Tax Deductions. What’s in and what’s out?

There are a lot of misconceptions and misinformation out there as to what is – and what is not – tax deductible. What often seems to make perfect sense in the real world does not always make sense for the Australian Tax Office (ATO). Sometimes, the tax law can seem very unfair.  However, as a taxpayer you must comply with the tax law.

In this article, we have compiled a list of the most common myths and misconceptions that we encounter year after year in the Individual Tax Return.

The 3 Golden Rules for claiming a tax deduction

Let’s begin with the fundamentals. To be able to claim anything in your income tax return, you must satisfy the ATO’s three golden rules:

  1. You must have spent the money yourself and you haven’t been reimbursed by your employer
  2. The deduction directly relates to earning your income; and
  3. You must have a record to prove it such as receipts or invoices.

And if your work-related deductions are collectively more than $200, you must have records to support your claims. Records are usually a receipt from the supplier of the goods or services.

The record that you must be able to show, needs to contain the following details:

  • What you purchased
  • Who the supplier was
  • The amount of your expense
  • The date the purchase occurred.

Bank or credit card statements usually won’t contain this information. So, you can’t depend on that as your evidence in the event of an ATO audit – it won’t cut it.

Even after you’ve lodged your tax return for the year, you must keep your records for a minimum of five years. Remember, receipts fade and that’s not an excuse that the ATO will accept. No receipt? No deduction. So you do need to store your receipts properly for at least five years. We recommend keeping a digital copy of your receipts. If it’s not legible to the ATO then chances are you won’t be able to claim it.

 

Here’s our list of 17 tax deductions that taxpayers most commonly ask to claim in their individual tax return.

1. Can I claim ‘the maximum allowed for everything”

Short answer: No.

A lot of taxpayers are under the impression that there’s some magic maximum amount or limit that they can claim without receipts. Basically, without receipts for your expenses, you can only claim:

  • A maximum of $300 worth of ‘other work related expenses’
  • A maximum $150 for laundry expenses, and
  • A maximum of 5,000 kms using the cents per kilometre method;

Also, some travel allowance expenses and overtime meal allowance expenses fall under this ‘substantiation exception’ category – meaning you don’t necessarily have to produce receipts for the claim but, it’s certainly not a ‘free hit’ or a ‘standard deduction’ that everyone’s entitled to.
For example, if you didn’t spend $150 on laundry because you don’t actually wear a uniform with a logo or protective clothing, then you can’t claim it in your tax return.

Despite being classed as expenses that don’t require written evidence, during an ATO audit, there’s still a degree of substantiation necessary and this will need to be shown to an auditor during an ATO audit. Without documented evidence, the tax deduction will be denied.

2. Can I claim a tax deduction for conventional, everyday clothing?

Short answer: No.

A tax deduction is allowable for the cost of buying clothing, uniforms or footwear if these items are:

Protective in nature;

If they’re occupation specific – like a chef’s uniform, a lab technicians coat, and so on  ;

If it’s a Compulsory uniform according to the definition within the tax law and meet the requirements of Taxation Ruling IT 2641

It’s a non-compulsory uniform but it’s listed on the Register of Approved Occupational Clothing; or

Conventional, and satisfy the deductibility tests as explained in a particular Tax Ruling TR 94/22 [F11] (see paragraphs 54 to 78). Please note that this condition is very rarely satisfied in the majority of occupations.

So what this means is that normal footwear such as runners, conventional flat shoes, and non-steel-capped footwear will not be claimable. It doesn’t matter that you’re on your feet all day and they’re sore. Unfortunately the ATO doesn’t care.

Likewise with suits and other professional attire. You mostly likely spend hundreds or thousands on this sort of clothing and although you only purchased this clothing for work and it’s not clothing you wear casually on the weekends, it still doesn’t meet the ATO’s definition of work-related clothing.

3. I work in a retail clothing fashion store and I’m made to purchase their clothes. Is this tax deductible?

Short answer: No.

Quite often employees working in retail clothing stores are required to wear the clothing that is sold in the shop. Some taxpayers believe that because they are required to purchase the store’s stocked clothing which includes the branding on it as part of the design, they can claim this clothing as a tax deduction. Well, unfortunately no, it’s not tax deductible.

Again, we understand that your employer is making you buy the clothing so that you can essentially advertise it to customers, however you are definitely not allowed to claim for this clothing expense in your tax return. The ATO considers such clothing to be conventional – as unfair as this may seem.

4. Can I claim prescription reading glasses?

Short answer: No.

We’re often asked if prescription reading glasses are tax deductible. The answer is no. Reading glasses are considered a medical or personal expense. Glasses cannot be claimed in your tax return unless it’s protective wear such as sunglasses, or the kinds of safety eye protection used on worksites etc.

The ATO actually says in one of their rulings TR 2003/16 at Paragraph 35 that money that you spend on items that you use to protect yourself against the risk of illness or injury is private or domestic in nature if it is incurred as part of your normal personal requirements.

For example, you can’t claim a deduction for the cost of prescription glasses to protect yourself against the risk of injury where the risk arises only because of your short-sightedness. This basically means that the ATO does not care if you only wear glasses to be able to work on the computer at work. They will argue that It’s a private expense and you can’t claim it.

However, TR 2003/16 at Paragraph 36 does state that the money you spend on prescription sunglasses, including photo chromatic glasses which have filtering and glare reducing qualities – similar to sunglasses which protect you from the risk of illness or injury at work – is not of a private or domestic nature. So this means you can potentially claim a tax deduction for transition lenses because they are sunglasses and have a protective quality.

A word of caution: if you do claim a deduction, you need to apportion between the private and work-relate use and of course keep receipts that detail the type of glasses you purchased.

5. Can I claim medical expenses in my tax return?

Short answer: No.

From the 2015 financial year and earlier, The Net Medical Expenses Tax Offset (NMETO) was an offset that could be claimed for the out of pocket portion of a family’s medical expenses over a set amount. This offset was phased out from the 2016 financial year, where you could only claim the offset if you had expenses that relate to disability aids, attendant care or aged care.

The 2019 financial year was the final year that this offset could be claimed. Legislation passed in 2014 abolishes this offset from 1 July 2019, so in the 2020 tax return there is no tax deduction for medical expenses whatsoever. This means any operations, dental work, medications, disability aids etc are absolutely no longer tax deductible or eligible for any kind of offset..

6. Can I claim haircuts and personal grooming?

Short answer: Mostly no.

Some employers expect their employees to maintain a well-groomed appearance at work. This may involve regular hair cuts, being clean shaven or wearing makeup etc. However, you can’t claim a tax deduction for personal grooming and haircuts for most occupations.

In an ATO legal case U217 87 ATC 1216, a police officer claimed 50% of the cost of his haircuts. But it was denied as a tax deduction. He argued it was a condition of his employment that he was required to keep his hair short. Although this was absolutely true, the ATO simply said the expense was private in nature and it was not tax deductible.

However there are exceptions for some taxpayers involved in the performing arts field and a very limited number of others. But for the majority of taxpayers you cannot claim a tax deduction for personal grooming costs – even if your employer or employment contract demands it.

7. Can I claim for coffee, food and refreshments for meetings with clients and work colleagues?

Short answer: No.

Taxpayers will often ask if they can claim a tax deduction for the cost of buying coffees and light refreshments clients during work meetings or at a cafe. These are not tax deductible to you as an employee.

If you are required to take a client out for lunch or pay for coffees at a meeting, then the only way you can be compensated for this is to ask your employer to reimburse you. Otherwise, the coffees are on you – literally.

8. Are Gifts for employees, team members and clients tax deductible?

Short answer: Generally no.

If you’re an employee that only earns a fixed income – meaning that you do not earn commissions such as a real estate agent might – then you won’t be able to claim a tax deduction for the gifts purchased for other staff and clients.

However, if you’re earning commissions, then in certain occupations and professions deduction may be allowed. The main requirement is that the gifts are not entertainment and that there is a definite connection between the expense and the earning of your commission income. However, in the majority of cases, and for most employees the answer is no, you cannot claim gifts for other employees, team members or clients in your tax return. You’ll be better off asking your employer to reimburse you for the cost.

9. Can I claim a tax deduction for attending social functions, galas, and dinners?

Short answer: No.

A tax deduction is not allowed for money spent to attend social functions.

The ATO classes these expenses as private and classes it as the provision of entertainment. This is the case even though your employer expects or makes it compulsory for you to attend the event. Unfortunately that will not make it tax deductible (see section 32-5 of the ITAA 1997 Act).

A good example of this is described in a particular tax ruling TR98/6 at paragraph 113 where a senior officer in the Australian Defence Force who was involved in negotiations to buy defence equipment was denied a deduction for money he spent in attending a range of lunches, cocktail parties, dinners and other forms of social contact relevant to the performance of his duties.

What’s most interesting is that business deals were actually done on many of these social occasions.

Typically, the ATO denied the tax deduction and didn’t care that the money spent was directly relevant to business transactions. This highlights just how firmly the ATO will deny your attempts at claiming the costs of attending work-related functions. If it’s compulsory, ask to be reimbursed.

10. Can I claim the cost of getting to and from work each day – car expenses, public transport, parking?

Short answer: Mostly no, but with certain exceptions.

In the majority of cases you cannot claim the cost of getting to and from work each day. This includes the cost of using your car, public transport and parking.

However, there are some legal exceptions to this rule particularly if you’re a tradie or an itinerant traveller for work purposes.   Contact us for more information on this very complex issue.

11. Can I claim the cost of my Private Health Insurance premium?

Short answer: No.

Private health insurance does help you to save extra tax caused by the Medicare Levy Surcharge, in certain circumstances, but the premium cost is not actually a tax deduction.  This means that if your private health insurance costs you $3,000 per year, you do not claim $3,000 in your tax return.

12. Is Child Care claimable on tax?

Short answer: No.

A deduction is not allowable for child care expenses, even if it is necessary for you to be able go to work and earn income.

You also can’t claim child care expenses as a tax deduction if you need your kids minded so that you can undertake studies relevant to your employment.

It’s just not an expense that has any place in the tax return. In the eyes of the ATO and the tax law, it’s a private expense and is incidental to you being able to earn your income.

13. Is my Driver’s Licence tax deductible?

Short answer: No.

A deduction is not allowed for the cost of obtaining or renewing a driver’s licence.

The cost of actually getting your initial driver’s licence is a capital or private expense. The cost of renewing a driver’s licence is also a private expense.

The ATO’s position on this has been demonstrated in a Case where it was decided that even though travel was an essential element of the work to be performed by the taxpayer, a driver’s licence was still an expense that was private in nature and therefore not an allowable tax deduction.

This doesn’t change even if holding a driver’s licence is a condition of your employment. You can read more about this here.

14. Can I claim fines, penalties and interlock devices in my tax return?

Short answer: No.

A tax deduction is not allowable for fines imposed under any Australian government law.

This includes the cost of an alcohol interlock device. We’re often asked if an alcohol interlock device is tax deductible. Similar to a fine, an interlock device is an expense that’s private in nature and not considered necessary in producing your income as far as the tax law is concerned. And furthermore it forms part of a punishment as a consequence of a drink driving offence.

15. Are newspapers a tax deduction for employees?

Short answer: Most likely no.

A deduction is not allowable for the cost of newspapers unless there is a sufficient connection between the duties carried out by you as an employee, and the content of the newspapers. But please note, there has to be a VERY strong connection. For example, if we look at a real estate agent, a deduction is allowable for the cost of the work-related portion of those newspapers containing property sections.

16. Can I claim guard dog expenses in my tax return?

Short answer: No, not if you’re an employee.

Generally speaking if you’re an employee earning wage and salary income and you pay for the costs of maintaining a dog (which is serving as a guard dog) these expenses are going to be classed as private in nature and not tax deductible.

If you’re a business, as opposed to an employee, the costs of maintaining a guard-dog or working dog can be considered a tax deduction. An example of tax deductible dog, or dog expenses, would be a guard dog used to provide security for a business premises that remains on site at all times, or a working dog used to muster stock. According to the tax law a dog, or other animal, does not qualify as plant or equipment unless it is used in a business.

17. Can I claim a tax deduction for employment medicals?

Short answer: No, not for pre-employment medicals.

Pre-employment medicals are not tax deductible. The expense of paying for an employment medical usually takes place before you actually start working and earning any income. So this expense is incurred as a prerequisite to enable you to obtain your current employment position.

When you pay for medical expenses that are required for you to start work in a new job, these expenses are considered to be incurred at a point that is too soon to be considered relevant to earning your income. From the ATO’s perspective, this type of expense is considered to be of a private or domestic nature.

But there is some good news. A deduction is allowable for the expenses associated with medical examinations for the renewal of relevant licences (except for a driver’s license). These expenses also include the cost of the travel to and from the medical practitioner, so make sure you keep written records or diary notes of the kilometres you travelled in relation to this.