Last editedMay 20222 min read
The Australian Taxation Office (ATO) allows businesses to claim deductions for most business expenses. This can cut down on your tax burden and help you maintain a stable cash flow throughout the year. However, the first step is understanding what qualifies as a business expense for tax purposes. So, what are business expenses, and how do tax deductions work? Keep reading to find out.
Business expenses explained
While there are multiple categories of business expense, the general definition includes any expense incurred to support your business.
To get more specific with deductible expenses, the ATO states that they must meet these two rules:
The expense must be for business, not personal use. If the expense involves both business and private use, you can only claim the percentage used for business.
Your business must have records to support the expense claim, such as a receipt or other proof of purchase.
What are business expenses for the self-employed?
The line between business and private use is often blurred for the self-employed, many of whom work out of a home office and use electronics for both purposes. What are business expenses for the self-employed in this context? According to the ATO rules above, self-employed workers can claim the percentage of a purchase used for business as a deduction.
For example, imagine that a freelance contractor purchases a new laptop. The laptop is used to conduct business 75% of the time and for personal purposes 25% of the time. The freelancer would be able to claim 75% of the purchase price as a business expense.
The same holds true for utilities, vehicles, and other hybrid expenses the self-employed might use for both personal and business reasons. Additional business expenses to consider in this category include:
Home office space
Home and contents insurance
Business phone line
What are the categories of business expenses?
Most funds used to support a business will qualify as expenses and should appear as such on your financial statements. Here are the different categories of business expenses, according to the ATO website:
Business travel expenses
Motor vehicle expenses
Workers’ salaries or wages
Workers’ super contributions
Deductions for PAYG payments
Repairs, maintenance, and replacement of assets
General operating expenses
This covers most aspects of daily operations as well as long-term purchases, such as machinery, equipment, and vehicles.
Which expenses are not deductible?
While the business expenses above cover a wide range of costs, there are some that won’t be deductible on your tax return. This includes any expenses primarily incurred for personal reasons. Traffic fines, entertainment costs, and private costs of childcare or clothing are also not business-related and won’t qualify as a deductible expense.
While you might spend time and money on a hobby, any expenses related to this pastime won’t qualify as a business expense. The only way that this will qualify is if you earn enough income that it must be reported to the ATO.
How to claim a tax deduction
Now that we’ve covered the ins and outs of what qualifies as a business expense, how can you claim your deductions? This will depend on your business structure and registration.
Sole traders can use their individual tax return under the ‘business and professional items’ schedule.
Partnerships can use the partnership tax return.
Trusts will use a trust tax return.
Companies will use the company tax return.
The category of expense will also determine the timing of your deduction. Operating expenses include any expenses related to daily business operations and should be reported in the year you’ve incurred the costs. By contrast, capital expenses like machinery and equipment should be reported over longer periods of time due to depreciation and interest.
Accounting software will help you track your small business expenses, ensuring you don’t miss any deductions on your return. When in doubt, it’s always best to consult with a tax professional.
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