Tradies – Are you over claiming & putting yourself at risk? Tax deductions for construction workers explained…
Tradies – are you over claiming tax deductions and putting yourself and your business at risk?
Tax deductions for construction workers can be a little involved. We see many working in the building industry without a clear idea of the expenses they can legally claim as tax deductions.
If this sounds like you, the following information is important – and could protect you from problems with the ATO.
We take you through each category of tax deduction and explain what you can and can’t claim – and what some of the pitfalls are.
Tax deductions for construction workers explained…
Motor vehicle expenses
Most construction workers are aware that they can claim motor vehicle expenses for business-related purposes. However, there are strict rules you need to satisfy to ensure you are claiming the correct amount.
If you claim motor vehicle expenses using the logbook method, will your log book hold up to an audit by the ATO? Is it more than five years old? Did you keep it for 12 continuous weeks? Does the log book percentage reflect your current work-related usage?
If you claim your motor vehicle using cents per kilometre, are you able to demonstrate to the ATO a reasonable calculation of how you worked out the kilometres you claimed?
If you drive a ute or van, this doesn’t exclude you from having to provide evidence to the ATO of how you calculated your business-use percentage. Many clients believe they can claim 100 percent of motor vehicle expenses when they drive a ute or a van. This is incorrect: if you don’t have a second vehicle, an adjustment for private usage will need to be made.
Travel expenses for construction workers
For construction workers (and other tradies), to be able to claim a tax deduction for work-related travel expenses, you must have been required to stay away overnight for work purposes.
The deduction can include meals, accommodation and incidental expenses that you incurred, and which were not subsequently reimbursed.
You’re not automatically entitled to claim a tax deduction for work-related travel expenses. You must keep written evidence of all expenses to be able to claim a deduction. You’ll need to show that you were away overnight, you spent the money yourself and that the travel was directly related to earning your income.
If you’re away for more than six nights in a row, you’re also required to maintain a travel diary.
Home office expenses for a home-based business
If you work from home but don’t generally operate the business at home, you’re entitled to claim running expenses such as gas, electricity, depreciation on furniture and equipment used for the business, telephone, and internet.
Remember to only claim the business-use portion. This may be based on the floor area of your home.
Tradies who work from home include builders, tilers, plumbers, electricians, etc. These professionals do most of their work at clients’ premises and don’t own or rent separate premises (office space) to manage their business.
If you work at home, where clients come to you, then you can claim deductions for occupancy expenses, such as mortgage interest or rent, council rates, land taxes and house insurance premiums.
These deductions would be claimed in addition to running expenses and apportioned for business and private use.
Be mindful that when you operate a business at home, you may be liable for capital gains tax when your home is sold in the future.
Materials and supplies
If you’re a construction worker renovating your own home, remember to exclude any materials and supplies used in the renovations from your business expenses. You’re only allowed to claim expenses that relate to the income you earn.
The ATO use sophisticated benchmarking software to identify taxpayers who are reporting high expenses compared to their income.
Telephone and internet expenses
If you’re claiming your mobile phone and home internet for work purposes, are you only claiming the portion that relates to your business?
If there is a mix of private and business use, you’re only allowed to claim the business portion. Be mindful that you’ll need to provide evidence of how you calculated the business percentage if you’re audited.
For example, you can’t claim 60 percent of your phone bill without doing a calculation first. You need evidence to support how you calculated the percentage of the expense you claim.
Nor can you claim 100 percent of your internet, if your internet package includes Foxtel and other personal type expenses. You need to calculate the component of the expense that relates to your business.
Caution first with tax deductions for construction workers
Remember, in order to claim expenses for tax purposes:
- You need to have spent the money; and
- The expense needs to relate to the income you’re earning
You should keep adequate records for evidence of payment of the expense. If you’re claiming only part of the expense, do you have sufficient evidence to support your apportionment calculation?
We recommend you implement a cloud bookkeeping system such as Xero if you haven’t already done so. It can capture all of your work-related expenses and also apportion business and private usage easily.
Receipts can be saved to the cloud software, reducing your risk if you have an audit in the future.
Need any more advice on tax deductions for construction workers? Contact us here.