Allowable deductions

Contributed by AnnetteMorgan and current to 27 July 2018

As indicated above, your assessable income is reduced by your allowable deductions in order to determine your taxable income. There are several matters to be borne in mind when claiming such deductions and the more important of these matters are discussed below.

Deductions under the Acts

The 1997 Act contains a general provision allowing for deductions of losses and expenses:
  • if you incur them in gaining or producing your assessable income; or
  • if you necessarily incurred them in carrying on a business for the purpose of gaining or producing your assessable income.
The first is available to all taxpayers; the second will only be relevant if you carry on a business.

However, you will not be allowed the deduction where the loss or expense represents a loss or outgoing of a private or domestic nature. The distinction between deductible and non-deductible items is not always clearly drawn. The following are examples of items for which the cost is likely to be private or domestic in nature, even though they may be expenses which are necessary to allow you to attend work to earn your assessable income:
  • childcare;
  • petrol or public transport expenses you incur in travelling from your home to work;
  • clothing, unless the clothing is of a particular type required in your occupation.
Certain expenses (for instance, family holidays) clearly do not bear any relation to producing assessable income, are completely private in nature and are not deductible.

You are also not allowed to deduct expenses that are capital in nature (though you may be able to claim depreciation where the expense is incurred in buying a depreciable asset). There is a fundamental distinction between expenses of an income and a capital nature. In determining whether an outgoing is revenue or capital, courts will have regard to:
  • the character of the advantage sought. If you are seeking a lasting benefit, the expenditure is likely to be capital;
  • whether the outgoing represents an addition to the profit-earning structure. If so, it is more likely to be regarded as capital. Where the benefit resulting from the expense is exhausted as part of the profit-earning process, it is likely to be regarded as revenue in nature; and
  • the frequency of the payment or payments. Where you have a regular periodic outgoing, it is more likely to be regarded as a revenue expense than it would be if you make a one-off payment for an item which will provide a benefit to you for a number of years.
However, these are general criteria to be balanced in characterising an expense and none of them is determinative.

For example, if you make a one-off payment to purchase a delivery van because you intend to start a courier business, it would not be deductible because the delivery van represents an integral part of your business for you to use over a number of years. On the other hand, your fuel costs for the van, being a recurrent cost for a consumable used in the course of business, represent an expense of an "income" or "revenue" nature that would be deductible. Another example is that of an investment property. Despite its potential to generate assessable income (for example, rent), expenses on the property are not deductible outright though you may be entitled to a capital write off allowance on the property over a longer timeframe.

As with the income provisions of the Acts, the general deduction provision is supplemented by a number of provisions which render certain specific amounts or expenses deductible.

Specific deductions if you are a wage or salary earner

The following list represents typical deductions claimable if you are a wage or salary earner:
  • sickness and accident insurance premiums where the policy covers a regular payment in lieu of wages;
  • dues and fees payable to trade unions, business and professional associations;
  • self-education expenses in excess of $250.
This deduction will most often be available where your studies relate to the particular trade or profession in which you are already engaged. A deduction is not available when expenses are designed for you to get employment or new employment, or to open up a new income-earning activity. Self-education expenses which are not deductible may be counted towards meeting the $250 threshold, but only qualifying expenses over that amount are deductible.
Any HECS or FEE-HELP payments you make are not deductible and any self-education expenses you incur are not deductible against income you receive in the form of Austudy, ABSTUDY, youth allowance or other educational assistance schemes.
  • Home office expenses. Deductibility on these expenses depends on whether your home can be regarded as a place of business or simply a convenient place to work. Unless you see clients at home, these generally are limited to electricity, depreciation on furniture, etc.
  • Special clothing, for example, protective clothing or uniforms. Deductions are not allowed where clothing is regarded as conventional clothing. Therefore, you could not claim the cost of a business suit even though it is expected that a suit be worn for your job;
  • Travelling expenses between two jobs in the course of your employment (to the extent that you are not reimbursed); and
  • Tools of trade. This will not apply to major items which will be depreciated annually rather than written off in one year.
Notes:
  1. It is common at the end of a financial year for journals published for particular professions and newspapers to provide general information on the types of claims which are commonly allowed for each industry.
  2. Your circumstances must be considered individually. Therefore, just because another taxpayer is allowed a deduction for a particular item does not necessarily mean that you will be allowed a deduction for an identical expense. The items in the above list should be regarded only as a general indication of the types of items that can be claimed as work-related deductions.
  3. The ATO has issued several Taxation Rulings on the deductibility of expenses incurred by employees in particular occupations, for example, if you are an employee of the airline industry, a member of the Australian Defence Force, a teacher, nurse, lawyer or hairdresser. Several other occupations are also covered. These are available on the ATO Legal Database website.

Superannuation deductions

You can claim a deduction for personal super contributions made on or after 1 July 2017 if:
  • you made the contribution to a complying super fund or a retirement savings account
  • you meet the age restrictions
  • you notify your fund in writing of the amount you intend to claim as a deduction
  • your fund acknowledges your notice of intent to claim a deduction in writing.
If you are under 18 years old at the end of the income year in which you made the contribution, you can only claim a deduction for your personal super contributions if you earned income as an employee or a business operator. If you are 75 years old or older, you can only claim a deduction for contributions you made on or before the 28th day of the month following the month in which you turned 75. There is also age related conditions under which your super fund can accept your contributions. If you are under 65 years old when you make a contribution, you don't need to satisfy the work test in order for your fund to accept the contribution from you. Once you turn 65; you must satisfy the work test in order for your super fund to accept a contribution for which you can claim a deduction. If you are 65-74 years old at the end of the income year in which you made the contribution, you need to satisfy a work test in each financial year that you make a contribution in order for your fund to accept the contribution for which you can claim a deduction. To satisfy the work test, you must work at least 40 hours during a consecutive 30-day period each financial year in order for your fund to accept a personal super contribution for which you can claim a deduction.

The contributions that you claim as a deduction will count towards your concessional contributions cap. If you exceed your cap, you will have to pay extra tax and any excess concessional contributions will count towards your non-concessional contributions cap. The concessional cap for 2017/18 is $25,000. The non-concessional cap for 2017/2018 is $100,000.

If you are an employer, the Superannuation Guarantee Charge Scheme applies to you in respect of your full-time, part-time and casual employees. There are only limited exceptions to this. The legislation requires that you, as an employer, pay your employees' superannuation contributions at the rate of 9.5% of the employees' gross annual salary to their nominated fund by the 28th day after the end of the quarter.

In some situations, you, as an employee, may be able to reduce your assessable income by making a salary sacrifice. This will occur where you sacrifice part of your salary in lieu of a benefit, for example, contributions to a superannuation fund. These contributions are generally deductible to an employer.

It should be noted that, where an employer or employee has claimed a deduction for a contribution, the recipient superannuation fund may be taxed on that contribution. This tax is almost inevitably deducted from the fund member's balance.

Donations

You may claim deductions for donations of $2 or more to organisations which are deductible gift recipients (DGRs). DGRs include charities, public libraries, art galleries, various public educational bodies, museums, political parties (subject to limitations), hospitals and environmental organisations. DGRs issue receipts for donations made and usually advise that donations you make to them are tax deductible. Some DGRs are listed in Subdivision 30-B of the 1997 Act, and a full list is available on the ATOassist website.

If you are a non-profit organisation interested in obtaining DGR status, you should seek legal advice on the matter. Further information can be found in booklets called Income Tax Guide for Non-profit Associations and GiftPack, which can be obtained from ATO.

Substantiation

It is essential that, when you claim a deduction for work-related car or business expenses, or for donations, you are able to substantiate the claim; that is, to prove that you, in fact, incurred the expense. Substantiation requirements are strictly enforced and it is essential that you find out exactly what is required in order to satisfy the substantiation requirements. Some of the major features of substantiation include the following:
  • Wherever possible you should retain documentary evidence of the expense, such as a receipt or invoice. The document should clearly indicate that it relates to the item you have claimed as a deduction. Therefore a general receipt indicating that you spent a certain amount of money in a particular shop will be insufficient. A receipt must indicate: the name of the person or business you paid; the date you paid the amount; a description of the item; the date of the receipt; and the cost of the item.
  • Documentary evidence is not required where the amount you claim for "employment-related expenses" (see "Specific deductions if you are a wage or salary earner", above) is $300 or less. However, you should retain some records showing your basis for making the claim.
  • You may simply keep a note of the expense for minor expenses which individually do not exceed $10 and in total do not exceed $200 for the taxation year, or where it would be unreasonable to ask for a receipt (such as on a toll-bridge or from a parking-meter).
  • Generally, if you are a wage or salary earner, you need to maintain your substantiation records for five years after lodging your return. If you are self-employed, the relevant period is seven years.
  • Where you claim a deduction for car expenses you incur in earning income, special substantiation requirements apply.
These requirements vary depending on the method you select to claim the car expenses which may be either the Cents Per Kilometre method or the Log Boook Method. The ATO guides and website provides information on the nature of the records to be kept.
  • If you are making donations through a workplace-giving program, you do not need a receipt from the relevant charity itself. It will be sufficient if you have a payment summary from your employer instead.
  • The ATO conducts substantiation audits. Therefore if you cannot prove a claim, you may have to pay additional tax and taxation penalties.
  • You may be able to gain relief from substantiation requirements where there is other evidence to support your claim (see Taxation Ruling TR 97/24).
The ATO has now launched an app called myDeductions which is available to individuals and sole traders to help them keep a record of their work related and business expenditure for substantiation requirements.

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