Which expenses are tax deductible in Australia?
For individual tax returns, you need to be able to prove that your expense was directly incurred to produce income.
Unfortunately, you cannot claim everything since there must be a reasonable connection between the expense and your current or expected income.
Therefore, a person cannot claim a tax deduction for buying something that is used for private, "domestic" or personal purposes (e.g. a TV or fridge for your home).
According to the Australian Tax Office website, a deduction must be work-related, and:
- You must have spent the money
- It must be directly related to earning your income, and
- You must keep a record to prove the expense was incurred
The rules are a little different for businesses and the self-employed, because you may also be able to claim expenses that are necessary to conduct your business to earn income.
The ATO says, "you can claim tax deductions for most costs you incur in running your business".
Regardless of the way you earn income, an efficient way to maximise your tax deductions is to keep tax receipts from every purchase in a safe place.
Although many Aussies may no longer be required to keep receipts, having a paper record of a purchase can help to keep track of cash transactions (which don't show up on your bank statement).
Sometimes, you'll get 2 receipts for a purchase (like buying fuel from the petrol station) -- make sure you keep the one which says "tax invoice".
Keep receipts or a record of purchase for:
- Travel and transport expenses
- Wages or invoices you pay, including Super
- Repairs and maintenance expenses
- Home office expenses (computers, electricity, etc.)
- Investments made for the business
Do this before you make a big purchase or investment!
Always consult a licensed tax agent before you make a big financial decision if you think it may affect your taxable position.
Depending on the expense, it could save you thousands -- or tens of thousands -- of dollars if you get expert advice upfront.
For example, did you know the tax rates for a company are lower than the highest tax rates for a person?
Or, did you know that different rates of depreciation can rapidly change how much you can claim for tax in the future?
The point is, paying a few hundred bucks to talk to an accountant before a BIG purchase could save you thousands of dollars in unnecessary tax down the track.
Test Your Knowledge
Jill works as a full-time salami chef at a restaurant. While at the supermarket, Jill buys some foil wrap for her home. Is the foil wrap likely tax deductible?
Maybe not. Jill appears to have bought the foil wrap for her home ("private purposes"), not her work, where she generates her income. However, Jill should keep the receipt and during a consult with her tax agent she should present all of her receipts.
Billy the Kid is a self-employed tradie. He's eying off a new ute for $49,999. The car salesmen (ever the gentlemen) says, "mate, you could claim all of the cost, plus the rego!" Billy the Kid should…
Billy the Kid should call his tax agent before getting into bed… I mean, "the ute" with the salesman. While the ute is likely to be tax deductible for Billy, special rules may apply to this type of tax deduction. Meaning, he may not be able to claim the entire $49,999 upfront. Therefore, the salesmen is likely wrong and giving incorrect tax advice to Billy.
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