Tax deductions for small business in Australia: what you can claim, what you can't, and how to prove it

An Australian small business can claim a tax deduction for an expense incurred in earning assessable income, provided it is not private, domestic, or capital in nature unless a specific rule allows the cost to be deducted over time. In practice, that test covers most day-to-day operating costs, including rent, wages, super paid on time, software, insurance, advertising, vehicle running costs (for business use), bank and merchant fees, and business phone and internet. The claim only stands up if three things line up: the expense has a clear business purpose, the business portion has been separated from any private use, and the records support the amount claimed.

Key takeaways

• A deduction reduces taxable income. It does not refund what you spent, so the goal is to claim everything you are entitled to, accurately, not to spend for the sake of spending.
• The $20,000 instant asset write-off applies for the 2025-26 year for businesses with aggregated turnover under $10 million. The asset must be first used or installed ready for use by 30 June 2026. The threshold is legislated to drop to $1,000 from 1 July 2026 unless extended.
• Mixed-use costs such as vehicles, phones, internet, and home office expenses need a reasonable business-use percentage backed by records, not estimates.
• Entertainment, fines, private costs, and ordinary clothing are generally not deductible, even when paid from a business account.
• If registered for GST, the deduction is usually the GST-exclusive amount, with the GST portion claimed through your BAS.
• The ATO expects records to be kept for at least five years. Digital records are acceptable and often easier.

What counts as a deductible business expense?

The general deduction rule in section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for a loss or outgoing to the extent it is incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for that purpose. It excludes losses or outgoings that are capital, private, or domestic in nature, or incurred in earning exempt income.

That section is where most small business deductions start. Applied to daily spending, it covers the costs that keep the business running: rent on commercial premises, electricity for the workshop, software the team uses, accountant and bookkeeping fees, business insurance, staff wages, compulsory super paid on time, bank and merchant fees, advertising, stationery, and interest on genuine business loans.

Some costs sit outside that straightforward treatment. Capital assets such as vehicles, machinery, and office fit-out are usually claimed over time through depreciation (though eligible small business assets under $20,000 can be written off immediately during 2025-26, covered below). Trading stock is dealt with under separate rules. Entertainment, fines, and private spending are excluded.

Common deductions small businesses miss

Missed deductions rarely come from the big-ticket purchases. They come from the small, recurring costs that get paid by direct debit and never make it into the accounting file with a tax invoice attached. Across the client base, the pattern is consistent:

• Software and subscriptions: cloud accounting, payroll, CRM, scheduling, quoting, design tools, cyber security, website hosting.
• Merchant and platform fees: EFTPOS surcharges, payment gateway fees, delivery platform commissions, marketplace listing fees.
• Digital advertising: Facebook, Instagram, Google Ads, LinkedIn campaigns paid by linked card, often without the tax invoice saved.
• Bank fees and interest on business loans and overdrafts.
• Tools of trade bought under $300, and consumables such as PPE, small hardware, and cleaning supplies.
• Professional fees: accounting, bookkeeping, tax agent, payroll support, business-related legal advice.
• Training and professional development directly related to current business activities.

An Ipswich retailer we reviewed had more than $4,000 of legitimate subscriptions, platform charges, and internet-related costs spread across twelve monthly direct debits. Each one looked minor in isolation. Over the year, the unclaimed total was material.

What you can't claim

The ATO does not allow deductions for private, domestic, or capital costs unless a specific rule applies. The bank account used to pay for something does not change its character. Paying for groceries from the business account does not make them deductible.

Expenses that regularly cause trouble include:

• Entertainment: client lunches, event tickets, staff social functions, and celebration dinners are generally not deductible, and GST credits on them are usually also denied. Fringe benefits tax can also apply.
• Ordinary clothing: plain black pants, business shirts, and general office wear are not deductible, even if worn only for work. Registered uniforms, occupation-specific items, and protective clothing may be.
• Fines and penalties: ATO, local council, traffic, and regulatory fines are not deductible.
• Private use portions: if you use a ute, phone, internet connection, or laptop for both work and private purposes, only the business portion is deductible.
• Loan principal repayments: interest on a business loan may be deductible, but the principal repayment is not.
• Capital improvements claimed as repairs: renewing or substantially upgrading an asset is usually capital, not repair, and needs to go through depreciation.

Motor vehicle and travel deductions

Motor vehicle claims are one of the ATO's standing review areas. The rules depend on who owns the vehicle, how it is used, and which calculation method you apply.

For a sole trader or partnership using a car, the two methods for working out a deduction for business use are the cents per kilometre method (capped at 5,000 business kilometres per car per year at a set rate) and the logbook method (business-use percentage applied to actual running costs and depreciation, supported by a logbook covering at least 12 continuous weeks representative of business use).

A logbook keeps its validity for five years, provided the pattern of use does not materially change. The logbook records the date, odometer readings, kilometres travelled, and purpose of each business trip. Without it, most vehicle claims beyond 5,000 business kilometres become very difficult to defend.

For companies and trusts that own vehicles, the vehicle is a business asset and running costs are deductible to the extent of business use. Private use by directors or employees may create an FBT liability, which has to be managed separately.

Travel between a regular home base and a fixed place of business is generally not deductible. Travel between separate worksites during the day, between a worksite and a client, or between the business and a supplier usually is. An Ipswich tradie working from home in Springfield who drives to a client site in Booval, then a supplier in Bundamba, then another site in Ripley, will typically have deductible travel for that day. The same tradie driving straight from home to a fixed office every morning will not.

Overnight work travel can include accommodation, meals, and transport, but personal days added to a work trip have to be carved out.

Home office and working-from-home deductions

Home-based business deductions fall into two categories: running expenses (electricity, internet, phone, depreciation of office equipment) and occupancy expenses (a portion of rent, mortgage interest, rates, and insurance). Running expenses are the usual starting point. Occupancy expenses are a separate and more restricted category and come with a significant tax consequence.

Running expenses: fixed rate versus actual cost

Sole traders and partners running a home-based business can work out running expenses using either the fixed rate method or the actual cost method.

The ATO's fixed rate for the 2024-25 income year was 70 cents per hour worked from home. The rate covers electricity, gas, internet, home and mobile phone, stationery, and computer consumables in one calculation. Depreciation on office equipment (desk, chair, monitor, laptop) and the decline in value of the business-use portion can be claimed separately on top. You need a contemporaneous record of actual hours worked from home for the full year. Estimates and representative four-week diaries are not accepted.

The actual cost method requires you to calculate the work-related portion of each running expense (electricity, internet, phone, consumables, depreciation) based on business use. It takes more work but often produces a larger deduction for businesses running from home most days.

Business owners should confirm the rate applying to the current income year before lodgment, because the rate is reviewed periodically by the ATO.

Occupancy expenses and the CGT trap

Occupancy expenses (rent, mortgage interest, rates, insurance) can only be claimed where part of the home has the character of a place of business, not merely a convenient workspace. Indicators include a clearly identifiable business area (such as signage or a separate entrance), an area not readily adaptable to private use, and an area used regularly and exclusively for business.

The trade-off is significant. If you claim occupancy expenses as a sole trader, the main residence exemption from capital gains tax is usually reduced for the portion of the home used as a place of business, for the period it was used that way. In many cases, the CGT cost when the home is eventually sold outweighs the annual deduction. Get advice before claiming occupancy.

Companies and trusts operating from a director's home

If a company or trust runs the business from a director's home, the company cannot simply claim the director's private household costs. There needs to be a proper arrangement in place, typically a genuine commercial rental or a reimbursement of specific business-related costs. Handled poorly, this creates Division 7A issues, FBT exposure, or unsupported deductions. Handled well, it is straightforward. The key is documentation.

Asset purchases, depreciation, and the instant asset write-off

Equipment purchases are where timing and classification matter most. Whether you can claim the full cost now or have to spread it over several years depends on the asset's cost, your aggregated turnover, and the date the asset was first used or installed ready for use.

The $20,000 instant asset write-off for 2025-26

For the 2025-26 income year, a small business with aggregated turnover under $10 million can immediately deduct the business-use portion of an eligible depreciating asset costing less than $20,000, if the asset is first used or installed ready for use between 1 July 2025 and 30 June 2026. The threshold applies per asset, so multiple assets under $20,000 can each be written off.

Key points that catch people out:

• The $20,000 threshold is GST-exclusive for GST-registered businesses and GST-inclusive if the business is not registered for GST.
• Ordering or paying a deposit is not enough. The asset must be installed and ready for use by 30 June 2026 to be claimed in 2025-26. An asset delivered on 3 July falls into the following year.
• Only the business-use portion is deductible. A $15,000 ute used 70 per cent for business produces a $10,500 deduction.
• The car limit (indexed annually) caps the depreciation cost of a car for tax purposes, regardless of the write-off threshold.
• The business must choose to apply the simplified depreciation rules to access the write-off.

The $20,000 threshold is legislated to revert to $1,000 from 1 July 2026 unless the government extends it again. If genuine capital expenditure is already planned for the coming months, bringing it forward to before 30 June 2026 may produce a meaningful cash flow benefit. Buying assets purely to chase the deduction, however, rarely makes commercial sense. The deduction reduces tax. It does not refund the cash you spent.

Assets over $20,000 and the small business pool

Assets costing $20,000 or more go into the general small business pool. Pooled assets are depreciated at 15 per cent in the year they are first used and 30 per cent each year after. If the pool balance (before the current year's depreciation deductions) is under $20,000 at the end of the 2025-26 year, the full pool balance can be written off.

Repairs versus capital improvements

Replacing a worn part or restoring an asset to its previous condition is usually a deductible repair. Upgrading an asset, extending its useful life, or improving its function is usually capital expenditure and goes through depreciation. The distinction affects both the size and timing of the deduction and is a common source of bookkeeping errors.

GST and tax deductions: how they interact

If your business is registered for GST and the purchase is fully for business use, you generally claim the GST credit through your BAS and claim the GST-exclusive amount as the income tax deduction. If you are not registered for GST, or the purchase does not carry a GST credit, you claim the GST-inclusive amount as the deduction.

Trying to claim both the full GST-inclusive amount as a deduction and the GST credit through the BAS creates a double benefit the ATO will unwind on review. This is the single most common bookkeeping error on mixed-use and GST-free purchases.

Not every purchase carries GST. Bank fees, certain financial supplies, residential rent, and many health and education services are GST-free or input-taxed. Entertainment often carries GST on the supplier invoice but the credit is restricted because the underlying expense is not deductible. Clean coding in your accounting software (GST, GST-free, input-taxed, private) keeps the BAS and the income tax return consistent, which is what the ATO looks for when it cross-checks the two.

Records, substantiation, and the no-receipt myth

There is no general rule that lets a small business claim a set dollar amount without receipts. The limited no-receipt concessions that exist apply to specific individual work-related expense categories, not to business deductions. A small business still needs to substantiate its claims.

For a deduction to stand up, the records should show the supplier, amount, date, nature of the expense, and its business purpose. A tax invoice is essential for GST credits over $82.50 (GST-inclusive). Bank statements on their own are weak evidence: they prove money moved, not what it was spent on or why.

The ATO requires business records to be kept for at least five years from the date of lodgment, preparation, or completion of the transaction (whichever is latest). Longer retention is sensible where capital assets or CGT may be involved.

What good records look like in practice

• A separate business bank account and a business-only card, used consistently.
• Tax invoices and receipts captured at the time of purchase, ideally via a receipt app attached to the transaction in your accounting file.
• Logbooks, diaries, and floor-area calculations to support mixed-use and home office claims.
• Payroll records, Single Touch Payroll reports, and super payment confirmations.
• Asset registers with purchase date, cost, supplier, and the date the asset was first used or installed ready for use.
• Weekly or monthly bank reconciliations so errors surface while the details are still fresh.

A missing receipt does not automatically kill a deduction. Bank statements, supplier-reissued tax invoices, contracts, emails, order confirmations, and diary notes can together tell a reliable story. The earlier you rebuild the trail, the stronger it is.

Industry-specific deduction notes

Deduction patterns vary by industry. Generic advice misses the categories where each type of business has the most to claim or the most to get wrong.

Trades and construction

Tools, protective clothing, safety gear, vehicle running costs, trailer and plant costs, subcontractor payments, and site-related travel are the core categories. Vehicle claims warrant particular care because utes and vans often do double duty. A current logbook, saved fuel receipts, and a clear distinction between home-to-base travel and site-to-site travel make the difference between a robust claim and one that gets reduced on review. Tool purchases under $20,000 are candidates for the instant asset write-off during 2025-26.

Retail and hospitality

Stock is the big one. Reviewing damaged, expired, or unsaleable stock before 30 June and writing it down to fair value (or off entirely) can reduce taxable profit, but the write-down needs to be genuine and documented. EFTPOS surcharges, delivery platform commissions, packaging, shrinkage, uniforms (where they qualify), signage, and fit-out costs round out the usual list. Fit-out is often capital and needs to go through depreciation, not expenses.

Professional services and consultants

Software is usually the largest missed category: accounting, CRM, design, video conferencing, file storage, email marketing, scheduling, and industry-specific platforms. Professional indemnity insurance, continuing professional development, and industry association fees are commonly deductible. For consultants working from home, the choice between the fixed rate method and the actual cost method often materially changes the deduction.

How business structure affects what you claim

Most core deduction rules apply across structures, but who claims the deduction and how the benefit flows through differs. A sole trader claims deductions in their individual tax return because the business and the individual are the same taxpayer. A company claims deductions in its own return, and distributions to owners are then taxed separately at shareholder level with franking credits. A trust claims deductions against trust income, and net income is distributed to beneficiaries under the trust deed.

The practical issues usually centre on who actually incurred the expense. If a company trades but the director keeps paying work expenses from a personal card without proper reimbursement processes, the deduction trail becomes messy and director loan account issues can arise under Division 7A. If the wrong entity signs the lease, buys the equipment, or receives the invoice, the tax treatment can be compromised.

For a broader look at how sole trader, company, and trust structures change year-round tax outcomes and planning decisions, see our companion article on tax planning for small business.

Get the deductions right the first time

Wiseman Accountants works with small business owners, sole traders, trustees, and company directors across Ipswich and South East Queensland on deductions, BAS, tax planning, and structure reviews. If you want a clear view of what you can and can't claim for your specific circumstances, or a second set of eyes before lodgment, get in touch for a conversation.