The ATO has set out its first detailed view of how the new $1,000 standard deduction for work-related expenses will operate, and the draft contains more nuance than the "instant deduction" label suggests. Draft Law Companion Ruling LCR 2026/D5, issued on 26 August 2026, explains how the deduction is calculated and which expenses reduce it. It also covers what happens to record-keeping. Public comments close on 9 October.

For the millions of employees expected to use the deduction from the 2026–27 income year, the draft is the clearest guide yet to the choices they will face when lodging from July 2027.

A draft ruling on a new section of the tax law

The deduction was enacted by the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received Royal Assent on 26 June 2026. It sits in section 25-130 of the Income Tax Assessment Act 1997.

Law companion rulings set out the ATO's view of how new legislation applies. LCR 2026/D5 is still a draft, so its contents reflect the ATO's preliminary view and could change before it is finalised. The draft states that, when finalised, the ruling is proposed to be effective from 1 July 2026.

The ruling has three parts. The first covers individuals, the second depreciating assets, and the third fringe benefits tax.

The stakes are broad. In April 2026 the government estimated that around 6.2 million workers, or 42% of taxpayers, would benefit, with an average saving of $205. Those figures were published at the exposure draft stage, before the law passed.

The two-step calculation, in the ATO's own example

The draft confirms eligibility is limited to individuals who are Australian residents for tax purposes and who derive "assessable labour income". That includes salary and wages, director fees and parental leave pay, among other payments subject to pay-as-you-go withholding.

Step one is to work out the standard deduction amount, which is the lesser of $1,000 and total assessable labour income. Step two is to reduce that amount, dollar for dollar, by any work-related expenses the person chooses to claim that fall within the scheme.

The ATO's first example involves Edilyn, who earns $650 of assessable labour income and claims $400 of work-related expenses in her 2026–27 return. Her standard deduction amount is $650, because that is less than $1,000. It is then reduced by the $400 she claims, leaving $250. Her total deductions come to $650.

In other words, the deduction works as a floor rather than a bonus. Claiming actual expenses does not add to the $1,000; it replaces part of it.

Which expenses eat into the $1,000 — and which don't

Under the draft, the expenses that reduce the standard deduction include general work deductions such as self-education, compulsory uniforms, home office costs and travel. Car expenses, travel between workplaces and the decline in value of work assets also reduce it.

Other deductions sit outside the scheme and can still be claimed in full on top. The draft lists income protection, personal sickness and accident insurance premiums, and membership of a trade, business or professional association. The ATO's guidance page adds union fees, donations, investment deductions, tax agent fees and personal super contributions.

The draft's example of Nadia, a teacher, shows how this plays out. She has $700 of in-scope costs, made up of stationery, work journals and travel between workplaces, plus a $100 tax agent fee. Because $700 is less than $1,000, she leaves those costs out and the ATO works out her standard deduction of $1,000. She can still claim the $100 fee separately, but she must keep records for it.

Records: the choice when expenses top $1,000

The draft's example of George, another teacher, covers the opposite case. His in-scope expenses total $1,100.

George has two options. He can skip claiming them and let the ATO apply the $1,000 standard deduction, with no need to substantiate anything. Or he can claim the full $1,100, which reduces his standard deduction to nil. He must then incur and substantiate the full amount claimed.

At a hypothetical marginal rate of 30%, the extra $100 of deductions under the second option would be worth about $30 before the Medicare levy. That is the trade-off between keeping full records and the simpler route.

There is a safety net. If claimed expenses are later found not to be deductible, the draft says the ATO may increase the standard deduction up to the amount the person would otherwise have been entitled to.

The draft also confirms that some long-standing substantiation exceptions no longer apply from 1 July 2026. These include the exception for work expenses of $300 or less and for laundry of $150 or less.

Laundry, gadgets and salary packaging

For people who do itemise, an appendix sets out a compliance approach for laundry from 2026–27: $1 for a full load of work-related laundry and 50c for a mixed load. The ATO's example of a chef who washes 100 full loads of uniforms produces a $100 claim, supported by records.

On depreciation, the draft notes that low-cost assets expected to be used mainly for assessable labour income cannot be allocated to a low-value pool from 1 July 2026. Decline in value of an existing low-value pool, however, can be claimed in addition to the standard deduction.

The fringe benefits tax part applies from 1 April 2027. From then, the draft states, portable electronic devices, software, protective clothing, briefcases and tools of trade provided to employees under a salary packaging arrangement will no longer be "eligible work-related items". That may matter to employees who salary package a laptop or phone.

Key dates to watch

Comments on LCR 2026/D5 close on Friday 9 October 2026. The ATO will then consider submissions before issuing a final ruling, which may differ from the draft.

The 2026–27 income year, the first to which the deduction applies, ends on 30 June 2027. The first claims will be made in returns lodged from July 2027. The deduction cannot be claimed in 2025–26 returns being lodged now.

In the meantime, workers whose expenses may exceed $1,000 may wish to keep records from the start of the year. Individual circumstances vary, and a registered tax agent may help assess which approach suits.