What Are Tax Deductions?

A tax deduction is an expense that is directly incurred during the course of earning income that you can use to reduce your taxable income. Any expense claims must relate specifically to your job and have appropriate evidence of the expense, such as a receipt, invoice or bank statement.

Who can benefit from tax deductions

Anyone who is either employed or self-employed can benefit from tax deductions. A tax deduction reduces your taxable income and so you are liable to pay less tax. Note that to be a valid tax deduction, the expense must relate directly to earning your income. For example, if you are a mechanic then the cost of purchasing tools would be an allowable tax deduction, while for an accountant, it would not.

How to calculate tax deductions

Only expenses incurred for earning your income may be used as a tax deduction. Expenses may be wholly or partly for work, and only the work-related component is an allowable tax deduction. For example, using your personal car to travel to and from customer sites from your principal place of business is deductible, however, driving from home to your principal place of business and back home is not deductible, as it is considered commuting. Learn more about deducting business travel in our ATO guide on reimbursement and deductions on business-related car expenses.

Your taxable income then becomes the amount you earn minus the sum of all of the allowable tax deductions.

Expenses you can’t claim as tax deductions

Items specifically disallowed as deductions by the ATO include fines or penalties imposed under the law, Higher Education Loan Scheme (HELP), travel expenses incurred by a relative accompanying you on work-related activities, expenses in maintaining your family, membership fees to social, sporting or recreational clubs and non-compulsory uniforms.

How to claim tax deductions

To claim an expense as a tax deduction, it must meet three criteria:

• The money must have been spent by you and not have been reimbursed by your employer; 
• The expense must directly relate to earning of income; and
• You must be able to prove the expense by having a record such as a receipt.

Documentary evidence is not required if the total claims are less than $300, however, you need to record how you calculated the claim. If $300 is exceeded, then every dollar must be substantiated.

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