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7 Tax Myths About Deductions (and the Truth Behind Them)

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When it comes to taxes (and especially to tax deductions) there’s a lot of misinformation floating around out in the world, particularly when it comes to tax deductions. After all, we all want to save a few dollars where we can. But many of those tax ideas have been accepted as fact, when they’re actually tax myths.

So, here are the top seven tax myths about deductions, and the truth behind them.

7 Tax Myths About Deductions (and the Truth Behind Them)

Tax Myth 1: Every dollar claimed in deductions, is a dollar you get back in your refund.

Unfortunately this is just not true (I wish it was!). Instead of a dollar-for-dollar refund, instead you’ll get a percentage of the amount of money claimed. In the best case scenario, you will get back 47% of the money you spent, or $47 out of every $100. And that’s assuming that you’re in the highest tax bracket. In the lower brackets that percentage will be between 22% and 35%.

Tax Myth 2: All deductions are good deductions.

Understanding the amount that you will have refunded to you when you make a deductions claim is important because it will help you understand where and when you should spend your money. Just because you’ll ‘get it back’ in your refund, doesn’t mean you should necessarily mean it’s a good buy. Because at the end of the day you’ll only get a small proportion of it back.

Deductions are only ‘good’ if they are necessary to support your life, boost your future income, build an asset or run your business. If it’s not a purchase that can do one of those things, then it’s sometimes a more financial savvy move to just pay tax on the income and bank the rest of the money allowing you to better manage your cashflow.

Tax Myth 3: Everyone is entitled to claim up to $300.

There’s an ongoing belief that everyone that files a tax return is entitled to claim up to $300 in deductions, despite not having purchased anything. Unfortunately, this is another claim that just isn’t true. What is true is that you don’t need receipts for claims of expenses up to $300. But you still have to have actually spend the money.

Tax Myth 4: You can claim your travel to work and back.

This is one that is sometimes, in very specific situations, true. You can claim travel between home and work if you are required to transport bulky tools or equipment and there isn’t a safe place to keep them at your workplace. But in most situations, you can’t claim the expense of travelling between work and home because these are considered ‘private expenses’ rather than ‘work expenses’.

Tax Myth 5: Coronavirus expenses, like gloves, masks and home schooling costs, can be deducted as work expenses.

This is another one that is partly true. There are some situations where you can claim protective gear, such as jobs where you are in close proximity to the public and where you are required to use those items to do your job safely. But for most of us, we’re purchasing these items for our private use, and we simply can’t claim them back.

And when it comes to setting up your kids for home schooling, those costs are always private expenses.

Tax Myth 6: You should always claim the maximum amount on all standard deductions.

There are some standard operating costs that business owners are allowed to deduct on their returns. And some of these have a maximum allowable amount, for example, $150 for clothing. But you can’t automatically deduct the $150 worth of clothes simply because you have to have clothes to go about your life. You can only deduct these if they are items specifically required for your job – for example nurse’s scrubs.

Regardless of amounts allowable, all your deductions must be directly used in your business and must tie directly to a related expense.

Tax Myth 7: You should try to find as many hidden deductions as possible.

With so many more people working from home, or having remote offices, deductions are changing. For example, now you can claim your home office and your internet as a deduction. But that doesn’t mean you should go and find every deduction possible or claim them to the full amount possible. Instead, you should focus on accurately reporting how much of your out-of-pocket expenses actually went towards your business.

You should also be careful trying to tie in ‘extra’ expenses. For example, you can’t write off your gym membership unless perhaps you’re a trainer at the gym. It’s always a good idea to look beyond traditional expenses when it’s closely related to your business. But not when it isn’t.

Talk to Your Tax Agent

If you want to understand the best approach when it comes to your tax planning, don’t rely on tax myths – give us a call. We can help you find the deductions that make sense for you because they’re the things you need to run your business or your life. And we can help you put in place a tax minimisation plan that will benefit you overall.

For more information on tax myths and tax deductions, get in touch. We’re here to help.

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Is Your Staff Christmas Party Tax Deductible?

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Everyone loves a good end-of-the-year, holiday celebration. And after the year we’ve had, your staff deserve it. But it’s not as simple as getting a few platters of sushi and throwing open the bar. At least not when it comes to your taxes.

Many Australian businesses mistakenly believe that their staff Christmas party is automatically tax-deductible. Sometimes that might be true. Other times it might not. And in some circumstances, it could be subject to Fringe Benefits Tax (FBT).

So, before you toss the company credit card down for the bar tab believing your staff Christmas party is tax deductible, here’s what you need to know.

Is Your Staff Christmas Party Tax Deductible?

Whether or not the expenses of your staff holiday party are tax deductible or subject to FBT depends on when it’s held, where it’s held, who attends and how much you spend. Likely it’ll be a combination of each of those things. Here are the broad rules.

General Rule

The cost of your staff Christmas party is income tax deductible to the same extent that it’s subject to FBT. Conversely, if you have costs that are exempt from FBT then you can’t claim those as an income tax deduction. So, if you’d like to not pay taxes on your company party, the first step is to try to work it into an FBT exemption. Because unless there’s an exemption, it’s likely that FBT will apply when you putting together a company Christmas party.

When it’s at your office (or property)

Exempt Property Benefits

If you hold the party on your business property, during the working day and only staff attend, then it will be exempt from FBT under the exempt property benefits. But this exemption won’t apply to friends, family or associates.

Minor Benefits Exemption

In the same vein, if you have a Christmas party on your premises and you pay less than $300 per person, that amount will generally be exempted from FBT. This can extend to friends and family as well (as long as it stays under $300 per head). This is the minor benefits exemption.

When it’s at another property

Minor Benefits Exemption

If you hold a party for your staff party off of the premises (so at your neighbourhood pub, or at a nice restaurant overlooking the valley) you lose the benefit of the property exemption. But you can still use the minor benefits exemption for both staff and friends and family as long as the costs don’t exceed $300 per person.

Tax Deductible

However, if the costs exceed the $300 threshold per person, the amounts above will likely be tax deductible. So, if you spend $350 per person on a fancy meal with champagne at a local venue, you can claim back $50 per person. And this applies to friends and family as well.

What about clients?

Unfortunately, the costs incurred entertaining clients are not tax deductible. So, if you decide to include clients at your company Christmas party, you won’t be able to claim the amounts that relate directly to entertaining them.What about gifts?

Staff gifts

Your staff Christmas party is a great time to give each employee a gift. And if you give them a gift that’s less than $300 under most circumstances those costs will be exempt from FBT.

It’s important to remember each gift or party is considered a separate benefit. So, you can throw them a party for less than $300 a person, AND give them a gift valued at less than $300 a person BOTH can be exempt.

Client gifts

Gifts can be a little tricky when you’re giving a to clients, however. This is because we have to decide whether the gift is actually a gift, or will be considered entertainment.

Gifts are things like a gift voucher, a Christmas hamper or a pen. But if you give something like tickets to something (whether it’s a movie, or a concert, or a flight), that’s more likely to be considered entertainment. The former are tax deductible, but the latter are not – regardless of how much you spend.

The divisions between ‘gift’ and ‘entertainment’ can be complicated, so it’s a good idea to speak to your accountant before spending money on Chrissy presents for your clients.

What if you’re a tax-exempt entity?

Tax exempt entities have different rules when it comes to Christmas parties and taxes. These are similar in nature, but have their own spin. For example, a tax-exempt entity can rely on the tax-exempt entertainment exemptions for Christmas parties, and the minor benefits exemption will only apply in very limited circumstances.

It’s best to speak to your accountant about your options if you are a tax-exempt entity.

Takeaway

How you organise your end-of-the-year celebrations and employee and client gifts can see you saving thousands of dollars in taxes (or not!). So, it’s worth taking the time to consider the best way forward before getting out the corporate credit card. You’ll be glad you did.

Get in touch if you’d like some specific guidance on how to save on tax while still having a great night of celebrations. We’re here to help.

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Are My Donations Tax Deductible?

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Tax deductible donations – what are they and will my donations for bushfire relief qualify?

Australians are incredibly generous. This year alone we’ve already donated nearly $500 million dollars towards bushfire relief. But even in years without terrible tragedies, five out of six Aussies give to charitable organisations, with the average annual deductible donations being nearly $650 per person.

While most of us are donating because it makes us feel good to help, it also makes sense to keep track of what we give. Come tax time, tax deductible donations are a great way to keep more of your money in your pocket.

We’re often asked if a donation to a crowdfunding campaign, or to a child’s school will count as a deduction. And now, we’re being asked about bushfire donations. Unfortunately, not all donations are tax deductible.

Donations that are tax deductible

So, what is required to make a tax-deductible donation? There are five requirements.

1. It must be made to Deductible Gift Recipients.

For a donation to be tax deductible it must be made to an organisation that is accredited as a Deductible Gift Recipient or DGR. You can easily find out if the charity you’re donating to is a DGR by checking the Australian Charities and Not-for-profits Commission’s (ACNC) Charity Register.

Most of the big names will be DGRs. Places like the Australian Red Cross, The Salvation Army Australia and WIRES will most certainly have their status as a charity confirmed by the ACNC and all donations to them will be tax deductible.

However, where you might run into trouble are donations to smaller organisations – perhaps local companies that are organising fundraising that they’ll then move on to a larger entity. If the person that you give the money to is not a registered DGR, you won’t be able to claim it on your tax return, regardless of where the money finally ends up.

2. It must be $2 or more.

You can claim the amount of the donation but it must be at least $2. It can be made in the form of money or property as long as the value exceeds the base amount.

3. You cannot receive a material benefit in return.

Your donation must be truly a gift. In other words, you can’t receive or expect to receive any material benefit, advantage or item in return for your donation.

Let’s consider the typical car wash fundraiser. Imagine your son’s cricket team is having a car wash, with all the proceeds to go to bushfire relief. Even if the donations are made straight through to an accredited charity, the money you are giving is not tax deductible because in return you’ve received a great (or not so great) car clean. It’s still a great thing to do – but you can’t claim it on your tax return.

4.Your donation must comply with any applicable conditions.

For some DGRs, tax law adds extra conditions on the types of deductible gifts they can receive. An example of this is when you donate to the Australian Disaster Relief Fund. That donation must be made within two years of the disaster (or from the date the Treasury minister declares).

You can read more about conditions on certain charities on the ATO’s website. Or the DGR that you are donating to will be able to confirm what types of donations they are able to accept.

5.You must have a record.

For every donation you make, you must have a record. In most cases the DGR that you’ve donated to will issue you a receipt. But if they haven’t (and they don’t always) you can simply show your donation on your bank statement, or if you gave via your workplace, your payment summary, your income statement or with a written notification from your employer.

There is one exception to the records rule, and that is for bucket donations. Many of us have popped some change into the red Salvos bucket at an outdoor cinema event, or even in one of the seeing eye dog collection statutes in your local Woolworths. In those situations, you may deduct up to $10 total for contributions without a receipt or record of any kind.

What donations are not tax-deductible

Donations that don’t meet the above five requirements are not tax deductible, and it pays to be on your toes. It’s not always crystal clear when a donation will be permitted especially in terms of receiving a ‘benefit’.

For example, art union or raffle tickets are not tax deductible even though you may not win (and therefore, won’t receive a benefit). Likewise, donating to a Facebook fundraiser organised by your local butcher or directly to family or friends who have been affected by bushfires won’t be deductible.

Going forward

Clearly there are more reasons than just tax deductions to make donations. But if you’re making a large donation, or donating often, it pays to ensure you can use these on your income tax return. That means you’ll feel good both when you donate, and at tax time.

Have questions about your tax deductible donations? We’d love to help you with some personalised advice. Get in touch!

Claiming work-related motor vehicle expenses tax deduction

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If you use your own car for work-related travel (even if you are leasing or hiring it), you may be entitled to a work-related motor vehicle expenses tax deduction. Even if you use your car part time for work reasons, and part time for personal reasons, you can claim the work related portion of your car expenses. However, you have to keep track of that use.

There are two methods currently available to claim motor vehicle expenses tax deductions – cents per kilometres and the logbook method.

Logbook Method (extracted from ATO’s website)

  • Your claim is based on the business use percentage of the expenses for the car.
  • Expenses include running costs and decline in value but not capital costs, such as the purchase price of your car, the principal on any money borrowed to buy it and any improvement costs.
  • To work out your business use percentage, you need a logbook and the odometer readings for the logbook period (see below).
  • You can claim fuel and oil costs based on either your actual receipts or you can estimate the expenses based on odometer records that show readings from the start and the end of the period you had the car during the year.
  • You need written evidence for all other expenses for the car.

Your business use percentage is the percentage of kilometres you travelled in the car for work during the year divided by the total kilometres travelled by the car during the year.

If the pattern of your car use changed during the year, make a reasonable estimate of your business use percentage for the whole of financial year, taking into account your logbook, odometer and other records, any variations in the pattern of use of your car and any changes in the number of cars you used in the course of earning your income.

Logbook Period

Your logbook is valid for five years. If this is the first year you are using this method, you must have kept a logbook during the financial year. It must cover at least 12 continuous weeks. If you started using your car for work-related purposes less than 12 weeks before the end of the year, you can extend the 12-week period into the next financial year. (But, if you are using the logbook method for two or more cars, the logbook for each car must cover the same period.)

If you established your business use percentage using a logbook from an earlier year, you need to keep that logbook and maintain odometer records. You also need to keep a logbook if the ATO tells you in writing to keep one.

Your logbook must show:

  • When the logbook period starts and ends, and the odometer readings at these times.
  • The total number of kilometres the car travelled during the logbook period.
  • The number of kilometres travelled for work during the logbook period based on the journeys recorded for the period.
  • The business use percentage for the period.

Entries in the logbook for each business trip must be made at the end of the journey (or as soon as possible afterwards) and show the:

  • Date the journey began and ended.
  • Odometer readings at the start and end of the journey.
  • Kilometres travelled on the journey.
  • Reason for the journey.

Your records must also show the make, model, engine capacity and registration number of the car.

Click on the button below to download your log book worksheet:

DOWNLOAD

Takeaway

It’s well worth taking the time to track your work-related car use and claim the motor vehicle expenses tax deduction. To get an idea of what you might save, check out the ATO’s online calculator, or get in touch. We’d be happy to talk you through the process and your potential savings.