To the extent that expenses are not reimbursed, residents and non-residents can deduct properly substantiated expenses incurred in earning employment and other income, for example, business-connected travel expenses, automobile expenses, subscriptions to professional or trade organisations, certain home office expenses, and protective clothing.
Note that as a result of the COVID-19 pandemic, the ATO has temporarily allowed a shortcut method to simplify how to calculate a deduction for working from home for the period 1 March 2020 to 30 June 2021. This shortcut method covers all work from home expenses, such as phone, Internet, the decline in value of equipment and furniture, and electricity and gas for heating, cooling, and lighting.
An employee is not entitled to a tax deduction for the following expenses:
- Costs of travelling to and from the place of work to home.
- Expenses of a private or domestic nature.
- Entertainment expenses.
Prepaid expenditures are generally only deductible over the period to which the expenditure relates, subject to certain limited exceptions.
Allowances provided to an employee for living-away-from-home are currently subject to FBT that is payable by the employer. A portion of living-away-from-home allowances in relation to the provision of accommodation and excess food costs is exempt from FBT, provided certain conditions are met. The concessional tax treatment of living-away-from-home allowances and benefits provided to employees is limited to 12 months for employees who are living away from a home in Australia.
Certain relocation fringe benefits are exempt from FBT. To the extent that a fringe benefit is exempt from FBT, it will also usually be exempt from income tax. Employer-provided cars are taxed concessionally under the FBT rules. Relocation costs are typically not deductible to the individual employee.
Deductions can be claimed for losses and outgoings incurred in the gaining or producing of assessable income. For example, to the extent that an individual owns a rental property, deductions would be available for any interest incurred in respect of borrowings to fund the acquisition of the property, property rates, insurance, repairs and maintenance, and, for some properties, depreciation on items such as carpets, curtains, and any furniture acquired for the rental property.
Tax deductions are not available for expenses of a private or domestic nature, for example, the cost of personal medical expenses, private health insurance premiums, the costs of child care (see the Other tax credits and incentives section for more information), alimony, life insurance premiums or interest incurred in respect of borrowings to fund the acquisition of an individual's place of residence.
Individuals can claim a deduction for contributions made to complying superannuation funds, regardless of the extent of their employment-related activities. However, additional tax may apply to the extent that the total of all superannuation contributions made in a year for the individual (including contributions made by an employer) exceed the annual 'concessional contributions cap' of AUD 25,000.
An individual with a total superannuation balance of less than AUD 500,000 at the end of 30 June of the previous financial year may be entitled to carry forward the amounts of the unused concessional contributions cap on a rolling basis for five years so as to contribute more than the concessional contributions cap in later years. The first year in which an individual can access unused concessional contributions that have been carried forward is 2019/20.
Charitable contributions of AUD 2 or more are generally deductible where they are made to entities that are specifically named in the tax law or endorsed by the Commissioner of Taxation as 'deductible gift recipients'. However, deductions for such gifts cannot generate tax losses. That is, generally the deduction is limited to the amount of assessable income remaining after deducting from assessable income all other deductions.
Residents receive the first AUD 18,200 of taxable income tax-free. Non-residents generally do not benefit from a tax-free threshold, nor do they qualify for the various tax rebates and tax offsets (see the Taxes on personal income section for more information).
Family Tax Benefits
Provided family income is below certain thresholds, resident individuals (or individuals in Australia with a special category visa or an approved visa for family tax benefit purposes) may be entitled to Family Tax Benefit payments if they have a dependent child or a secondary school student under the age of 20 (who is not receiving a pension, payment, or other government allowance) for whom one cares for at least 35% of the time.
The limits, rates, and nature of Family Tax Benefit payments (i.e. Family Tax Benefit Part A and/or Family Tax Benefit Part B) vary depending upon family income, number of children, and ages of children, and change from year to year.
An individual will be able to claim a deduction for expenditure incurred in gaining or producing assessable income or which is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (not being expenditure of a private, capital, or domestic nature). Entitlement to a deduction for certain motor vehicles or travel expenses will, however, depend on satisfying the particular record keeping requirements of the substantiation provisions.
A self-employed individual is entitled to a tax deduction for personal contributions made to a complying superannuation fund. See Personal deductions above for further details.
A deduction is allowable for costs incurred in managing tax affairs.
Subject to some limits and exceptions, where deductions exceed assessable income, an individual is able to carry forward tax losses for offset against assessable income derived in future income years.
Individuals are not permitted to carryback losses for Australian tax purposes.
The non-commercial loss rules prevent losses from non-commercial business activities carried out by an individual from being offset against other assessable income in the year the loss is incurred. The rules operate to defer a deduction for the loss, so that it may be offset in later years against assessable profits from the activity. There are tests to determine if a business activity is non-commercial. These rules do not apply to losses on passive investments such as real estate held for rental, or stocks and shares. There are rules limiting the ability to claim losses in respect of boats and 'leisure facilities' (which includes holiday houses), although a boat owner may be able to claim deductions up to the amount of income earned from the boat hiring activity. Non-commercial losses of individuals with 'adjusted taxable income' of AUD 250,000 or more, are automatically quarantined for use only against income from the non-commercial business activity in future years.
Capital losses are offset only against capital gains (and are applied to any capital gains before discounting) and cannot be offset against other income. In calculating capital losses, there is no indexation of the cost base (see Capital gains in the Income determination section for more information).