As we approach the end of the financial year, you might be wondering which expenses you can claim on your business tax return this year.
After working as a tax accountant for many years, I have to say that you might be surprised at what you can nominate as a work-related expense.
Take a look at some ‘crazy’ but legitimate claims, and then at how you can figure out what counts as a tax-deductible expense.
When are helicopters and body glitter tax deductible?
Would you claim a helicopter ride as a tax-deductible expense?
It seems extreme, but one of my past clients had good reason for doing so.
This client was on an international trip to Los Angeles, where he needed to travel between meetings. LA traffic is notoriously bad, and he figured he could spend the time sitting in taxis or other forms of land transportation, or he could hire a helicopter to get to and from meetings, and achieve so much more in the limited time he had.
The key point that made this expense valid as a tax deduction is that every destination was work-related. The helicopter trips were technically work commutes, making them legitimate and claimable.
What’s worth noting is that the ATO has no limit on how much you claim, only on whether or not the claim has ‘nexus’ with your business. For example, the tax department isn’t monitoring how much you spend on a new computer. It only cares if you can prove the expense is work-related. So in tax terms, the ‘nexus’ is the connection between your claim and how the expense was used to contribute to the operations of your business.
Here’s another example. One young woman shared her receipts and they included the purchase of body glitter. This ‘tool of the trade’ was necessary to support her work as a club dancer. She never used the glitter outside of work so she was able to claim the full cost.
Usually, makeup and clothing aren't deductible purchases, but because this young woman proved her body glitter was solely work-oriented, it was a legitimate claim.
If this is getting you excited about buying things and writing them off as work costs; be wary. The expenses do have to work with your budget. It’s not advisable to spend $1 to save 25 cents.
The golden rules of tax deductions
I’ve mentioned the first rule: nexus—the connection between your tax-related expense claim and your work.
Keep in mind, there are limits.
For instance, if you claim an expense as research, you can only reasonably claim so much.
Say you are a craft brewer, and you need to taste other brewers' creations. Buying a single beer or even a six-pack is reasonable but it would be questionable to write off the cost of buying an entire case of the same beer for yourself.
The next golden rule?
Keep your receipts.
In other words, you must be able to prove what you purchased and when.
Some people assume that bank records will be enough, but this is not the case. Bank records will show that a transaction occurred with the particular vendor but it won’t always outline what you spent the money on.
You don’t have to literally keep a copy of every paper receipt. In fact, this is not even the best method, as many receipts fade over time. Instead, take digital records, a photo or scan, of all your receipts and invoices as they come in. Work with your tax accountant to find the right place to digitally store these receipts. If your accountant needs to double check an expense, they should be able to find them easily.
What’s going on at the ATO during tax time?
When you think about the ATO, your first thought is probably of people in grey suits going through the papers, with eagle eyes ready to spot the smallest discrepancy.
Of course, this is not quite the truth. In reality, your tax return will be analysed by a computer algorithm. The computer will have a bell curve representing the usual amount businesses claim in your sector. Returns that fall comfortably within the curve are processed, while those that sit outside of it may be flagged for additional review.
This is when the ATO's team, possibly in suits but possibly not, get involved, and your return gets questioned. However, since you followed the rules, this is also when you can justify your claim and prove your expenses.
How to get your tax deductions right
I’ve explained the basics of making business-related tax claims, but it can still feel confusing when you sit down to review everything at the end of the year.
This is why a tax accountant is essential. Your tax accountant will be able to discuss the claims you wish to make with you and let you know if they are legitimate, or, for example, if you can’t claim the full amount (a vehicle or your home internet expenses may fall into this category).
Work with your accountant and they may even be able to identify things you can claim that you weren’t aware of.
Need help to prepare for your 2023/2024 tax return? Get in touch with JVP Advisory today.