Business Deductions

Your business can claim a tax deduction for most expenses it incurs in carrying on the business if they are directly related to earning assessable income.

There are three golden rules for a valid business deduction:

 The expense must have been for your business, available as an allowable deduction and not for private use.

 If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.

 You must have records to prove it.

Types of business expenses that are generally deductible include:

 certain capital expenses, such as the cost of depreciating assets like machinery and equipment used in your business;

 day-to-day operating expenses;

 purchases of products or services for your business.

You can also claim deductions for expenses related to protecting staff from safety hazards involved in performing their duties. For example, infection from transmissible diseases. This may include hand sanitiser, sneeze or cough guards, face masks, gloves, other personal protective equipment, antibacterial wipes and other cleaning supplies that are used for business purposes.

The amount of the deduction and when it can be claimed will depend on:

 the type of expense (for example, certain capital expenditures are deductible over time);

 whether it has any private or domestic purpose for which the deduction must be reduced.

The GST component of expenses cannot be claimed as a deduction if it can be claimed as a GST credit on a business activity statement.

What you can't claim

There are some expenses that are not deductible, such as:

 entertainment expenses, other than those provided as an entertainment-related fringe benefit;

 traffic fines;

 private or domestic expenses, such as childcare fees or clothes;

 expenses relating to earning income that is not assessable;

 payments for which your business has not met its PAYG withholding or reporting obligations;

 the GST component of a purchase if it can be claimed as an input tax credit;

 general interest charge or shortfall interest charge incurred on or after 1 July 2025 – if you’re an entity with a substituted accounting period, these changes apply from your next accounting period starting after 1 July 2025.

You generally cannot claim a deduction for the cost of capital assets that are dealt with under the capital gains tax rules, such as the land your business premises are on. Some exceptions apply for capital works, plant and certain expenditure of primary producers on improvements to land.

If you earn personal services income (PSI) and the PSI rules apply, the PSI rules will limit the deductions you can claim in relation to your PSI.

How to apportion expenses

You cannot claim a deduction for an expense to the extent it is incurred for a private or domestic purpose. Thus, if an expense only partly relates to running your business it will need to be apportioned between the deductible and non-deductible amounts.

If you have a home-based business and claim occupancy expenses, you will generally apportion these based on floor area and the time your home is used in your business. For running expenses, there is a variety of methods you may use depending on your circumstances.

There are different methods you can use to calculate deductions for motor vehicle expenses, depending on your business structure and the type of vehicle you are claiming them for.

For other expenses, you will generally apportion based on the private and business use of the asset or service acquired. This must be done on a fair and reasonable basis that reflects any private use of the asset or purpose of the expense.

You need to keep records to show how you have apportioned your expense. For example, if you incur an expense to repair your laptop which you only use for your business, you can claim a deduction for the full cost of the repair. However, if you use the laptop 50% of the time for your business and 50% of the time for private use, you can only claim a deduction for 50% of the cost of the repair.

Example: expenses that have both business and private purposes

Jax is a make-up artist who runs a business teaching make-up techniques and promoting make-up and products for profit through multiple online channels.

Jax purchases make-up for use in that business but also uses some of the make-up they purchase for personal use. They estimate this to be about 50% with the remainder used in their teaching business. Jax is only able to claim a deduction for 50% of the cost of the make-up.

Claiming a deduction for a prepaid expense

There are different rules for expenses you pay in advance – that is, expenses incurred now for goods or services will be received (in whole or in part) in a later income year.

Where the expense is $1,000 or more, the expense will usually be apportioned (or distributed) across the whole supply or service period if the goods or services are not received in full within 12 months and an immediate deduction is not available.

When you can claim a deduction

The type of expense – operating expense or capital expense – determines when your business can claim a deduction. Generally:

 operating expenses (such as office stationery and wages) are the deductible in the year they are incurred;

 certain capital expenses (such as depreciating assets and capital works assets) are deductible over a longer period – however, an immediate deduction may be available for the business use portion of depreciating assets acquired for your business if it is a small business entity and it uses the simplified depreciation rules;

 other capital expenses (such as start-up expenses) may be immediately deductible or claimed over time.