What is a tax deduction, and how does it work?

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A classic saying most Aussies are likely to have heard is "I'll just claim it back on tax", but what do people mean when they say this and why should you take notice? Whether you are lodging your first tax return or your tenth, brushing up on your tax knowledge is always a good idea at the start of the new financial year. 

Knowing what you can and can't claim on your tax return is important because if you don't claim what you're entitled to you're paying more money in tax than you need and if you're claiming too much, you could end up owing the Australian Taxation Office (ATO) money, which isn't anyone's idea of fun.

Tax laws and regulations also change year on year so what you might have been able to claim in the past might no longer be available and vice versa, so here's a general rundown of what you'll need to know about tax deductions for the 2023/24 Australian tax year.

What is a tax deduction? 

The elusive tax deduction is a work related expense that helps lower the amount of tax you have to pay by lowering your taxable income. Essentially, you can claim business expenses that range from travel to office equipment, which are then deducted from your gross income and this is then called your  taxable income. It’s simple, but there are a few rules you need to abide by to stay out of hot water with the ATO. 

What is an eligible tax deduction in Australia?

So, your tax deductions lower your taxable taxable income, but how does it work? In Australia, when it is time to submit your tax return, either by yourself or through a tax agent, you are also able to claim work and income related deductions. To be eligible to claim a dedication you need have done the following things: 

  • Hold a record to prove your expense 
  • Spent the money yourself on the expense 
  • Must not have been reimbursed for the expense 
  • The expense is related to your income

What expenses can you claim on your taxes in Australia?

There are a wide range of expenses you might be eligible to claim on your tax return. It is always wise to consult a tax professional to see what you are and are not able to deduct. Depending on your job and expenses from the year, these are some of the categories you can claim (given they are work related): 

  • Car, transport and travel expenses
  • Tools, computers, internet, stationery, books and other items you use for work
  • Clothes, glasses, protective gear and other items you wear at work
  • Working from home expenses such as stationery, energy and office equipment
  • Education, training, conferences and seminars 
  • Memberships, union fees, working with children check, agency fees and commissions
  • Meals, snacks, entertainment and functions 
  • Medical assessments, vaccinations, COVID-19 tests, gym fees
  • Gifts and donations, check out our cash gift guide for more information. 
  • Investment expenses, insurance and super
  • Using a tax agent 

What do you need when claiming expenses on your taxes? 

Depending on the category of your deduction you may need different supporting documents, but they all boil down to one thing - evidence. You will need proof that your deduction was work related, through letters from work or work policies, and then proof of the expense such as receipts and invoices. It is more complicated based on the deduction, the ATO outlines what supporting documents are needed to verify your deductions. 

Since not everyone keeps hold of every receipt and scrap of paper, a handy tool to stay on top of your work expenses is the ATO app myDeductions. At tax time you can email your records or even prefill your lodgement with your expenses from the year. 

Do your tax deductions give you money back in your tax return?

Despite popular belief, you do not directly get back the money claimed as a deduction. This is a common misconception. The deductions reduce your taxable income which lowers the amount of money you will be charged tax on. So, with the help of deductions, your income can be lower than the amount you paid tax on, meaning you have been overcharged in tax and will be issued a refund. Our income tax calculator can help you see your before/after-tax salary. 

Why didn’t my deductions give me a good tax return? 

With the cost of living, the extra refund cash you were expecting might have been holding you together - but don’t freak out. A lot of Aussies are feeling the burn this year from their tax return due to the end of low-to-middle-income tax offset (LITMO) in July 2022. Those who were earning $48,001 to $90,000 and were getting an additional $1,500 back in their tax return, might now only get back a couple hundred. 

If after you've done your tax return and it appears that you won't be getting a refund that you were hoping for, whatever you do, do not make up expenses to make up the shortfall. This could lead to a fine from the ATO which you do not want.  It's always a good idea to consult with a taxation professional as they might be able to suggest some other options that could reduce your taxable income that you were not aware of.  

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