Preparing your individual tax return can be quite involved, with multiple sections requiring consideration including: income, deductions, capital gains and losses, offsets (rebates), and the Medicare levy.

Therefore, whether you prepare your tax return yourself, or use a registered tax agent, you can make the process quicker and easier by having all of your receipts, tax invoices and documents in order.

Importantly, this stands not only for the previous 2020-21 financial year (the one you are most likely preparing for), but also for the current (2021-22) and future financial years.

On this point, the deductions section in particular can require considerable attention and preparation.

According to the most recently available data from the Australian Taxation Office (ATO)*, for the 2018-19 financial year, 14,677,545 individuals claimed on average $2,498 in deductions—with the median being $600.

For context, in terms of where deductions sit regarding your individual tax return, please see below:

1. Assessable income – allowable deductions = Taxable income.
2. Taxable income x relevant marginal tax rates = Gross tax payable on taxable income.
3. Gross tax payable – non-refundable tax offsets = Net tax payable on taxable income.
4. Net tax payable + HELP debt repayments + Medicare levy and Medicare levy surcharge – tax credits and refundable tax offsets = Refund or amount owing.

As highlighted above, it’s important to note the distinction between a deduction and an offset (rebate):

• a deduction reduces your taxable income before tax has been calculated on it.
• a tax offset reduces the amount of income tax you have to pay after it’s been calculated based on your taxable income.

With the above in mind, when it comes to deductions, it’s vital to understand what you can (and can’t) claim and the appropriate evidence needed to claim. Below is information on several common deductions:

1. Gifts and donations. To potentially claim a deduction for a gift or donation, you need to ensure it’s:

1. made without expected or received material benefit in return
2. made to an ATO endorsed charity with ‘deductible gift recipient’ status—an organisation that can receive donations that are tax-deductible
3. able to be substantiated with evidence, when lodging your tax return (and claiming it as a deduction).

According to ATO data, for the 2018-19 financial year, 4,210,270 individuals claimed on average $933 in deductions for gifts or donations—the median being $120.

2. Work-related expenses. To potentially claim a deduction for a work-related expense, you need to ensure it’s:

1. directly related to earning your income
2. personally incurred while you were performing your work duties, and not have been reimbursed by your employer
3. a claim for expenses such as clothing, laundry and dry cleaning, travel and car, home office, and certain areas of self-education
4. able to be substantiated with evidence, when lodging your tax return (and claiming it as a deduction).

Please note: If the expense was for both private and work purposes, only the work-related portion can be claimed.

According to ATO data, for the 2018-19 financial year, 8,888,020 individuals claimed on average $2,331 in deductions for work-related expenses—the median being $1,045.

3. Personal super contributions. To potentially claim a deduction for personal super contributions you make to your super, they can’t be First Home Saver Scheme recontributions or Downsizer contributions, and you need to have:

1. met the age related super contribution eligibility rules
2. made a personal contribution to an eligible fund (e.g. not a Commonwealth Defined Benefit or Constitutionally Protected Fund) and retained those contributions within that fund
3. provided a valid notice of intent to your super fund and received acknowledgement.

According to ATO data, for the 2018-19 financial year, 436,952 individuals claimed on average $13,395 in deductions for personal super contributions—the median being $12,500.

4. Costs of managing tax affairs. To potentially claim a deduction for an expense you incur in managing your own tax affairs (eg cost of managing tax affairs through a registered agent), you need to ensure it’s:

1. able to be substantiated with evidence, when lodging your tax return (and claiming it as a deduction).

According to ATO data, for the 2018-19 financial year, 5,951,011 individuals claimed on average $332 in deductions for other expenses included in managing their tax affairs—the median being $176.

5. Income protection insurance. To potentially claim a deduction for the cost of the income protection insurance premiums you pay to insure against the loss of your income, you need to ensure it’s:

1. held by the insured person (not via super)
2. appropriately apportioned i.e. if the insurance policy provides benefits of an income and capital nature, only that part of the insurance premium that relates to the income benefit is deductible
3. able to be substantiated with evidence, when lodging your tax return (and claiming it as a deduction).

According to ATO data, for the 2018-19 financial year, 673,191 individuals claimed on average $3,109 in other deductions, including deductions for income protection insurance premiums—the median being $1,706.

6. Interest payments on investment loans. To potentially claim a deduction for interest payments you pay on investment loans for things such as property or shares that you derive assessable interest or dividend income from, you need to ensure it’s:

1. appropriately apportioned i.e. if you use the money you borrow for both private and income-producing purposes, you must apportion the interest accordingly
2. able to be substantiated with evidence, when lodging your tax return (and claiming it as a deduction).

According to ATO data, for the 2018-19 financial year, 185,078 individuals claimed on average $3,404 in interest deductions—the median being $184.

Moving forward

A deduction can help reduce an individual’s taxable income before tax has been calculated on it. Depending on your personal circumstances, there may be a number of deductions you can claim.

Therefore, it’s important to understand what you can (and can’t) claim, and the appropriate evidence needed to claim. This is pertinent not only for the previous financial year (the one you are most likely in the process of preparing for), but also for the current and future financial years.

Please note: While we have provided you with an overview of several common deductions, please consider seeking professional tax advice to assess their relevance and appropriateness to you.

If you have any queries about this article, please contact us.

*Australian Government, Australian Taxation Office. Taxation Statistics 2018-19 Individuals – Table 6.