How to avoid the biggest tax deduction mistakes (and the things you can claim)

Whether you are a diligent filer of taxes, or the kind to bury their head ostrich-style until the ATO come searching for you, one thing remains true; at some point, you’ll need to file a return.  Unless you are a tax expert, chances are you may make a few mistakes. And not to your benefit.

In fact, the ATO has even come out and *surprise* recommended that you don’t do your return too early. Apparently, self-preparers who lodged in July 2023 were twice as likely to be amended. That’s a point in favour of the procrastinators!

The reason is that you may not properly represent your income, especially since August is when most companies report and announce full-year dividends and credits.

Some of the biggest mistakes people make are typically around deductions. It could be missing deductions that you are eligible for or, on the flip side, thinking you can use a deduction that doesn’t apply to you.

Since no one wants a call from an ATO debt collector, I spoke to Paul Aliprandi, Strategic Financial Adviser at Wilsons Advisory and Mark Chapman, Director of Tax Communications at H&R Block, for their tips.

The biggest deduction mistakes

According to Aliprandi, some of the typical mistakes he sees result from poor record keeping and misunderstanding the deduction rules.

An example of this might be claiming 80% of your phone bill for work activities.

“If you can’t substantiate that by demonstrating on average 80 of the 100 calls made are related to income-producing activities, the ATO would reduce your claim to $50 or even zero and penalise you for their trouble,” says Aliprandi.

He suggests keeping physical or digital records of your relevant expenses, pointing out that there are a range of apps you can use to help you these days.

Further to this, don’t embellish, as Chapman cautions.

“You can only claim what you’ve spent. So, don’t inflate deductions in order to get a biggest refund and only claim for costs you can prove you’ve spent, by producing an invoice, receipt or bank statement for instance,” says Chapman.

When it comes to misunderstanding deduction rules, Aliprandi notes that the ins and outs of investment property are a common cause of trouble – the ATO cite nine out of 10 claims are incorrect.

Some of the mistakes Aliprandi has seen include “claiming tax deductions for capital expenses as repairs, muddying interest deductions by drawing down on rental property loans for personal purposes and then either claiming all the interest or an incorrect split.”

Chapman also points out an unexpected mistake – relying on the ATO data. That’s right, even the taxman gets it wrong sometimes.

“Some people assume that because the pre-filled data comes from the ATO, it must be right. That’s a dangerous assumption, especially in July and early August. If you omit income and get questioned by the ATO, the legal burden will be on you, even though you’ve taken the information straight from the ATO’s pre-filled data,” says Chapman.

The most popular tax deductions and what you need to know

Some of the most popular tax deductions include:

• Work-from-home expenses
• IT-related items
• Travel and accommodation
• Self-education and subscriptions
• Work-related clothing

Here are some of the things you need to know about each.

Work from home

You can claim an actual portion of home running costs with receipts or a standard rate of 67 cents per hour to cover internet, phone use, energy expenses, stationery needs.

“Be careful not to “double dip” and claim separately for mobile phone costs (even if you are using your mobile phone outside of the home, for instance while you are on the road),” says Chapman.

This doesn’t include depreciation and maintenance of furniture and technology or office cleaning costs, which are separate deduction options.

IT-related items

“You can claim a deduction for items of plant, machinery and tools that you have bought. If the cost is less than $300, a deduction is claimable immediately, otherwise a deduction can be claimed over the “effective life” of the assets,” Chapman says.

Aliprandi notes that phone, computers and internet are popular deductions. Be careful not to apply for a deduction that your employer may already have reimbursed you for though.

Travel and accommodation

Before you get excited, this doesn’t mean your daily commute to the office – unless you have to carry bulky equipment that can’t be stored at the office. (The old laptop that feels like a brick doesn’t count as bulky either, just in case you wondered).

“You can claim the cost of travelling between two workplaces. This includes public transport and taxi costs,” says Chapman.

You can also claim costs for using your car for work purposes – for an example, a sales person travelling to meetings might then record road tolls, parking fees and kilometres travelled.

Self-education and subscriptions

Any education or conferences you might attend to further your knowledge and skills in your chosen career. You may even be able to claim accommodation and meals if you’ve needed to travel.

On the last though, Chapman reminds “you may need to apportion the costs if you spent some downtime on the beach afterwards.”

Subscriptions refers to professional memberships you might be required to hold as part of your career – such as Chartered Accountant membership – or journals, periodicals and magazines with content aligned with your career.

Work-related clothing

To be clear, you cannot claim a deduction for a business suit. Work-related clothing means uniforms or occupation-specific clothing like medical scrubs that would identify your occupation to the general public. Furthermore, you can claim the costs of laundering and dry-cleaning such clothing.

You can also claim protective equipment like gloves or masks that are required as part of your job.

Investing and deductions

Investing can form part of your income – so you are probably aware the implications for capital gains tax and the like. You may also be counting on franking credits. But did you realise some aspects of investing may allow you to deduct expenses?

Aliprandi explains further.

“The general rule for an individual taxpayer is that an expense is deductible when incurred in relation to gaining or producing an assessable income,” he says.

So you might be able to claim subscriptions like Bloomberg or travel to company AGMs. The fees of a wealth manager might also be deductible.

When it comes to investment losses to deduct from other gains, Chapman notes that you need to have sold the positions at a loss to claim them. Be wary of ‘wash sales’, too—that is, say you sold your position at a loss last financial year to claim it against your other gains; you can’t then buy it back again this financial year.

Final tips for tax season

1. Seek expert help
   Both Aliprandi and Chapman advocate using an expert who will be across all the finer details of tax rules – don’t forget tax agent fees are tax deductible too.
2. Records, records, records
   “Make sure you have written evidence, such as receipts, invoices and bank or credit card statements, for everything you intend to claim,” says Chapman.

Aliprandi agrees, adding that you need to be across the rules for substantiating your claims.

The substantiation rules don’t apply if your deductible expenses are under $300, but “you still need to have incurred the expenses. Claiming $300 in your tax return each year is a sure way to have your return reviewed by the ATO”.

All the best with your tax – and may the returns be in your favour (or the bill not too high).