07 Aug Unveiling the power of tax deductions: Keep calm and be reasonable.

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Unveiling the power of tax deductions: Keep calm and be reasonable.

Blog post by Sarah Pyke

4th August, 2023

The Australian Taxation Office, affectionately known (or not) as the ATO, is a somewhat mythical beast.

We all have to deal with them, play by their rules and follow their guidelines. But at the same time, we seem to know so little about what they want from us!

A lot of people worry about being audited by the ATO or getting on to their naughty list. But to be honest, the ATO is actually quite reasonable. The whole tax system is built on the premise of reasonableness and the ATO is just there to oversee that.

Within this blog we will be discussing deductions and how to ensure we are correctly claiming deductions for work and business purposes.

What is a deduction?

A deduction is an expense, an outflow of money, that has a direct connection (what we call nexus) to your employment or business income.

For example, I am an accountant and I have professional membership fees to the Chartered Accountants Institute. These fees are directly related to what I do and therefore, I claim them as a deduction in my return. If I however had a membership to the horticultural society, because I am a budding garden enthusiast (I am, but trying to keep plants alive is my main aim at this stage!), this would not be something I could deduct. Horticulture has no connection to what I do and my income.

What is: Being reasonable?

An example of where there is a level of reasonableness to be determined, is deductions for home office expenses. We all have a mobile and internet, both of which we use daily to generate our income from our work/business.

Now the ATO expects this, they expect to see these expenses. But they also know that you are using your mobile and your internet to watch Netflix, to post on social media, to call friends and family and conduct online shopping. So when you put 100% of your mobile and internet expense as a deduction in to your return, the ATO does not see this as reasonable. You are not accounting for the personal use that is inherently there.

Therefore, when claiming these expenses be sure to use a percentage that best reflects the portion of work/business use and personal use.

Another example: You buy a laptop bag. If you were to go on Ebay you could find a laptop bag for $30. Might only last you a year, but that’s pretty reasonable! Haha

What we see however, is people who go out and buy a Prada laptop bag, or a Gucci laptop bag. Paying $30 for something versus $300-$400 + raises the question around reasonableness. Similarly, if you head to a work conference overseas and choose to fly first class, when you could have flown economy.

Both of these are connected to the income you’re generating, and therefore are deductible, but they’re not necessarily reasonable. Therefore, please keep in mind that a deduction isn’t purely how much it costs, but what it is and why it was incurred. The ATO just wants you to be reasonable.

Unlock the power of tax deductions.

Tax season often brings a sense of dread for many individuals and businesses, but it’s essential to remember that it’s not all gloom and doom.

Remember, seeking professional advice is always a wise choice, especially when dealing with complex deductions or unique circumstances. So, take charge of your tax situation, uncover the hidden opportunities, and enjoy the benefits of keeping more of your hard-earned money in your pocket!