The $1,000 Work Deduction: What the ATO's Draft Ruling Says Counts

What is law and what is still a draft

The deduction itself is settled. Schedule 4 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Act No. 49 of 2026) inserted section 25-130 into the Income Tax Assessment Act 1997. The Act received Royal Assent on 26 June 2026, Schedule 4 commenced on 1 July 2026, and its application provision says the amendments apply to assessments for the 2026-27 income year and later income years. The ATO also calls it the "instant tax deduction".

What is still in draft is the ATO's reading of that section. LCR 2026/D5 is a draft Law Companion Ruling, dated 26 August 2026. The ATO describes it as "the Commissioner's preliminary view only", and says the ruling, when finalised, is proposed to take effect from 1 July 2026. A draft still gives some protection: if you rely on it reasonably and in good faith and it turns out to be wrong, the ATO says you will not pay interest or penalties on the resulting underpayment, though you may still owe the tax.

Who gets it

Under subsection 25-130(1) you are eligible if you:

• are an individual
• are an Australian resident for tax purposes at any time during the income year, and
• derive assessable labour income in the income year.

"Assessable labour income" is defined exhaustively. It is income from which PAYG withholding is required, "regardless of whether any amount was in fact withheld", as the draft puts it: payments to employees, company directors and office holders, payments to religious practitioners, return to work payments, retirement and termination payments (including super income streams, annuities, super lump sums and employment termination payments), and parental leave pay.

Foreign residents for the whole year miss out. So does anyone whose only income is investment or business income: the ATO says the standard deduction will not apply if you only earn income such as dividends or business income.

The amount: the lesser of $1,000 and your labour income

Paragraph 16 of the draft states the rule directly: "The standard deduction amount you are entitled to deduct for an income year is the lesser of $1,000 and your total assessable labour income for the income year." The cap is measured against labour income only, not total income.

The ATO's own example makes the point. Simon earns $400 from casual work and $40,000 from dividends, interest and other investments in 2026-27. His total assessable income is $40,400, but his maximum standard deduction is $400, because only the wages count.

What happens when you itemise

This is the part most summaries get wrong. The deduction is not a switch between "standard" and "itemised". The draft says that if you claim covered work expenses, "your maximum standard deduction is reduced dollar-by-dollar by the amount of those claims, possibly to nil".

In practice your covered work deductions come to whichever is larger: your maximum standard deduction, or the covered expenses you actually claim. Claiming a smaller amount does not lose you anything, but it does not gain you anything either, and it brings a record keeping obligation you would otherwise avoid.

Two conditions attach if you itemise. You must have actually incurred the expenses, and you must substantiate "the full amount claimed under the ordinary rules, not just the amount above your standard deduction amount". And if some of your claims are later disallowed on audit, the ATO says it may increase your standard deduction back up to the amount you would otherwise have had. In its Example 3, Edilyn's $400 of claims are disallowed and her standard deduction goes back to $650.

What reduces it and what sits on top

Claims that reduce the standard deduction

Section 25-130(2) lists them, and the draft spells them out. Each counts to the extent it relates to earning assessable labour income:

• general deductions under section 8-1, including self-education, compulsory uniforms and occupational clothing, working from home, work travel and other common work expenses
• car expenses under Division 28
• travel between workplaces under section 25-100
• repairs, decline in value and balancing adjustment deductions for depreciating assets used to earn labour income
• COVID-19 test expenses.

Claims that sit on top

Subsection 25-130(3) carves four items out of the general deductions, so they do not reduce the standard deduction: income protection insurance premiums, personal sickness insurance premiums, accident insurance premiums, and membership of a trade, business or professional association. In the draft's Example 2, Paul pays $200 in union fees and ends up with $1,200 in deductions: $1,000 standard plus $200.

Deductions unrelated to earning labour income also sit on top. The draft names investment deductions (interest, dividends, rental property), the cost of managing your tax affairs and charitable donations. The ATO page adds personal super contributions and expenses of earning business or platform income. You still need records for every one of these.

What $1,000 is worth at your tax rate

A deduction comes off taxable income, not off your tax bill. The ATO says so plainly: the standard deduction "reduces your taxable income" and "isn't a tax offset or rebate". So $1,000 is worth your marginal rate, including the Medicare levy and any change in the low income tax offset.

Worked with our 2026-27 engine: Australian resident, tax-free threshold claimed, full Medicare levy, no study loan. A study loan debt can add to the saving, because repayments are based on an income figure that the deduction also lowers.

Take the ATO's Marco, and put him on a $95,000 wage. He has $3,500 of covered work expenses. Claiming all of them rather than taking the $1,000 standard deduction cuts his tax by a further $800 for 2026-27, which is why the ATO frames itemising as the choice that gets him "the full tax deduction he is entitled to". The price is keeping written evidence for all $3,500.

For the return you are lodging now, the tax refund calculator estimates your 2025-26 result, and it has a 2026-27 year setting: enter $1,000 as your work-related deductions to preview the standard deduction, or your real figure if it is higher. If your refund this year looks thin, why your tax refund is so low walks through the usual causes.

When you first get it, and what happens to your pay

The ATO's page carries a banner: "The standard deduction is not available for Tax Time 2025-26." It first applies in your 2026-27 tax return, which covers 1 July 2026 to 30 June 2027 and is lodged from July 2027. Do not add it to the 2025-26 return you are lodging this year; the deadline for that one is on the tax return due date page.

You do not claim it. The ATO says it will be "automatically applied in your tax return if you're eligible", worked out from the income you report at the correct labels.

Your pay does not change because of it. We found no ATO statement saying withholding moves for the standard deduction, and three things point the other way: the deduction is worked out at assessment when you lodge; Schedule 4 of the Act amends the income tax assessment rules, not the withholding rules; and the Schedule 1 withholding formulas that apply to payments from 1 July 2026 make no mention of it. The benefit reaches you as a larger refund or a smaller bill on your 2026-27 assessment.

Record keeping from 1 July 2026

Three old shortcuts are gone from the 2026-27 income year, for everyone, eligible for the standard deduction or not:

• the exception for total work expenses of $300 or less
• the exception for laundry expenses of $150 or less
• the award transport payment exception.

The practical effect: if you plan to claim more than your standard deduction, you need written evidence for every covered expense, from the first dollar. Because you may not know until June whether you will pass $1,000, the draft suggests keeping records of all your expenses through the year.

Laundry gets its own proposed compliance approach in Appendix 2 of the draft. From 1 July 2026 the ATO will accept $1 per load of work-only laundry and 50c per mixed load, provided you keep records of the number of loads and evidence of the outgoings. The draft's Example 15 has a chef claiming 100 full loads, $100, alongside $2,700 of other expenses, and itemising because $2,800 beats $1,000.

Commenting on the draft by 9 October 2026

Appendix 3 of LCR 2026/D5 invites comments by 9 October 2026, sent to the contact officer at IAIPAG@ato.gov.au. The ATO publishes an edited compendium of the comments, with names removed, when the ruling is finalised. Nothing in the draft changes the $1,000 figure or the start year: those are in the Act. What the final ruling could change is the ATO's reading of the edges, such as which expenses count as earning labour income and how the laundry method applies.

Frequently asked questions

Sources

All four fetched 25 September 2026. Every rule and quoted phrase on this page traces to one of them.

• Draft Law Companion Ruling LCR 2026/D5, The standard deduction for work-related expenses (issued 26 August 2026). Eligibility, the lesser-of rule, the dollar-for-dollar reduction, the Edilyn, Paul and George examples, the laundry compliance approach and the 9 October 2026 comment due date.
• Standard deduction for work-related expenses (QC107752, last updated 14 September 2026). First applies in the 2026-27 return, automatic application, the Simon, Yui and Marco examples, and the removed record keeping exceptions.
• Treasury Laws Amendment (Tax Reform No. 1) Act 2026, No. 49, 2026 (C2026A00049). Schedule 4 inserts section 25-130 of the ITAA 1997. Royal Assent 26 June 2026, Schedule 4 commenced 1 July 2026, applying to assessments for 2026-27 and later years.
• Schedule 1, Statement of formulas for calculating amounts to be withheld (QC107116, published 17 June 2026). The withholding formulas that apply to payments made from 1 July 2026.

Related