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Are Merchant Fees Tax Deductible?

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Last editedOct 20212 min read

If your business accepts credit card payments, you’re likely paying merchant fees. As you start to draw up a list of tax-deductible business expenses, you might be wondering – are merchant fees tax deductible in Australia? Here’s a breakdown of the rules surrounding merchant fees and taxes.

What are merchant fees?

Merchant fees group together all the fees associated with a credit card transaction. Credit card companies set standard fees that issuing banks must charge each time the card is used. These fees might include a flat per-transaction amount, as well as a small percentage of the sale value.

Retailers will also pay their merchant services provider a fee for processing card payments. These providers use a range of different fee structures. Some prefer flat rates, while others use a tiered system.

Do debit cards charge merchant fees?

Merchant fees are higher for credit card transactions, but there is also some cost involved with processing debit cards. Processing fees typically cost 1 – 1.5% for Visa or Mastercard credit card transactions, compared to only 0.5% for a Visa or Mastercard debit transaction.

Understanding business tax deductions

The Australian Tax Office (ATO) understands that it costs money to make money. When businesses spend money to generate tax-assessable income, they’re usually entitled to a tax deduction. Operating expenses include any money spent during the day-to-day running of your business, such as rent, utilities, and fuel. You can then claim a tax deduction for these expenses in the same income year they’re incurred, provided you have kept accurate records. However, note that only business-related expenses qualify for deduction – not personal.

Are merchant fees tax deductible in Australia?

Because they can be classified as operating expenses, the answer to ‘are merchant fees tax deductible’ is usually yes. Your business pays fees to both the card issuer and card network processor to accept credit card payments. These fees are allowed as tax deductions according to the ATO. One thing to keep in mind is that merchant fees include several different small charges, which you should add together and include as business expenses:

  • Per-transaction fee

  • Flat acceptance fee

  • Authorisation fee

  • PCI compliance fee

How does merchant fees GST work?

How are merchant fees taxed? When financial institutions charge retailers a merchant fee, this commission uses the GST (Goods and Services Tax) inclusive price of the sale value. The processor then deducts its merchant fee before paying the retailer. As a retailer, you can claim an input tax credit for the GST included in merchant fees you’ve paid.

For example, imagine that a business makes $110,000 of credit sales and owes $10,000 in GST. The retailer is charged a merchant fee of 0.55% by their financial institution, which means they’ll be charged $605 including $55 of GST. The financial institution will deduct the $605 from the $110,000, which includes applicable merchant fees GST.

How to claim merchant fees as an expense

As with any expenses, you must keep detailed and accurate records of your expenditures on merchant fees. You can then claim them as expenses in the same tax year that these fees were paid. The type of return you use will depend on how your business is structured. For example, sole traders will use the ‘business and professional items’ schedule on their individual tax return. Companies will use their company tax return.

Ultimately, though merchant fees are tax deductible it’s still best to compare processors to make sure you’re not overpaying. It’s worth shopping around to find the best rates and cut expenses from the start.

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