BUSINESS AND EMPLOYMENT DEDUCTIONS
Income tax is calculated based on a taxpayer’s taxable income. The fundamental equation is, assessable income less allowable deductions equals taxable income.
In claiming income tax deductions, there are “general” and “specific” deductions.
The general provision for claiming allowable deductions is section 8(1) of the Tax Act, which states that any loss or outgoing is a tax deduction to the extent that:
- It is incurred in gaining or producing assessable income; or
- It is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
It should be noted, however, under the second limb of section 8(1), that you cannot claim a deduction if the outgoing is of a capital, private or domestic nature.
There are also provisions in the Tax Act that prevent you from claiming certain deductions, for example, fines and most entertainment expenses.
The key principle underlying substantiation is that to deduct work expenses. A taxpayer needs to have written evidence of the expense (Division 900 of ITAA 1997).
Note that substantiation only applies to individual taxpayers and partnerships that include at least one individual. Normally the written evidence must be kept for a minimum of five years from the date of lodgement of the return in which the claims are made.
Once you have established that the relevant expenses were incurred in earning assessable income or in carrying on a business, the substantiation rules must be considered before the expense is claimed.
There are exceptions where substantiation is not required:
- The total claimed for all employment-related expenses is less than $300.
- Laundry expenses up to a maximum of $150 (calculation method for the relevant clothing is required, not receipts).
- Travel claims less than the amounts stipulated in TD 2021/6, provided that a bona fide allowance has been paid to you as an employee.
- Car expenses under the cents per kilometre method.
- Overtime meal allowances up to $32.50 per day (TD 2021/6).
Under the substantiation requirements, you must have documentation that contains the following:
- The name of the supplier
- The amount of the expense
- The nature of the ‘goods’ or services
- The date the expense was incurred
- The date the document was made out.
Small expenses of $10 or less that total less than $200 per annum do not require substantiation if you record the details in a book or a diary.
MOTOR VEHICLE EXPENSES
Whilst business travel expenses or employee work-related expenses are deductible, travel expenses incurred travelling between home and work are not generally deductible.
However, a tax deduction may be claimed if you have a detour for work-related expenses on the journey to see a client.
Taxpayers who have to carry heavy or bulky equipment to their place of work may also claim a deduction.
- A self-employed tradesperson will be able to claim a deduction if he uses his home as his base and when he travels to sites is obliged to take his tools of trade and equipment. In 2016 the ATO made it very clear that where there is a secure place to store the tools or where an employer provides suitable tools onsite, this deduction is not allowable. The ATO continues to focus on these cents per kilometre claims in 2020/21.
- Musicians who carry bulky equipment, e.g., amplifiers, to their place of performance may be able to claim a tax deduction.
- Trips to town by primary producers will be deductible if it can be shown that the principal purpose of the journey was business in nature. Examples could include purchasing equipment and supplies or visiting the bank.
When claiming motor vehicle expenses, there are two choices open to the taxpayer. You may alter your choice from year to year and make a fresh choice when replacing a vehicle. If you are choosing the actual cost method, it may be necessary to keep a replacement logbook.
If you own more than one vehicle, a claim may be made for each vehicle if it can be demonstrated each vehicle has a business use.
Please note the “one-third of actual expense method” and “the 12% depreciation method” were abolished from 1 July 2015.
CENTS PER KILOMETRE METHOD
This method is available for motor vehicle usage up to 5,000 kilometres of business use.
In cases where the vehicle has been used for more than 5,000 kilometres in a tax year. This method is still available as long as the claim is reduced to 5,000 kilometres.
Significant changes have applied since 1.07.2015, with a flat rate of 66 cents per kilometre applying to relevant motor vehicles. For 2020/21, the rate has increased to 72 cents per kilometre.
This method does not have to be substantiated by logbook; however, on occasion, the ATO may inquire (particularly in the case of employees) how the motor vehicle has been used for business purposes and may seek verification from the employer.
Couples engaged in small business may jointly own and use a car for business purposes. In cases where each person uses the vehicle separately, both can claim a deduction up to the 5,000-kilometre limit using the set rate per kilometre method.
This method is popular for small businesspersons and employees who own older vehicles and cannot access high depreciation claims.
ACTUAL COST METHOD
When using this method, the total operating cost of the vehicle is determined with an apportionment made between private and business use.
A logbook that is kept in the “prescribed format” determines the apportionment. Logbooks may be purchased at stationers and usually state that they comply with ATO requirements.
A logbook must be kept for at least 12 consecutive weeks and remains valid for five years as long as there are no substantial changes in usage patterns. An existing logbook may also be used for a replacement vehicle if patterns of usage remain consistent.
Motor vehicle expenses include all costs and outgoings incurred in operating and maintaining the vehicle. These include, but are not limited to, fuel, tyres, servicing, repairs, maintenance, registration, financing costs (interest), depreciation and or lease payments. All relevant records to substantiate the amounts claimed must be kept. A depreciation cost limit (maximum amount) applies and is $59,136 for 2020/21, increasing to $60,733 for 2021/22. In contrast, cars that cost more than this can only be depreciated from a value of $60,733.
Be sure to keep change-over details when purchasing new vehicles. The relevant details are make, model and registration number and odometer records of both cars and the date of change-over.
Always be able to demonstrate that your business percentage is based on a reasonable estimate. Although logbooks will be the primary source, changes in patterns of usage or the number of cars you use are also relevant.
EXCEPTIONS TO MOTOR VEHICLE SUBSTANTIATION RULES
The above rules do not apply to:
- Panel vans, utilities or other vehicles designed to carry weights exceeding one tonne
- Motorcycles and similar vehicles
- A car only used for lease or hire in a business of leasing or hiring
- Panel vans, utility trucks or other vehicles designed to carry less than one tonne (not being vehicles mainly designed for passengers) where no private use is indicated. This usually means that the only private use is travel between home and work. If a second vehicle is owned, it is suggested this contention of incidental private use can reasonably be made.
Although substantiation may not apply, reasonable documentation should still be kept to justify all claims as the ATO has indicated this is now an area of focus.
Substantiation is required for all domestic and overseas travel expenses. Written evidence must be retained regardless of the length of absence from home.
The only exception is expenses incurred by employees that are not in excess of reasonable travel allowances received from employers.
Travel records, meaning a travel diary or similar document, must be kept if you are away from home for more than five nights. The diary must set out:
- The nature of the activity
- The day and approximate time it began
- How long it lasted; and
- The location where the activity took place.
The travel records required are for business activities only, and it will be necessary to establish that the principal purpose of the trip was for business purposes.
PREPAYMENT OF EXPENSES
Carefully note the tax treatment of prepayments depends on the status of the taxpayer and the amount and nature of the expense.
The tax treatment also depends on whether the taxpayer has elected to access the small business entity (SBE) concessions (if eligible).
In general, prepaid expenditure must be apportioned over the period in which the relevant service is provided.
The following expenses are excluded:
- amounts less than $1000 (net of GST)
- amounts paid pursuant to Court Order or government legislation
- salaries and wages
- payments by taxpayers using the SBE as long as the period of service does not exceed 12 months.
Individuals and SBE taxpayers can still participate in “tax-effective” investments such as forestry plantations by making a prepayment of management fees.
Individuals with negatively geared investments can still make prepayments of interest.
LONG DISTANCE TRUCK DRIVERS
If in receipt of a travel allowance, employee truck drivers who are required to sleep overnight away from home can claim food and drink expenses up to stipulated daily rates without substantiation.
Expenses must be substantiated if no allowances are paid or if amounts paid are in excess of stipulated amounts.
Acceptable daily rates for 2021/22 are:
The amounts for each meal break are separate and cannot be aggregated into a single daily amount.
TRAVEL CLAIMS WITHIN AUSTRALIA
The substantiation requirements do not apply to ‘travel expenses’ incurred by an employee who receives a travel allowance for travel within Australia, and the claim for costs of accommodation, food, drink and other incidentals do not exceed reasonable amounts as determined by the ATO.
The 2021/22 daily rates for accommodation, meals, and incidentals are outlined in TD 2021/6. Rates for country centres are also set out in the determination.
|Place||Salary below $129,250||Salary $129,251 -$230,050||Salary above $230,051|
This is generally disallowed, but there are some interesting exceptions being:
- A professional actor who buys stage clothing specific to a production.
- A police officer doing surveillance or undercover work who incurs costs to buy clothing he would not normally wear.
- A television game show host who purchases evening and formal wear to complement the prizes and sets.
OCCUPATIONAL CLOTHING AND PROTECTIVE GEAR
Clothing expenditure is generally private expenditure and not deductible. However, there are circumstances where expenditure on certain types of occupational clothing gives rise to a deduction listed below:
Generally, a deduction will be allowed for occupational specific clothing, which clearly identifies a person as a member of a specific profession, vocation, trade, occupation, or calling. Examples may include barrister’s robes, a chef’s checked pants or a nurse’s uniform. A business suit is not occupation-specific and therefore not tax-deductible.
Protective Clothing and Footwear
Such costs are deductible where the clothing is specially designed to protect the taxpayer from a personal work injury, disease, or death.
Personal Protection Equipment (PPE)
The COVID-19 outbreak has outlined the importance of PPE for frontline health workers and anyone working in a job that requires close human contact, and all occupation-specific clothing or equipment required for these roles is eligible as tax deductions, including:
Disposable or reusable gloves
Disposable or reusable masks
Plastic face shields
For expenditure to be deductible, the work uniform must be distinctive. The wearing of the uniform must be an express policy of the employer, consistently enforced and applicable to all employees in the same class.
Glasses, Sunhats and Sunscreen
Since the Morris case (2002), expenditure on sunglasses, sunscreen, and sunhats are deductible for taxpayers who are required as part of their duties to work outside and be exposed to sunlight while performing their duties.
Examples of such taxpayers include those involved in farming, outdoor sports, the construction industry, courier services and other outdoor services.
HOME OFFICE EXPENSES
A taxpayer can make expenditure claims for home office expenses if it can be shown that part of the home is used for income-earning purposes and has the character of a place of business or is used in connection with income-earning activities, but is not a place of business.
Where additional running costs are incurred because of income-producing activities, an individual taxpayer may make a claim for home office expenses based on:
- actual expenses
- diary records for a typical four-week period in each year. This will establish a pattern for the entire year.
In broad terms, the following types of expenses are typically incurred:
- telephone and internet expenses
- heating and lighting expenses
- equipment depreciation
- occupancy expenses where the home is a place of business. These include rent, interest, etc.
Occupancy expenses are deductible only if a particular part of the dwelling is set aside and is clearly identifiable as a place of business and used exclusively for business purposes. Having a computer alcove at home will not meet this test.
Note: If you elect to claim occupancy expenses, there are Capital Gains Tax implications. Having accepted that your home is a place of business, the main residence exemption will be affected.
Alternatively, the ATO allows a claim of $0.52c per hour to cover heating, cooling, and lighting costs.
COVID-19 WORKING FROM HOME
For the period 1 March to 30 September 2020, in response to covid-19, the ATO allowed individuals to claim a deduction for all running costs incurred during the period based on a rate of 80 cents for each hour an individual carries out genuine work duties from home. This period has been extended to at least 30.6.2021.
Working from home deductions for the above period includes:
- Electricity expenses associated with heating, cooling and lighting the area at home being used for work.
- Cleaning costs for a dedicated work area.
- Phone and internet expenses.
- Computer consumables (e.g., printer paper and ink) and stationery.
- Depreciation of home office furniture and furnishings (e.g., an office desk and a chair).
- Depreciation of home office equipment (e.g., computer and printer).
Please note that under the 80 cents per hour method, separate claims cannot be made for any of the above running expenses.
As a result, using the 80 cents per hour method could result in a claim for running costs being lower than a claim under the pre-Covid arrangements.
The fundamental test in determining the deductibility of interest is the “use test”, being the use to which the finances have been put.
Security is irrelevant, and under section 8(1) of the Tax Act, you can only claim a deduction for interest expenses if the funds have been used to gain or produce assessable income or carry on a business for that purpose.
- A business owner has a business overdraft limit, which is secured on business assets. The owner decides to use funds of $15,000 to finance an overseas holiday. The interest cost on this $15,000 of the overdraft is not deductible because the borrowings have not been used for business purposes.
- A business borrows $30,000 to purchase a new computer system. The loan is secured on the owner’s home. Interest on the loan is deductible because the monies have been borrowed for business purposes, and the interest expense has been incurred in carrying on the business.
As long as existing loan arrangements remain unchanged, interest on borrowings that remain after ceasing business are deductible. Interest in connection with borrowings necessarily incurred prior to commencement of business may also be deductible if there is a sufficient connection with the expense and future income derived.
If you are required to contact clients or your employer on a regular basis, or if you are required to be on call, home telephone rental expenses may be partially deductible.
Claims can be made in either of the following ways:
- A diary or log is kept for 28 days, establishing a pattern of usage for the whole year: or
- Actual expenses based on a completely itemised account.
It is suggested that the itemised account method is too onerous, and the 28-day diary method is recommended.
Deciding whether a claim should be made should be relatively simple; however, items of expenditure may be capital in nature. This issue has been tested in the Courts on numerous occasions. The dictionary definition of repairs is “the restoration of some material thing by the removal of some decayed or worn out parts”.
Before making a claim, carefully consider whether the expense is:
- A capital expense in respect of recently acquired property
- An improvement
- The replacement of a subsidiary part or an entirety.
If you replace or reconstruct entire premises or plant, this is not a repair. Essentially a repair involves restoring an object to the condition it formerly had without changing its character. Tax Ruling TR97/23 provides guidance on this issue.
DEDUCTION FOR PROFESSIONAL COSTS RE-STARTING BUSINESS
From 1 July 2015, new start-ups are able to immediately deduct professional costs associated with starting a business rather than writing them off over 5 years.
SELF EDUCATION EXPENSES
The expenses for self-education can be deducted provided there is a direct and provable link between the course undertaken and how you derive your income.
Generally, you will need to satisfy any of the following tests to be entitled to a tax deduction:
- The expense has a relevant connection to your current income-earning activities (i.e., the course must be relevant or incidental to how you derive your assessable income).
- The self-education program being undertaken enables you to maintain or improve the skills or knowledge necessary to carry out your income-earning activities.
- Self-education leads to or is likely to increase income from your current income-earning activities in the future.
Deductions for self-education expenses are not allowed if the course of study is designed to:
- Get employment in a new field of endeavour (e.g., a teacher studying law to become a lawyer).
- Get employment or obtain a qualification to enable you to enter a restricted field of endeavour (e.g., obtaining a degree to be able to practice as a surveyor); or
- Open up new income-earning opportunities in the future (whether in business or your current employment) because they are incurred at a point too soon to be regarded as being incurred in gaining or producing your assessable income.
Expenses that may be tax-deductible:
- Accommodation and meals (if away from home overnight)
- Computer consumables
- Course fees
- A decline in value for depreciating assets (cost exceeds $300)
- Purchase of equipment or technical instruments costing less than $300
- Equipment repairs
- Home office running costs
- Internet usage (excluding connection fees)
- Parking fees (only for work-related claims)
- Phone calls
Section 82A applies limits to the deductibility of self-education expenses.
The amount of self-education expenses allowable under section 8-1 must not be greater than the excess of the net amount of ‘expenses of self-education over $250.
It was announced in the May 2021 Federal Budget that from 1.7.2021, this $250 would be removed.
Section 82A applies if:
- The expenses of self-education are necessarily incurred by the taxpayer for or in connection with a course of education provided by a school, college, university, or other places of education; and
- The taxpayer undertakes the course to gain qualifications for use in the carrying on of a profession, business, or trade, or in the course of any employment.
Subsection 82A(2) specifies that the net amount of expenses of self-education is calculated by reducing the total amount of expenses of self-education by:
- The amount of Commonwealth educational assistance for secondary education, technical or tertiary education or post-graduate study that was capable of being claimed by the taxpayer or by another person in respect of the taxpayer, but excluding amounts that have been or will be included in the taxpayer’s assessable income; and
- Any non-assessable payments received or receivable from the taxpayer’s employer or other person in the year of income in respect of the self-education expenses.
CHECKLIST OF DEDUCTIBLE ITEMS
Note these expenses must be income related, which means that the expenditure must have the necessary nexus with you or your business earning assessable income.
|Accident insurance premiums
|Accrued leave entitlements, transferred employee payments||Advertising expenses
Appeal costs relating to tax disputes
|Audit costs, including ATO audit
|Bank charges, business
Bills of exchange, discount factor
|“Blackhole” (business capital) expenses
Broker’s commission on borrowed money
|Buildings and structural improvements
Business operating expenses
Business trips, expenses of
|Car expenses (business)
|Clothing (corporate wardrobes and uniforms, occupation-specific clothing, protective clothing)||Commission
Consolidation valuation expenses
Copyrights, patents, and registered designs: registration fees and amortisation of development cost or purchase price
|Corporate wardrobes and uniforms
Credit card (personal) used for work-related purposes
|Death or disability benefits provided by a superannuation fund
Debt/equity swaps resulting in a loss
Depreciation of business assets
|Discounts or rebates on sales income
Distributions by co-operative to members
|Dues: union, professional or business associations
|Election expenses: local government
Election expenses: parliamentary
|Electricity connection costs
Employer’s costs of shares scheme
|Employment agreement expenses of the employer, employee||Employee’s expenses: self-education, special clothing, purchase and laundering, Technical and trade journals|
|Tools of trade
Travel, but generally excluding to and from work
|Entertainment expenses related to business (limited)
Environmental impact study expenses: general, mining
|Environmental protection expenditure: general, mining
Farmers – see Primary producers
Feasibility study expenses for a new project
|Film (Australian) investment
Financial arrangements losses
|Gift valuation fees under the Cultural Program|
|Gifts: advertising or public relations
Gifts of works of art and heritage items
|Gifts of $2 or more to prescribed donees
|Gratuities to employees
Higher qualification expenses
|Home office expenses where home is used as business premises
Insurance company, unreported claims
|Insurance premiums (business-related)
Interest on late lodgements
|Interest on borrowings for employer superannuation contributions
Interest on borrowings to pay income tax
|Interest on late payments of tax
Interest on money used for assessable income production or purchase of income-producing assets
|Interest on money used to pay HELP
Interest on underpaid tax where assessment amended
|Interest referable to the home office where home used as business premises
Interest withholding tax
|Investment portfolio, expenses of servicing
Land tax on business premises
|Late payment penalty interest
Lease incentive payment
|Lease preparation expenses
Lease termination payments (business)
|Leave payments made by an employer
– Proceedings affecting future income-earning
|– Relating to borrowing or mortgage discharge
– Tax advice costs
|Lessor’s or lessee’s payment to secure early termination of business lease
Living-away-from-home allowance expenses
|Losses (company) of the current year
Losses (trust) of the current year
|Losses on isolated business transactions
Losses: previous years
|Losses (trust) of previous years
Losses through theft or misappropriation
|Losses, transferred from group company
|Luxury car lease expenses
Mains electricity connection
|Management expenses, investor
|Mortgage discharge expenses
Motor vehicle dealers: warranty repair costs
Municipal rates on business premises
|Natural disasters recovery expenses
Newspapers and magazines
Overtime meal allowance expenses
Partnership share of net losses
Patent, design, copyright registration costs
Personal Protection COVID 19
|Petroleum resource rent tax
Plant (installed), cost of bringing to full operation
|Political parties, contributions, and gifts by non-business individuals
|Breeding service fees
|Electricity connection costs
Farm management deposits
|Fencing assets (primary production)
Hire of farm implements
Food for employees
Grapevine establishment costs
|Horticultural plantation establishment
Insecticides, weedkillers, rabbit fumigant
Lease preparation expenses
Mains electricity connections
|Marketing and delivery expenses
Motor vehicle expenses
Newspaper (rural) expenses
|Payment to co-ops for business services
Power, fuel, light
|Rates and land taxes
Rent on farm property
Rent on residence used by employees
|Salaries and wages
|Subscriptions to producers’ organisations
Telephone expenses in business
|Telephone line expenses
Timber felling deduction
|Vaccination against Q fever
|Water facility expenditure
|Workers compensation premiums
Professional journals: subscriptions
Project infrastructure costs
|Promissory notes, discount factor
|Regional headquarters set-up costs
Relocation expenses incurred by the employer
Rent collection, commission on
Rent for business premises
Rent referable to the home office (business)
Repair costs under warranty
Repairs to income-producing property
Repayments of travel agents’ commission
Salaries paid in the business
|Self-insurers’ provisions for workers compensation
|Shortfall interest charge
|Structural improvements (post 26.2.92)
Superannuation contributions by employer, Self-employed persons, and unsupported employees
|Superannuation funds expenses
Superannuation supervisory levy
Takeover defence costs
Tax advice costs
|Tax agents’ fees
Tax return lodgement costs
|Telephone expenses if work-related
Telephone lines on primary production land
Tools, depreciation, and cost of transporting and insuring
|Trade union dues
Trading stock taken to new premises
|Travel (relocation) costs paid by the employer
Travel expense related to business
|Traveller accommodation buildings, Trees, carbon sink forests|
|Trees, purchased in immature forest or plantation and sold standing||Uniforms, special clothing for employees
Water rates on business premises
|Work in progress payment
Workers compensation premiums