How do tax deductions work?
The basic Australian income tax formula is: Tax rate x taxable income = tax payable.
Taxable income = assessable income less deductions.
So, tax deductions reduce tax payable in an indirect way.
John’s 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.
Summary: The value of tax deductions depends on the tax rate.
Normally, if you spend money directly related to earning assessable income, you can claim a deduction for the cost.
Costs that are private or domestic in nature are not deductible. You could argue that you need to eat food in order to work, so your workday lunch should be deductible. It’s true you need to eat in order 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 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.
If assets such as equipment or tools cost over $300, the cost generally needs to be apportioned (depreciated) each year according to the estimated life of the asset.
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 situation, the following costs may be deductible:
Clothing and Laundry
Education and Training
Tools and Equipment
Books, Journals, Subscriptions
Memberships, Registrations, Union Fees
Work from home office
Phone and Internet
Interest and Dividend Deductions
Gifts and Donations
Tax Preparation and Advice
Income Protection Insurance
How we can help
At Bristax, personal tax is one of our specialist areas. Our tax accountants would be happy to speak or meet with you to discuss your needs. We’ll take the time to understand your circumstances and provide appropriate advice.
You can contact us on 1300 883 597. We have offices in Brisbane, Sydney and Melbourne and provide full tax and accounting services Australia wide via internet, email and phone.