Maximising Your Tax Deductions

By: Aus Mark
Submitted: 2008-07-30 17:40:36
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This will help the soloist grasp the fundamentals so that reducing your tax is possible! The first thing to know is:

What is a Tax Deduction?

The ATO criteria and definition of a tax deduction is:

It must be spent.
It must be necessarily incurred in earning your income.

A definition we use is:

A tax deduction is an expense that is related to your income.

The formula for calculating your net income follows easily from this definition and can be expressed as:

No matter how complex the system becomes with new taxes and different laws, fundamentally this basic formula applies; whenever you spend money to make money that’s a tax deduction, but only if you were making the money first!

Self-Assessment System

Here in Australia we have a self-assessment tax system. You absolve your accountant of responsibility every time you sign a tax lodgement. It’s true that the accountant is dependant upon you to provide the necessary information to calculate the tax deductions and profits. A trained professional accountant or tax agent uses their know-how to include all the deductions and work out your tax bill. Once all the work is done, in a complete role reversal, assignment of full responsibility and accuracy is then handed over to you. You give them the information, they do the work and it’s up to you to decide if it’s right!

This is the current tax system. You could liken it to a brilliant computer whose manufacture boasts about its amazing ability to calculate massive figures at lightening speed or produce the most up-to-date reports at the press of a button. Imagine then you put this computer into the hands of an untrained person who can’t tell the difference between the monitor and the keyboard and ask him to produce a report. And if the report is wrong he is in trouble. The outcome, of course, would be comical and even if he was trained on how to use the computer, no matter how good the computer was, it would only be as good as the information entered into it in the first place.

The point we’re making is that you need to know what you can put into your tax return and it extends beyond the role of your accountant. You know, accountants have a tough job (yes, this is a sympathy plea on behalf of accountants everywhere) staying abreast of the law while also acting in the best interests of their clients. It’s a constant juggle between acting in the clients favour by pushing the boundaries and simultaneously remaining compliant. If you ever want a living example of being stuck between a rock and a hard place; then be an accountant for a day!

Nevertheless, no matter how proactive your accountant may or may not be, the end result is this:

The size of your tax deductions is directly related to your ability to know and track all your expenses.

This factor is primary to having a “good accountant”. Using our definition of a tax deduction, you can easily determine if an expense is a tax deduction or not. If you’re unsure, then by all means get a second opinion. A proactive accountant is one who works with you to really maximise your deductions, but it is up to you to first make sure you’ve tracked and included all possible expenses. If you don’t tell your accountant that you spent $100 on tolls or include it in your bookkeeping, how will it ever be deducted?

The simple act of seeing how an expense could legitimately be related to your income producing activity is the key and it also, incidentally, gives you a great index as to the proactiveness of your accountant. Is he or she willing to see how an expense can be related or do they just dismiss the “tricky” ones without regard?
For example, if your job entailed a considerable amount of time working outdoors then safety sunglasses could be a related expense. But you’d have a tough time relating sunglasses to an office job!

Therefore, willingness to look outside the box is required by both you and your accountant.

The first step, however, is to record the sunglasses as an expense. If you’re ever in doubt as to whether an item is an expense or not, include it in your bookkeeping and nut it out with your accountant at tax time. If you fail to record it in the first place then you’ve lost the opportunity to claim it altogether.

So part of being an investor or business owner is making that extra effort to record and claim all that you legitimately can. After all, you’ve worked for the money and by organising your paperwork you’ll be able to keep that little bit extra in your back pocket!

Ask yourself “How can this expense be legitimately related to my income?”.

... read more at...www.knowledgecentre.com.au

Article source: Expert Articles