(QC 33725) Business tax deductions

Source:

You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.

See our definitions for explanations of tax and super terms that you don’t understand.

On this page:

• What you can claim
• What you can’t claim
• When you can claim your deduction
• How to claim your tax deduction
• Types of expenses

What you can claim

There are three golden rules for what we accept as a valid business deduction:

1. The expense must have been for your business, not for private use.
2. If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
3. You must have records to prove it.

For example, if you buy a laptop and you only use it for your business, you can claim a deduction for the full purchase price. 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 50% of the amount as a deduction.

You can’t claim the GST component of a purchase as a deduction if you can claim it as a GST credit on your business activity statement.

See also:

• Watch our Income tax deductions webinar about the principles of income tax deductions that apply to all businesses

What you can’t claim

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

• entertainment expenses
• traffic fines
• private or domestic expenses, such as childcare fees or clothes for your family
• expenses relating to earning income that is not assessable, such as money you earn from a hobby
• the GST component of a purchase if you can claim it as a GST credit on your business activity statement.

Remember, if you earn PSI your deductions may be limited.

When you can claim your deduction

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
• capital expenses (such as machinery and equipment) over a longer period.

For operating expenses, you generally incur the 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.

See also:

• Capital allowances: effective life reviews

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.

See also:

• Deductions for prepaid expenses

How to claim your tax 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.

See also:

• Business and professional items 2018 – individual tax return

Types of expenses

Learn more about the different categories of expenses:

• Motor vehicle expenses
• Home-based business
• Business travel expenses
• Workers’ salaries, wages and super contributions
• Repairs, maintenance and replacement expenses
• Other operating expenses
• Depreciating assets and other capital expenses

See also:

• Record keeping for business

Last modified: 24 Jun 2019QC 33725