“But I can’t do my job without it” Every accountant hears it. I have to wear a suit to see clients. The army makes me keep my hair short. I pay a parking fine most days because there is nowhere else to stop. I put the business logo on my car.
Every one of those statements can be completely true. The expense really is unavoidable. You really would be worse off at work without it. And it still may not be deductible.
That is the part that surprises people. There is no rule in the tax law that says if it is essential, you can claim it. Essential is not the test. It is only the first question of three, and plenty of expenses sail through the first one and fail the next two.
Question One: Is It Connected to Your Work?
Do you spend this money because of how you earn your income? For most of the examples above, the honest answer is yes. This is the question clients focus on, and it is usually the one they are right about.
Question Two: Is It Really a Private Cost, or Something You Are Buying to Keep?
The law will not let you claim an expense that is private in nature, or one that is really the purchase of a lasting asset.
A suit is conventional clothing — you have to be dressed for the day whether or not you are working, so it is treated as private. Keeping your hair short is grooming, and grooming stays private no matter who insists on it. Buying the car is acquiring an asset rather than incurring a running cost. And putting a logo on the door does not turn the drive to work into a work trip — that journey was private before the sticker went on, and it stays private afterwards.
Question Three: Is There a Rule That Specifically Blocks It?
Sometimes the law simply names an expense and says no. Fines and penalties are the clearest example: the daily parking ticket is not deductible, full stop, no matter how impossible your run would be without it. Entertaining clients, most club memberships and paying a partner’s travel costs are blocked the same way.
An expense has to clear all three questions. Being unavoidable only helps with the first.
If you are certain you cannot earn your income without a particular expense, raise it with us before we lodge — not after the ATO asks. Sometimes the answer is yes, and where it is not, there is often a way to change how the cost is incurred so that it becomes deductible. Come and talk to us first.