Note: The information in the articles below is of a general nature only and may not be relevant to your specific individual circumstances. You may need to engage ezytaxback.com Pty Ltd to provide you with specific advice to suit your specific circumstances.
Tax Planning for Individuals, – here are our recommendations on the use of tax deductions that can help reduce taxable income in a legally.
Maximize Tax Deductions
How can I get the most out of my tax return?
An individual can reduce their taxable income legally through the use of tax deductions, allowing them to take advantage of lower tax rates.
Tax Deductions are defined as out of pocket expenses that are directly related to an individual’s employment and income activities.
Claiming tax deductions is a legal form of tax minimisation, but it is essential that the expense meets the requirements set out by the Australian Taxation Office.
For your deduction to be classified as legitimate, the ATO requires a work-related expense to meet the following criteria:
1. You must have spent the money yourself during the specified financial year and were not reimbursed
2. It must be related to your job
3. You must have a record to prove it – the record must provide a description, cost and date of purchase
Sometimes we can incur costs which are associated with both work and private use.
In this case, a tax deduction is still allowed but only for the portion related to work use, and must be accompanied by a receipt or proof of purchase. Keeping these receipts or proof of purchase is vital to maximising your return.
When we complete our tax return, claiming of work-related deductions is often forgotten.
Individuals often aren’t sure what they are entitled to claim and leave them out altogether.
Listed below are common work-related deductions you can include in your Australian Online Tax Return.
Vehicle and Travel Expenses, including travel between work and home
When you use your personal vehicle to travel for work-related purposes, you can make some deductions.
No matter the distance, trips between home and the workplace are considered to be private travel and are therefore not deductible.
What is deductible are direct trips between two separate workplaces – this includes if you have a second job.
If you have to travel from your normal workplace to an alternate workplace, this is also deductible, along with the trip back to the normal workplace or directly home.
If you have to visit clients as part of your occupation or drive to meetings or conferences, this is considered travelling to an alternate workplace and is also an allowable deduction.
When you do your tax online and you would like to claim a motor vehicle tax deduction you do not need written evidence as proof.
However, you must be able to show how you worked out your business travel.
One handy tax planning strategy for ensuring you get the best motor vehicle deduction is to keep a log book or diary of all travel that meets the criteria for a deduction.
This will also ensure you have a simple tax return to complete!
Clothing, Laundry and Dry-Cleaning Expenses
The costs of purchasing and maintaining occupation specific clothing and protective clothing can also be tax deductables.
If you are required to purchase and wear uniforms with distinctive business logos on them, this is considered occupation specific clothing.
Occupation-specific clothing is also defined as clothing that is not ordinary in nature and is simply identifiable to a certain occupation. A good example of this is a chef’s uniform, including the hat and checked pants.
Protective clothing is defined as both clothing and footwear that is worn to minimize chances of injury or illness caused by an individual’s occupation. Some examples of protective clothing are: safety coloured vests, fire resistant and sun-protection clothing, steel cap boots, non-slip nurse’s shoes and overalls.
The costs of all of those described above can be a tax deduction.
You can also claim the costs of dry cleaning, washing, drying and ironing eligible work uniform that meets the requirements of the clothing outlined above.
These small expenses are easy to overlook, but they certainly add up, so always be sure to hold onto your receipts, especially if the cost of your claim exceeds $150 or if your total work-related expenses exceed $300.
Gifts and Donations
Gifts or donations of $2 or greater, are eligible for tax deductions.
The deduction can only be claimed by the person who pays the donation or for the gift, also known as the donor.
The deduction is only applicable if the donor does not receive any material benefit or advantage in return (for example, a raffle ticket does not qualify as a donation or gift).
One piece of tax planning advice we recommend is to ensure the gift or donation recipient is a deductible gift recipient (DGR), and you have a receipt as proof.
Home Office Expenses
If you are an employee, the running costs of a home office are not generally able to be claimed. However, if part of your employment involves working from home significantly, a portion of the running costs may be claimed as a tax deduction in your online tax return.
These include rent, mortgage interest, council rates and house insurance premiums. Alternatively, if you work from home regularly but not the majority of your work hours, you can claim a deduction for the number of hours per week you work from home. The deduction is calculated as a set rate of the total hours worked from home for the year.
Self-education expenses can be considered a taxable deduction. You must ensure the following requirements are met for self-education to be considered a deduction. The course you’re undertaking must have a sufficient connection to your current employment. It must allow you to advance and or expand your particular skills or knowledge required in your employment. Or, the education results in a high likelihood that your income from your employment will increase due to your studies.
Tools, Equipment or Other Assets
Some occupations require their employees to purchase their own tools and equipment to undertake their work activities. The costs of tools and equipment purchased directly for your employment can be added as a deduction. If the asset is for both personal and work use, only the work portion should be included as a deduction, for example, 50% of the cost.
If the cost of equipment is more than $300, the asset should be depreciated over several years rather than the total cost claimed in the year of purchase. Repairs and maintenance on these items are also tax deductible. When considering year-end tax planning always remember to keep receipts and only claim the work use portion.
You may have out-of-pocket costs directly related to your income but do not fall under any of these categories. An expense can still be claimed in your Australian online tax return as a tax deduction even if it doesn’t fall into the above categories.
Everyone’s employment is different, and some expenses are incurred less often. These can sometimes qualify under “all other expenses”. Some examples of these expenses include union or professional membership fees, income protection insurance, cost of managing the previous year’s tax affairs, and personal mobile phone use for work purposes.
When claiming an expense under this category always ensure you can show how it relates to your income and you have a source document to prove it. It is also handy to describe the expense to ensure it is evident with the ATO what you are claiming, otherwise they may question it, delaying the completion of your return.
Accelerating Tax Deductions
A common strategy used by for individual tax planning to maximize their tax deductions is accelerating their spending to achieve higher deductions. The financial year runs from the 1st July to the 30th June the following year.
As the end of financial year approaches, some people increase their spending by paying for certain expenses before this date to take advantage of the tax deductions and reduce the amount of tax they pay in their tax return for that year.
An example of this tax planning strategy could be a membership cost to a professional association that is due in July. However, the individual chooses to pay the fee before the 30th of June. When the time comes to claim their tax back online, the individual can include this fee in their current tax return rather than claiming it in the next year’s tax returns.
This strategy can be used with any expense that is allowable and provided proof of purchase is attached. When adopting this strategy, it is essential to ensure you monitor your cash flow to ensure spending does not outweigh the benefits, leaving you with no cash flow.
We have created a handy tax calculator to help estimate your return.