Key Highlights

  • Workers whose actual expense claims Fail an audit can fall back to the $1,000 standard deduction.
  • The standard deduction is capped at the lesser of $1,000 and assessable labour income.
  • Low earners cannot claim more than they earned from work.
  • The ATO's guidance remains a draft and comments closed on 9 October.

Claiming your actual work expenses instead of the new $1,000 standard deduction carries a risk: what happens if the ATO later rejects some of them? Its draft ruling on the deduction, LCR 2026/D5, says the flat amount can be restored when claims are knocked out. But the same draft confirms a firm ceiling for people with little work income. With the 2026–27 income year under way, both rules shape how workers keep records now.

The deduction itself is enacted law, inserted by the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. It applies from 2026–27, so the first claims go on returns lodged from July 2027.

The ATO's guidance on how it works is still a draft. It was issued on 26 August 2026, comments closed on 9 October, and the Commissioner describes it as his "preliminary view only".

How the safety net works

Under the law, any covered work expenses you claim reduce your standard deduction dollar for dollar. Claim $1,400 and your standard deduction drops to nil.

The draft ruling addresses what happens if those claims fail. If work-related expenses you claimed turn out not to be deductible, the ATO says it "may increase your standard deduction amount" when making or amending your assessment. The increase can go up to the amount you would otherwise have been entitled to.

In the draft's Example 3, Edilyn's $400 of claimed expenses is disallowed after an audit. Her standard deduction, which had been cut to $250, is increased back to $650, the full amount she would have been entitled to.

The word "may" matters. This is the Commissioner's draft position, and the final ruling could word it differently.

The safety net could matter more from 2026–27 because evidence rules are tightening. The draft says the old exceptions that let people claim up to $300 of work expenses, or $150 of laundry, without full written evidence no longer apply. Anyone claiming more than $1,000 of covered expenses will "need to fully substantiate them".

That raises the chance that a claim with patchy records is reduced on review. The draft's approach means the worker would not necessarily end up with less than the flat $1,000 they could have taken in the first place.

Hypothetical example: when an audit bites

Hypothetical example: Jordan earns a $60,000 salary in 2026–27, putting him in the 30% bracket. With the 2% Medicare levy, each dollar of deduction is worth 32 cents.

He claims $1,400 of actual work expenses, so his standard deduction is nil. On review, the ATO disallows $900 of the claims for lack of evidence, leaving $500 allowed.

Without a safety net, his deductions would fall from $1,400 to $500. That's $900 more Taxable Income and $288 more tax.

Under the draft's approach, his standard deduction could be increased to $500, topping his total back up to $1,000. His deductions fall by only $400, so the extra tax is $128.

What the draft doesn't say is that restoring the deduction cancels any penalty or interest. If a claim is found to be wrong, shortfall penalties and interest charges could still apply under the normal rules, separate from the deduction calculation.

The cap for low earners

The standard deduction is "the lesser of $1,000 and your total assessable labour income for the income year", according to the draft. If you earn less than $1,000 from work, the deduction can't exceed what you earned.

That's Example 1. Edilyn has $650 of labour income and claims $400 of work expenses. Her standard deduction is cut from $650 to $250, so her total deductions are $650, not $1,000.

For many people on very low incomes, this changes little in practice. Someone whose only income is $650 of wages is well under the $18,200 tax-free threshold and pays no income tax anyway.

The cap matters more for people with a small amount of work income alongside other income, such as Investment returns. It can also catch students who pick up only a few shifts in a year and have other income.

Hypothetical example: Priya has $26,000 of Dividend and interest income in 2026–27 and earns $800 from a casual job. Her standard deduction is $800, not $1,000. At the 15% rate that applies above $18,200 in 2026–27, and ignoring the Medicare levy, it cuts her tax by $120. A full $1,000 would have saved $150.

One cap, however many jobs

The cap applies to your total assessable labour income, so it is one $1,000 per person, not $1,000 per job. A worker with two or three part-time employers still gets a single standard deduction. The draft ruling doesn't include a worked example on multiple jobs.

What counts as labour income is defined exhaustively. It covers amounts subject to PAYG withholding, such as payments to employees and company directors, return to work payments, termination payments and parental leave pay.

Self-employment income isn't on the list, so a sole trader's Business profits don't create an entitlement. Neither does income that comes only from investments, rent or dividends.

Claims that sit on top

Some deductions don't eat into the standard deduction at all, the draft says. In Example 2, Paul, a factory worker, earns more than $1,000 and pays a $200 union fee. He gets the full $1,000 standard deduction plus the union fee, $1,200 in total, but must substantiate the fee.

The same applies to income protection and personal sickness and accident insurance premiums, investment-related deductions, the cost of managing your tax affairs, and gifts to deductible gift recipients.

Budget papers estimate about 6.2 million workers, around 42% of taxpayers, will benefit, with an average saving of $205. Those are projections.

Key dates and what to watch

  • Now: the 2026–27 income year is running. The draft ruling recommends keeping records of expenses through the year.
  • Final ruling: watch whether the final LCR keeps the "may increase" wording on disallowed claims and adds a multiple-jobs example.
  • 30 June 2027: the 2026–27 income year ends.
  • From July 2027: the first returns claiming the standard deduction are lodged.
  • 1 July 2027: the lowest tax rate falls to 14% and the $250 Working Australians Tax Offset begins for 2027–28. Both are enacted.