For many Australian employees, tax time often means digging through receipts for uniforms, home office costs, tools and other work-related expenses.
Following the passage of the relevant tax reform legislation, the Australian Taxation Office (ATO) has released Draft Law Companion Ruling LCR 2026/D5. The draft ruling explains how section 25-130 of the Income Tax Assessment Act 1997 (ITAA 1997) is expected to operate in practice, including the proposed $1,000 standard deduction for work-related expenses.
Tax planning should be practical, proactive and easy to understand. Here is our breakdown of the draft ruling, how the calculation works, and what it could mean for your tax position.
1. Who is Eligible and How the $1,000 Cap Operates
The standard deduction is designed as a compliance-saving measure so eligible taxpayers can claim a standard deduction without keeping extensive substantiation records.
– What has changed: The standard deduction is available to individuals who are Australian tax residents and derive “assessable labour income”, such as salary, wages, directors’ fees and parental leave payments.
– How the Amount is Worked Out: Your deduction is capped at the lesser of $1,000 or your total assessable labour income for the year. If you earn $800 in wages, your deduction is capped at $800; if you earn $60,000, your deduction baseline is the full $1,000.
– Practical tip: You do not need to have actually spent $1,000 to claim the standard deduction. If your work-related expenses are modest, such as $200 to $400, the standard deduction may reduce your taxable income while saving you the burden of keeping detailed substantiation records.
2. The Dollar-for-Dollar Offset: What Reduces the Standard Deduction?
The ATO ruling establishes clear mechanics to prevent “double dipping” on general work expenses.
– Covered Deductions: The standard deduction is reduced dollar-for-dollar by standard work-related deductions claimed under section 8-1—including car expenses, travel between workplaces, home office running costs, repairs, and depreciation on general work equipment.
– The Threshold Choice: If your actual covered expenses are under $1,000, you can claim the standard deduction (or claim your actuals plus a top-up balance up to $1,000). If your actual covered expenses are more than $1,000 (e.g., $2,500 in motor vehicle and tool costs), you simply bypass the standard deduction and claim your full $2,500 with receipts as usual.
– The Deductions You Can Still Claim on Top: Crucially, Draft LCR 2026/D5 confirms that several deductions do not reduce your $1,000 allowance and can be claimed in addition to it:
– Union and professional association membership fees
– Income protection, personal sickness, and accident insurance premiums
– Charitable gifts and donations
– Costs of managing your tax affairs (such as accounting and tax agent fees)
– Deductions unrelated to labour income (such as investment loan interest)
3. Capital Allowances and Fringe Benefits Tax (FBT) Interactions
The draft ruling also resolves important technical questions around asset depreciation and salary packaging arrangements.
– Depreciating Assets (Division 40): From 1 July 2026, depreciating assets expected to be used mainly to produce assessable labour income cannot be allocated to a low-value pool. Furthermore, if you dispose of a work asset and claimed the standard deduction during its effective life, special 50% balancing adjustment concessions apply.
– Salary Packaging & FBT: For employers, the ruling makes it clear that where an expense payment fringe benefit is covered by the standard deduction and provided under a salary packaging arrangement, the “otherwise deductible rule” will not apply. This ensures employees cannot double the tax benefit through pre-tax salary sacrifice.
A Heads-Up for Employers and Record-Keepers
While the standard deduction simplifies tax time for employees by replacing the old $300 no-receipt threshold and the $150 laundry concession, it does not remove the need for good employer governance. Businesses reviewing their employee expense reimbursement and salary packaging policies for the upcoming FBT year should ensure their remuneration structures account for these new interaction rules.
The team at EMspire Advisory are qualified Chartered Accountants, tax agents and small business accountants. We work closely with our clients to provide practical advice and support tailored to their circumstances. To find out more, please contact us.
This information is general in nature and should not be relied on as advice. Please contact us for advice specific to your organisation and circumstances