Heading into end of financial year tax time is a good time to begin thinking about, and brushing up on, understanding how to determine the tax deductibility of expenses. The ATO allows for a wide variety of expenses to be offset against assessable income as part of your tax return. This applies to not only individuals, but also companies, trusts and even superannuation funds.
The ATO publishes a wealth of information on its interpretation of what is, and isn’t, allowed under taxation legislation but there is one basic principle which underpins all eligibility for tax deductibility. The technical term for this is ‘nexus’, which just simply mean that all expenses must be related to the income generating activity as a basic requirement to be considered for tax deductibility.
This principle was highlighted recently in a case overseen by the Administrative Appeals Tribunal (AAT) where the tribunal upheld a decision to deny the deduction of self-education expenses of a dental technician.
This case involved a dentist who was qualified in Romania and moved to Australia where she commenced work as a dental technician. While working as a dental technician she undertook the study and examination requirements needed to become registered to practise as a dentist here in Australia.
These self-education expenses included examination costs and associated meals, accommodation and flights and were claimed as tax deductions over multiple tax years. While all these are legitimate deductible expenses, the ATO found that there was not a sufficient connection between her role as a dental technician and the expenses.
This decision was upheld on appeal to the AAT which stated that the following would need to be shown for this connection to exist:
- The self-education undertaken by the applicant was necessary to maintain her income-earning activities as a dental technician.
- The self-education improved her skills or knowledge necessary to perform her role as a dental technician.
- The self-education led to an increase in income in her role as a dental technician.
In this case, the ATO showed that there was no evidence that the expense in question related in any way to her role as a dental technician or were required by her employer to maintain her role.
While this recent case is specifically for self-education expenses, this principle is applicable across potentially deductible expenses.
A more common example would the use of a personal vehicle for work. Vehicle expenses are generally not deductible when travelling to or from work. If the personal vehicle is used in the course of completing employment duties, such as travelling to meet with clients make deliveries or visit various job sites, then this use can be a deductible expense.
This same principle applies when considering deductibility of business expenses and includes whether a credit can claimed for the GST component of those expenses. The rules for business expenses however are generally far broader than those that govern the deductibility of personal expenses on a tax return.
As tax time approaches then, it is wise to review what might be relevant and eligible to claim as tax deductions. The ATO has guidelines on its view on these matters and some good bedtime reading can be found at their website.
The time is now to start planning for any potentially claimable deductions and gathering the required documentary evidence to support those claims. Please reach out to us an we can help you identify and maximise any deductions that may be available to you.