Guide to tax deductions for businesses in Australia

Business leaders have a lot on their plate and some even wear many hats to get their ventures off the ground. While tax obligations are not usually their top priority, it’s important to understand taxation including tax deductions to reduce tax liability and make compliance easier.

Some of your business expenses can be claimed as deductions in your tax return. In this article, we’ll delve into these tax deductions in detail.

Tax deductions businesses can claim in Australia

You basically can claim tax deductions for most of your business expenses as long as they are related to earning your assessable income. The types of business expenses you can claim tax deductions for are as follows:

• Day-to-day business and operating expenses
• Product/service purchases for your business
• Capital expenses such as the cost of some depreciating assets like equipment and machinery

The amount of tax deduction and when you can claim it varies depending on the type of expense. Take note that some expenses like fines aren’t deductible. For easy reference, you can consider these 3 golden rules for what is accepted as a valid deduction:

1. The expense should be a business expense and not for personal use
2. If it’s for both business and personal use, you can only claim a portion of the deduction
3. Always back your claims up with records and receipts

There are also other types of expenses you can claim tax deductions for like those related to protecting your employees from safety hazards. For instance, during the pandemic, purchases of sneeze or cough guards, gloves, hand sanitizers, cleaning supplies, antibacterial wipes, and personal protective equipment can all be claimed as income tax deduction.

However, if your business is GST-registered, you cannot claim the GST component of your expenses as tax deduction. For example, if you buy office supplies for your GST-registered business, and you pay $22 (10% or $2 being GST), you can claim a GST credit of $2 but you can only claim $20 as a tax deduction on your tax return.

Tax deductions businesses CANNOT claim in Australia

Some expenses aren’t eligible for tax deduction including:

• purchases for entertainment purposes (unless for fringe benefit)

• expenses involving non-assessable income (gifts, gambling wins, inheritance, etc.)
• the GST component of your purchase if you can claim it as GST credit on the business activity statement.
• payments for which you haven’t met your PAYG withholding/reporting obligations – also called non-compliant payments
• private or domestic expenses (e.g. childcare fees, clothes for family, etc.)

How about the expenses or purchases that are for both business and personal use? How do you apportion these expenditures?

It generally depends on how much expense relates to operating your business and what type of expense it is:

• For home-based businesses that want to claim occupancy expenses, you can apportion these according to the floor area and the time the space is used for business purposes. There are also various methods for accounting for the running expenses depending on your exact circumstance.
• As for motor vehicle expenses, the calculations are based on your business structure and the type of automobile involved.
• For other items and purchases, they’re generally apportioned based on the extent of private and business use, and it must be done in a reasonable and unbiased manner.
• Just make sure to document all the records that reflect how you apportioned your expenses. Follow the right record-keeping methods to meet your obligations and manage taxes more seamlessly.

Claiming a deduction for prepaid expenses

The rule is different when paying for expenses in advance– upfront payments for goods and services that you are yet to receive in part or in whole at a later date. If the prepaid expense is at least $1000, you typically have to distribute the expense across the entire supply or service period if:

• The goods/services won’t be received within 12 months
• You aren’t eligible for immediate deduction.

Business travel expenses

Business travel expenses can also be covered, but ATO has certain restrictions on business travel expense deductions:

• For small business owners, they can claim train, airfare, taxi, bus, ride-share, or metro train fares
• Rental car expenses and private car hire fees can be deductible
• For overnight stays, meals and hotel accommodations are tax deductible but some restrictions apply. Business trips should not include personal affairs, so business travels scheduled around holidays may face some restrictions. Business travel expenses for team building and fringe benefits should be reported to the ATO.

Tax depreciation incentives in Australia

The Australian Taxation Office had introduced a tax depreciation incentive, giving businesses special incentives to help them manage the financial challenges of the Covid-19 pandemic. The following are some of the special areas and incentives businesses can maximise:

1. Temporary full expensing
2. Instant asset write-off
3. Backing business investment
4. General depreciation rules

Bad debt write-off

If you have accounts receivables that are left unpaid by your customers, they can be expensed if they’re too old to legally pursue; they’ve been sold to a private company; or there are other agreements that release the customer or debtor from the liability. In general, bad debts that can be proven to be irrecoverable can be allowable as deduction (within the year in which the debt is written off).

How to claim your tax deduction

Different business types in Australia claim tax deductions differently. Check the guide below:

• Sole trader – For sole traders, just claim the tax deductions in your individual tax return under the ‘Business and professional items’ schedule, using either myTax or a registered tax agent.
• Partnership – For partnerships, claim your deductions under the partnership tax return.
• Trust – If you run your business through a trust, claim tax deductions in your trust tax return.
• Company – For company structures, claim the deductions in the company tax return.

As long as you keep accurate records of business and work-related expenses, you can be eligible for tax deductions in Australia.

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