Contents
- How do income tax deductions work?
- Tax deductibility
- Common tax deductions
- Tax deductions for various occupations
- Related Articles
How do income tax deductions work?
The basic Australian income tax formula is:
Income tax rate x taxable income = income tax payable
Taxable income = assessable income less income tax deductions
Tax deductions therefore reduce tax payable in an indirect way and do not result in a dollar for dollar refund of income tax.
Example:
- John’s marginal tax rate is 30% and his assessable income is $100,000 and his deductions are $10,000.
- John’s taxable income is $100,000 less $10,000 = $90,000.
- John’s tax payable before tax deductions is 30% x $100,000 = $30,000.
- John’s tax payable after tax deductions is 30% x $90,000 = $27,000.
- The dollar value of John’s tax deductions is his tax rate (30%) x his deductions ($1,000) = $3,000.
- John’s $10,000 in tax deductions does not equal $10,000 less tax payable.
The value of tax deductions in reducing tax therefore depends on a taxpayer’s marginal tax rate.
See these articles for further information:
Tax deductibility
Normally, if you incur costs directly related to earning assessable income, and that are not private in nature, you can claim a tax deduction for the costs. The main tax law authorising this is section 8-1 of the Income Tax Assessment Act (ITAA) 1997.
Directly related
Costs that are private or domestic in nature are not deductible. You could argue that you need to eat food to work, so your workday lunch should be deductible. You indeed need to eat to work, but you would still eat even if you weren’t working. Another example is clothing. You could argue that you must wear clothes otherwise you couldn’t earn income. That’s true, but you would still (hopefully) wear clothes anyway even if you weren’t working.
So food and clothing are some examples of private or domestic costs that are not usually directly related to earning assessable income.
In some limited circumstances, food and clothing can be deductible. Overtime meals and meals while travelling may be deductible. Clothing that is occupation specific, protective or logoed may also be deductible.
Assessable income
Assessable income is income that is subject to income tax. Most salary and wage income is assessable income. If you do volunteer work, you won’t receive assessable income, so you can’t claim deductions for costs you incur doing volunteer work. If you earn income from a hobby, it’s not assessable, so you can’t claim deductions for your hobby costs.
In summary, to claim a deduction for a work related cost:
- you must have spent the money yourself and weren’t reimbursed
- it must be directly related to earning your income
- you must have a record to prove it
Common tax deductions
Depending on your employment or business situation, the following costs may be deductible:
| Car expenses and tolls | |
| Self Education and Training | |
| Tools and equipment | Books, journals, subscriptions |
| Memberships, registrations, union fees | |
| Sunscreen and Sunglasses | |
| Mobile Phone and internet | Overtime meals |
| Interest and dividend deductions | |
| Tax preparation and advice | Superannuation contributions |
| Income protection insurance | |
Tax deductions for various occupations
Related Articles
|
|
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.