How Do They Work? "Tax Deductions"

A common misconception I hear people say regarding certain expenses or giving is, "it's okay, I'll get it all back at tax time." Well, that's not exactly true and, strictly speaking you do not "get it back" at all. So what does a deduction do...

How do deductions work?

A tax deduction reduces the amount of income you have to pay tax on. The Tax Office does not reimburse you for your expenses nor can you deduct these from your tax amount. Tax deductions are taken off your total income to get your 'taxable income' - the amount your tax is calculated on.

Income - Deductions = Taxable Income

Example:

Sally has income of $25,000. The tax payable on this amount is $2,850. Now suppose that Sally also has $400 in deductions. This reduces her taxable income to just $24,600. Tax payable on $24,600 is $2,790.

In this example, deductions of $400 have saved Sally $60 in tax (Sally is taxed at the 15% tax rate).

Please note this is a simplistic example given as a guide to understand how the deductions work and does not take into account other factors such as offsets previous losses, the Medicare levy, etc.

How much of a saving?

The individual tax saving as a result of deductions will vary depending upon what tax bracket a person is in. If your taxable income is less than $6,000 you would not receive any benefit from a deduction as your income is below a taxable level.

As the average Australian is in the 30% tax bracket, the best most of us can hope to recoop of our allowable deductions is just 30 cents in the dollar; better than nothing but a long way from "getting it all back at tax time."

Child Care Budget Changes #2

The second 2007-08 Budget initiative relating to child care comes in the form of changes to the way parents currently claim the child care tax rebate.

2. The Government will bring forward payment of the Child Care Tax Rebate (CCTR) and pay it through the Family Assistance Office (FAO) at the end of each financial year. This means eligible families will receive the rebate soon after the end of the financial year - a lot easier than the current way of having to wait and claim it the following year.

Who will benefit?

The change will benefit all working families who receive CCB for approved child care. These families will now be able to receive a payment equivalent to 30% of their out-of-pocket expenses up to $4,000 indexed per child per year for approved child care at an earlier time. The payments will begin from September 2007 for child care expenses incurred in the 2006-07 year.

Good News!

Families who incurred child care expenses in both the 2005-06 and 2006-07 years will receive two rebates in 2007-08, potentially totalling up to $8,000 (indexed) per child! The first rebate will be received as part of their tax assessment, while the second will be received as a direct payment from the FAO.

How do I get it?

For child care costs incurred in 2005-06 you still need to keep your paperwork and claim the Child Care Tax Rebate (CCTR) in your 2006-07 tax return. For child care costs incurred after 1 July 2006 the FAO will pay the CCTR directy into your bank account after you have lodged your tax return.