TAX TIPS: contractor & project-based work
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.
For many Australians, navigating the tax system can be quite overwhelming (especially for those engaging in project-based contracted work). To help take the stress out of their tax returns and maximise 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:
● Cents per kilometre:
○ 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 total business kilometres travelled (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. 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 log book 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 that relate to the operation of the car, 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 claim, such as insurance, servicing and repairs. Petrol can be estimated using the start and end odometer readings for the year, 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 clothing and footwear that you wear 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
□ 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:
● Compulsory 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. Their colour, style and type must be specified in your employer’s uniform policy as is sometimes the case with air stewardesses 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.
● Non-compulsory work uniforms
○ In some instances, you can claim for a noncompulsory 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. 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 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. 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 and 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
○ results in, 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 postage stationery student union fees student services and amenities fees textbooks 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 that 4-week period. You can then apply that to the full year.
Professional associations, magazine subscriptions and 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. 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.
Mark Chapman, H+R Block Director Tax Communications