Overview of Deductions

Expenses are only tax deductible if you are carrying on a business

An expense will be deductible if there is some connection between the income producing activity and the expense incurred. Note that the activity does not necessarily have to be generating income, but it does have to be conducted with a view to the making of a profit, and with the possibility that income could be generated at any time. For example, you have works in an exhibition for sale; there are no red dots when the exhibition comes down (sadly) but there could have been sales and that’s the point.

To paraphrase the legislation we might say that any time you spend money or incur a commitment to pay (the expense is credited to your credit card), and that payment is, in some way, connected to an activity that you are carrying on with the intention of making a profit, then that expense will be tax deductible.

Once you have established that you have (a) incurred an expense, and (b) that expense is related to your business or work, then the only remaining issues to consider are:

  • To what extent is the expense deductible? Is it 100% deductible, or is it only partly deductible? Subscriptions to professional bodies, art materials, upkeep of instruments, professional development and so on will be fully deductible, but the use of your car or traveling expenses may be only partly deductible. If the latter is the case, then you may need to be, for example, keeping a car logbook to work out the business use percentage, or a travel diary to establish what portion of the time spent away from home (for trips of more than five nights away) was devoted to business activity, or draw up a mud-map of your residence to establish what proportion of the floor area is set aside for business purposes.
  • What records do I need to keep? Receipts, invoices, diary entries and so on.
  • Is the expense an exception to this general rule? Exceptions include medical expenses (which are never, ever, tax deductible), clothing (unless it is protective in nature, or a uniform – performance related clothing may, or may not be deductible, depending on the extent to which it may be seen as ordinary type day-to-day clothing –and occupation specific clothing) and entertainment expenses (the exception here being, for example exhibition opening costs, where there is no clearly identifiable individual/s being entertained) and food costs (unless they are food costs incurred while traveling which involves overnight accommodation).
  • Is the expense self-education? In which case the expenses will be deductible (except the first $250) providing the course of study is related to your job or business.

Expenses will fall into two categories, those related to work that is subject to PAYG tax –

referred to as Work Related Expenses, and those related to your business. In respect of the latter, if you are registered for GST then the deductible part of the expense is the after-GST amount. If you are not GST registered then the total amount of the payment, including GST is deductible.

The separation between work related and business expenses gives rise to record keeping issues; your car logbook, for example, will need to split the car usage between work related travel and business travel. Remember, travel between home and work is not deductible unless the car is used to carry work related tools and materials, but only if those tools and materials could not be carried on public transport.

In that example, you would be entitled to claim back the GST for that proportion of the car costs relating to business, but not work.

Purchases of items such as computers, musical instruments and cars cannot be claimed in full, but have to be deducted over a period of time, as depreciation.

See also Simplified Tax System (STS)
See also A Business or a Hobby
See also Non-commercial Loss Provisions
See also Deductions List