Deductions and taxable income

Gross income, the ATO's three rules for allowable tax deductions, work-related expenses, working from home and car deductions, and calculating taxable income.

You don't pay tax on everything you earn. You pay it on your taxable income: what you earned, minus the costs you had to pay to earn it. Those costs are allowable deductions, and claiming the right ones is the difference between a small refund and a bigger one.

Taxable income

$$\text{Taxable income} = \text{gross income} - \text{allowable deductions}$$

Gross income includes more than wages. Bank interest, tips, bonuses, government payments such as JobSeeker, and profit from a side business all count. Australia's financial year runs from 1 July to 30 June, and your tax return covers that year.

What can you claim?

The ATO has three rules for a work-related deduction. All three must be true:

You spent the money yourself and weren't paid back by your employer.
It was directly related to earning your income.
You have a record, such as a receipt or bank statement.

If something is used for both work and private life, like a phone, you can only claim the work share. Other common deductions are union fees, protective clothing, uniforms with the company logo, gifts of $\$2$ or more to registered charities, and the cost of a tax agent.

InteractiveSort the expenses

Try this

Sort all ten expenses, then check. Which ones caught you out, and which of the three rules does each one break?

Once they're all correct, read off the taxable income. How much did the correct deductions reduce it by?

Example 1●●

Liam earned $\$58{,}400$ in wages and $\$85$ of bank interest. He paid $\$189$ for steel-capped boots, $\$312$ in union fees, $\$50$ to a registered charity and $\$120$ to a tax agent. He also uses his phone $30\%$ for work, and his phone plan costs $\$720$ a year. Find his taxable income.

Gross income $= 58\,400 + 85 = \$58\,485$

Interest is income too, so add it to the wages.

Phone: $0.30 \times 720 = \$216$

Only the work share of the phone plan counts.

Deductions $= 189 + 312 + 50 + 120 + 216 = \$887$

Add all the allowable deductions.

Taxable income $= 58\,485 - 887 = \$57\,598$

Gross income minus deductions.

Working from home and using your car

For some costs, the ATO lets you use a set rate instead of adding up every bill:

Working from home: a fixed rate per hour worked at home, which covers electricity, internet and phone. It has been $70$ cents an hour in recent years. You need a record of your hours.
Car for work trips: a rate per kilometre, up to $5000$ km a year. It was $88$ cents per km for 2024–25.

These rates change, so check the ATO website for the year you're claiming. In an exam, the question will give you the rate.

Example 2●

(a) Erin works from home $6$ hours a week for $46$ weeks. Find her deduction at $70$ cents an hour. (b) Dev drives $1200$ km between job sites in a year. Find his deduction at $88$ cents per km.

(a) $6 \times 46 \times 0.70 = \$193.20$

Total hours times the rate per hour.

(b) $1200 \times 0.88 = \$1056$

Kilometres times the rate per km.

Your turn

Ruby earned $\$64{,}500$. Her expenses were: steel-capped boots $\$149,$ union fees of $\$9$ a week for the year, $\$1200$ driving from home to work, and a tax agent's fee of $\$99$. Find her taxable income.

Show the working

Allowable: boots $\$149,$ union fees $9 \times 52 = \$468$, tax agent $\$99$. Home-to-work driving is private. Deductions $= 149 + 468 + 99 = \$716$. Taxable income $= 64\,500 - 716 = \$63\,784$.

Flashcards

Taxable income

Gross income − allowable deductions

ATO's three rules for a deduction

You paid it and weren't reimbursed; it relates to earning your income; you have a record

Mixed-use items (like a phone)

Claim only the work percentage

Practice

Gross income is $\$52{,}300$ and allowable deductions are $\$1450$. Find the taxable income.
Which of these is an allowable deduction for a nurse?
A phone plan costs $\$85$ a month and is used $40\%$ for work. Find the deduction for a full year.
Find the deduction for working from home $4$ hours a week for $48$ weeks at $70$ cents an hour.
Amir earned $\$61{,}000$ in wages and $\$240$ in bank interest, and has $\$1100$ of deductions. Find his taxable income.
Which is not one of the ATO's three rules for a work-related deduction?
A tradie drives $950$ km between job sites. Find the deduction at $88$ cents per km.
Which donation is tax deductible?
Exam style: After claiming $\$2680$ of deductions, Tia's taxable income is $\$47{,}320$. Find her gross income.
Exam style: Grace earned $\$49{,}800$ in wages and $\$120$ in interest. She paid $\$230$ for a uniform with her employer's logo, union fees of $\$6$ a week, $\$150$ to a tax agent and $\$1300$ for petrol driving to work. She uses her $\$960$-a-year internet plan $25\%$ for work. Find her taxable income.