Tax Planning for Individuals
Note :The information in the articles below is of a general nature only and may not be relevant to your specific individual circumstances. You may need to engage ezytaxback.com Pty Ltd to provide you with specific advice to suit your specific circumstances.
Maximize Tax Deductions
Everyone always asks us how to get the most out of their tax returns?
Through the use of tax deductions an individual can reduce their taxable income in a legal manner, allowing them to take advantage of lower tax rates. Tax Deductions are classified as out of pocket expenses that are directly related to an individual’s employment and income activities. Whilst claiming tax deductions is a legal form of tax minimization, it is important the expense meets the requirements set out by the Australian Taxation Office.
The ATO requires a work-related expense to meet the following criteria in order for it to be classified as a legitimate tax deduction to include in your personal online tax return:
1.) You must have spent the money yourself during the specified financial year and you weren’t reimbursed
2.) It must be related to your job
3.) You must have a record to prove it – the record must provide a description, cost and date of purchase
Sometimes individuals can incur costs which are associated with work and private use. In this case, a tax deduction is still allowed but only for the portion related to work use and must be accompanied by a receipt or proof of purchase. Keeping these receipts or proof of purchase are key to maintaining effective tax planning strategies in order to maximise your return.
When you do your own tax online claiming of work related deductions is often forgotten, or individuals don’t know what they are entitled to claim and in that case leave them out altogether. The following tax deductions are common forms of work related deductions you can include in your Australian Online Tax Return in order to become an efficient tax planner and get the most of your return.
Vehicle and Travel Expenses, including travel between work and home
Deductions are available for the use of your personal vehicle to travel for work related purposes. Whilst many people drive some distances to their workplace, trips between home and the work place are considered to be private travel and are therefore not deductible.
What is deductible however, are direct trips between two separate workplaces – this includes if you have a second job. If you have to travel from a normal workplace to an alternate workplace this is also deductible along with the trip back to the normal workplace or directly home. If you have to visit clients as part of your occupation or drive to meetings or conferences this is considered travelling to an alternate workplace and is therefore an allowable deduction.
When you do your tax online and you would like to claim a motor vehicle tax deduction you do not need written evidence as proof however you must be able to show how you worked out your business travel. One handy tax planning strategy for ensuring you get the best motor vehicle deduction is to keep a log book or diary of all travel that meets the criteria for a deduction, this will also ensure you have a simple tax return to complete.
Clothing, Laundry and Dry-Cleaning Expenses
Tax deductions can also be included for the costs of purchasing and maintaining occupation specific clothing and protective clothing.
Occupations which require their employees to purchase and wear uniforms with distinctive business logos on them are considered occupation specific clothing and the costs can be included as a tax deduction. For individual tax purposes, occupation specific clothing is also defined as clothing that is not ordinary in nature and is simply identifiable to a certain occupation. A good example of this is a chef’s uniform, including the hat and checked pants.
Protective clothing is considered as both clothing and footwear that is worn to minimize chances of injury or illness caused by an individual’s occupation. Some examples of protective clothing to consider when engaging in individual tax planning are: safety coloured vests, fire resistant and sun-protection clothing, steel cap boots, non-slip nurse’s shoes and overalls.
You can also claim the costs of dry cleaning, washing, drying and ironing eligible work uniform that meets the requirements of the clothing outlined above. For end of year tax planning, these small expenses are easy to overlook but they certainly add up so always be sure to hold onto your receipts, especially if the cost of your claim exceeds $150 or if your total work-related expenses exceeds $300.
Gifts and Donations
A tax deduction is eligible for gifts or donations of $2 or greater. The deduction is only able to be claimed by the person who pays the donation or for the gift, also known as the donor. The deduction is only applicable if the donor does not receive any material benefit or advantage in return. One piece of tax planning advice we recommend undertaking, is to ensure the gift or donation recipient is a deductible gift recipient (DGR) and you have receipt as proof.
Home Office Expenses
As an employee, the running costs of a home office are not generally able to be claimed, however if it is required as part of your employment to work from home a large amount, a portion of the running costs may be claimed as a tax deduction in your online tax return. These include: rent, mortgage interest, council rates and house insurance premiums.
Alternatively, if you work from home on a regular basis but not the majority of your work hours, you can claim a deduction for the amount of hours per week you work from home. The deduction is calculated as a set rate of the total hours worked from home for the year.
Self-education expenses can be considered a taxable deduction. When considering tax planning strategies you must ensure the following requirements are met in order for it to be considered as a deduction. The course you’re undertaking must have a sufficient connection to your current employment and allows you to advance and or expand your particular skills or knowledge required in your employment, or the education results in a high likelihood that your income will increase from your employment due to your studies.
Tools, Equipment or Other Assets
Some occupations require their employees to purchase their own tools and equipment to undertake their work activities. The costs of tools and equipment purchased directly for your employment can be added as a deduction. If the asset is for both personal and work use, only the work portion should be included as a deduction, for example 50% of the cost.
If the cost of equipment is more than $300 the asset should be depreciated over several years rather than the total cost claimed in the year of purchase.
Repairs and maintenance on these items are also tax deductible, but when considering year-end tax planning always remember to keep receipts and only claim the work use portion.
An expense can still be claimed in your Australian online tax return as a tax deduction if it is an out-of-pocket cost that is directly related to your income but does not fall under any of these categories. As everyone’s employment is different other expenses are incurred less often that can also be claimed under all other expenses. Some examples of these expenses can include: union or professional membership fees, income protection insurance, cost of managing the previous year’s tax affairs and personal mobile phone use for work purposes.
When claiming an expense under this category always ensure when you do your tax to make sure you can show how it relates to your income and you have a source document to prove it. It is also handy to describe the expense to ensure it is clear with the ATO what you are claiming, otherwise they may question it, delaying the completion of your return.
Accelerating Tax Deductions
When considering end of year tax planning a common strategy that many individuals adopt to maximize their tax deductions as much as possible is accelerating their spending to achieve higher deductions. The financial year runs from the 1st July to the 30th June the following year, as the 30th June approaches individual’s increase their spending by paying for certain expenses before this date in order to take advantage of the tax deductions and reduce the amount of tax they pay in their tax return for that year.
An example of this tax planning strategy in place could be a membership cost to a professional association that is due in July, however the individual pays the fee before the 30th June. When the time comes to claiming tax back online, the individual can include this fee in their current tax return rather than claiming it in the next year’s tax returns if they were to pay it during July.
This strategy can be adopted with any type of expense that is allowable and provided proof of purchase is attached. When adopting this strategy, it is very important to ensure you monitor your cash flow to ensure spending does not outweigh the benefits and leaves you with no cash flow.