Many people seem to be confused at what a tax deduction actually entails. As such, you may hear people, all the time, say things like “It’s okay, I’ll get the money back at tax time”. Phrases like this reveal a large element of confusion here; it would seem over the word deduction.

Deduction does not mean you get the money back!

What a deduction means, when relating to tax, is that the price of the item is taken away from your assessable, or total, income. So for (a very simple) example: If you have earnings of $30,000 and you make a business-related purchase of $3000, then instead of paying tax on the full amount you would only pay tax on $27,000. ($30,000 - $3000 = $27,000.)

Therefore, what a tax deduction does is reduce your taxable income, thus reducing your overall tax bill. It does not mean that you will “get the money back” as an expense or even get anything “back” at all. Please note however, that this is a very simple example and does not take into account other factors such as offsets, previous losses or the Medicare levy etc.,

However, before you hang your head in disgust and decide to throw out all those receipts, expenses incurred in running your day-to-day business activities can add up to a significant amount over the course of a year: especially if you have to drive a car for your work, buy your own uniform, or buy heavy and expensive technical books or journals to keep you on top of your game. As such you can, in some instances, reduce your tax bill and make savings on the total bill (note: not rebate), which can in some cases equal hundreds of dollars.

The good news is that a wide range of goods and services that you may buy are business-related items and so covers a wide range of items such as tools for your trade, where quality materials cost a lot of money. Though any single item over $300 has to be depreciated over its lifespan. If you use a room in your house as an office, or your phone for business purposes you can also apportion the part that is for private use and claim the rest as tax-deductible. As these can be significant, regular bills and mortgages the amount you can deduct soon starts to be a significant number and something not to be sniffed at.

Since the average Australian pays approximately 30% tax on their income, then the most you can expect to save on your tax bill is about 30 cents on the dollar. Certainly not close to getting the money back but definitely a nice little trick to avoid overpaying on your tax when it comes to that time of the year.