Do you know the difference between a tax deduction and a tax credit? If not, this blog post is for you! Tax deductions and credits are two ways to reduce your taxes. A tax deduction lowers the amount of income that is taxed; whereas, a tax credit reduces taxes owed dollar-for-dollar.
There are some different types of deductions and credits available depending on your profession. We will cover some of those today as well as how these apply to builders and contractors in Australia.
Taxes can be complicated, which is why we want to make it easy for you by providing helpful information like this blog post.
If you’re a contractor or builder in Australia, you know that taxes can be complicated to navigate. To help save on some of the hassles, we’ve put together this list of tax deduction tips for builders and contractors in Australia.
Some people try to avoid paying their taxes altogether, but it’s not worth it. Tax deductions are designed to reward taxpayers who make an honest effort at staying within the law while making money for themselves and their country.
Every taxpayer must take advantage of these opportunities where they can legally do so. We hope our guide helps!
What Are Tax Deductions?
Tax deductions reduce your taxable income for the respective year. The deductions usually come from your expenses as a contractor or a business owner for things like work tools or training.
For example, let’s assume that you’ve earned $10,000 this year as a contractor. At that rate, you are taxed at 10%, which is equal to a tax amount of $1,000 before any deductions are applied.
However, you spent $2,000 this year on work-related expenses, and you file for a tax deduction.
As work expenses are tax-deductible, the $2,000 that you’ve spent is deducted from your taxable income of $10,000, which leaves you with a taxable income of $8,000. This means that your tax rates will be calculated based on your final taxable income of $8,000, not $10,000.
A 10% tax rate on $8,000 is equal to $800, which means that you’ve effectively saved $200 in taxes compared to when tax deductions were not applied.
This is a very simplified version of how tax deduction works, leaving but it should you give a basic understanding of the system. Be careful about not mixing up tax deductions with tax credits.
Both of them reduce your tax burden, but tax deductions reduce your taxable income while tax credits reduce the amount of your tax outright. Sticking with the example above, you pay $800 in taxes after applying a $2,000 tax deduction to your taxable income.
However, a tax credit of $2,000 will deduct the same amount from your total tax amount of $1,000. Therefore, as your tax credit is larger than your tax amount, the government owes you $1,000 as you paid more than what you owed in taxes.
Unfortunately, most tax credits are non-refundable, so you won’t be refunded the difference even if you paid more.
Tax Deductions For Builders And Constructors
Note: Tax deductions will vary from country to country. However, this list includes tips that are common and frequently used by contractors and should not be considered an exhaustive list. The best way to get a complete understanding of your tax deductions is to consult a professional for help.
Tools And Work Equipment
Tools and work equipment that you use in your projects are usually tax-deductible. To make things even better, almost every tool that you own (and bought) are able to be written off your tax bill.
Usually, any tool that is under $300 will have a 100% tax deduction for the fiscal year. However, if your tools go well into the 4-5 figure range, it’s best to consult a professional on what to do next, as there will be a decline in the value of the tools over time.
To reduce your tax burdens as much as possible, keep the receipts of every tool that you’ve purchased, including tools that are under $10. You will be surprised at how much small purchases add up to in a year.
Repairs and maintenance costs can also be deducted from your taxable income, so keep that in mind.
Transportation And Travel Expenses
Travelling across the country or overseas is also a tax-deductible expense. However, it has to be related to your work or to learn a skill related to your trade.
To make your life easier, always remember to keep your travel receipts to prove that the trip was related to work. Categorise the receipts into work and non-work purposes so that the deduction process will be smoother.
However, travelling between home and work is not considered as a work expense, therefore, you won’t be able to collect tax deductions for it.
This also includes situations where you make small work-related tasks such as collecting the mail on the way home.
Consult a professional or an accountant to correctly identify which of your travel expenses are eligible for tax deductions.
Tax Deductions For Work Uniforms And Clothing
The expense of renting or buying uniforms for work is a deductible expense. Laundry and repair fees are also included in the deductions; make sure that your business or work logo is on the uniform to ease the tax deduction process.
The costs of protective clothing and footwear are also tax-deductible in many countries. So as long as the clothing is used to provide protection and stay safe during your work, you may file for a tax deduction.
Some of the common protective clothing that is tax-deductible include:
- Protective footwear such as work boots or rubber-soled shoes
- Eye protection equipment such as sunglasses or safety goggles
- Sun protection equipment such as sunscreen or UV-sunglasses
- Work uniform and overalls
Trade Union And Association Fees
Membership fees or annual union subscriptions that you pay are tax-deductible as long as the government approves the organisation. The deduction also only applies if it is related to your work.
However, your expenses cannot be claimed if the organisation is not recognised by the local government. You also cannot get a tax deduction on fees that are not paid by yourself; for instance, membership fees that are paid by your employer are not tax-deductible.
Usually, your organisation will give you a guideline on collecting tax deductions for your membership fees.
Home Office Expenses
You can claim tax deductions for home expenses if you use it for work purposes, including running costs such as the electricity bill.
However, you cannot claim deductions on things such as the rent or mortgage interest – you can only do it for work-related purposes.
If you are required to use your computer or smartphone for work, you may be able to claim a deduction for your costs.
You may need some proof to show the authorities that you’re working from home. Using a time-tracking software or registering your home address as your work office are two ways of doing this.
Some of the tax deductions that you are entitled to include:
- Home office equipment expenses such as computers, smartphones, and printers.
- Phone bills for work-related calls. It is best if you can show that you are on the phone with your clients or employer regularly for the deduction to be approved.
- Electrical bills for house heating, air conditioning, or lighting.
- Costs of repairing your home office furniture or maintenance fees such as house cleaning.
Tax Deductions for Building and Construction Employees
If you work in the building and construction industry, there is a range of tax deductions available based on your employment. To make things a little easier, we’ve compiled a list of deductions you can claim before October 31.
Tax Deductions for Building and Construction Employees: Motor Vehicle, Meals, and Travel
You may claim the cost of your personal car if it is used for work purposes, including travel to meetings, conferences or training that is not held at your usual place of work or to visit your patients at their homes.
If you plan to claim the cost of using your personal vehicle, you will need to keep a diary of trips to provide an estimate of the number of kilometres travelled. For more information on motor vehicle claims, visit Vehicle Tax Deductions.
Parking fees and tolls can be claimed if the travel comes under the two rules above for claiming travel.
As long as your employer doesn’t reimburse the expenses, you can claim meals, accommodation, incidentals and travel costs (vehicle, airfares, public transport and taxi fares) associated with overnight stays for work.
Tax Deductions for Building and Construction Employees: Work Clothing
You can claim the costs of renting, buying, laundering and repairing compulsory uniforms with a company logo as a deductible expense.
The cost of purchasing protective clothing and footwear is also deductible, including:
- Safety items such as glasses, gloves, steel-cap boots, high-visibility clothing, overalls, heavy-duty shirts and pants, and fire-resistant clothing
- Sun protection clothing and sunscreen
Tax Deductions for Building and Construction Employees: Training
You are able to make claims for self-education expenses as long as the education is connected to your current employment and designed to improve your skills or increase your income potential in your current role.
- You can claim the cost of attending seminars, conferences and training courses such as first aid courses.
- You are able to claim the cost of textbooks, course fees, stationary, Internet access, student union fees, travel expenses and decline in value of the equipment (such as computers)
Tax Deductions for Building and Construction Employees: Other Expenses
- You can claim the cost of work-related phone calls, just be sure to keep the copies of some itemised bills to support your work-related claim.
- Union and professional association fees can be claimed.
- Home Office – If you perform some of your work from your home office, you may be able to claim a deduction for the costs you incur. The Taxation office allows a deduction of $0.52 per hour to cover the expenses of heating, cooling, lighting and depreciation of general office furniture such as chair and desk. In addition, expenses such as stationery, telephone, internet, computers, etc., can be claimed separately.
- You can make an immediate claim for the purchase of work-related equipment under $300. If the equipment cost more than $300, you can claim depreciation expenses over the life of that asset.
- The cost of insuring tools can be claimed, and interest charges associated with borrowing money to buy tools can also be claimed.
- You cannot claim the cost of getting work-related licenses and certificates, but you can claim the cost of renewing them.
- Journals, periodicals and magazines related to your industry can be claimed.
Top Tax Tips For Building And Construction Workers
For many Australians, navigating the tax system can be quite overwhelming (especially for those engaging in building and construction which is often project-based, contracted work). To help take the stress out of their tax returns and maximising your return, H&R Block Director of Tax Communications, Mark Chapman, has provided some expert advice.
Contractor Or Employee?
It’s common in certain trades for people to be taken on as independent contractors rather than employees. Deciding whether a person is a contractor or an employee can be a minefield, both for the individual and for the business taking them on. Getting it wrong can have a big impact, with consequences both for you and the business that has engaged your services.
A contractor (or consultants as they are sometimes called) is a self-employed person engaged for a specific task, at an agreed price, with a specific goal in mind, often over a set period of time.
They set their own hours of work and take care of their own tax obligations. Contractors are paid a fee for completing an assignment. They don’t receive a salary or wage and need to pay their own tax from their gross earnings whilst also making their own superannuation contributions.
By comparison, an employee has tax deducted at source from their salary and receives compulsory superannuation payments from their employer.
Vehicle And Travel Expenses
The most important thing to remember when it comes to work-related vehicle and travel expenses is that you must keep records, making everything easier come tax time. If you use your car for work, you are entitled to claim the work-related travel expenses that relate to the business costs of using your car to do your job.
Travelling to and from work on a daily basis cannot be claimed as this is considered as private travel, even if: you do minor tasks on the way to work, such as picking up mail; you travel back to work for a security call out or parent-teacher interviews; you work overtime, and no public transport is available to use to get you home. Methods you can use to claim car expenses include:
- Your claim is based on a set rate for each business kilometre you travel. Under this method, you are eligible to claim up to a maximum of 5,000 kilometres per year per vehicle. If you travel in excess of 5,000 kilometres, this method of claim is not appropriate to you. You will need to use the alternate method of a logbook to claim.
- The claim value is calculated by multiplying the business kilometres (limited to 5,000 per vehicle) by the standard rate of 66 cents per kilometre. This figure takes into account all the vehicle running expenses (including depreciation).
- You do not need written evidence, however, you need to be able to demonstrate that you have covered the kilometres claimed. For example, a diary of work-related journeys (including the kilometres travelled) will suffice.
- Your claim is based on the business use percentage of each car expense. This is determined by a logbook that must have been kept for a minimum 12 week period and must be updated every 5 years. Through your logbook, you can claim all expenses related to the car’s operation at your percentage of business use.
- The logbook must record all business journeys made in the car over the 12 week period that it records, detailing;
- when the log book period begins and ends
- the car’s odometer readings at the start and end of the period
- the total kilometres travelled
- the business percentage for the logbook period
- For each journey in the logbook, you must record:
- start and finishing times of the journey
- odometer readings at the start and end of the journey
- kilometres travelled
- reasons for the journey
- if you make two or more journeys in a row on the same day, you can record them as a single journey.
You will need to keep all receipts throughout the year to justify your claims, such as insurance, servicing and repairs. Petrol can be estimated using the year’s start and end odometer readings, indicating the total kilometres travelled.
Depreciation is calculated as 25% of the written down value of the car (using the Diminishing Value method).
You can claim the cost of work-related car expenses if they are incurred whilst performing your job as an employee, such as:
- Carrying tools or equipment required to complete your job
- Travelling from your home to an alternative workspace (such as a client/supplier’s office) and then back to your own workplace or home at the end of the day
- Travelling between two separate workplaces where you are employed
- Travelling to conferences, meetings or other events as required by your employer
- Delivering or picking up items/packages related to your job and as required by your employer
Deductions For Work Clothing
When it comes to what you wear to work, there are some clothes-related deductions you can claim – the cost of buying and cleaning occupation-specific clothing such as:
- protective and unique clothing (i.e. not everyday wear)
- clothing that easily identifies your occupation, like checked chef trousers
- distinctive uniforms
- You wear clothing and footwear to protect yourself from the risk of illness or injury posed by your job or the environment in which you do your job. To be considered protective, the items must provide a sufficient degree of protection against that risk and might include:
- fire-resistant and sun-protection clothing (including sunglasses)
- hi-vis vests
- non-slip nurse’s shoes
- rubber boots for concreters
- steel-capped boots, gloves, overalls, and heavy-duty shirts and trousers
- overalls, smocks and aprons you wear to avoid damage or soiling to your ordinary clothes whilst at work.
Claiming the cost of work uniforms:
- A uniform identifies you as an employee of an organisation. The uniform must be compulsory to wear while you’re at work, with a strictly enforced policy ensuring its enforcement. If this is the circumstance surrounding your uniform, the cost is deductible.
- Where your shoes, socks and stockings are an essential part of a distinctive compulsory uniform, you may be able to claim a deduction. Your employer’s uniform policy must specify their colour, style, and type, as is sometimes the case with flight attendants and nurses. It might be possible to claim for a single item of distinctive clothing, such as a jumper if it’s compulsory to wear to work.
- In some instances, you can claim for a non-compulsory uniform, given that it’s unique and distinctive to your organisation. Clothing is considered unique if it’s been designed and made solely for your employer. In addition, distinctive clothing must have your employer’s logo permanently attached and not be available for public purchase.
- You can’t claim the cost of purchasing or cleaning a plain, logo-free uniform, such as generic white shirts or black trousers that wait for staff wear. Non-compulsory work uniforms are usually required to have a design registered with AusIndustry in order to be tax-deductible. Shoes, socks and stockings aren’t considered part of a non-compulsory work uniform, and neither is a single item such as a jumper.
- It’s possible to claim the costs of washing, drying, ironing and dry-cleaning eligible work clothes. However, written evidence for your laundry expenses, such as diary entries and receipts, must be kept if both the amount of your claim is greater than $150 and your total claim for work-related expenses exceeds $300. This doesn’t include car, meal allowance, award transport payments and travel allowance expenses.
Deductions For Courses & Training
Most of us want to better ourselves at work, and a large part of doing that is equipping yourself with the skills you need to advance your career. The good news is that you can often do that and claim a tax break on the costs you incurred at the same time.
Self-education expenses are tax-deductible when the course you undertake leads to a formal qualification and has a sufficient connection to your current employment and:
- maintains or improves the specific skills or knowledge you require in your current employment, or
- or is likely to result in an increase in your income from your current employment.
- You can’t claim a deduction for self-education expenses for a course that does not have a sufficient connection to your current employment even though it:
- might be generally related to it, or
- enables you to get new employment.
You can claim the following expenses in relation to your self-education:
- accommodation and meals (if you are away from home overnight)
- computer consumables (such as paper or ink)
- course or tuition fees
- decline in value for depreciating assets such as computers or laptops (cost exceeds $300)
- purchase of equipment or technical instruments costing $300 or less
- equipment repairs
- fares (bus/plane/train, etc.)
- home office running costs (for any home study) such as heat, light, etc.
- interest on any money borrowed to fund the course
- internet usage
- parking fees
- phone calls
- student union fees
- student services and amenities fees
- trade, professional, or academic journals
- travel to-and-from the place where the course takes place (only for work-related claims)
You can’t claim:
- repayments of Higher Education Loan Program (HELP) loans (although the fees paid by some HELP loans are)
- Student Financial Supplement Scheme (SFSS) repayments
- home office occupancy expenses (such as mortgage interest or rent)
- meals where not sleeping away from home
Mobile Phone Use
If you use your own phone for work purposes, you can claim a deduction if you paid for these costs and have records to support your claims. If you use your phone for both work and private use, you will need to work out the percentage that reasonably relates to your work use. You can’t double-dip and claim for phone expenses that have been reimbursed by your employer.
To work out your deduction, you need to choose a typical four-week period from some point in the tax year. If you have a phone plan where you receive an itemised bill, you need to determine your percentage of work use over those 4 weeks. You can then apply that to the full year.
Professional Associations, Magazine Subscriptions & Trade Union Fees
As a part of your profession, you may be a member of an association – the good news is, you can claim your subscriptions. In addition, if you’re part of a trade union, your fees are also deductible.
Magazines can make a dent in your return, as can subscriptions to mags associated with your line of work. If you’re an investor, financial publications and research services are claimable.
Tools & Equipment
You can claim a deduction for some or all of the cost for tools and equipment if you require it for work purposes. If the work is used for both work and private expenses, you need to divide what you can claim. The cost of the asset will affect the type of deduction you can claim:
- items that cost $300 or less and don’t form part of a set, you can claim an immediate deduction
- items that cost over then $300 or form part of a set, you can claim a deduction for their decline in value. You can also claim the cost of repairing and insuring tools and equipment if need be.
So now there is no excuse, be well prepared if you want a rewarding End of Financial Year!