The Art Of Deductions

Sydney Morning Herald

Wednesday May 24, 2006

Denise Cullen

Claim all you're entitled to - and prosper. By Denise Cullen

A tax refund cheque always comes as a welcome fillip but many people are still failing to claim everything they're entitled to at the end of the financial year.

In the 2003-04 income year, Australian Taxation Office figures show that almost 7 million taxpayers (out of about 11 million) claimed $11 billion in work-related expenses, chiefly for the costs associated with cars, uniforms and self-education expenses.

In its compliance plan, the ATO says it intends to put work-related expense claims in the spotlight "to ensure only legitimate expenses are deducted".

That said, there are still many deductions that are commonly overlooked - often because people don't know about them or don't have appropriate record-keeping systems in place - and these can make a big difference to the bottom line.

The net medical expenses tax offset is a prime example. The birth of a child or a serious illness can escalate medical bills.

For instance, many couples who have a baby during the year focus on obtaining the well-publicised baby bonus, a refundable tax offset available to those becoming responsible for a child after July 1, 2001 - but they neglect to keep track of other claimable expenses, says Andrew Gardiner, a senior tax manager with the National Tax and Accountants Association.

These typically include mounting bills from the gynaecologist, pediatrician, obstetrician, physiotherapist and chemist.

"In the year of a child's birth, there's usually a fairly substantial gap between what you outlay and what you get back," he says, "whether it's due to the euphoria that's associated with having a child or sheer sleep deprivation. You could be doing yourself a disservice by not keeping track of these expenses."

The net medical expenses tax offset is available to those who have out-of-pocket medical expenses over a specified limit in an income year.

For the 2005-06 income year, the tax offset is 20 cents in the dollar of your net medical expenses (less Medicare and private health insurance refunds) over the threshold amount of $1500.

There is no limit to the amount you can claim and the definition of "medical expenses" is fairly broad, encompassing costs associated with illnesses or operations, nursing homes, dental and optical treatment and medical aids (such as crutches) or therapeutic treatments (such as osteopathy or speech therapy) undertaken at the direction of a doctor.

But Michael Dirkis, a senior tax counsel with the Taxation Institute of Australia, notes cosmetic procedures no longer qualify.

"If you're planning on a facelift or tummy-tuck, the Government has decided that taxpayers will no longer subsidise your vanity," he says.

However, if cosmetic procedures are undertaken for valid medical reasons (in which case a Medicare benefit also would be payable), the item still qualifies.

Gardiner says people typically underestimate or overlook the running expenses associated with a home office.

"We all work longer hours and most people will do some work at home, either late at night or on the weekends," he says.

You can claim the additional running expenses of a home - including heating, cooling and lighting, along with repairs to home office furniture and fittings - if you use a separate room, or a room for work-related purposes at a time when others are not present.

Gardiner recommends keeping a diary to work out how much of your running expenses relate to work in your home office.

Another alternative is to use a fixed rate of 26 cents an hour for home office expenses. "It isn't outrageously generous but it could add up to hundreds of dollars over the course of the year," he says.

But if you only do the occasional jot of work at home, don't bother, advises Paul Drum, the senior tax counsel with CPA Australia. "If all you'll be claiming is small negligible amounts, you have to ask if it is worth the energy."

Because of the fiddly little bits of paper involved, it's also easy to let the money you donate to charities over the year slip under the radar, Dirkis says.

For instance, if you made a donation to a tsunami relief fund during the year, you will be able to claim a deduction provided it is $2 or more.

However, as with other donations to deductible gift recipients (or DGRs - entities or funds that can receive tax deductible gifts), the donor must not receive any "material benefit".

This means that while items of "insubstantial value" such as plastic lapel pins or bumper stickers are not sufficient to deny the tax deductibility of your donation, the same wouldn't apply if you received tickets to a fundraising dinner in exchange for your largesse (even if the cost exceeds the value of the dinner).

Self-education is another area where taxpayers tend to do themselves out of a dollar. Most people are able to produce course fee receipts at tax time, Gardiner says, but they can easily overlook claiming associated costs, such as books, travel to and from the courses and, if they have borrowed to pay the fees, the interest.

To be deductible, however, he says the course must be related to your present income-producing activity.

Gardiner also advises keeping an eye on small-ticket items such as meal, overtime and travel allowances. As a general principle, if people have spent more than they received as allowances, as is often the case, it is possible to claim up to "reasonable amount" without the need to retain receipts "provided they spent the money".

Don't forget to claim union dues and professional memberships.

The new tax rates and thresholds coming into effect from July 1 should encourage people to "prepay what you can where you have legitimate reason to do so", Dirkis says.

"It's the same basic principle that underlines tax planning generally - where possible, bring forward your deductions, and delay [receiving] income."

© 2006 Sydney Morning Herald

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