The Aussie workers claiming $20k in tax deductions

It’s tax time and people have one thing on their mind: refunds. The bigger your tax deductions, the bigger your refund. But what deductions do people claim, and how much? Luckily I have the latest taxation stats to hand and they give us all the details.

But first, an important question:

What are tax deductions?

Tax deductions are what you subtract from your ‘total’ income to get your ‘taxable’ income. We call them tax deductions but really they’re income deductions - they reduce the income you pay tax on.

For example, if you pay a 40 per cent marginal tax rate and you claim $10,000 in tax deductions, it reduces your taxable income by $10,000 and your tax by $4,000.

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Who can claim a deduction?

Anyone can claim a deduction. You’re usually entitled to a tax deduction if you spent money to make money. For example:

• If you had to buy a uniform for work

• If you spent money to belong to a professional association

• If you paid brokerage fees to trade stocks

• If you lost money on a rental property

You can also get deductions for charitable donations and for the cost of managing your tax affairs. If you’re entitled to a deduction, you should absolutely claim it. If you’re not, don’t go making stuff up. The ATO will audit you one day and you’ll regret it.

So, who claims deductions? As the next chart shows, more than 90 per cent of people who make $100,000 or more are doing it, while only 60 per cent of people who make $30,000 put in tax deductions.

The size of deductions can be large: surgeons have tax deductions of almost $20,000, on average. Fast-food cooks are claiming around $1,000, as the next chart shows.

In all these charts, the size of the circle tells you the size of the profession - the number of people paying tax who do that job. The biggest one for non-work-related deductions is “Occupation blank”. That’s mostly retired people. They still need to pay tax if they have income from things other than work, and can claim deductions on those.

Remember, deductions are not just for work, they are also for anything you did to earn income.

If we look at a chart of just work deductions, we see a difference to the chart of total deductions. Mid-earning professions rely on tax deductions related to work. But not all top earners do. Work-related deductions aren’t a priority at the very top of the income tables. Surgeons, for instance, aren’t just claiming deductions on their scrubs. For many surgeons, their only tax deductions are for income-generating activities outside of work.

What sort of work deductions are people claiming?

Deductions for work clothing and uniforms is one example. As the chart shows, this is definitely the preserve of middle-income earners. Expensive protective wear and uniforms are not common in top-paying jobs (although barristers do claim for those silly wigs!)

One of the big categories of deduction is paying someone to help do your tax. I pride myself on being able to do my own tax, and it turns out there are a lot of economists like me: relatively few economists claim for the cost of managing tax affairs, given the average income of the profession. In fact, a smaller share of economists claim an accountant fee as a tax deduction than laundry workers.

Accountants are in the same boat, there’s no way they’re paying someone else to do their taxes for them. Generally, it looks like income causes people to get accountants. But then education moderates that trend: educated people have confidence (perhaps misplaced) that they can navigate the tax system on their own.

Lastly, we should look at charitable donations. Every dollar you give to charity reduces your taxable income, and the higher your marginal income, the lower the out-of-pocket cost to you of donating.

Note I had to use a log axis here because the size of average donation by financial dealers was off the charts. That’s just one of several surprises in the data. CEOs are very big givers, on average - much more so than doctors. Politicians also do well, compared to their incomes.

So, look carefully at all your transactions this tax time. The average person can easily have several thousand dollars in tax deductions in the form of work expenses, charitable donations, etc. Claiming them could net you a very tidy tax refund.

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