By Melissa Brown, Accountant WA Today 5 April 2017
Last month online magazine Financy caused a sensation among women when an article suggested we may be able to claim our handbags as tax deductions. The excitement died down a little when it was suggested a log book may need to be kept to prove complete deductibility of the bag, but I’m still certain stores will see a spike in female bag sales pre June 30.
What was interesting to me as a result of the article was two things. First, I think it’s fairly accepted that Australians are pretty excited and motivated by tax deductions. Second, it made me wonder how many people actually understood how much they stood to save by the purchase of their Prada and also what else they could potentially claim for.
So because I’m an accountant and these things excite me more than they should below is a breakdown of what it all means and what the outcome is for you at tax time.
What sort of bag
If I think I can claim my soft-sided, smaller handbag that tucks under my arm and doesn’t fit a whole lot in I’m probably going to be disappointed. That’s because we’re arguing the handbag is being used for work-related purposes. That means it essentially has to fulfil the same purpose and function as a briefcase or satchel. If instead, like me, when you purchased your handbag you took your laptop to make sure it had compartments that would hold it, you’re closer to being able to argue a tax deduction.
What sort of use
The trend to carry two bags caught on a couple of years ago – the smaller bag to carry your wallet, lip gloss and keys and the second to carry your bulkier bits and bobs. This is where you have a much clearer claim with the Tax Office. If you have a small everyday bag for work and a larger bag used solely to carry your laptop, files and so on then the Tax Office is going to be much more comfortable with your argument that the second bag is being used purely as a work bag. In my case this second bag is a sturdier, more upright handbag that will easily carry my 17-inch laptop, mini iPad, pens, business cards and client files.
Of course, if you don’t love the idea of two bags then you have other options. One is to have a weekday work bag purchased for its ability to carry your laptop that you use for work only and separate weekend and weeknight bags that are used apart from work.
How to justify your claim
Sure, you could simply argue that your work bag is necessary but it’s always preferable to be able to do more than debate your point verbally. The Tax Office loves documentation and in order to support your claim it would be preferable to keep a log book for at least a month to prove usage. If you genuinely have two bags you may be able to document this with photo evidence proving the usage but if you don’t and you’re arguing that the one bag fits all then you may need a log book to prove it.
What you get back
This is the important bit right? It’s also where it becomes a little complicated. If you’re an employee and you find a bag costing less than $300 you can claim an immediate deduction for the work-related bag to the percentage you’re using it for work. For many taxpayers this means a tax saving of approximately $100 in the tax year you purchased the bag if you can argue it’s 100 per cent business use. If your bag costs more than $300 you’ll need to depreciate the bag over a number of years which means your claim is stretched out and so is the tax saving.
For the self-employed it’s much easier and if you’re registered for GST you’ll receive a dual saving. First you’ll receive a credit for the GST component and if you’re a small business with a turnover of less than $2 million and the bag cost less than $20,000 you can claim the entire amount as a deduction in the tax year in which you bought it. So for a bag costing $1100 you could receive up to $100 back in GST and if you’re in the middle tax bracket you’ll save approximately $300 in tax.
I’m not a fan of spending to receive a tax deduction but if you’re going to buy something anyway you may as well be smart about whether it can become one. Other lesser-known deductions include sunglasses, make-up and moisturiser. Most people would argue these are private items but if you’re a sales rep, own your own business and are in the car a lot, a junior and spend half your day running around outside, or a teacher and spend a good part of your day at assemblies or on play ground duty then all of these may become deductible. How? Through the sun protection claim, which means of course that your moisturiser and foundation must have an SPF factor in them.
Now before you ask if you can claim suits, shoes and workwear the answer is probably no. The line has to be drawn somewhere. However, by understanding more of what the Tax Office is looking for in a claim, you can make decisions when you’re buying items to ensure you’re maximising your refunds at tax time. Now if only I could find a steel-capped pump with a five inch heel …
Melissa Browne is CEO of accounting firm A&TA and author of Fabulous but Broke.
Originally published on smh.com.au as ‘How to claim a handbag as a tax deduction‘.
WA Today article here
Emily Duffell has no hesitation in claiming children’s pillows, doona covers and pyjamas on her tax. Decorative wall hangings, bedding and night lights will also be claimed by the mother of two.
The Melburne sleep consultant uses the items in promotional videos for her business, Sleepy Starz. “We can’t always use our children’s bedrooms to make our videos, so we’ve had to set up staged bedroom scenes,” Duffell says.
She’s not alone. As end of financial year looms, Australian small business owners are searching for legitimate and interesting tax deductions to improve their business. Particularly in light of the government’s $20,000 instant tax write-off.
Tax adviser Tania Tonkin agrees that the $20,000 tax break is bringing forward spending decisions. “The important thing is you must be able to prove the item is work-related and be prepared to show evidence if needed. The ATO isn’t giving small business owners a free $20,000 gift,” Tonkin, of dcma advisory says.
Here are some of the other surprising things you may be able to claim on your tax, if you’re able to justify its use in your business.
“The business owner didn’t want to make their employees choose between their favourite console, so they got one of each. Entry to the office Friday afternoon gaming competitions are now highly sought after in this friendly but competitive office,” senior tax manager for online tax portal Etax, Liz Russell says.
With so many employees ducking out for coffee in the morning, some small business owners invest in their own coffee machine. “This great office perk keeps employees happy and caffeinated, making it a wise investment that’s also fully tax deductible at tax time,” Russell says.
What’s the security like at your office? One of Russell’s clients legitimately claimed the purchase of a purebred German Shepherd (and associated equipment). “This business needed after-hours security and man’s best friend was a fantastic, tax-friendly addition to the team.”
Tonkin was recently asked about claiming several garden gnomes for a rental property. “If it’s a holiday house that’s rented out, it’s reasonable that some form of decoration is appropriate, so it’s legitimate. You probably wouldn’t be able to argue a Picasso painting, though,” Tonkin says.
If you’re able to prove that your caravan is connected to your business, it could be a legitimate claim.
A client of Tonkin’s was able to claim the caravan as it was only used for business, as the client travelled around the state on a regular basis. “The caravan saved him the cost of hotel accommodation, so it was a clever idea, really.”
If you’re using your bag for work purposes and they essentially fulfil the same purpose and function as a briefcase or satchel, you may be able to claim it as a tax deduction.
The Australian Taxation Office says that it’s the use of the item rather than its description that is relevant. If in doubt, remember that the tax office loves documentation, so keeping a log book for up to three months documenting use of the bag can help you get the claim over the line.
A word of warning
While these claims are interesting, they don’t necessarily make good business decisions, Russell points out. She urges business owners not to be creative in their claims.
“You should always seek the advice of a tax agent before making any big ticket purchases to make sure firstly what you’re looking to purchase is claimable on your tax return, and secondly, that it actually makes financial sense for your business to make the purchase,” she says.
One of her clients didn’t think a recent decision through, borrowing $20,000 to purchase a new car even though their business was running at a loss. The deduction they were hoping to claim immediately can’t actually benefit them right away, Russell explains.
“They now need to wait until the business actually starts turning a profit at some point in the future to deduct the $20,000 car purchase against income, all the while having an additional loan that needs repaying right away.”
Meanwhile, there have been calls made to simplify the tax system at the Small Business Association of Australia Summit this week.
The current tax system is far too complicated and expensive in both time and money to manage hinders success for small business and this needs to change, various participants agreed
Original article here