What work-related expenses can you claim?

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Gavan Ord:
Hello, and welcome to With Interest's 2024 Tax Time Series. I'm Gavin Ord from CPA Australia. Tax Time is just around the corner. And to help you navigate this year's tax season, we've got four special editions of With Interest. They'll cover all the need to know topics for accountants and finance and business professionals. Today we'll be talking to Assistant Commissioner, Rob Thomson from the ATO about work-related expenses.

From the crazy to conservative and the rules you need to follow to make sure you hit the mark and pay the right amount of tax. We'll cover record keeping, working from home expenses, car and travel expenses, special equipment and tools, education expenses, and then tips for calculating and making sure you keep everything you'll need if the ATO knocks on your door. Welcome back to With Interest, Rob.

Rob Thomson:
Thanks, Gavan. Glad to be back.

Gavan Ord:
So last week we spoke about Tax Time 2024, and the key areas the ATO was focusing on. You mentioned that incorrect claims for work-related expenses were one of the biggest drivers to the individual tax gap. So let's talk about that. And we know a lack of substantiation can cause difficulties. So what do people need to consider when keeping records for their deductions?

Rob Thomson:
So it's essential for people to keep records of their work-related expenses without the proof to support a claim, you simply just can't claim the deduction. And so a couple of tips. The first is, and I think I mentioned this on last episode, is that in most cases a bank or a credit card statement on its own isn't enough evidence to support a work-related deduction for claims for your clients, so they need to have a receipt.

Now when it comes to talking about receipts, there's this question on what is a valid receipt? So it needs to show all the following. It needs to show the cost, the supplier, the date of the purchase, the nature of the good or the service and the day of the document, the receipt or invoice that was produced. Second, I think the second tip is create good record keeping habits. So most people don't really think about the receipts and records until it's Tax Time, which is a little bit too late and they're potentially missing out or forgetting about deductions that they could have claimed.

And finally create a system. Now whether this be a spreadsheet in a folder in their emails, our myDeductions tool within our ATO app, even the good old shoebox govern, people should collect their receipts year round and keep them in one place for no less than five years. And what we're encouraging people is we're saying, "Look, when then when you book and see a tax agent, make sure you're taking all your receipts along to make it easier at Tax Time."

Gavan Ord:
And the receipts don't have to be in hard copy, they can be electronic as well?

Rob Thomson:
That's correct. Yep.

Gavan Ord:
We touched on working from home claims last week as well as many people are still working in a hybrid environment. And you said there are two calculation methods people can use. Can you refresh listeners of what those calculation methods are and their record keeping requirements for each?

Rob Thomson:
Sure. So as you said there's two ways to calculate a working from home deduction. There's the fixed rate method and then there's the actual cost method. So the fixed rate method allows people to claim a set rate for every hour they work from home and covers a range of additional running expenses that can be hard to apportion at times like your phone and your internet, gas, electricity, stationery.

So if you're using this method, then they do need to keep a record that shows the actual number of hours worked from home for the whole year. So whether that's a time sheet, a diary, that's up to them. And they also need to have an example of the additional running expenses. So if they had additional phone usage or electricity costs, keep one electricity bill from each quarter, at least one monthly phone bill.

The other thing on that is obviously we've made some changes to it last year and we increased the expenses that are included under the fixed rate method. So just a reminder if people are using that, not to claim those expenses for phone and internet on other parts of their tax return. Then you've got the actual cost method. So the actual cost method allows people to claim the actual additional running expenses that are incurred as a result of them working from home. So they'll need to calculate the work-related proportion of these expenses and have records to actually show how they've calculated for each expense.

So people can claim a separate deduction also for depreciating assets for working from home, so your office furniture or technology, and this is the case regardless of whichever method they use. But remember if you're doing that and claiming those separate deductions for depreciating assets, if the item costs more than $300, then you're going to need to determine its effective life and claim the decline in value over the effective life. And it can't all be done at once.

Gavan Ord:
I think we said last week, records are really fundamental to this.

Rob Thomson:
That's right.

Gavan Ord:
Records and records and records. I think the former commissioner spoke about the golden rules and that's one of them.

Rob Thomson:
That's right. That's right. Definitely one of the three golden rules, which I might remind everyone at the end is that you have a record normally in the form of a receipt, but for some of these other things like working from home and car expenses, there are additional record keeping requirements associated with them.

Gavan Ord:
And just on car expenses. And that's obviously another very common claim in the work-related expense area. Can you talk to us about what you can and can't claim?

Rob Thomson:
So it is a common one. So last year we saw about three million people claim work-related car expenses. So if people are eligible to claim car expenses, there are two ways they can calculate the deduction. There's the cents per kilometre method and then there's the log book method. And again, whichever method is used, it's the choice of each person they need to keep records.

So once again, no record, no deduction. But if they're using the log book method, then they'll need to have kept a log book. And this helps to determine the percentage of their car use that was for work-related versus private. And they'll also need evidence for each car expense they're claiming, for example, fuel, oil or maintenance. And they need to keep a 12 week log. That's indicative of kind of the normal working pattern they have through the year.

So that's one method people can use. If people would prefer to use the cents per Kilometre method, they can claim up to 5,000 work-related kilometres but they need to have a record to show how they've calculated those work-related kilometres. And as the name suggests, the cents per Kilometre method allows people to claim a set rate for each work-related kilometre, but this is an all-inclusive method. So this includes amounts related to your rego, your insurance, repairs, maintenance, declining value. So if people are using the cents per Kilometre method for their work-related car expenses, then they can't separately claim these amounts somewhere else in their tax return.

Gavan Ord:
And just in terms of the rate for the cents per kilometre, that changed recently, is that correct?

Rob Thomson:
That's right, Gavan. So if your clients are claiming the work-related car expenses for the 23/24 income year, and they're using the cents per Kilometre method, this rate has increased from 78 cents up to 85 cents per kilometre. And this is probably another good reason not to just copy and paste your deduction from last year into this year's return because the rate's gone up, you could actually be doing yourself a disservice there.

Gavan Ord:
Yeah. This next question gets into what actually is work purposes. So a lot of industries require people to purchase tools or equipment to do their job. Are they expenses that they can claim in their tax return?

Rob Thomson:
So yes, people can claim a deduction for tools and equipment if they're acquired for the purposes of carrying out their work. Again, they can only claim the work-related use of the items, so not private use. So if you've bought some tools and use them both at home and at work, then you'll need to apportion these expenses and only claim the amount that relates to your work-related deduction.

There also needs to be a direct connection between the expense and the job type. For example, we might see tradies claiming power tools, we see performing artists claiming musical instruments and we see hairdressers claiming scissors and blow dryers. If we saw an office worker claiming a power drill, we're probably going to ask some questions. I don't know too many office workers that need a power drill on a day-to-day basis.

But remember, I think tools and equipment decline in value over time. So for items costing $300 or less, people can claim an immediate deduction for the whole cost providing they have a receipt and they bought the item for work purposes. There are some exceptions to this rule. For example, if you've purchased a tool that costs less than $300, it is part of a set that totals more than $300, then it's not immediately deductible. And then for items over $300 or for sets totaling more than $300, then you'll need to work out its decline in value and claim the deduction over a number of years.

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Gavan Ord:
And what about clothing, that often comes up about clothing? So there are some clothing items you can claim and some you can't. What's the difference between the two and what do people need to do if they are making a clothing claim?

Rob Thomson:
You actually generally can't claim the clothing that you wear to work. So for most jobs you'll wear what we consider to be conventional clothing, Gavan. This is things like, and this is regardless of your occupation. So this is things like black trousers that might be worn by people in the hospitality industry. This might be jeans or shorts that are worn by tradies. This might be a business attire, which where we're both sitting in today.

Now I can't say I wear a shirt and tie at home on the weekend, but it's considered conventional clothing. And so you can't claim a deduction for those things. In limited circumstances people can claim clothing items, but they need to fit into one of four categories. So the first is protective clothing. So this is things like fire resistant clothing, steel cap boots or non-slip shoes. And this clothing generally needs to provide protective features that protect against illness or injury that are likely to occur in the workplace. The second is occupational specific clothing.

So clothing that clearly identifies someone as a person associated with a particular job. For example, a chef's checkered pants or judge's robes. The third is a compulsory uniform. So that's where an employer strictly enforces under a workplace agreement that you've got to wear a compulsory uniform. And lastly is one that's called a non-compulsory uniform, and that is one that is registered on the register of approved occupational clothing and looks. So people can find out about all of those on our website. On the last one, if you're not sure, you probably want to check with your employer, but once again, it's all going to come down to if you do fit into one of those four categories, making sure you have receipts to kind of back your claims up.

Gavan Ord:
And I think if you buy protective boots to weather the office, that's not in the nature of your work. So just because it's protective doesn't necessarily mean it's deductible.

Rob Thomson:
Yeah, I don't think if I wore steel-cap boots to work arguing that the A4 bit of paper I dropped, my foot's likely to cause damage, Gavan.

Gavan Ord:
Yeah, exactly. And Rob, what about education expenses with the changing nature of work, a lot of people do training courses from short courses to professional developed courses like MBAs. What are some of the key rules around self-education expenses?

Rob Thomson:
So there are three golden rules to claim your work-related expense, which I think you noted. And these are, you need to have spent the money yourself and you went reimbursed. The expense must directly relate to earning your income and you need to have a record, like a receipt to prove it. And so if we go to self-education expenses, and this can include things like tuition courses or seminar fees, it'll need to directly relate to earning income and your income in your current job.

And it'll have a close connection to your job if it maintains or improves the skills of your job or results or is likely to result in an increase in your income from your work activities at that time. But you can't claim a deduction for study if you're not employed at the time you incur that expense. So if the course allows you to get employment or get a different job, then that's not related to your current job and your current income and so you can't claim it.

And so for example, we had a recent case in the AAT where the AAT agreed with the commissioner that a dental technician could not claim self-education expense deductions for training to become a registered Australian dentist and the associated travel with that. So it can get tricky, but really it relates to if it's related to your current job, that expenditure. And so, if you're eligible to claim a deduction, then once again, keep good records. This includes evidence around your course fees, but also receipts for your textbooks and your stationery.

Gavan Ord:
That's a good example around the dental technician one. Often the examples are given are quite extreme, like you're an office worker who's doing flower arranging, obviously you can't do that, but that dental one's more, what do you call an edge case where it's not so clear cut from the title, but obviously when you see the evidence, I think it became more clear cut.

Rob Thomson:
That's right. I mean, we had one a few years ago where someone was an accountant and trained to be an opera singer, like they're quite different jobs.

Gavan Ord:
So we've covered a lot today. Rob, do you have any final advice and tips for listeners? And does the ATO provide any tools to help people with their expense claims?

Rob Thomson:
So we have a range of resources on our website that will help people with their deductions. We also have the ATO's myDeductions tool on the ATO app. So that's one thing they can look at. We have a suite of over 40 tailored occupational specific guidelines that cover the expenses that can and can't be claimed in an industry. And so people can find those on ato.gov.au/occupations. They can be really good for people to give to their clients. They can say, "Here, have a look at this. These are the things you can and cannot claim during the year.

Make sure you keep your receipts for the things you can claim." We also have a suite of deduction guides, which can be found on the ATO's website. And this includes things like working from home, car expenses and clothing, which we've kind of talked about as well. We also have a range of online tools and calculators that can help people to calculate their deductions such as working from home, including also things like decline in value for depreciating assets, self-education, car expenses. As if people go to the ATO website and just type in calculators, they'll all come up. There definitely range of tools available on the ATO website.

Gavan Ord:
So I think for me, the key takeaway is have a look at the ATO website for that information and the three golden rules you mentioned. Thanks for joining us for this special Tax Time Edition of With Interest today. Thanks, Rob for your help today.

Rob Thomson:
Thanks, Gavan. Happy to be here and thanks for having me along.

Gavan Ord:
For more information about the topics covered in today's episode, don't forget to check the show notes where you'll find links to additional resources from CPA Australia and the Tax Office. We'll be back next week to talk about what businesses and tax agents need to know about Division 7A. With Interest is a regular podcast. If you like today's show, you can subscribe on your favourite podcast app by searching for CPA Australia's With Interest. And until next time, thanks for listening.

Garreth Hanley:
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