Tax Deductions

A tax deduction is an expense you can claim from the ATO to reduce your taxable income. When you claim tax deductions on your tax return, you lower the amount of income you pay tax on, which means you owe less tax and keep more money.

Knowing exactly how tax deductions work can be helpful when you’re trying to save money. Whether you’re an employee, sole trader, or business owner, here’s what you need to know about tax deductibles so you can supercharge your tax refund every financial year.

How do tax deductions work?

Tax deductions cut down your assessable income. The ATO calculates income tax on your taxable income, which is your total income minus any allowable deductions. In short, the more legitimate expenses you claim, the less tax you pay.

Let’s say you earn $80,000 annually and claim $5,000 in deductions. In this scenario, you only pay tax on $75,000. As you can see, it’s so important to claim every deduction you’re entitled to. But remember, you must incur expenses yourself – costs reimbursed by your employer can’t be claimed.

Top tip: A proposed instant tax deduction of $1,000 for work expenses is expected to begin on July 1, 2026.

How do tax deductions work?

Tax deductions cut down your assessable income. The ATO calculates income tax on your taxable income, which is your total income minus any allowable deductions. In short, the more legitimate expenses you claim, the less tax you pay.

Let’s say you earn $80,000 annually and claim $5,000 in deductions. In this scenario, you only pay tax on $75,000. As you can see, it’s so important to claim every deduction you’re entitled to. But remember, you must incur expenses yourself – costs reimbursed by your employer can’t be claimed.

Top tip: A proposed instant tax deduction of $1,000 for work expenses is expected to begin on July 1, 2026.

What expenses can you claim as tax deductions?

You can claim expenses that relate you employment or business income. The expenses you claim mustn’t be for personal use. Here are a few examples of deductible costs that you might want to claim on:

• Home office expenses: Including home office expenses like electricity, internet, mobile phone, and office furniture. Use the revised fixed-rate method (70 cents per hour) or the actual cost method.
• Car expenses: Costs of using your own vehicle for work travel, calculated using the cents per kilometre method or a logbook. No private use can be claimed.
• Travel expenses: Think public transport fares, accommodation, meals for overnight work travel, etc. It’s a good idea to keep a travel diary for trips of six or more nights.
• Work uniforms and protective clothing: Buying and dry-cleaning work uniforms, occupation-specific clothing, and safety gear. Normal clothing isn’t deductible, even if your employer requires it.
• Equipment and depreciation: Tools, laptops, mobile phone costs, and office furniture. Items over $300 are claimed through depreciation over their effective life.
• Other costs: Self-education, union fees, professional development subscriptions, donations to registered charities, income protection insurance premiums, and rent on business premises.

Business expenses like operating costs, employee wages, repairs, and maintenance are also deductible. Investment income expenses – like interest on investment loans and investment management fees – can be separately claimed. Always check the ATO website for the full list of allowable deductions.

What expenses aren’t tax deductible?

You can’t claim deductions for any personal expenses. The cost has to be incurred in earning your assessable income, not for private benefit.

A few items you’re unable to claim include commuting costs (i.e. petrol, wear-and-tear) between home and work, conventional clothing like suits or plain office wear, personal grooming, childcare, and entertainment. Fines and penalties aren’t deductible either.

If you use something for both work and personal purposes, you can only claim a deduction for the work portion. If, for example, your mobile phone is 60% work purposes and 40% personal, you claim 60%.

What records do you need to claim tax deductions?

The ATO has strict requirements around record-keeping. You have to keep good records of all expenses you claim for at least 5 years. Everything, including receipts, invoices, bank statements, and any other documents that prove the cost was incurred.

Remember that the records must be kept for five years from the date you lodge your tax return. Digital records stored in accounting software are acceptable as well, and they actually make it easier to track your expenses throughout the year.

If the ATO asks for proof and you can’t provide any, your deduction will be denied. The result? It could raise the amount of tax you owe and even trigger financial penalties. As such, good record-keeping is the foundation of every successful claim.

How do you claim home office expenses?

If you work from home, you can claim home office expenses using one of two methods. The revised fixed rate method lets you claim 70 cents per hour worked from home, which covers electricity, internet, phone, and stationery.

Under the hour method, you can also claim depreciation on office furniture and equipment. The actual cost method relies on detailed records of every expense but might give you a bigger deduction. Check the ATO’s home office guidance for all the latest rules and restrictions.

How do you claim car and travel expenses?

You can claim car expenses when you use your own vehicle for work travel (i.e. travelling between job sites or meeting clients). You can’t claim your normal commute from home to work.

For car expenses, use the cents per kilometre method (88 cents per km) or the logbook method. For travel expenses involving any overnight stays, keep a travel diary with dates, destinations, costs, and anything else that might be important. Only the work-related portion is deductible.

Should you use a tax agent for your deductions?

A registered tax agent or qualified accountant can help you get all the deductions you’re entitled to. They know tax laws across every industry and can spot deductions you would’ve probably missed.

Using a tax agent or accountant is very helpful if you have investments, rental income, multiple sources of income, or other financial needs. Their fee is itself tax-deductible. Come tax time, getting expert advice can save you money, and avoid any chances of an audit from the ATO.