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A tax deduction is a business expense you subtract from your assessable income to reduce the amount of tax you pay.
Managing business expenses is crucial for maintaining cash flow, complying with tax regulations, and ensuring long-term profitability.
Claim tax deductions correctly, and you lower your taxable income, keeping more money in your business. Here is what you need to know.
What is a tax deduction?
A tax deduction lowers your taxable income. In short, assessable income minus deductions equals taxable income. The more legitimate business expenses you claim, the less tax you pay overall.
You claim tax deductions in your tax return every financial year. A sole trader claims in their individual return. Companies, partnerships and trusts lodge separate returns.
What tax deductions do you qualify for?
You can claim a deduction for most expenses directly related to earning your business income.
The ATO has three golden rules for valid business tax deductions:
- The expense must be for business purposes.
- It must not be for private or personal use.
- You have to have the records to prove it.
If an asset or cost is split between business and private use, you can only claim the business-related portion. If, for example, your motor vehicle has 60% business use and 40% personal, you claim 60%.
You need to keep complete and accurate records for at least 5 years to substantiate your claims for all of your home-based business expenses.
What expenses are tax-deductible for a small business?
Some typical business tax deductions include:
- Operating expenses: Rent for business premises, office supplies, raw materials, digital products, software subscriptions, and business management tools.
- Motor vehicle and business travel expenses: Fuel, tolls, parking, and overnight accommodation for work trips. Only the business portion is claimable.
- Employee salaries, wages and super contributions: Including payments to contractors during their service period.
- Depreciating assets: You can claim a deduction for the decline in value of depreciating assets used in your business, such as computers and office furniture. Eligible assets under $20,000 could qualify for an immediate deduction.
- Capital expenses: Claiming depreciation on the decline in value of business assets over their effective life.
- Running expenses: Electricity, internet, phone, and other costs relating to day-to-day operations.
Entertainment expenses arenโt deductible unless provided as a fringe benefit. Personal expenses canโt be claimed, even if incurred during work hours.
Always check your reporting obligations with the ATO.
What are commonly missed tax deductions?
Lots of small business owners miss deductions that could reduce their tax bill. Make sure you claim a deduction for:
- Personal super contributions: Sole traders can claim contributions made to their own super fund.
- Bad debts: Unpaid invoices beyond recovery can be written off.
- Self-education: Courses, books, and training directly related to your business.
- Bank fees and interest: On business loans or accounts.
- Union and professional registration fees.
- Prepaid expenses: Those with a service period of 12 months or less, like insurance or subscriptions.
You might also be able to claim deductions without receipts in certain cases. Work with an accountant to make sure you arenโt leaving money on the table.
Hot tip: To effectively track business expenses for tax purposes, separate personal from business finances and maintain accurate categorisation.
What can you claim for a home based business?
If you run a small business from home, you can claim home-based business expenses on top of standard business deductions.
Think running expenses like electricity, internet and phone, plus occupancy expenses like rent or mortgage interest if you have a dedicated business area.
Thereโs a lot more to claiming home office expenses. The ATO also has a home office expenses calculator to help you work out the best method for your situation.
How do you calculate home office expense claims?
The ATO has different methods for calculating home office deductions. The right one for you will depend on your record-keeping and the cost of your expenses.
Fixed rate method
The fixed rate method lets you claim 70 cents per hour worked from home, covering electricity, gas, internet, phone and stationery.
You can still separately claim the decline in value of depreciating assets, such as office furniture and computers.
You must keep a record of all hours worked from home for the entire financial year.
Actual cost method
With the actual cost method, you have to calculate the business portion of each running expense, which requires more record-keeping but can yield a larger deduction if your costs are high.
You need receipts for all expenses relating to your home office. You must separate business and private use for each cost.
Hot tip: Digitising receipts immediately can prevent loss, fading, or clutter and allows for easier data extraction.
When can you claim tax deductions?
You claim deductions when you lodge your tax return. The Australian financial year runs from 1 July to 30 June.
You can lodge from 1 July, with a deadline of 31 October for self-lodgers. If you use a registered tax agent, you have until May the following year.
Small businesses can claim virtually all expenses that are business-related and contribute directly to the running of their operations or the earning of business revenue.
Good business management means tracking your expenses throughout the year, not just at tax time. Use cloud accounting software to record every cost as it happens for your reporting obligations.
Software makes it easier to claim every eligible deduction and pay the right amount of tax.
