You can claim a tax deduction for most expenses you incur in carrying on your business if they are directly related to earning your assessable income.
Types of business expenses you may be able to claim deductions for include:
- day-to-day operating expenses
- purchases of products or services for your business
- certain capital expenses, such as the cost of depreciating assets like machinery and equipment used in your business.
The amount of your deduction and when you can claim it will depend on the type of expense (for example certain capital expenditures are deductible over time) and whether it has any private or domestic purpose for which you must reduce your deduction. Also, some expenses are not deductible (for example fines).
There are 3 golden rules for what we accept as 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.
You can't claim the GST component of your expenses as a deduction if you can claim it as a GST credit on your business activity statement.
You can also claim deductions for expenses related to protecting staff from safety hazards involved in performing their duties. For example, infection from COVID-19 or other 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.
For more information, watch our Claiming small business tax deductions webinar.
If you need assistance with understanding some of the tax and super terms, see our definitions.
There are some expenses that are not deductible, such as:
- entertainment expenses, other than those you provide as a fringe benefit
- traffic fines
- private or domestic expenses, such as childcare fees or clothes for your family
- expenses relating to earning income that is not assessable
- payments for which you have not met your PAYG withholding or reporting obligations – non-compliant payments
- the GST component of a purchase if you can claim it as a GST credit on your business activity statement.
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.
How to apportion for expenses that have both business and private purposes
You cannot claim a deduction for an expense to the extent it is incurred for a private or domestic purpose.
How you apportion depends on how much of the expense relates to running your business and the type of expense.
- 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 your 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.
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.End of example
The type of expense – operating expense or capital expense – determines when you can claim your deduction. Generally, you can claim:
- operating expenses (such as office stationery and wages) in the year you incur them
- certain capital expenses (such as depreciating assets and capital works assets) over a longer period – however, under the current temporary full expensing rules, you may be eligible to claim an immediate deduction for the business use portion of depreciating assets you acquire for your business if the asset was first held or used, or installed ready for use for a taxable purpose between 7:30pm AEDT 6 October 2020 and 30 June 2023
- other capital expenses (such as start-up expenses) may be immediately deductible or claimed over time.
Find out more about claiming a tax deduction for depreciating assets and other capital expenses.
You generally incur an expense when you have a legal obligation to pay for the goods or services. An invoice is not necessary for an expense to have been incurred, but you do need a record of the expense.
If you use an item in your business for only part of a year, you generally need to restrict your claim to the period it was used for the business.
Claiming a deduction for a prepaid expense
There are different rules for expenses you pay in advance – that is, expenses you incur now for goods or services you will receive (in whole or in part) in a later income year.
Where the expense is $1,000 or more, you will usually need to apportion (or distribute) the expense across the whole supply or service period if you:
- won't receive the goods or services in full within 12 months
- are not eligible for an immediate deduction.
How to claim your business deductions depends on your business type:
- Sole trader – claim the deductions in your individual tax return in the 'Business and professional items' schedule, using myTax or a registered tax agent.
- Partnership – claim the deductions in your partnership tax return.
- Trust – claim the deductions in your trust tax return.
- Company – claim the deductions in your company tax return.
Learn more about different types of expenses:
- Motor vehicle expenses
- Home-based business
- Business travel expenses
- Digital product expenses
- Workers' salaries, wages and super contributions
- Claiming deductions for PAYGW payments
- Repairs, maintenance and replacement expenses
- Other operating expenses
- Depreciating assets and other capital expenses