience can prevent it from being deductible. An example would be stopping at the supermarket on the way to work because it is more convenient than going during the work day – this doesn’t make the travel deductible.
The same premise also applies to where you live – the ATO sees this as a personal choice. If you need to stay away from home because the commute is too far to do daily, this is not deductible because it is an expense of convenience.
Similar to motor vehicle claims, for other travel (such as taxi’s, airfares, etc) to be deductible they need to be necessary and not out of convenience, and incurred while “on duty”.
“Special demands travel”, which would include things like heading interstate to visit another branch may be deductible even though they may fail the above tests because it is a particular direction from your workplace.
The convenience vs necessity differentiation becomes prevalent when working away from home. Are you required to live away from home? Or is it merely more convenient? If you are on a job 2 hours away from home you might feel that you need to stay in a hotel nearby, but ultimately it’s not necessary.
The deductibility of meals is largely misunderstood by the general public. There are generally only two circumstances where your meals are claimable:
– You are on deductible overnight travel; or
– You are working overtime AND being paid an overtime meals allowance.
Even if you are a salesperson in the car all day everyday with no lunchroom to store your food – it doesn’t make your purchased meals deductible.
Living Away From Home
A true “living away from home” arrangement is one where you are required to be away from home for work on a semi-permanent basis – think of a fly-in fly-out arrangement where you are working somewhere remote.
Travel between home and your “work-home” is not deductible.
Receipt of an Allowance
The receipt of a travel allowance, meal allowance, or any other type of allowance doesn’t make travel expenses, meal expenses, or any other expenses deductible where they wouldn’t normally be (the exception being overtime meals).
If you claim a travel expense, you need the evidence to back it up (including the explanation as to why that travel is deductible). There is no amount that the ATO allow you to have without receipts, despite what your neighbor may tell you.
In some circumstances there are “reasonable amounts” that the ATO will accept with less evidence required – but you still need evidence (bank statements and diary entries may suffice in these circumstances).
The first thing to point out is that ordinary clothing is almost never deductible. It doesn’t matter if your employer forces you to wear a particular colour, style, or brand – it is not deductible.
For clothing to be deductible, it generally must be either:
– A compulsory uniform with a logo;
– A registered uniform; or
– Occupation specific clothing
Clothing that is specifically designed to protect you from work related hazards, injury, disease, and/or death are claimable.They key here is that the clothing must be specifically designed for that purpose. Jeans, while they do provide greater protection than most clothing, are not designed to protect from work hazards and are not deductible.
In the ATO’s words, “must be prescribed by the employer in an expressed policy that makes it a requirement…to wear that uniform while at work, and which identifies the relevant employer”.
The ATO also consider that for a uniform to be identifiable, it needs to have limited colour, style, and fabric choices (as to not dilute the identification of the brand), and the uniform must be “durable” as in the overall concept or look of the clothing should be intended to last for a number of years.
Occupation Specific Clothing
For example, a nurse’s uniform, ceremonial robes, chef’s pants, barrister’s robes, and other items that are readily identifiable to one specific occupation. Clothing that can be attributed across a number of occupations (such as a business shirt) are not deductible.
Sun Protection Expenses
If you are required to work outdoors, then the cost of glasses, hats, and sunscreen can be deducible also.
Landry and Dry Cleaning
The cost of laundering and maintaining clothing that fits the above definitions are claimable. It’s difficult to ascertain the actual cost of this (what does it cost you to put a load of washing on?), so the ATO generally allow a rate of $1 per wash (or 50c per wash if work clothing is mixed with personal clothing).
Aside from laundry costs, be prepared to keep your receipts for all clothing purchases. Failure to do so may result if your deductions being denied by the ATO.
We need to educate ourselves and improve our skills to get a job (or a better job), so surely these costs are deductible right? Not usually.
This is also regardless of whether your employer mandates that you undertake the training.
Education to Open Up New Opportunities
The cost of gaining new knowledge or skills is a “capital” outgoing and not deductible. Capital is a strange term to use when talking about an individual, so think of it as a house. The money you spend on improving your house is not deductible – even if it leads to greater rent income. The same applies to you and your education.
With the above in mind, education that opens up new doors for you are not tax deductible. That is regardless of whether that door opens up into the hallway of your same employer, or a different one.
Education to Maintain Your Existing Skills and Knowledge
Following the house analogy, costs incurred on your property to maintain its current status (such a repainting, repairing gutters, etc) are deductible. Similarly, your education costs that maintain your current level of knowledge are also deductible.
For example, a public tax accountant that does education around tax changes will be able to claim those costs as a tax deduction.
The Grey Area
If the education is likely to lead to increased income from your current income earning activities, then it can be deductible. Confused?
Direct from a court case, this example may assist you.
“Hatchett” was a primary school teacher who as an “untrained” teacher was being paid a lower pay rate when compared to “trained” teachers – even though he was doing the same job, the same hours, and had the same obligations.
Hatchett enrolled in a “Teacher’s Higher Certificate” to gain the qualification to enable him to jump to the higher pay scale.
These fees were held to be tax deductible by the courts.
In the same case, Hatchett also undertook a University course which included an Arts subjects which would allow him to teach different classes and would also qualify him to become a headmaster down the track.
The courts disallowed the University fees because these were opening up new income earning activities.
If Your Education is Claimable
If your education is of the type that is claimable, then the types of items that are deductible include:
– Tuition fees (however we note HECS / HELP fees are not deductible);
– Books and resources;
– Student union fees;
– Travel related to attending the educational institution;
– Phone, internet, computer, stationary, and home office expenses; and
– Interest on borrowings to pay for the above.
In relation to your costs, keep receipts of everything. If your claims include motor vehicles, home office, or other items where the ATO allow diary evidence, make sure you have those ticked off too.
You will also need to have evidence that the education you are claiming does fit the criteria (i.e. maintains your existing knowledge), and is not designed to improve your knowledge to open up further job opportunities. The ATO challenge these, and unfortunately the onus is on you to prove it is deductible. The ATO does not have to prove you wrong – they are afforded the assumption that your education is not claimable by default.
Many of us work from home, but there are certain conditions that you must meet before you are able to claim a portion of your home expenses, and these vary based on your circumstances.
In general, home office expenses are grouped into two categories:
– Running expenses: Such as electricity, gas, cleaning, insurance, furniture, etc; and
– Occupancy expenses: Such as mortgage, rent, council rates, water, etc.
Home Office for Personal Convenience
Where you perform work activities from home because it’s easier or more convenient than doing it at the office (even if the hours required of you are long), then you are limited in what you can claim.
You are essentially limited to claiming costs that are additional to what would have been incurred by the household anyway. For example, if your home has a ducted heating system, it is going to cost you the same amount to heat your home whether you are working in the study or not.
Home as a Place of Business
In order to qualify here you generally need to demonstrate that your home office is distinctly separate from the rent of your home and private living spaces, and is used pretty much exclusively for work purposes.
Two barristers have already tried and failed to claim that a spare bedroom was a “place of business” because:
– there was no physical separation of the study area to the rest of the house; and
– the barristers had chambers they could work from.
An example may be a massage therapist that sees some clients at home after hours, and they have a dedicated room setup for this.
In this case, you can be more generous with what running costs you claim, and if you are renting you may be eligible to claim a portion of that also. Note that we are not suggesting you claim mortgage interest or other occupancy expenses.
Home as Your Only Place of Business
If your home is your only business premises, then it opens up the claims you can make. However (*cue the big warning*), claiming your home as a business premises is likely to mean that it no longer qualifies for the main residence capital gains tax exemption.
You can claim the relevant proportion of all housing costs (mortgage interest, rent, rates, electricity, gas, insurances, etc). You should work this out based on the floor area of the building used for business vs the entire floor area.
The ATO have an administrative concession that allows people to claim 45 cents per hour that use their home as a place of business to cover running costs. You need to keep a diary for 4 weeks detailing your use, and that will be enough for the year.
If you prefer to claim a percentage of your expenses based on floor area, be prepared to back up each and every item with a receipt.
Gifts and donations are tax deductible when made to an eligible organisation. While the list is too long to detail, the types of organisations include:
– public benevolent organisations;
– Scientific research organisations;
– School building funds;
– The armed forces;
– Public libraries;
– Political parties (subject to a $1,500 limit);
– Volunteer fire services; and
– Organisations listed at http://www.abn.business.gov.au/DgrListing.aspx
It Must be a Gift
A gift is not a gift if you get something in return. For a gift or donation to be tax deductible, you cannot receive anything in return (other than a token gesture, such as an ANZAC badge). The purchase of raffle tickets for example is not tax deductible, neither is the purchase of a soft toy from a charity, or the purchase of tickets to a charity event should you get fed at the event.
A gift must also be voluntary. Mandatory contributions to a school building fund are not eligible for example.
Donations of Property has Conditions
You are able to gift items and assets if it meets one of the below two conditions:
– The item was purchased by yourself within the last 12 months; or
– The item is valued at more than $5,000
If purchased within the last 12 months, the deductible amount is the lower of its cost and market value.
While not subject to the same strict requirements of most other expenses, you still need to be able to prove that you made the donation, that is really was a gift, and who it was made to. Realistically this would be in the form of a receipt from the donee.
The onus of substantiating your expenses is on you - not your tax agent. You are required to keep copies of receipts, bank statements, log books, diary entries, etc. In general terms, there is no "maximum claim" that you are allowed without proof. You need evidence for every dollar of deductions you claim.
There are some circumstances where the ATO will accept a lower level of substantiation, for example if your total deductions are under $300 the ATO will accept other forms of proof and not actual receipts (such as diary entries, bank statements) - but these circumstances are few and far between.
Below is some further info on your obligations and requirements
“Substantiation” is the term used by the ATO in relation to what documents you need to keep in order to prove that your tax return is accurate. While it does apply to both income and expenses, it is most commonly is brought up with respect to what you have claimed as a tax deduction.
Everyone is required to be able to substantiate EVERY expense they put on their tax return. What can change is the level of substantiation.
The default position is that you need to have invoices / receipts for your expenses. In some cases the ATO have concessions where a lower level of substantiation is accepted, for example:
- If your work related expenses are less than $300 in total, diary evidence or similar is acceptable;
- If you are claiming the cents per kilometer method for your car, diary evidence or other records detailing trips is acceptable;
- If you are a truck driver on overnight trips, diary evidence of meals is generally acceptable if under the ATO’s set rate; and
- Petrol receipts are generally not needed if it is clear on bank statements that the amount is from a petrol station, and the amount does not include a cash withdrawal.
Your tax agent works for you, not the ATO. Having said that, your tax agent has a legal obligation to only lodge a tax return that a reasonable person would believe is correct, and that a tax agent cannot lodge something they know or suspect is incorrect.
They key in this is the reasonableness aspect. Tax agents are not required to audit all of your claims. They are not required to sight every receipt to make sure everything is accurate.
If you tell your tax agent that you have $x of claims for travel for example – your tax agent’s obligation extends to making sure this is reasonable. Part of this assessment is whether you understand what travel is and isn’t claimable (hence these FAQ’s).
If your tax agent tells you (for example) that you can only claim home to work travel where you carry bulky tools and there is no storage space at work, they will rely on your answer. Your tax agent will not pop around to your place at 7am to make sure that you actually do carry tools.
One “role” people presume tax agents take is that they will limit or reduce your claims by just enough to keep you out of trouble with the ATO. There is no threshold for us to assess you against, and what is “high” is different for every occupation. A nurse claiming 2000kms of travel is more likely to be audited than a tradie claiming 5000kms. All we can say is that if your claims are genuine, it doesn’t matter if the ATO looks at it if it’s true and correct.
Another “role” is that tax agents will just put in “standard” deductions. This is not something a tax agent can do. If you haven’t spent money on eligible deductions, there is no figure that your tax agent can just pull out of fresh air to help you with.
If you are unlucky enough to be picked by the ATO, and are found to have false claims, the next step for most people is to chat to your tax agent about “fault”.
The throw away line that frustrates people is “you signed a declaration, therefore it is your responsibility”. We are obviously biased about responsibility, but we’ll put our two cents forward.
We work for you, not the ATO. Our primary responsibility in preparing your tax return is to minimise the amount of tax you pay. Combined with this, is that we need to do this legally – and that is where the contention ultimately ends up.
Tax agents do not audit your claims. If you tell your tax agent you had $100 of donations – to what degree do they need to enquire with you to make sure those donations were made to a registered charitable organisation, that you didn’t receive anything in return, and that you have a receipt?
So there is a subjective element here. Is it likely that when you say you had $100 of donations that this figure is claimable? If we think about that, part of our obligation to you is to keep you informed of the tax rules so we can rely on what you tell us.
There is also a commercial aspect. Would you be happy paying fees 3 times higher than you do now for us to spend the time explaining the intricacies of our tax rules? So what is that “ideal” level of education and checking that we need to provide to minimise your tax, keep it legal, and keep your fees down to acceptable levels?
We address this equation by providing the following:
- When we sit with you to discuss your tax return we will give you an overview of the rules where we think it is necessary (and again, that is a subjective assessment based on what we know of you);
- We allocate significant resources to keeping our clients informed through our newsletters, brochures, website, Facebook, Twitter, LinkedIn – which are all free; and
- We will always take your call and answer direct queries.
Given the above, we believe it is reasonable to assume clients have a level of understanding – obviously not the same as us – but enough that where the amounts being told to us are reasonable in context of their income and occupation, that we can rely on it.
You also have the responsibility to ask questions of your tax agent when you forward your information. “I travelled here for work, is that claimable”, instead of just including it and hoping that your tax agent will read your mind. You are given the opportunity to review your return before it is lodged. You can ask as many questions as you like.
Where your tax agent has taken reasonable care to:
- Minimise the amount of tax you pay;
- Keep you informed of what things are claimable, and what is not (or more accurately, provide you with the resources to keep yourself informed);
- Make sure your claims are reasonable, and if not that you can substantiate them; and
- Given you opportunity to ask questions / raise concerns before your return is lodged,
then we believe that in the event of an ATO audit it is unreasonable to hold the tax agent at “fault” for any incorrect claims as they have done what their role in the tax system is.