House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Chapter 4: Standard deduction for work-related expenses

Outline of chapter

4.1 Schedule 4 to the Bill amends the ITAA 1997 to introduce a $1,000 standard deduction for the 2026-27 income year and later years for work-related expenses for individuals who are Australian tax residents who derive assessable labour income.

4.2 Schedule 4 to the Bill also amends existing substantiation, capital allowance and capital gains tax rules, and includes integrity rules in the FBTAA to avoid misuse of the standard deduction to obtain a double benefit.

Context of amendments

4.3 The $1,000 instant tax deduction aims to provide permanent cost of living relief, helping Australians keep more of what they earn. This tax reform aims to cut red tape and make tax time quicker and easier for individual taxpayers.

4.4 Under the current income tax law, individual taxpayers who earn labour income must itemise and substantiate their work-related deductions.

4.5 The amendments provide a standard deduction of up to $1,000 for an income year for work-related expenses for individuals who are Australian tax residents and derive assessable labour income. The standard deduction is intended to operate as a compliance saving measure so that taxpayers can rely on receiving a standard amount without requiring substantiation. Taxpayers with more than $1,000 in genuine work-related expenses may continue to itemise and substantiate their claims and their standard deduction is reduced to zero.

Summary of new law

4.6 Schedule 4 to the Bill introduces a new specific deduction into the ITAA 1997 that allows individuals who are Australian tax residents to claim a standard deduction for work-related expenses each income year of the lesser of $1,000 and their total assessable labour income. The standard deduction is reduced, dollar-for-dollar, by general and specified work-related expense deductions claimed (including certain transport, car, repair, capital allowance and COVID-19 test deductions) so that taxpayers do not receive a double benefit, while deductions such as income protection type insurance premiums and union or other trade, business or professional association memberships, and deductions not related to assessable labour income, remain unaffected.

4.7 Schedule 4 to the Bill aligns existing substantiation and capital allowance rules with the new standard deduction by removing small amount substantiation concessions for work-related expenses, repealing related provisions and definitions, and updating the transport expense rules. The amendments prevent new depreciating assets that are mainly used to produce assessable labour income from being allocated to a low-value pool. It also introduces an optional fixed-reduction method for calculating balancing adjustments and capital gains or losses for depreciating assets used to derive assessable labour income where the taxpayer has relied on the standard deduction, instead of retaining records of how much they used the asset for certain purposes.

4.8 Schedule 4 to the Bill amends the FBTAA so that the:

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'otherwise deductible' rule does not apply to expense payment fringe benefits for work-related expenses covered by the standard deduction and provided under a salary packaging arrangement; and

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FBT exemption for eligible work related items is limited to benefits that have not been provided under a salary packaging arrangement and is no longer limited to substantially identical items.

4.9 The amendments to the FBTAA ensure the standard deduction cannot be combined with salary packaging arrangements entered into by an employee with their employer that could result in a double tax benefit being received.

4.10 All legislative references are to the ITAA 1997, unless otherwise specified.

Detailed explanation of new law

4.11 To simplify the tax system for individuals who are Australian tax residents, a $1,000 standard deduction is introduced to cover work-related expenses. A taxpayer is not required to incur or substantiate work-related expenses to claim the standard deduction. [Schedule 4, items 1 and 3, section 12-5 and subsection 25-130(1) of the ITAA 1997]

Expenses the standard deduction covers

4.12 Introducing the $1,000 standard deduction is intended to simplify the process for taxpayers deducting work-related expenses. To ensure that the standard deduction for an income year only covers work-related expenses once, and taxpayers cannot effectively claim the same deduction more than once, the standard deduction covers any of the following deductions in the income year:

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general deductions for a loss or outgoing that is incurred in gaining or producing assessable labour income;

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deductions for car expenses to the extent that the deduction arises in respect of gaining or producing assessable labour income under Division 28;

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deductions relating to transport expenses for travel between workplaces under section 25-100 to the extent that the taxpayer was engaged in activities to gain or produce assessable labour income at either of the workplaces;

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capital allowances deductions (deductions for the decline in value of depreciating assets) to the extent the asset is used for the purpose of gaining or producing assessable labour income;

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balancing adjustment deductions under subsection 40-285(2) to the extent the asset was used for the purpose of gaining or producing assessable labour income;

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deductions relating to repairs to premises or a depreciating asset under section 25-10 to the extent the underlying asset is used in producing assessable labour income; and

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deductions relating to a loss or outgoing for COVID-19 tests under section 25-125.

[Schedule 4, item 3, subsection 25-130(2) of the ITAA 1997]

4.13 The amount of the standard deduction is the lesser of $1,000 or the total amount of assessable labour income produced in an income year. If the combined total of work-related expenses claimed by the individual is less than the amount of the standard deduction, the standard deduction operates so that the amount of work-related expenses reduces the standard deduction.

4.14 The introduction of the standard deduction has the result that, in practice, taxpayers seeking the benefit of deductions can choose whether to itemise (or claim) those deductions in their tax return. If a taxpayer decides to itemise their deductions and the deductions are covered by the standard deduction and are less than their standard deduction entitlement (being the lesser of $1,000 and the taxpayer's assessable labour income), the taxpayer will receive a standard deduction amount, that when combined with their itemised deductions, is equal to their standard deduction entitlement.

4.15 On the other hand, if an individual's total amount of deductions covered by the standard deduction exceeds their standard deduction entitlement and they choose to itemise those deductions, the taxpayer will not receive any standard deduction and will instead receive deductions equal to the total amount of their work-related expenses that have been incurred for the income year.

4.16 Where a taxpayer chooses not to itemise their deductions that are covered by the standard deduction and those deductions would otherwise exceed their standard deduction entitlement, the taxpayer will instead receive their standard deduction entitlement.

4.17 Where a taxpayer chooses to itemise deductions that are covered by the standard deduction in their income tax return, they should substantiate their claims (at that time) regardless of whether the amount is more or less than their standard deduction entitlement. However, if the itemised deductions total to less than a taxpayer's standard deduction entitlement, there is no practical need for the taxpayer to retain receipts and later substantiate those itemised deductions (for the purpose of calculating taxable income for that year) as any itemised expense that could later be found to be not deductible would be simply replaced by a further amount of standard deduction.

Deductions that can be claimed in addition to the standard deduction

4.18 Some deductions can be claimed separate to and independent of the standard deduction.

4.19 Types of deductions that can be claimed in addition to the standard deduction include:

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deductions that are not in connection with earning assessable labour income, such as interest income deductions;

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specific deductions not covered by the standard deduction such as for gifts or contributions and costs of managing your tax affairs;

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deductions for:

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income protection, personal sickness and accident insurance premiums; or

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payments for membership of a union or other trade, business or professional association. [Schedule 4, item 3, subsection 25-130(3) of the ITAA 1997]

Example 4.1 Nicky's work-related expenses are less than $1,000

Assume Nicky has assessable labour income of more than $1,000 and has incurred the following expenses and claims them in his tax return:

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$200 in work from home expenses;

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$50 in stationery that is required for his job;

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$50 for a work-related subscription;

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$150 for travelling between workplaces;

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$50 for a charitable donation; and

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$150 for payment to a tax agent to complete his income tax return;

The total amount of expenses covered by the standard deduction is $450. The charitable donation and costs for managing tax affairs are not expenses covered by the standard deduction and may be claimed in addition to the standard deduction. Therefore, Nicky receives the $1,000 standard deduction, but the operation of receiving the standard deduction is that the $450 work-related expenses reduce the $1,000. Effectively, Nicky is only receiving $550 of the total standard deduction, because the expenses covered by the standard deduction are also claimed.

Example 4.2 Nicky doesn't claim his work-related expenses less than $1,000

Assume the same facts as example 4.1 but Nicky chooses not to claim his $450 expenses covered by the standard deduction in his income tax return. Nicky receives the $1,000 standard deduction.

In addition, Nicky will need to claim the donation and costs for managing tax affairs expenses to receive these deductions.

Example 4.3 Nicky doesn't claim work-related expenses greater than $1,000

Assume Nicky has incurred $1,050 expenses that are covered by the standard deduction. If Nicky decides to include the $1,050 deductions in his income tax return the standard deduction that he would otherwise receive will be reduced to nil.

However, Nicky can choose not to include the $1,050 deductions in his income tax return and he will instead receive the total available standard deduction of $1,000.

Example 4.4 Standard deduction maintained following ATO review of income tax return

Assume Nicky has itemised $1,200 in expenses covered by the standard deduction in his 2027-28 income tax return that he believes to be deductible. As explained in Example 4.3, Nicky's standard deduction for the 2027-28 income year is reduced to nil.

Nicky's 2027-28 income tax return is later reviewed by the ATO and $400 of the expenses that were included in his income tax return are disallowed. Nicky's total expenses covered by the standard deduction are now only $800. As explained in Example 4.1, Nicky now receives a reduced standard deduction of $200 which makes his total deductions for the 2027-28 income year $1,000.

An amended notice of assessment is issued to Nicky for the 2027-28 income year including $1,000 of deductions made up of his $800 of allowable deductions and a $200 standard deduction.

Assessable labour income

4.20 The standard deduction allows eligible individuals that claim less than $1,000 of work-related expenses to avoid the need to claim those deductions. Although there is no substantiation required for the $1,000 standard deduction, given the intended simplification for work-related expenses, it is tied to earning assessable labour income and leverages off existing concepts and substantiation rules in Division 900.

4.21 The standard deduction is provided to taxpayers that have assessable labour income, which includes payments from which an amount must be withheld (even if the amount is not withheld) under any of the following provisions in Schedule 1 to the TAA 1953:

[Schedule 4, items 3 and 13, subsections 25-130(4) and 995-1(1) of the ITAA 1997]

Limiting the amount of standard deduction available if assessable labour income is less than $1,000

4.22 For taxpayers earning less than $1,000 in assessable labour income, the amount of the standard deduction available to those taxpayers is limited to the total amount of assessable labour income earnt in the income year. This approach ensures that the amount of the standard deduction does not exceed the taxpayer's assessable labour income. [Schedule 4, item 3, subsection 25-130(2) of the ITAA 1997]

Capital allowances

Low-value pool

4.23 Taxpayers have the choice to allocate depreciating assets that have a cost of less than $1,000, or which have been depreciated using the diminishing value method and have an opening adjustable value of less than $1,000, to a single low-value pool. This low-value pool can become a mix of depreciating assets that relate to different types of income, such as depreciating assets used in connection with producing their salary or wage income and producing rental property income.

4.24 The decline in value for low-value pools can also be deducted in addition to the standard deduction. Given the complexity involved in identifying the decline in value for each depreciating asset in a low-value pool to selectively reduce the standard deduction appropriately, a taxpayer's entitlement to the standard deduction is not reduced by a decline in value of a depreciating asset in a low-value pool that is not used to produce assessable labour income.

4.25 However, depreciating assets that a taxpayer reasonably expects to use mainly to gain or produce assessable labour income at the time they were first installed or ready for use cannot be allocated to the low-value pool from 1 July 2026, for the 2026-27 and later income years. Over time it is expected individuals' low value pools will only be made up of depreciating assets that are used to mainly produce assessable income that is not assessable labour income. [Schedule 4, item 8, section 40-425 of the ITAA 1997]

Balancing adjustment

4.26 A balancing adjustment event occurs in relation to a depreciating asset where a taxpayer stops holding the asset, stops using it or having it installed ready for use, and expects to never use the asset or, if it was in use, never to use it again.

4.27 When a balancing adjustment event occurs, the tax legislation requires a calculation which is designed to reconcile the depreciated cost of the asset with its value for tax purposes. This may result in an amount being included in assessable income or being deductible in accordance with Subdivision 40-D.

4.28 A taxpayer that receives the standard deduction in one or more income years that overlaps with a depreciating asset's effective life and is used to produce assessable labour income in an income year, may reduce the balancing adjustment amount by 50%. [Schedule 4, items 5, 6, and 7, notes to subsections 40-290(1) and 40-291(1) and section 40-291A of the ITAA 1997]

4.29 To align with the broader policy outcome that a taxpayer is not required to substantiate their work-related expenses to receive the standard deduction, a taxpayer may not retain detailed records of the degree to which they used depreciating assets for a taxable purpose in order to determine a balancing adjustment amount. This approach makes compliance easier for taxpayers, because the standard deduction covers the asset's decline in value that would otherwise be taken into account under section 40-290 (about reductions for non-taxable purpose) where they may have not maintained detailed records of the asset's use for a taxable purpose.

4.30 The other requirements, including substantiation under Division 900, for calculating a balancing adjustment will remain as in the current law, meaning that taxpayers will need to calculate the decline in value over the depreciating asset's effective life up to the time of the balancing adjustment event.

Capital gain or loss for a depreciating asset that is used for purposes other than a taxable purpose (CGT event K7)

4.31 Balancing adjustments for depreciating assets that are used for a non-taxable purpose also give rise to CGT event K7 under subsection 104-235(1). A taxpayer that partly uses a depreciating asset to produce assessable labour income and partly for a non-taxable purpose (e.g. for private use) would ordinarily be required to maintain a record of the reductions under 40-25 to calculate the capital gain or loss under section 104-240.

4.32 However, given that a taxpayer may not keep records of the taxable use when they receive the standard deduction in income years that overlap the asset's effective life under Division 40, a simplified approach is adopted.

4.33 If a taxpayer has chosen the fixed reduction under section 40-291A for the balancing adjustment event, the same amount is used to calculate the sum of reductions in the capital gain or loss formula in subsections 104-240(1) and (2). [Schedule 4, item 9, subsection 104-240(1) of the ITAA 1997]

Interaction with Fringe Benefits Tax

Otherwise deductible rule for expense payment fringe benefits

4.34 An expense payment fringe benefit occurs when an employer pays or reimburses an expense incurred by an employee. The taxable value of an expense payment fringe benefit can be reduced to the extent the employee would have been entitled to a once-only income tax deduction for the expense if they had paid for it themselves.

4.35 Where the expense payment fringe benefit is an expense covered by the standard deduction and provided to an employee under a salary packaging arrangement, the amendments ensure the otherwise deductible rule does not apply to reduce the taxable value of the expense payment fringe benefit. This ensures that any benefit received from entering into salary packaging arrangements would be removed as the employer will be assessed on the full taxable value of the expense payment fringe benefit provided under the FBTAA – provided no other exemption or reduction in taxable value otherwise applies.

4.36 The otherwise deductible rule in section 24 of the FBTAA does not apply where the benefit is provided to an employee under a salary packaging arrangement and the gross deduction is covered by one of the items under paragraphs 25-130(2)(c) to (g) (being general deductions, deductions for travelling between a work place or car expenses, repairs, deductions for depreciating assets, balancing adjustments or COVID-19 tests). This has the effect that employers will be unable to take any of those deductions into account when calculating the notional deduction where the benefit is provided under a salary packaging arrangement. [Schedule 4, item 18, subsection 24(1A) of the FBTAA]

4.37 Only expense payment fringe benefits are captured as this is the relevant category of fringe benefit that would commonly apply to work-related expenses that employees could easily move to employers and could otherwise be deducted. Further, the amendment is limited to salary packaged fringe benefits to ensure other benefits provided to employees that do not form part of an employee's general core remuneration are not captured and can continue to be provided without the employer incurring FBT.

4.38 Although the amendments to the otherwise deductible rule are limited to expense payment fringe benefits, Treasury will monitor taxpayer behaviour for attempts to undermine the integrity of the standard deduction by shifting their work-related expenses into other fringe benefit arrangements and may consider further amendments in the future.

Provision of certain work related items exemption

4.39 An expense payment, property, or residual fringe benefit is an exempt benefit under section 58X of the FBTAA where the benefit provided relates to an eligible work related item that is primarily for use in the employee's employment. An eligible work related item includes:

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a portable electronic device;

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an item of computer software;

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an item of protective clothing;

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a briefcase; or

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a tool of trade.

4.40 The amendments limit this exemption to benefits provided outside of salary packaging arrangements and repeals the exception to the exemption for expense payment and property fringe benefits for items that have substantially identical functions provided in the same FBT year. [Schedule 4, item 19, subsection 58X(2) of the FBTAA]

4.41 The amendments to section 58X of the FBTAA ensure that an employer who provides an eligible work related item to an employee in a salary packaging arrangement will be assessed on the taxable value of the benefit provided under the FBTAA where no other exemption or reduction in taxable value otherwise applies.

4.42 Limiting the exemption to benefits provided outside of salary packaging arrangements ensures eligible work related items can continue to be provided to employees primarily for use in their employment without the employer incurring FBT.

Example 4.5 Salary packaging expenses covered by the standard deduction

Assume Nicky enters into a salary packaging arrangement with his employer for the FBT year starting on 1 April 2027 for a laptop that Nicky will use primarily in his employment resulting in an expense payment fringe benefit.

Section 58X of the FBTAA does not apply to exempt the expense payment fringe benefit and section 24 is not available to reduce the taxable value of the fringe benefit to the extent of Nicky's once-only deduction for income tax purposes. Nicky's employer will include the full taxable value of the expense payment fringe benefit when calculating the FBT payable on the benefit where no other exemption or reduction in taxable value otherwise applies.

If Nicky's employer instead provided the laptop outside of salary packaging, section 58X of the FBTAA will exempt the benefit provided from FBT.

Standard deduction replaces certain substantiation provisions

Deductions for small expenses

4.43 The introduction of the standard deduction replaces the need for provisions that provide an exception to substantiation requirements, including for laundry expenses claimed up to $150 and work-related expense deductions that total $300 or less. Corresponding amendments repeal the definition of 'laundry expense' in section 995-1 as a result of repealing sections in Division 900. [Schedule 4, items 11 and 14, sections 900-35 and 900-40 and subsection 995-1(1) of the ITAA 1997]

Deductions for transport

4.44 With the introduction of the standard deduction, Subdivision 900-I and related section 28-180 have also been repealed to simplify the tax system and prevent overlapping deduction entitlements. Subdivision 900-I allowed taxpayers to claim a deduction for transport expenses up to the relevant award transport payment amount paid under an industrial instrument in force on 29 October 1986 without substantiation. Where Subdivision 900-I applies to car expenses, section 28-180 provided that taxpayers are not required to use the cents per kilometre or logbook methods to calculate their deduction. [Schedule 4, items 4, 10, 11 and 12, section 28-180, note to section 900-10, section 900-45 and Subdivision 900-I of the ITAA 1997]

4.45 Section 25-100 provides a specific deduction for transport expenses for travel between workplaces. Due to repealing the provisions where the definition of transport expense is currently located, the definition has been moved to the operative provision in subsection 25-100(1). The formulation of the definition has been updated for easier reading however this is not intended to change its operation. [Schedule 4, items 2 and 15, subsections 25-100(1) and 995-1(1) of the ITAA 1997]

4.46 The definitions of 'award transport payment', and 'transport payment' in section 955-1 are repealed as a result of repealing the corresponding provisions in Division 900. [Schedule 4, item 14 and 16, subsection 995-1(1) of the ITAA 1997]

Commencement, application, and transitional provisions

4.47 Schedule 4 to the Bill commences the first day of the quarter after Royal Assent. [item 6 of the commencement table in clause 2 of the Bill]

4.48 The amendments to the income tax laws apply in relation to assessments for the 2026-27 income year and later income years. [Schedule 4, item 17]

4.49 The amendments to the FBT laws apply in relation to FBT years starting on or after 1 April 2027. [Schedule 4, item 20]