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Technical Update

The standard deduction for work expenses from 2026-27: a floor, not a bonus

New section 25-130 of the ITAA 1997 applies to assessments for 2026-27 — the only measure in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 that touches the income year now under way. It gives eligible individuals a standard deduction of up to $1,000, reduced dollar for dollar by their listed work-related deductions, and it repeals the $300 and $150 substantiation exceptions.

Published Sources verified 9 min read

Applies to: Income tax: assessments for FY2026-27 (1 July 2026 – 30 June 2027) and later income years. FBT amendments: FBT years starting on or after 1 April 2027. Enacted law, verified against the Act text at 13 July 2026. · Australia

The direct answer

From the 2026-27 income year, new section 25-130 of the Income Tax Assessment Act 1997 gives eligible individuals a standard deduction for work-related expenses: start with the lesser of $1,000 and your total assessable labour income, then reduce that amount — but not below zero — dollar for dollar by the work-related deductions you claim under the provisions the section lists. It is a floor beneath that class of deductions, not an addition to them: if your listed work-related claims already reach $1,000, the standard deduction is nil. It is a deduction from assessable income, so its cash value is the deduction multiplied by your marginal tax rate, not $1,000.

Key points

  • This is the **only measure in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 that affects the income year now under way. Item 17(1) of Schedule 4 applies the income tax amendments to assessments for the 2026-27 income year** and later — the first return in which the standard deduction can be claimed is the 2026-27 return, generally lodged from July 2027.
  • The amount is worked out by cap and reduce, not by a flat grant: the lesser of $1,000 and your total assessable labour income, reduced (but not below zero) dollar for dollar by your deductions under the provisions listed in s 25-130(2)(c)–(g).
  • It therefore operates as a floor on that class of deductions. Claim $700 of listed work deductions and the standard deduction is $300; claim $1,200 and it is nil.
  • Eligibility is narrow: you must be an individual, an Australian resident at some time during the income year, and you must derive assessable labour income — an exhaustive list of PAYG-withholding payment types in s 25-130(4). Sole traders and self-employed people cannot claim it unless they also derive labour income of a listed kind.
  • Four categories are disregarded when working out the reduction (s 25-130(3)): income protection, personal sickness and accident insurance premiums, and membership of a trade, business or professional association. Claiming them does not erode the standard deduction.
  • From 2026-27, item 11 repeals s 900-35 (the $300 total work-expenses substantiation exception) and s 900-40 (the $150 laundry exception), along with s 900-45. Any advice that you can claim up to $300 of work expenses without written evidence is wrong for 2026-27 onwards.
  • The fringe benefits tax amendments in Part 2 apply separately — to FBT years starting on or after 1 April 2027 — so the old FBT rules continue through to 31 March 2027 while the income tax measure is already running.

It is law — and it is the one change that hits this income year

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (No. 49 of 2026) received Royal Assent on 26 June 2026. It is enacted law, not an announcement or a proposal — see enacted vs announced measures. Schedule 4 inserts a new section 25-130 into the Income Tax Assessment Act 1997, creating a standard deduction for work-related expenses.

Commencement is not application

Schedule 4 commenced on 1 July 2026, but item 17(1) applies the income tax amendments to assessments for the 2026-27 income year and later income years. Of the five schedules in the Act, this is the only one that reaches the income year now under way — the CGT, negative-gearing quarantining, Working Australians tax offset and SMSF borrowing measures all bite later. Nothing in Schedule 4 changes the 2025-26 return you may be lodging now.

Schedule 4 — commencement compared with application
PartWhat it changesCommencedFirst applies to
Part 1 (income tax)New s 25-130; repeal of the $300 and $150 substantiation exceptions; depreciating-asset changes1 July 2026Assessments for the 2026-27 income year and later (item 17(1))
Part 2 (FBT)New s 24(1A) and substituted s 58X(2) of the FBTAA 19861 July 2026FBT years starting on or after 1 April 2027 (item 20)

That gap is deliberate. Between 1 July 2026 and 31 March 2027 the income tax standard deduction operates while the existing FBT rules still apply — which matters for anyone reviewing salary packaging arrangements this year.

How the amount is worked out — cap, then reduce

Section 25-130(2) does not grant a flat $1,000. It sets a ceiling and then erodes it. The mechanics run in two steps, and the second step is the one that is most often misread.

The two steps in s 25-130(2)

  1. Step 1 — take the lesser of $1,000 and your total assessable labour income. Paragraphs (2)(a) and (2)(b). The $1,000 is a ceiling, and it is measured against your labour income alone — not your total income. Someone whose wages for the year were $600 can never start above $600.
  2. Step 2 — reduce that amount, but not below zero, by your listed work-related deductions. Paragraphs (2)(c) to (g). The reduction is dollar for dollar and it is applied to the Step 1 figure, so the standard deduction shrinks as your actual work-related claims grow — and disappears entirely once they reach the Step 1 ceiling.

The deductions that cause the reduction are an exhaustive list. They are your deductions for the income year under:

  • s 8-1 — general deductions, to the extent they are incurred in gaining or producing your assessable labour income (this paragraph is expressly subject to the s 25-130(3) carve-outs below);
  • Division 28 — car expense deductions, to the extent they arise in gaining or producing assessable labour income. Our resource on cents per kilometre versus the logbook method explains how those claims are calculated;
  • s 25-100 — travel between workplaces, where the relevant places involved labour-income activities;
  • **s 25-10 (repairs), Subdivision 40-B (decline in value) and Subdivision 40-D (balancing adjustments)** — to the extent they arise in respect of a depreciating asset used to produce assessable labour income; and
  • s 25-125 — COVID-19 test expenses.

A floor, not a bonus

The practical effect is that your total deductions across this class become the greater of what you actually claim and the Step 1 ceiling. Someone with modest work expenses is lifted up to the floor; someone with substantial, properly substantiated claims is unaffected by s 25-130 and simply claims what they always would have. There is no election in the section — you do not choose between the standard deduction and your actual deductions. The amount is worked out under the s 25-130(2) formula, by reference to your actual deductions, and it can be nil.

One further point of arithmetic: the $1,000 is a fixed statutory figure. Schedule 4 contains no indexation mechanism and no regulation or legislative-instrument power to vary it, so it does not rise automatically with inflation.

And because this is a deduction from assessable income rather than an offset or a payment, its value to you is the deduction multiplied by your marginal tax rate. It reduces the income you are taxed on; it is not money paid to you, and it is worth nothing to a person whose taxable income sits below the tax-free threshold. The 2026-27 rates that determine that value are set out in our resource on the individual income tax rates for 2026-27.

Who can claim it — the labour income gateway

Section 25-130(1) sets three cumulative conditions. You must be an individual; you must be an Australian resident at any time during the income year; and you must derive assessable labour income in the income year. A person who was a foreign resident for the whole income year cannot claim, even though PAYG withholding was taken from their pay.

"Assessable labour income" is defined in s 25-130(4) by reference to an exhaustive list of PAYG-withholding payment types in Schedule 1 to the Taxation Administration Act 1953. If your income is not on this list, it does not open the gate — and it does not count toward the $1,000 cap.

Assessable labour income — the exhaustive list in s 25-130(4)
Withholding provisionPayment type
s 12-35Payment to an employee
s 12-40Payment to a company director
s 12-45Payment to an office holder
s 12-47Payment to a religious practitioner
s 12-50Return to work payment
Subdivision 12-CPayments for retirement, or because of termination of employment
para 12-110(1)(ca)Parental leave pay

Who is left out

Because the list is exhaustive, sole traders and self-employed people cannot claim the standard deduction on their business income, and neither can investors, landlords or most people whose only income is a pension. A person with both a job and a business is not excluded — but the Step 1 ceiling is measured against the wages component only, not against total income. Entities (companies, trusts and partnerships) are not eligible at all.

What does not reduce it

Section 25-130(3) requires four categories of s 8-1 deduction to be disregarded when working out the paragraph (2)(c) reduction. Claiming them does not erode the standard deduction:

  • income protection insurance premiums;
  • personal sickness insurance premiums;
  • accident insurance premiums; and
  • membership of a trade, business or professional association — which covers union fees and professional body memberships.

Separately, because the reduction list in paragraphs (2)(c) to (g) is exhaustive, deductions that are not of a listed kind at all are outside the reduction as a matter of construction. Gifts and donations under Division 30, personal superannuation contribution deductions under Division 290, the cost of managing your tax affairs under s 25-5, and deductions relating to business or investment income are not in the list, so they do not shrink the standard deduction either.

Two different $300 rules — do not conflate them

Schedule 4 repeals s 900-35, the substantiation exception that let you claim up to $300 of total work expenses without written evidence. That is a record-keeping rule: it governed what evidence you had to hold, not what was deductible. Repealing it does not make any expense non-deductible — it removes the concession that let you claim without written evidence. A separate $300 threshold appears elsewhere in the tax law, in the Division 40 depreciating-asset rules, and it is a different rule doing a different job. Item 11 repeals the Division 900 substantiation exceptions only; the conditions of the Division 40 low-cost asset rule are outside the scope of this resource, and specific advice should be taken on them.

The repeals — the $300 and $150 concessions are gone

This is the part of Schedule 4 that is most easily missed and most likely to catch people out, because it changes what records you must keep during 2026-27 — a year already under way. Item 11 repeals sections 900-35 to 900-45 of the ITAA 1997 outright, and items 4, 10, 12, 14, 15 and 16 dismantle the award transport payment regime that sat alongside them.

Division 900 substantiation — repealed from 2026-27, and what survives
ProvisionWhat it didStatus from 2026-27
s 900-35Exception for a small total of expenses — total work expenses of $300 or less could be deducted without written evidenceRepealed (item 11)
s 900-40Exception for laundry expenses below $150 — no written evidence requiredRepealed (item 11)
s 900-45Exception for a work expense related to an award transport paymentRepealed (item 11)
Subdivision 900-I and s 28-180The award transport payment regime, and car expenses related to award transport paymentsRepealed (items 12 and 4). The "transport expense" definition is relocated, substantively unchanged, into new s 25-100(1A)
s 900-50Domestic travel allowance expensesSurvives
s 900-55Overseas travel allowance expensesSurvives
s 900-60Reasonable overtime meal allowance expensesSurvives
s 900-65International flight crew travel recordsSurvives

The substantiation burden goes up, not down

The standard deduction itself needs no substantiation, because it is a statutory amount rather than a loss or outgoing you incur — Division 900 does not bite on it. But if you claim any actual work expenses, they must now be substantiated under the Division 900 rules that remain, and there is no longer a $300 free pass beneath them. For anyone who claims above the floor, the record-keeping requirement has tightened. Advice that "you no longer need receipts for work expenses" is wrong and is a compliance risk.

Practically, that means the receipts and logbooks you gather during the 2026-27 year need to be complete from the start — see our guide on preparing for your tax return. It is easier to keep the evidence as you go than to reconstruct it in July 2027.

Depreciating assets — pooling and balancing adjustments

Two supporting changes deal with work assets, because decline-in-value and balancing-adjustment amounts feed into the s 25-130(2)(f) reduction.

  • New s 40-425(9) bars you from allocating a depreciating asset to a low-value pool if, when you started to use it (or had it installed ready for use), you reasonably expected to use it mainly to produce assessable labour income. Item 17(2) grandfathers assets already allocated to a low-value pool for the 2025-26 income year or an earlier income year — those stay in the pool.
  • New s 40-291A is an optional simplification. Instead of the reduction otherwise required by s 40-290 or s 40-291, you may reduce a balancing adjustment amount under s 40-285 by a fixed 50%. It is conditional: the asset must have been used at some time to produce assessable labour income, you must have deducted an amount under s 25-130 for an income year (so it is unavailable where your standard deduction was reduced to nil), and the asset's effective life must overlap that income year. It works whether the balancing adjustment amount is assessable income or a deduction.

The design logic is straightforward: a taxpayer who took the standard deduction may never have tracked the taxable-use proportion of a work asset, so s 40-291A offers a fixed proportion instead of a reconstruction. Whether it produces a better or worse result than the ordinary rules depends entirely on the asset and the facts.

The FBT amendments — from 1 April 2027, not now

Part 2 of Schedule 4 amends the Fringe Benefits Tax Assessment Act 1986, and item 20 applies those amendments to FBT years starting on or after 1 April 2027 — the FBT year 1 April 2027 to 31 March 2028. They do not apply to the FBT year that began on 1 April 2026.

  • New s 24(1A) switches off the otherwise deductible rule in s 24(1) where an expense payment fringe benefit is provided under a salary packaging arrangement and the gross deduction would be of a kind mentioned in paragraphs 25-130(2)(c) to (g). Ordinary, non-salary-packaged employer reimbursements are unaffected — s 24(1) continues to apply to them.
  • Substituted s 58X(2) narrows the exemption for eligible work related items so that an item qualifies only if it is primarily for use in the employee's employment and is not provided under a salary packaging arrangement. The exemption itself is not abolished — it continues to be available for genuine, non-salary-packaged employer provision, subject to the other conditions in s 58X. Employers should confirm the full set of conditions that will apply from 1 April 2027 before relying on the exemption for any particular item.

Employers reviewing packaging arrangements should look at these now, even though they bite in 2027 — see our FBT return service. The interaction between s 24(1A) and the s 25-130(3) carve-outs was not free from doubt on the Act text alone, and we do not take a position on it here.

Hypothetical example — the same employee, two different sets of work expenses

Meet Priya — an entirely hypothetical employee, not a real client. In 2026-27 she earns $85,000 in salary and wages, which is assessable labour income, so her Step 1 ceiling is the lesser of $1,000 and $85,000, that is $1,000. Scenario A — she claims $700 of listed work deductions. Her substantiated claims under the listed provisions (work-related tools, a Division 28 car claim and travel between two workplaces) total $700. Her standard deduction is $1,000 − $700 = $300. Her total deductions across this class are $700 + $300 = $1,000: the floor lifts her to the ceiling, and the $300 is not money she receives — it reduces the income she is taxed on. Scenario B — she claims $1,200 of listed work deductions. The same categories, but a larger, fully substantiated car claim takes the total to $1,200. The reduction cannot take the standard deduction below zero, so it is $1,000 − $1,200 = nil. She simply deducts her actual $1,200, exactly as she would have before s 25-130 existed. She gains nothing from the standard deduction — and she is not entitled to add it to her claim. In both scenarios, her union membership fee and her income protection insurance premium are disregarded under s 25-130(3), so claiming them does not change either calculation. And in both scenarios, every dollar of the actual work expenses she claims must be substantiated under Division 900 — the old $300 no-written-evidence concession no longer exists for 2026-27. These figures are illustrative only; your own position depends on your facts.

This example is entirely hypothetical and illustrates the mechanics only. It is not a client outcome, a prediction, or advice.

Limitations of this information

  • This is general information about enacted law, not tax advice, and it does not take account of your circumstances. Whether s 25-130 produces any benefit for you depends on your labour income, your actual work-related deductions and your marginal tax rate — and for many people it will produce nothing at all.
  • No dollar figure for the "benefit" of the standard deduction is published here. Its value is the deduction multiplied by your marginal tax rate, which depends on rates set by the Income Tax Rates Act 1986 as amended and on your taxable income — we do not project a refund figure.
  • No ATO administrative guidance on Schedule 4 had been published at the verification date (13 July 2026). Everything above is taken from the Act text as assented. How the deduction will appear in myTax, whether PAYG withholding schedules will be adjusted for it, and how the ATO will approach borderline cases were all unsettled — nothing here describes ATO practice.
  • Whether a deduction you are entitled to but do not claim reduces the standard deduction is not spelled out in Schedule 4. Do not assume you can decline small work-expense claims to preserve the full $1,000 — that position is not established on the Act text and had not been confirmed by ATO guidance at the verification date.
  • Whether new s 24(1A) of the FBTAA picks up deductions that s 25-130(3) carves out (for example, a salary-packaged professional association membership) is arguable on the text and we take no position on it. Employers should obtain specific advice before relying on either reading.
  • The low-value pool grandfathering in item 17(2) covers assets allocated to a pool for 2025-26 or earlier. An asset first used mainly for labour income before 1 July 2026 but not allocated to a pool until 2026-27 appears to be caught by new s 40-425(9); the Act text does not address that case expressly.
  • Explanatory memoranda for the Act could not be retrieved at the verification date. All conclusions rest on the Act text itself, which governs in any event — but no explanatory gloss was available to us.

Practical next steps

  1. Treat 2026-27 as a full-substantiation year from the outset: keep written evidence for every work-related expense you intend to claim, because the $300 and $150 no-receipts concessions no longer exist.
  2. If you claim car expenses, decide early which method you will use and keep the records it requires — see cents per kilometre versus the logbook method.
  3. If your listed work-related claims usually sit well below $1,000, note that s 25-130 contains no election: the amount is worked out under the statutory formula and lifts that class of deductions up to the Step 1 ceiling. How the deduction is to be reflected in the return had not been addressed by ATO guidance at the verification date, so check the return instructions for 2026-27 when they are issued.
  4. If you salary package work-related items, review those arrangements before the FBT year beginning 1 April 2027, when the otherwise deductible rule and the s 58X exemption change for packaged items.
  5. To have your 2026-27 return prepared with the substantiation the new rules require, see our individual tax return service or contact the practice.

Frequently asked questions

In your 2026-27 return. Schedule 4 commenced on 1 July 2026, but commencement is not application: item 17(1) applies the income tax amendments to assessments for the 2026-27 income year and later income years. The 2026-27 income year runs from 1 July 2026 to 30 June 2027, so the first return in which s 25-130 operates is generally lodged from July 2027. It does not apply to the 2025-26 return.

Official sources

The facts in this resource are drawn from the following official sources, each read on the date shown. If a source has changed since, the source prevails.

  • Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (No. 49 of 2026)Federal Register of Legislation · retrieved 13 July 2026 · supports: that the Act received Royal Assent on 26 June 2026 and is law; the s 2 commencement table (Schedule 4 commenced 1 July 2026); and that no legislative instrument has been made under the Act
  • Treasury Laws Amendment (Tax Reform No. 1) Act 2026 — Schedule 4 (text as assented)Federal Register of Legislation · retrieved 13 July 2026 · supports: new s 25-130 ITAA 1997 (eligibility, the cap-and-reduce amount, the subsection (3) carve-outs and the definition of assessable labour income); item 17(1) and item 17(2) application and grandfathering; item 11 repealing ss 900-35 to 900-45; item 12 repealing Subdivision 900-I; item 4 repealing s 28-180; item 7 (new s 40-291A); item 8 (new s 40-425(9)); and item 20 applying the FBT amendments to FBT years starting on or after 1 April 2027
Discuss your situation with us

This resource is general information for Australian residents, not tax advice. It does not consider your circumstances, and tax outcomes depend on individual facts. Speak to a registered tax agent before acting. It is also not financial product advice — we are not an Australian financial services licensee. Decisions about superannuation or other financial products should be discussed with a licensed financial adviser.

Last verified against official sources: · Next scheduled review by 13 October 2026 · Update sensitivity: high

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