Jul

why you should avoid workplace tax deductions

We all want to pay less tax, so having a long list of work related tax deductions to claim is good right? Maybe.

When it comes to work related costs that are potentially tax deductible, the best scenario is one where your employer pays all or most of your work related costs. Why? Because even though these costs may be 100% tax deductible, that doesn’t equate to you getting 100% of the cost back. And after all, these expenses are incurred in employment, so the employer should be covering them (that’s the unionist in me talking).

Let’s work through an example to demonstrate.

Joe earned $45,000 this year. This puts him in the 30% income tax bracket. The following shows how much tax he will have to pay.

Net taxable income	$45,000
Tax due	$7,350
Medicare levy (1.5% of taxable income)	$675
Total tax due	$8,025

Now let’s assume Joe has taken some training to improve his work performance at a cost to him of $500, which he claims as a deduction on his tax return. The following shows the difference in the amount of tax that Joe has to pay and how much he is still out of pocket for his training costs.

Gross income	$45,000
Work related deductions	$500
Net taxable income	$44,500
Tax due	$7,200
Medicare levy	$667
Total tax due	$7,867
Tax saving with deductions accounted for	$158
Out of pocket for work expenses	$342

Ignoring Medicare for a moment, the amount that Joe is getting back is 30% of the original $500 expense despite the fact that he is claiming 100% of the cost. If he were in the 38% tax bracket, he would get 38% of the original cost back at tax time. The amount your receive back on your work related deductions is proportionate to the income tax bracket you fall in according to your net taxable income.

Joe is still out of pocket $342. If his employer had paid the training cost, Joe would be out of pocket $0.

I realise that employers may not, will not (and in some cases should not) pay all deductible employment expenses. In this case, at least you can get some money back on work expenses as a deduction in tax. If you can though, get your employer to pay for work place expenses, you will be better off financially if you do.

On the other hand, you may take on extra training or incur other expenses for your own benefit (without regard to your employer). Assuming that you can show how these expenses are related to your current employment, then you will be able to receive a portion of these expenses back at tax time.

For more information on tax rates or on workplace deductions may be available to you, check out the ATO website. Don’t forget to keep all receipts or a record of expenses so that you are able to claim all available deductions.

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2 Responses to “why you should avoid workplace tax deductions”

Benjamin Bankruptcy Says:
July 21st, 2010 at 2:04 pm

It’s true but don’t forget your $300 minimum deduction for work related expenses.
Melissa Says:
August 2nd, 2010 at 9:03 pm

True, but while you don’t have to have receipts for the $300 it isn’t an automatic deduction. You will still need to show what the deduction is for and justify it if the tax man ever came a-knockin’.