With tax time upon us, millions of people will be looking to maximise their refund by boosting their tax deductions. But there are strict rules around what you can claim.
Firstly, you need to have incurred the expense and not been reimbursed; secondly, it must directly relate to the income you earned (for instance from your job, business or investment); and thirdly, you need to be able to prove that you spent the money, so you’ll need an invoice, receipt or some other proof of purchase (like a bank statement).
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If you tick all those boxes, you should be OK. But, there are certain deductions that consistently seem to attract attention.
Among the areas frequently picked up by the ATO are the following:
There is no connection between the expense and your income earning activity
You’ve made large claims out of kilter with previous years
Your claims are disproportionate to other taxpayers with a similar background
You don’t have invoices or receipts
There are matching allowances received from your employer and deductions claimed in your tax return, e.g. in relation to travel claims
There is an inappropriate reliance on ‘flat rate’ deductions, e.g. the cents per km for motor vehicle usage
There is an incorrect apportionment between work and private/domestic use
There is “double-dipping” of expenses claim such as claiming expenses that have been reimbursed by the employer or claiming the 80 cent rate for working from home and also claiming individual costs such as depreciation
With these points in mind, here are the nine most commonly miss-claimed individual tax deductions, and how to avoid them.
1. Using your car for work
You can claim the Australian Taxation Office (ATO)’s flat rate allowance of 72 cents per kilometre (78 cents from 1 July 2022) for work-related journeys up to 5,000km but the ATO is concerned that some taxpayers are automatically claiming 5,000km without having proof that they actually undertook the journeys.
So, every time you use the car for a work trip, make sure to note down in a diary the number of kilometres you travelled and what the purpose of the journey was.
Remember too that the journey from home to work and back again doesn’t generally count as a work-related journey so can’t be included in your 5,000km.
If you use the other method of claiming work-related car expenses – the “logbook” method – you actually need to keep a logbook in order to be eligible to make a claim, plus invoices or receipts for all the individual expenses you want to claim, such as fuel, servicing, etc.
2. Claiming for the cost of work-related clothing
The cost of a work-related uniform is tax deductible, as is any protective clothing you are required to wear to keep you safe at work.
But that doesn’t include expenses you might incur on ordinary clothing, even if you only ever wear it to work. So, put aside any thoughts of claiming business suits. And remember, just because you work in a fashion store and are obliged to wear clothes purchased in your store, that doesn’t make the items tax deductible.
Also read: 5 most overlooked tax deductions
3. Claiming for charitable donations
You can claim a tax deduction for charity donations greater than $2 but you must have proof that you made the deduction. So, if you don’t have a receipt, you can’t make a claim.
Also, the cost of things like raffle tickets or tickets to charity dinners aren’t deductible, because you’re getting something in return (such as the chance to win a prize or a nice dinner).
4. Laundry expenses
You can claim the costs of washing, drying, ironing or dry cleaning eligible work clothes. If your claim is $150 or less, you don’t even need proof of your expenditure.
But remember, the cost of the garment itself must also be eligible for a tax deduction in order for you to claim the cost of the cleaning said garment.
So, dry-cleaning your business suit is not allowed.
5. Working from home claims
A lot of people don’t even know you can claim some of the costs of household bills like power, water and cleaning if you work from a home office, as so many people do these days.
But, if you do make a claim, it’s very easy to get it wrong.
Some people try to claim a portion of the rent or the interest on the mortgage but that is not generally allowable (unless you run a home-based business).
Others simply overestimate the amount of household costs that are claimable or can’t prove the amount of time they actually spent working from home.
Keep a diary of all your work from home for a typical four-week period and make a realistic assessment of the proportion of your costs that actually relate to the home office, bearing in mind that other people may use that room for non-work purposes at other times.
Alternatively, if you make a claim using the ATO’s 80 cents per hour rate (not available from 1 July 2022), remember you can’t claim anything else.
So, no double-dipping by trying to claim individual expenses too.
6. Child care and other non-deductible costs
There’s a long list of things – tax “myths” if you like – that many people are convinced are deductible but really aren’t (except in very specific circumstances).
So, if you’re thinking of trying to claim any of the following, think again:
Child care costs
Golf club memberships
Theatre and cinema tickets
The cost of getting a driving licence
7. Repairs to your rental property
If you need to rectify a defect to your rental property, you can claim a deduction for the cost of the repair. That potentially covers everything from fixing a broken toilet seat to replacing a weather damaged roof.
But if the defect you’re fixing already existed at the time you purchased the property (even if you weren’t aware the defect existed on purchase), the ATO doesn’t allow a deduction.
Instead something called the “initial repair” rule is invoked to insist that the expense is added to the cost of the property for CGT purposes – meaning no immediate deduction.
The biggest audit risk is if you’ve bought a property in the last 12 months and then tried to claim a repair – expect to see the ATO question the claim and ask for proof that the defect wasn’t pre-existing at the date of purchase.
8. Mortgage interest on your rental property
You can claim the cost of interest on the mortgage of a rental property. But beware of trying to claim mortgage costs associated with your private residence – they aren’t claimable.
That can be a particular issue if you use an existing line of credit on your rental property to finance – say – repairs to your family home or if you have what’s called a “split loan” whereby one loan facility covers both properties, allowing you to pay down interest on your family home whilst keeping the loan balance on the rental property high.
9. Travel expenses to visit your rental property
Until July 1, 2017, rental property owners could claim the cost of travel to visit their properties to do things like repairs or attend Owners Corporation meetings.
But after that date, the deduction was abolished so no claim can now be made for travel costs.
But many taxpayers haven’t yet got the message and still seek to make travel claims; there can be few faster ways to get pushback from the ATO.
The best way to ensure your return is correct and that you’re maximising the deductions you’re entitled to is to visit a tax agent like H&R Block. Best of all, if you get a tax agent to help you lodge your return, the cost is itself tax deductible.
Mark Chapman is director of tax communications at H&R Block.