Guide to claiming business deductions
Guide to claiming business deductions
Overview
You can claim most expenses you incur in running your business as deductions to reduce your assessable income. The rules can vary depending on the business structure you operate under and the nature of each expense.
Keeping good records
You must keep records of your business transactions, including expense claims, for five years after they are prepared, obtained or the transactions completed, whichever occurs later. If you don't have those records, your expense claim may be denied or reduced. Store records in either paper or electronic form. But they must be readily accessible and available in English.
What you can claim and how to claim
You can claim most expenses you incur in running your business as deductions to reduce your assessable income. As a general rule, you can claim your day-to-day business operating expenses in full in the year you incur them, while capital items (such as buying plant and equipment) are claimed over a number of years.
Motor vehicle expenses
The deductions you can claim for the business use of a motor vehicle depend on the business structure you operate under, whether you use the vehicle for private use, and the type of vehicle. We have also developed an online calculator to help you work out your entitlement to a deduction.
Business travel expenses
To claim business travel expenses, you need specific, documented evidence of the expenses.
Capital allowances - plant and equipment depreciation
There are two sets of rules you can use to work out how much you can claim for depreciating assets, such as plant and equipment - the simpler capital allowances rules concession; and the uniform capital allowance rules. Small businesses with aggregated turnover of less than $2 million can select the set of rules preferred. Larger businesses must use the uniform capital allowance rules.
Salary, wages and super
If you operate your business as a company or trust, you can claim a deduction for salary and wages paid to employees, and for super contributions you make to a complying super fund or retirement savings account for them. If you are self-employed, you can claim a deduction for your own super contributions in your personal tax return and you can claim a deduction for salary and wages you pay to other employees.
Losses
If you operate a business that makes a loss, you can carry forward that loss and may be able to claim a deduction for that loss in a future year. The rules differ for different business structures. If you operate as a sole trader or a partner in a partnership, you may be able to claim business losses by offsetting them against other income - for example, income you earn from salary or wages.
Expenses related to your home work area
If you run all or some of your business from home, you may be able to claim things such as rent, rates, insurance and utilities. What you can claim depends on whether your home is your place of business and whether or not you have an area set aside exclusively for business activities.
Tax-related expenses
You may be eligible to claim a deduction for things such as having a bookkeeper prepare your business records and activity statements.
Repairs, maintenance and replacement expenses
You may be able to claim a deduction for repairs to machinery, tools or premises you use to produce business income.
Keeping good records
You must keep records of your business transactions for five years after they are prepared, obtained or the transactions completed, whichever occurs later. If you don't have those records, your expense claim may later be denied or reduced and we may apply penalties.
These records include:
- sales and expense invoices
- sales and expense receipts
- cash register tapes
- credit card statements
- bank deposit books and cheque butts
- bank account statements
- employee records, such as copies of tax file number declarations, wages books, time sheets and superannuation records.
You may also need to keep the following specific income tax records for each financial year:
- motor vehicle expenses, including logbooks
- debtors and creditors lists
- records of depreciating assets
- stocktake records
- records of any use of any business purchases or assets used for private purposes
- records of assets for capital gains tax purposes.
You can store records in either paper or electronic form. However, all your business records must be readily accessible and available in English.
We recommend you talk to an experienced bookkeeper about setting up a good record-keeping system to keep track of your business records.
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Our record keeping evaluation tool will help you work out your business's record-keeping needs. Based on the information you provide, the tool will produce:
- a list of business records you should keep
- a report that shows how well you are keeping your business records
- suggestions for improvement.
For more information about record keeping, refer to Record keeping for small business.
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What you can claim and how to claim
What makes an expense an allowable deduction?
You can claim most expenses you incur in running your business as deductions to reduce your assessable income. You can't claim private or domestic expenses, such as childcare fees. If you incur an expense that relates to both business and private use of an asset, you can only claim the business portion.
Expenses you can claim in the year you incur them
Working or operating expenses you incur for the everyday running of your business (such as office stationery, wages and rent of business premises) are called revenue expenses. You can generally claim a deduction for these expenses in the year you incur them.
Expenses you can claim over time
Assets that have a longer life, such as motor vehicles, furniture, and plant and equipment, are called capital assets. Generally, you can't claim the total cost of a capital asset in the first year. Instead, you claim an amount for the decline in value, or depreciation, of the asset each year over a number of years.
If you're a small business entity and paid less than $6,500 for the asset, you can claim the full amount in the year you incurred the expense. You can also 'pool' most capital assets and claim depreciation for the pool, which is simpler than depreciating the individual assets.
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From 1 July 2012 the small business instant asset write-off threshold has been increased from $1,000 to $6,500.
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When is an expense incurred?
You can generally claim a deduction for an expense in the income year you receive an invoice to pay it. Many small businesses use the cash basis method of accounting and claim deductions in the income year they actually pay the expense. If you pay in advance for something that won't be wholly delivered until a later income year, there may be limits on how much you can claim in the year you pay the expense.
What makes an expense an allowable deduction?
You can claim most expenses you incur in running your business as deductions to reduce your assessable income. You claim these deductions in your business's annual tax return. If you're a sole trader, you claim business deductions in your personal tax return.
Any expense you incur must be directly related to earning assessable income or you cannot claim it as a deduction.
If you incur an expense that relates to both business and private use of an asset, you can only claim a deduction for the business portion of the expense. Similarly, if you use an item in your business for only part of a year, you may need to restrict your claim to the period it was used for the business.
You can't claim an income tax deduction for the goods and services tax (GST) you paid in the price of something you purchased if you're entitled to claim it as a GST credit on your activity statement. You also can't claim:
- private or domestic expenses, such as childcare fees or clothes for your family
- expenses relating to income that is not taxable, such as money you earn from a hobby
- expenses that are specifically non-deductible under the tax law, such as parking fines.
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Rules apply to personal services income (PSI) that may limit the deductions you or a personal services entity can claim. If the PSI rules don't apply, deductions for specific expenses will not be affected. For more information about the personal services income rules, refer to Personal services income essentials.
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Expenses you can claim in the year you incur them
Working or operating expenses you incur for the everyday running of your business - such as office stationery, rent of office premises, salary or wages - are called revenue expenses.
You can claim a deduction for most expenses you incur for the everyday running of your business in the same income year you incur them. These include expenses you incur as:
- advertising and sponsorship expenses
- bad debts
- bank fees and charges
- business motor vehicle expenses
- business operating expenses
- business travel expenses
- clothing (corporate wardrobes and uniforms, occupation-specific clothing, protective clothing) expenses
- depreciating assets you paid less than $6,500 for if you are a small business entity ($1,000 prior to 1 July 2012)
- education, technical or professional qualification expenses
- electricity costs
- fringe benefits - the cost of any fringe benefit provided and fringe benefits tax on the benefit
- home office expenses where the home is used as business premises
- insurance premiums, including workers' compensation, accident or disability, fire, burglary, professional indemnity, public risk, motor vehicle, loss of profits insurance
- interest on money borrowed for income tax obligations, employer super contributions, late payment or lodgment of tax, to produce assessable income or to purchase income-producing assets
- land tax on business premises
- legal expenses, such as those you incur to defend future income earning, borrow money, discharge a mortgage or obtain tax advice
- losses from a previous year
- luxury car lease expenses
- office stationery
- costs for operating a commercial website, such as site maintenance, content updating, internet service provider fees
- parking fees
- public relations costs
- phone expenses
- rates on business premises
- registered tax agent and accountant fees
- rent or lease of business premises
- repairs and maintenance of income-producing property
- costs for replacing income-producing property costing $300 or less
- salary, wages, bonuses or allowances paid
- subscription costs for business or professional journals, information services, newspapers and magazines
- costs for sunglasses, sunhats and sunscreen where your activities require you to work outside
- super contributions
- tax preparation costs, such as income tax or GST returns
- tender costs, even if the tender is unsuccessful
- trading stock, including delivery charges
- transport and freight expenses
- travel expenses related to relocating employees
- union dues and periodical subscription fees to trade, business or professional associations
- water rates on business premises.
Expenses you can claim over time
A 'capital expense' is the name given to the cost of assets that have a longer life (usually longer than one income year) or that relate more to establishing, replacing, enlarging or improving the structure of your business.
These assets have a limited life expectancy (effective life) and can reasonably be expected to decline in value over the time you use them. They are called 'depreciating assets', and include:
- computers
- electrical tools
- furniture
- carpet and curtains
- motor vehicles
- plant and equipment.
Generally, you can't claim the total cost of a capital asset in the income year you pay it. Instead, you can claim an amount for the decline in value of the asset each year over a number of years - see Capital allowances - plant and equipment depreciation.
Land and items of trading stock are not depreciating assets. However, improvements to land and fixtures on land, such as windmills and fences, may be depreciating assets.
Your business assets start to depreciate from the time you first use them, or install them ready for use, for any purpose, including a private purpose. However, you can only claim deductions for depreciation for the time you use the assets to produce assessable income.
The amount you can claim will be less if you:
- only own the asset for part of a year
- only use the asset in part for business purposes; that is, if you only use it for 60% business purposes, you can only claim 60% of its total depreciation for that year
- owned the asset for some time before you started business - in this case, you must work out how much the asset depreciated before you started business and use the reduced value as your starting base value for the asset.
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You can ordinarily only claim a deduction for the depreciation of assets you legally own or are purchasing under a hire purchase agreement.
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If you are not sure whether an asset is a depreciating asset, phone us on 13 28 66 or talk to your tax adviser.
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When is an expense incurred?
Accruals or cash basis accounting
You can generally claim a deduction for an expense you incur in the everyday running of your business in the year in which you incur it. For example, an expense is incurred when you receive an invoice, even if you haven't actually paid it. This is known as the accruals method of accounting.
However, if you are using the cash (receipts) accounting method, you can claim a deduction in the year in which you pay the expense, rather than in the year you incurred it.
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For more information, refer to Taxation Ruling TR 97/7 - Income tax: section 18-1 - meaning of 'incurred' - timing of deductions.
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Claiming expenses you pay in advance
There are different rules for expenses you pay in advance (prepaid expenses). A prepaid expense is one you incur now for goods or services you will receive (in whole or in part) in a later income year.
If your aggregated business turnover is less than $2 million, you can use the prepayments concession. This means you can claim a deduction for the total expense you prepaid if you receive the goods or services in full within 12 months. This applies even if the 12-month period extends into the next income year.
If you will not receive the goods or services in full within 12 months, or your aggregated turnover exceeds $2 million, you must apportion the expense across the whole supply or service period.
Motor vehicle expenses
The amount of motor vehicle expenses you can claim depends on your business structure.
If you operate your business as a company or trust, you can claim a full deduction for expenses you incur in running a motor vehicle your company or trust leases or owns. If you or other company or trust employees (or their associates) use the vehicle for private purposes, you may have to pay fringe benefits tax (FBT). The cost of FBT is also a deduction.
If you operate your business as a sole trader or a partnership that includes at least one individual, you can claim a:
- full deduction for a business-purpose vehicle - a larger truck or van, or a smaller vehicle, such as a ute, wagon or panel van that has been heavily modified for business use, or where private use is restricted to home-to-work travel and very minor other use
- vehicle expense deduction for a vehicle you own, lease or hire under a hire purchase agreement - for an ordinary car, station wagon or four-wheel drive, or for most other vehicles designed to carry less than one tonne or fewer than nine passengers.
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If your income includes personal services income and the personal services income rules apply, you may be able to claim a deduction for only one car you use for business and private purposes. For more information, see Personal services income essentials.
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Calculating your deduction
If you operate your business as a sole trader or a partnership that includes at least one individual, there are four methods you can use to work out the amount you can claim.
You can also use our online 'Work-related car expenses calculator' to help you work out your claim. The calculator will automatically determine your eligibility and calculate your claim under each of the four methods. You can then choose the method that gives you the largest deduction, as long as you have the evidence required for that method.
Calculating your deduction
There are four methods you can choose from to work out the amount you can claim for any car:
When choosing a claim method, you:
- can choose the method that will give you the best result
- can use different methods for different vehicles
- can change methods from year to year
- must keep appropriate records.
The claim methods available to you depend on whether you travel more or less than 5,000 business kilometres a year in the vehicle.
If you travel 5,000 business kilometres or less, you can use the:
- cents per kilometre method, or
- logbook method.
If you travel more than 5,000 business kilometres, you can use one of the following:
- cents per kilometre method (but you can only claim a maximum of 5,000 kilometres)
- 12% of original value method
- one-third of actual expenses method
- logbook method.
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You cannot claim the cost of travelling between your home and your place of business, except in certain limited situations. However, if your home is your place of business, you can claim the cost of trips you make between your home and other places, provided you made the trip for business purposes.
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Method 1 - cents per kilometre
If you use this method:
- your claim is based on a set rate for each business kilometre
- you can claim a maximum of 5,000 business kilometres
- you do not need written evidence to show how many kilometres you have travelled, but we may ask you to show how you worked out your business kilometres
- you cannot make a separate claim for depreciation.
To work out how much you can claim, multiply the total business kilometres you travelled by the number of cents allowed for your car's engine capacity - see the 'Rates per business kilometre' table below. Divide your answer by 100 to work out the amount you can claim in dollars. This figure takes into account all your vehicle running expenses.
The rates are adjusted each year.
Rates per business kilometre: 2011-12
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Engine capacity
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Cents per kilometre
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Ordinary engine
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Rotary engine
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1.6 litre (1,600cc) or less
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0.8 litre (800cc) or less
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63 cents
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1.601-2.6 litre (1,601-2,600cc)
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0.801-1.3 litre (801-1,300cc)
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74 cents
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2.601 litre (2,601cc) and over
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1.301 litre (1,301cc) and over
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75 cents
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Example
Jane travelled 3,000 business kilometres during the income year. Her car has a 1.8 litre (1800cc) engine.
Jane worked out she could claim $2,220 for her vehicle expenses; that is:
3,000kms x 74 cents per km
100
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= $2,220
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Method 2 - 12% of original value
If you use this method:
- you can claim 12% of the original value of your car (subject to the luxury car tax limits) - that is, if you
- bought the car, you can claim 12% of the cost
- leased the car, you can claim 12% of its market value from the first time it was leased
- your car must have travelled more than 5,000 business kilometres during the income year
- you do not need written evidence to show how many kilometres you have travelled, but we may ask you to show how you worked out your business kilometres.
The luxury car tax limit was set at $57,466 for 2011-12. This limit is updated each year.
Example
Raji's vehicle cost $20,000. She had the vehicle for the full year and met the requirements to make a claim under this method. Raji worked out she could claim $2,400 for her vehicle expenses; that is, 12% x $20,000 = $2,400.
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You cannot claim a separate deduction for your car's depreciation if you use either the cents per kilometre or 12% of original value method to work out how much you can claim for your car expenses.
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Method 3 - one-third of actual expenses
If you use this method:
- you can claim one-third of your car expenses
- your car must have travelled more than 5,000 business kilometres during the income year
- you must have written evidence of your fuel and oil costs or odometer records on which your estimates are based
- you must have written evidence of all your other car expenses.
You must also keep records that show:
- your car's odometer readings at the start and end of the period during which you owned or leased it during the income year
- the car's engine capacity, make, model and registration number
- how you worked out your business kilometres and any reasonable estimate you made.
Example
Kosta's vehicle expenses totalled $9,000 for the income year. These costs were for:
- fuel and oil
- registration and insurance
- interest on a loan to buy the vehicle
- repairs and maintenance
- depreciation or lease payments.
Kosta met all the other requirements for claiming under this method. He worked out he could claim $3,000; that is:
Method 4 - logbook
If you use this method, you:
- can claim the business use percentage of each car expense, based on your logbook records
- must keep a logbook so you can work out the percentage
- must have written evidence of your fuel and oil costs or odometer records on which your estimates are based
- must have written evidence for all your other expenses.
Example
At the end of the income year, Tim's logbook shows he travelled a total of 11,000 kilometres, of which 6,600 were business kilometres.
To work out the percentage he used the car for business purposes, Tim completes the following calculation:
Tim's total expenses, including depreciation, are $9,000 for the income year. To work out how much he can claim, Tim completes the following calculation:
$9,000 X 60% = $5,400
Your logbook
Each logbook you keep is valid for five years, but you may start a new log book at any time.
If this is the first year you have used the logbook method, you must keep a logbook during the income tax year for at least 12 continuous weeks. If you started to use your car for business purposes less than 12 weeks before the end of the income year, you can continue to keep a logbook into the next year so it covers the required 12 weeks. If you want to use the logbook method for two or more cars, the logbook for each car must cover the same period. The 12-week period you choose should be representative of the car's business use.
Each logbook you keep must contain the following information:
- when the logbook period begins and ends
- the car's odometer readings at the start and end of the logbook period
- the total number of kilometres the car travelled during the logbook period
- the number of kilometres travelled for work activities based on journeys recorded in the logbook - if you made two or more journeys in a row on the same day, you can record them as a single journey
- the business use percentage for the logbook period.
If you established your business use percentage using a logbook from an earlier year, you must keep that logbook and maintain odometer records in the following years.
You can use pre-printed logbooks (available from stationery suppliers) or make your own.
Business travel expenses
You can only claim your business travel expenses if you have:
- written evidence of all expenses, where you stayed away from home for one night or more
- travel records, where you were away from home for six or more consecutive nights.
You must use a diary or similar document to record the particulars of each business activity before your travel ends, or as soon as possible afterwards. The particulars you must record are:
- the nature of the activity
- the day and approximate time the business activity began
- how long the business activity lasted
- the name of the place where you engaged in the business activity.
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Your plane ticket may show all the details you need to show how much you paid for your air fares. You must keep records of those expenses for five years.
If your travel is for both business and private purposes, you must exclude the private expenses from your claim. If you operate your business as a company or trust, you may have to pay fringe benefits tax if the travel includes private activities.
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Capital allowances - plant and equipment depreciation
There are two sets of rules you can use to work out how much you can claim for depreciating assets, such as plant and equipment - the simpler capital allowances rules concession and the uniform capital allowance rules. Small businesses with aggregated turnover of less than $2 million can select the set of rules you prefer. Larger businesses must use the uniform capital allowance rules.
Simpler capital allowances (depreciation) rules concession
These rules provide a simplified approach to claiming depreciation on your assets. They are particularly suited to small businesses.
Uniform capital allowance rules
These rules allow you to choose from two methods to calculate how to depreciate your business assets - the prime cost method and the diminishing value method.
You can also use our online 'Decline in value calculator', which will help you:
- calculate the deduction for the decline in value of a depreciating asset
- calculate the total deduction for decline in value in the current income tax year for up to eight assets
- work out disposal calculations, including balancing adjustments and capital gains
- make comparisons between the alternative decline in value methods - diminishing value and prime cost.
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For more information on depreciating your business assets, refer to:
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Simpler capital allowances (depreciation) rules concession
Simplified depreciation rules are available for small businesses with aggregated turnover of less than $2 million. Under these simpler rules, you can:
- immediately write off most depreciating assets costing less than $6,500 each ($1,000 prior to 1 July 2012)
- pool other depreciating assets in a 'general small business pool' and claim a 30% deduction for them
- claim a deduction for most assets you have newly purchased or acquired at 15% in the first year, regardless of when you purchased or acquired them during that year.
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For certain depreciating assets, you must use the uniform capital allowance rules rather than the concessional rules. These assets include:
- assets you rent or lease to others
- assets allocated to a low-value pool
- horticultural plants
- software
- capital works
- investments in Australian films
- research and development.
For more information, refer to 'Exclusions' in Simplified depreciation rules.
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Example: simpler depreciation - general small business pool
Calculation of general small business pool balance
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Depreciation claim
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Closing pool balance from previous year
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$10,000
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Opening pool balance for current year
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$10,000
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Add new asset purchases
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$1,000
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Sub total
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$11,000
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Less
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Proceeds of disposal
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$4,000
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Sub total
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$7,000
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Pool deduction claim (30% of $10,000)
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$3,000
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$3,000
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Sub total
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$4,000
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New asset deduction claim
(15% of $1,000)
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$150
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$150
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Total depreciation for current year
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$3,150
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Closing pool balance
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$3,850
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Uniform capital allowance rules
Under the uniform capital allowance rules you can depreciate most business assets using either the prime cost method, or the diminishing value method. Both methods give you the same total deduction for the depreciation, but the prime cost method does so over a shorter time.
Comparing prime cost and diminishing value methods
This graph shows the two methods you can use to work out the depreciation of an asset costing $4,000 with an effective life of five years. In this instance, the asset has been used for 12 months for business purposes only.
You can use either of the methods to work out how much a business asset has depreciated. However, once you choose a method for a particular asset, you cannot change to the other method for that asset.
Working out the depreciation - prime cost method
This method assumes that the value of a depreciating asset decreases uniformly over its effective life.
Working out the depreciation - diminishing value method
This method assumes that the value of a depreciating asset decreases more in the early years of its effective life.
Working out the effective life of an asset
To use either of the depreciation methods, you have to work out how long the asset can be used to produce income - its effective life.
Using a low-value pool
You can work out the depreciation on certain low-cost and low-value assets you hold by allocating them to a low-value pool and depreciating them at a set annual rate. This applies to business assets that cost, or are written down to, less than $1,000.
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Most assets purchased with a value of less than $100 dollars can be claimed as an immediate deduction under the low-cost assets threshold rule.
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For more information, refer to:
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Other capital expenditure
You can claim a deduction under the uniform capital allowance system for certain business-related capital expenses you incur, as long as you cannot claim a deduction for them under any other part of tax law. Examples of this sort of expenditure include the cost of setting up or ceasing a business, and project-related expenses.
Working out the depreciation - prime cost method
Using the prime cost method, you can claim a fixed amount each year.
The formula for the prime cost method is:
Asset's cost
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X
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days held
365
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X
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100%
asset's effective life
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If the asset cost $4,000 and has an effective life of five years, you can claim 20% of its cost, or $800, in each of the five years.
$4,000
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X
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365
365
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X
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100%
5
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=
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$4,000
5
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=
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$800
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Working out the depreciation - diminishing value method
The formula for the diminishing value method is:
Base value
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X
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days held
365
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X
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200%
asset's effective life
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If the asset cost $4,000 and has an effective life of five years, the claim for the first year will be:
$4,000
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X
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365
365
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X
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200%
5
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=
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$8,000
5
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=
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$1,600
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The base value reduces each year by the decline in value of the asset. This means the base value for the second year will be $2,400; that is, $4,000 minus the $1,600 decline in value in the first year.
The claim for the second year will be:
$2,400
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X
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365
365
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X
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200%
5
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=
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$4,800
5
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=
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$960
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In the third year, the base value will be $1,440 and the claim will be $576.
In the fourth year, the base value will be $864 and the claim will be $346.
This will continue until the value reaches zero. Once the value of the asset drops below $1,000 you can choose to transfer its remaining value to a low-value pool. By doing so, you can claim depreciation for the asset together with any other low-value assets, rather than making separate calculations for each.
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You can use the Decline in value calculator to work out disposal calculations and comparisons between the prime cost and diminishing value methods.
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Working out the effective life of an asset
The effective life of a depreciating asset is how long it can be used to produce income, taking into account reasonable:
- wear and tear under the circumstances in which you expect to use it
- levels of maintenance.
To work out the effective life of an asset, you must first know how much the asset cost you and how many years you expect it to last.
For most depreciating assets, you can work out what the effective life will be. Alternatively, you can use the number of years we have already worked out for most assets.
Table: Examples of the effective lives of depreciation assets
Depreciating asset
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Effective life in years
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Carpets
- in commercial office buildings
- in tenpin bowling centres.
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8
4
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Cash registers
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10
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Chairs
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10
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Computers:
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4
3
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Curtains and drapes
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6
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Desks
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20
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Fire extinguishers
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15
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Floor coverings (linoleum and vinyl)
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10
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Hot water installations
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15
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Lawnmower:
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6 2/3
5
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Library (professional)
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10
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Motor vehicles, etc:
- cars generally
- hire and travellers' cars
- taxis
- motorcycles and scooters.
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8
5
4
6 2/3
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Photo copying machines
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5
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Power tools - hand-operated:
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5
3
5
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Refrigerators
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10
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Television receivers (not used for hire)
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10
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Tools (loose)
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5
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Vacuum cleaners (electric)
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10
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For residential property operators only:
- electric heater
- garbage units (compacting)
- refrigerators
- stoves
- window blinds.
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15
6 2/3
12
12
10
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For more information, refer to Taxation Ruling TR 2011/2 Income tax: effective life of depreciating assets (applicable from 1 July 2011).
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Using a low-value pool
You can work out the depreciation on certain low-cost and low-value assets you hold by allocating them to a low-value pool and depreciating them at a set annual rate.
You start a low-value pool when you first choose to allocate a low-cost or low-value asset to the pool.
Once you choose to create a low-value pool and you allocate a low-cost asset to it, you must pool all other low-cost assets you start to hold in that income year and in later income years. You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis.
Once you have allocated an asset to the pool, it must remain there. You then calculate the depreciation of all the assets in the low-value pool once a year at a rate of 37.5%. This rate is equivalent to an effective life of four years.
If you purchase or acquire an asset and allocate it to the pool during an income year, you calculate the deduction for it at a rate of 18.75%; half the pool rate. You can use this rate regardless of when you allocate the asset to the pool during the year.
You cannot allocate the following assets to a low-value pool:
- low-value assets for which you previously calculated depreciation deductions using the prime cost method
- horticultural plants, including grapevines
- assets for which you can claim deductions under the simpler depreciation rules
- assets costing $300 or less that you can claim an immediate deduction for
- certain assets you use to conduct research and development activities.
If you purchase a large number of assets for your business and you use a low-value pool, you may be able to use the sampling rule to estimate how much you can claim as an immediate deduction and how much you must depreciate over time. The sampling rule saves you time because you don't need to decide whether each purchase is of a revenue nature (and so immediately deductible) or of a capital nature (which must be written off over time).
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For more information on the sampling rule, refer to:
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Other capital expenditure
You can claim a deduction under the uniform capital allowance system for some other business-related capital expenses you incur. However, the costs must not be deductible under any other part of the tax law or form part of the cost of a depreciating asset or of land. Examples of this sort of expenditure include the cost of setting up or ceasing a business, and project-related expenses.
Business set-up or cessation costs
You may be able to claim a deduction for pre and post-business related capital expenses, such as costs associated with setting up or ceasing your business, or the cost of raising finance.
You can claim a deduction of 20% of these expenses in the year you incur them and in each of the following four years.
Project expenses
You can also claim a deduction for certain capital expenses directly connected with a project, such as feasibility studies or environmental assessments.
These expenses can be allocated to a pool and written off over the effective life of the project using the diminishing value method.
Salary, wages and super
Salary and wages
If you operate your business as a company or trust, your company or trust can claim a deduction for any salary and wages it pays to you or any other employees.
If you operate your business as a partnership, you cannot claim a deduction for any salary or wages paid to a partner of the partnership.
If you operate your business as a sole trader, you cannot claim a deduction for salary and wages you pay to yourself. This means you cannot claim a deduction for any amount you take from your business income for private purposes. However, you can claim a deduction for salary and wages you pay to other employees.
If your income includes personal services income, the amount you can claim for payments you make to an associate may be limited.
Super
You can claim a deduction for super contributions you make to a complying super fund or retirement savings account for yourself (if you are self-employed) or for your employees.
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The amount you can claim for making super contributions may be different if your income is personal services income.
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Losses
You incur a tax loss when your total deductions you can claim for an income year (excluding tax losses from earlier income years) is more than your total assessable income and net exempt income. However, there are some deductions you cannot use to create or increase a tax loss, including donations or gifts and personal super contributions.
Claiming tax losses from previous years
If your business makes a loss in an income year, you can carry forward that loss and may be able to claim a deduction for that loss in a future year. The rules differ for different business structures.
Offsetting current year losses against other income
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This applies to sole traders and individual partners in a partnership only.
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If you operate as a sole trader or a partner in a partnership, you may be able to claim business losses by offsetting them against your income from other sources, such as wages. However, you will need to meet the requirements of the non-commercial losses rules. These rules determine whether you can use your business loss to offset income from other sources.
Claiming tax losses from previous years
If your business made tax losses in previous years, you can carry forward those losses. You can also claim a deduction for those losses in a later year. However, sole traders and individual partners in a partnership are subject to the non-commercial loss rules.
When you carry forward tax losses, all of the following apply:
- If you have tax losses from several previous years, you must claim the entire loss you incurred from the earliest year before you can claim all or part of a tax loss from a later year.
- You can use your tax losses from earlier income years to reduce your Australian income to zero only. If your tax losses from earlier income years are more than your Australian income, you must keep a record of the tax losses to claim the extra tax loss amount in a later year.
- You can carry forward most tax losses indefinitely.
If you have unclaimed foreign losses relating to the income years 1998-99 through to 2007-08, then special deduction rules apply.
If you operate your business as a sole trader, partnership or trust, you cannot choose the year or years in which to claim a deduction for your tax losses from previous years. You must carry the tax loss forward from one year to the next until they are all claimed.
If you operate your business as a trust and you incur a tax loss, you cannot distribute the loss to the trust's beneficiaries.
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There are special rules that restrict when you can claim a deduction for a tax loss as a trust. We recommend you seek further advice if you wish to claim such a deduction.
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If you operate your business as a company, you cannot distribute any loss you incur to your shareholders. The company must carry the tax loss forward and offset it against assessable income in a later year.
As a company, you cannot deduct a tax loss unless either of the following applies:
- You have the same owners and the same control throughout the period from the start of the loss year to the end of the income year.
- You carried on the same business throughout a specified period.
If you operate your business as a company, under certain conditions you may be able to:
- choose the amount of a previous year's tax loss you want to claim
- carry forward to a later year a tax loss you would have incurred in a particular year had you not received income from franked dividends.
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For more information on claiming losses for companies, refer to Taxation Ruling TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132.
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Offsetting current year losses against other income
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This information applies only to sole traders and individual partners.
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Although you are in business, you may have income from other sources. For example, you may have income from salary and wages as well as your business.
If you are an individual or partner in a partnership and you make a net loss from your business activity, you can claim that loss by offsetting it against your other income provided one of the following applies:
- Your business is a primary production business or a professional arts business and you make less than $40,000 (excluding any net capital gains) in an income year from other sources.
- Your loss was solely due to a deduction claimed under the small business and general business tax break.
- We allow you to offset the loss.
- Your income for non-commercial loss purposes is less than $250,000, and either your
- assessable business income is at least $20,000 in the income year
- business has produced a profit in three out of the past five years (including the current year)
- business uses, or has an interest in, real property worth at least $500,000, and that property is used on a continuing basis in a business activity (this excludes your private residence and adjacent land)
- business uses certain other assets (excluding motor vehicles) worth at least $100,000 on a continuing basis.
If you do not meet any of these requirements, you cannot offset your business loss against any of your other assessable income for that income year. However, you can defer the loss or carry it forward to future years. If your business makes a profit in a following year, you can offset the deferred loss against the amount of this profit.
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For more information, refer to:
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Expenses related to your home work area
If you operate your business in full or in part from home, you may be able to claim a deduction for:
- occupancy expenses, such as rent, mortgage interest, rates, land taxes and house insurance premiums
- running expenses, such as phone rental and business calls, internet fees, depreciation of office furniture and equipment, and any additional heating, cooling, lighting and cleaning expenses.
Whether you can claim both running expenses and occupancy expenses depends on whether:
- your home is your place of business and you have an area set aside exclusively for business activities
- your home is not your place of business, but you have an area set aside exclusively for business activities
- you work at home, but have no home work area - that is, you work when others are not present in a living area or garage, but your home is not your place of business and you don't have an area set aside primarily or exclusively for business activities.
If your home is your place of business and you have an area set aside exclusively for business activities, you may be able to claim both running and occupancy expenses.
If you carry on your business elsewhere and also do some work at home, you cannot claim occupancy expenses even if you have a home work area set aside.
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Before claiming expenses relating to your home work area, we recommend you read Home-based business.
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The following table shows the deductions you can claim for the three ways you can work at home.
What you can claim
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How you operate your business
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Home is your place of business and you have a home work area
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Home is not your place of business but you have a home work area
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You work at home but don't have a home work area
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Occupancy expenses
Cost of owning or renting the house (such as rent, mortgage interest, insurance and rates)
If your income includes personal services income (see below), you may not be able to claim a deduction for occupancy expenses.
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Yes
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No
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No
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Running expenses
Cost of using a room (such as gas and electricity)
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Yes
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Yes
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Yes
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Business phone costs
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Yes
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Yes
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Yes
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Decline in value of office plant and equipment (such as desks, chairs and computers)
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Yes
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Yes
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Yes
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Depreciation of curtains, carpets, light fittings, etc.
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Yes
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Yes
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No
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You can keep a diary to work out how much of your running expenses relate to working at home. All you have to do to support your claims is keep a diary for a representative period of about four weeks each income year.
Alternatively, for home work area expenses, such as heating, cooling, lighting and depreciation of furniture, you can claim a fixed rate, instead of keeping details of actual expenses.
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Effective from 1 July 2010, the hourly rate for home office expenses increased from 26 cents to 34 cents an hour.
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We have developed an online tool to help you determine whether you are entitled to occupancy expenses and then calculate your allowable deduction - refer to Home office expenses calculator.
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For more information on home office expenses, refer to:
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If your home is your place of business, capital gains tax may apply when you sell your home.
Tax-related expenses
You can claim the expenses you incur in managing your business taxes. These expenses include:
- having a bookkeeper prepare your business records
- having tax returns and activity statements prepared and lodged
- objecting or appealing against an assessment
- attending an Australian Taxation Office (ATO) audit.
You may also be able to claim as an ordinary business expense deduction the cost of obtaining tax advice about the everyday running of your business.
Repairs, maintenance and replacement expenses
You can claim a deduction for repairs to machinery, tools or premises you use to produce business income, as long as the expenses are not capital expenses. These allowable claims include the cost of:
- painting
- conditioning gutters
- maintaining plumbing
- repairing electrical appliances
- mending leaks
- replacing broken parts of fences or broken glass in windows
- repairing machinery.
To repair something generally means to fix defects, including renewing parts. It does not mean totally reconstructing something. You do not have to own the property or item that is repaired.
Repairs do not include:
- substantial improvements to an item or property, such as replacing a dilapidated ceiling with an entirely new and better ceiling - you may be able to include this type of expense in the cost base of the asset when working out capital gains
- repairs made to machinery, tools or property immediately after you purchase or acquire them - this is because the price you paid for an item reflects its condition, so the cost of any such repairs are capital expenses.
Last Modified: Friday, 29 June 2012
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