Employees guide for work expenses
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Part A - Claiming a deduction: the basic conditions
Table of contents
The basic conditions - a summary
You must 'incur' the expense
Expenses incurred 'in gaining or producing' employment income
Expenses are not capital or capital in nature
Expenses are not private or domestic
Gaining or producing exempt income or non-assessable non-exempt income
To claim a deduction against your assessable employment income, the work expense must meet several conditions. This guide explains these conditions in more detail and gives examples of how they apply.
We refer to expenses related to your employment as work expenses or work-related expenses .
You can only claim an expense as a general deduction if it meets all of the following conditions:
- you actually incurred the expense
- the expense was incurred gaining or producing your employment income
- it is not capital or capital in nature
- the expense is not private or domestic
- the expense was not incurred in gaining or producing exempt income or non-assessable non-exempt income
- you satisfy the relevant substantiation requirements.
Expenses that are capital or capital in nature may still be deductible, but they are claimed as a deduction for the decline in value of a depreciating asset over a period of time. If you have incurred an expense that is related to both earning your employment income and your private purposes you need to apportion the expense and deduct only the portion that relates to your employment income.
To claim a deduction you must incur the expense yourself. To incur an expense means that you must actually pay, or be obliged to pay, for the good or service. A deduction is not allowed if someone else pays for the good or service, or gives it to you for free or as a gift, or you are reimbursed by your employer.
Example - gifts
Roisin's parents buy her a leather bound diary for Christmas. She uses it every day for her work. Roisin cannot claim a deduction for the expense as she did not incur any amount for the diary.
If your employer pays you back for an expense, even if you haven't paid for it yet, this is a reimbursement. You cannot claim a deduction for an expense that has been reimbursed.
- Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions
Example - reimbursement of expense
Ramesh takes a taxi to attend a meeting with clients in another suburb. He spends $46 on the taxi. When he returns to his office, he gives the receipt to his employer who repays him the $46. As this is a reimbursement, Ramesh cannot claim a deduction for the taxi expense.
- Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement
For an expense to be incurred in gaining or producing your employment (assessable) income there must be more than just a general or broad connection between the expense and the earning of your assessable income. There must be real and close connection between the expenditure and your employment activities. In other words, the expense must directly relate to what you do to earn your employment income.
Your employment activities include the duties and tasks that are expected of you by your employment contract, position description or company directives. Incurring expenses to get you ready for duty - such as job searching or obtaining qualifications for a new job -are not incurred in earning your employment income. Expenses you incur to put you into a position to earn income or are a prerequisite to earning income are not deductible.
The fact your employer requires you to purchase a good or service does not mean the expense is automatically deductible. You still need to demonstrate how the expense has a genuine connection to your employment activities.
Example - gaining or producing assessable income.
Joshua works as a sales assistant at a shoe store. His employer requires him to wear shoes of a similar kind to those sold in the store when he is at work, but they are not part of a uniform. The employer also requires Joshua to be well-groomed for his customer service role in the store.
Joshua cannot claim deductions for the cost of shoes he purchases, or any items he acquires to maintain his personal appearance. These are conventional clothing and grooming items that put him in a position to work, but are not directly related to the employment activities of selling shoes and maintaining the store through which he earns his income.
The expenses are considered private in nature.
Expenses that are capital or capital in nature are not deductible under the general rules. An amount is capital or capital in nature where the purchase has an enduring or lasting benefit such as a work tool, computer or motor vehicle. The law recognises that these purchases decline in value over time, however, so the annual decline in value on purchases of depreciating assets may be deductible under the capital allowance provisions.
Example - capital expenditure
Due to the nature of his employment, Ali is rarely in his work office and he needs to be able to write up documents while he is out of the office. He purchases a new laptop for $2,100 to help him with his work on the road. As the laptop provides an enduring benefit, and is therefore a capital expense, Ali cannot claim a deduction for its cost under the general provisions. However, Ali should consider whether he is entitled to a deduction for the annual decline in value of his computer under the capital allowance provisions.
Private or domestic generally means expenses that are personal or related to the home or household. Expenses like everyday clothing, food, drink and shelter are private or domestic, even if your employer has required you to purchase the items, or specified which type to buy.
Example - private expense
Brenton is an employee architect and purchases a coffee and lunch every day at work. Even though he spends the money while he is at work, food and drink is a private expense. There is nothing specifically about Brenton's work as an architect that requires him to spend money on food.
Example - domestic expense
Charlie is a teacher who often does her lesson planning and marking at home. Even though working at home, she cannot claim any of her rent costs as a work expense. This is because her rent is a domestic expense and therefore not deductible. Merely doing work at home does not make the expense deductible.
If the income you receive from your employment is tax exempt or non-assessable, you cannot claim a deduction for expenses relating to that employment. This includes some income of Australian Defence Force or Australian Federal Police personnel when they are deployed overseas.
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