Most deductions are expenses you’ve had to pay in order to earn income. If these costs meet certain criteria, you can reduce your taxable income by the value of your expenses. There are a few different kinds of deductions you can claim:
Work related expenses - costs you had to pay as part of your employment/earning income. There are three main rules to claiming work related expenses – you had to spend the money yourself (i.e. not reimbursed), it has to directly relate to earning income and you have to have records to prove it. Work related expenses include costs like laundry, home office and car and travel expenses.
Investment expenses – expenses you paid to earn interest, buy shares or rental property. Some costs involved in setting up your investments may not be deductible, so it’s worth checking our website to learn more about what you can and can’t claim.
Gifts and donations - if you’ve made a gift or donation to certain charities or groups, you may be eligible to claim a tax deduction. Your gift must be money or property given to a deductible gift recipientvoluntarily and where you don’t receive any material benefit or advantage. Deductions can be claimed from a $2 bucket donation through to more expensive donations to groups provided you meet all the relevant criteria.
Other deductions – some costs you pay to earn income need to be claimed over time. This category of deductions covers a range of different expense types.
Unlike offsets – which are generally dollar for dollar – you usually won't get back the total dollar value of deductions that you claim.
Example – calculating how deductions apply to your tax return
A person earned $32,000 (their assessable income) in the 2017-18 financial year. During the year, they had the following costs that they can claim as deductions on their tax return:
uniform expenses of $120
bucket donations of $10
work-related mobile phone expenses of $50
cost of seeing a tax agent last tax time of $99
We subtract the total of their deductions ($120 + $10 + $50 + $99 = $279) from their assessable income to get their taxable income:
$32,000 – $279 = $31,721
Their taxable income is $31,721. For the sake of simplicity, we won’t include the Medicare Levy, HELP repayments and so on. From the income tax rates, you can see that this person will be taxed at 19% for every dollar they earn over $18,200 (the tax-free threshold). This means:
($31,721 – $18,200) x 19% = $2,568
The person’s total tax payable, with deductions included, is $2,568.
Now let’s see what their tax payable would be if they hadn’t claimed any deductions. In this scenario, because there aren’t any deductions to subtract, their taxable income is the same as their assessable income - $32,000.
We’re still in the same income tax bracket, so they’ll be taxed at 19% for every dollar they earn over $18,200.
($32,000 – $18,200) x 19% = $2,622
Their total tax payable without deductions is $2,622.
If we compare the two scenarios, we can see their tax payable has been reduced by $54 by claiming deductions ($2,622 – $2,568 = $54). Although the total dollar amount of their deductions was $279, this did not equate to a dollar-for-dollar reduction in their total tax payable.
If you’d like to see how deductions could affect your tax payable, check out the income tax estimator (note this calculator can only provide an estimate).