Top Small Business Tax Deductions to Know: Free 2023 Checklist

Paying taxes is a primary concern for Australian businesses. As noted by business consulting firm PricewaterhouseCoopers (PwC)(opens in a new tab), all large companies in Australia are subject to a federal tax rate of 30% on their taxable income, although small or medium-sized businesses are subject to a reduced tax rate of 25% – the reduced rate applying to companies have an aggregate turnover of $50 million or less.

While a necessary part of doing business in Australia, tax obligations can be a challenge for business owners. Payroll tax, as just one example, has a notable impact on a business’s profitability, particularly for businesses operating under relatively low margins or when under financial stress, according to an industry survey report by the Australian Chamber of Commerce and Industry(opens in a new tab).

But by keeping up with all the tax deductions available for business expenses, even a small company can ensure it’s taking full advantage and lower its tax burden while ensuring its tax filings are compliant. Tax deductions reduce the amount of business income that is taxed, which helps reduce tax burden, particularly among smaller companies.

According to the Australian Taxation Office (ATO)(opens in a new tab), there are three golden rules for what is excepted as a valid business tax deduction:

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

What Are Small Business Tax Deductions?

All businesses have to file tax returns—but how they actually pay taxes depends on how they’re structured. Generally, a small business in Australia can be structured to operate as a company, partnership, trust or sole trader, according to the Australian Securities and Investments Commission (ASIC)(opens in a new tab).

• A sole trader is an individual running a business. It is the simplest and cheapest way to run a business, according to the ATO.
• A partnership is a group or association of people who run a business together and share the income or losses from the business between themselves.
• A company is a separate legal entity with its own tax and superannuation obligations, run by its directors and owned by its shareholders.
• A trust is an obligation imposed on a person or other entity to hold and manage property for the benefit of beneficiaries.

Different business structures have different compliance and legal requirements. In the eyes of the ATO, each structure has its own tax implications.

Regardless of a company’s structure, there are a range of categories in which expenses can be claimed as deductions, according to the ATO(opens in a new tab):

• Motor vehicle expenses
• Home-based business
• Business travel expenses
• Digital product expenses
• Workers' salaries, wages and super contributions
• Claiming deductions for PAYGW payments
• Repairs, maintenance and replacement expenses
• Other operating expenses
• Depreciating assets and other capital expenses

Tax deductions reduce the assessable income of a business, that is, the amount of business income that is taxed. The business owner subtracts all the deductions from the business income (or gross income) to determine the taxable income before figuring out the amount of tax owed.

What are the tax pros and cons of each business structure?

Although deductions can be claimed by all businesses, each business structure comes with its own set of key tax obligations, some of which differ by business type.

Here just a few of the requirements for each kind of business structure, according to the ATO(opens in a new tab):

• Sole traders pay tax on all their income, including from their business. However, they can claim a deduction for any personal super contributions they make after notifying their fund, but not money or assets taken from the business for any other personal use.
• Partnerships and their partners cannot claim a deduction for money they withdraw from the business, and they must lodge an annual partnership return showing all business income and deductions and how its income or losses are distributed to the partners
• Companies must lodge an annual company tax return, and need to issue distribution statements to any shareholders it pays a dividend to. They usually pay income tax by instalments throughout the year via the pay as you go instalments system.
• Trusts must lodge an annual trust tax return, which includes a statement of how its income was distributed. As with other kinds of business structures, trusts may also be required to lodge business activity statements, for example if they are registered for GST.

What Can I Deduct?

The ATO allows businesses to claim a tax deduction for most expenses arising from carrying on the business, as long as they are directly related to earning a tax assessable income. Costs incurred in running a business might include staff wages, marketing and business finance costs.

To be claimed as deductions, expenses need to be for the business, not private use. If expenses are a result of a mix of private and business use, only the portion used for the business is able to be claimed.

Deductions can also be claimed for expenses relating to protecting staff from safety hazards involved in performing their duties, the ATO notes. If a business is run from home, the business portion of some expenses can be claimed, such as mortgage interest and electricity.

However, it is essential that records are kept to prove that the claimed expenses are legitimate. The ATO advises that Australian businesses keep detailed records for all transactions related to their tax and superannuation affairs as they start up, run, sell, change or close down.

The ATO also notes that businesses can't claim the GST component of a purchase as a deduction if they can claim it as a GST credit on their business activity statement.

Other expenses that are not deductible include:

• Entertainment expenses, other than those you provide as a fringe benefit
• Traffic fines
• Private or domestic expenses, such as childcare fees or clothes for family
• Expenses relating to earning income that is not assessable

For more information, the ATO offers webinars(opens in a new tab) about how to claim small business tax deductions.

Top Small Business Expense Tax Deductions

The ATO provides extensive guidance and details(opens in a new tab) on deductible business expenses, which it breaks down by category:

1. Motor vehicle expenses.

Business owners can claim a tax deduction for expenses for motor vehicles – cars and some other types of vehicles such as motorbikes – used in running their business. Vehicle-related expenses that can be claimed include fuel and oil, repairs and services, depreciation, registration, lease payments, insurance premiums and interest on a vehicle loan.

If a motor vehicle is used for both business and private purposes, it’s important to correctly identify and justify the percentage of time that is being claimed for its business use, as the portion of time a vehicle is employed for private use can’t be claimed. One of the best ways to keep track of this is to keep a logbook or diary of vehicle usage.

2. Home-based business.

If some or all of a business is operated from home, there may be tax deductions for home-based business expenses that can be claimed. These may include occupancy expenses such as rent and council rates, running expenses like electricity and expenses related to motor vehicle trips between the home and other locations if for business purposes.

For tax purposes, a home-based business is one where a home is also your principal place of a business. This means the business is run at or from home, and there is a room or space in the home set aside exclusively for business activities. Even if the home isn’t the principal place of business but is sometimes used as a place of business, some expenses may be claimed as deductions.

As noted by the ATO, if your business is entitled to GST input tax credits, you must claim the deduction in your income tax return at the GST exclusive amount.

3. Business travel expenses.

The general rule around business travel is that deductions can be made for expenses if a business owner or employee is travelling for business purposes. Travel-related expenses that can be claimed include airfares, taxi, bus, train or ride-sourcing fares, car hire fees, accommodation and meals if away overnight.

Sole traders or partners in a partnership-structured business who travel for six or more consecutive nights must keep a travel diary or similar document before the period of travel ends, or as soon as possible afterwards. A travel diary can be in any format as long as it contains sufficient detail to justify what is being claimed.

It should be noted that fringe benefits tax (FBT) may apply if the business pays for or reimburses its employees for their travel expenses. Certain exemptions and concessions may apply to reduce an organisation’s FBT liability, for example if an employee is reimbursed for travel expenses to attend a work conference, the cost of which the employee would have been able to claim as an income tax deduction if the company hadn't reimbursed them.

However, businesses will be liable for FBT if an employee travelling work extends their travel for private purposes and are reimbursed by the business for those private costs.

4. Digital product expenses.

There are two types of expenses relating to digital products that can be claimed for tax purposes: operating expenses and capital expenses. Each type of expense determines when a deduction can be claimed. Operating expenses in this context relate to any expenses incurred in the everyday running of the business, such as internet services or cloud storage.

Capital expenses, meanwhile, are either the expense of a depreciating asset or an expense associated with establishing, replacing, enlarging or improving the business. Capital expenses are generally claimed over time, reflecting the asset’s depreciation. Digital product expenses need to be apportioned between business and private use if used for both, with a deduction claimed only for the business portion.

Bear in mind that if you are registered for GST and can claim the full GST credit, you must exclude the GST amount of the asset.

5. Workers' salaries, wages and super contributions.

Salary and wage expenses are considered a type of operating expense. This means that, generally, business owners can claim a tax deduction for the salaries and wages paid to employees and superannuation contributions for employees, although these have to be made on time and to a complying super fund or retirement savings account.

Salary and wage related deductions that can be claimed depend on the type of business. Sole traders are considered business owners and not employees, so they can’t pay themselves a salary or wage. Likewise, partnerships cannot pay partners salaries or wages, because they are not technically employees. However, a company or trust can generally claim a deduction for any salaries and wages paid to workers and business owners who pay themselves a salary.

6. Claiming deductions for PAYGW payments.

Deductions can be claimed for payments to workers if the business has complied with pay as you go withholding (PAYGW) and reporting obligations. Deductions can be claimed from payments such as salary or wages, directors’ fees or labour hire costs, but only if the business has complied with the PAYG withholding and reporting requirements for the respective payment.

Deductions can also be made for payments given to contractors, providing an invoice has been issued to the business by the contractor that quotes the contractor’s ABN and that there are no reasonable grounds to believe that the number given is not the contractor’s ABN. Deductions for various payments may be lost if the business doesn’t comply with its PAYG withholding and reporting obligations for the respective payments.

The ATO suggests that it is always a good business practice to check the ABN on the invoice and to check if the contractor is registered for GST if they have charged GST.

7. Repairs, maintenance and replacement expenses.

Expenses relating to repairs, maintenance or replacement of machinery, tools or premises used to produce business income can be claimed as tax deductions, as long as they are not capital expenses – money spent to purchase assets such as plant and equipment.

An applicable repair is one that restores the efficiency of function of the asset in question without changing its character. However, you can't claim capital expenses, such as substantial improvements to an item or property – for example, installing a new ceiling, repairs made to machinery, tools or property immediately after you purchase or acquire them – this is because the price paid reflects the item’s condition.

Allowable expenses include painting, maintaining plumbing, repairing electrical appliances and repairing machinery. Moreover the property does not need to be owned by the business or the business owner for these expenses to be claimed.

It should be noted that businesses can claim tax deductions for depreciating assets and other capital expenses, and certain improvements to land and fixtures on land are considered depreciating assets in the eyes of the ATO.

Moreover, you can claim a deduction over a number of years for the construction expenses of buildings and other capital works – such as structural improvements – that are used for producing income.

This class of deduction is available for select capital works, specifically new buildings or extensions, alterations or improvements to an existing building, structural improvements such as sealed driveways, fences and retaining walls, and earthworks for environmental protection, such as embankments.

8. Other operating expenses.

Generally, most operating expenses associated with running a business in the same year they are incurred can be claimed as a tax deduction. General business operating expenses include purchases of trading stock, including delivery charges, bad debts, bank fees and charges and tender costs.

Operating expenses from employing people include salary, wages and super, fringe benefits, protective clothing, travel expenses and losses due to misappropriation of money by an employee. Business premises operating expenses include electricity, rent or lease of office space, rates, internet service fees and landline telephone calls and rental. Tax-related operating expenses include registered tax agent fees and bookkeeper wages.

9. Depreciating assets and other capital expenses.

Tax deductions can be claimed for depreciating assets and other capital expenses, with some businesses also able to claim an immediate or accelerated deduction for the business of the cost of an asset using one of the allowable tax depreciation incentives, as outlined by the ATO(opens in a new tab).

Depreciating assets may include things like machinery, motor vehicles, furniture or computers. These assets can include items that are already personally owned by a business owner and have been brought into the business or those purchased by the business to produce assessable income. Generally, a deduction can be claimed for the decline in value of depreciating assets each year over the effective life of the respective asset.

The ATO advises business owners to ensure they keep accurate and complete records of all expenses they want to claim deductions for.

Manage Your Tax Deductions with NetSuite

It’s time to say goodbye to that old shoebox stuffed with receipts and records. NetSuite's cloud-based suite of solutions including ERP, accounting and more makes it easy to track expenses, ensure compliance and manage fixed assets.

Automation can greatly ease record keeping for small businesses. For example, accounts payable (AP) automation solutions can reduce errors related to manually typing in invoice headers, automatically preserving tax information for the five years the ATO recommends(opens in a new tab) all relevant records are kept, and automatically send out invoices.

Consider creating a budget that covers these five elements:

• Fixed costs
• Variable costs
• One-time costs
• A cash flow statement
• Profits (what’s left after all of the above are factored in)

We also recommend building in some savings for unexpected events and consulting with an adviser who can help you develop a financial plan suitable for small businesses.

Finally, get help when you need it. Andrew Mills, director of tax policy and technical at The Tax Institute and former ATO Second Commissioner, claims(opens in a new tab) that the true cost of compliance with Australia’s tax law is likely over $50 billion.

It’s not surprising then that most small businesses pay an external tax practitioner/accountant to handle their taxes. There are even more benefits here for most businesses, with tax-related operating expenses arising from registered tax agent fees and bookkeeper wages being deductible.

Small Business Tax Deductions FAQs

• Do I need documentation for business tax deductions?
• Always keep receipts, bank statements, invoices, payroll records, etc. to support any expense deduction. For example, keeping a travel diary is recommended for all businesses and it is compulsory for sole traders and partners in a partnership to record overnight business travel expenses.
• What are expenses that you cannot deduct under any circumstances?
• There are some expenses that are not deductible, such as entertainment expenses (other than those you provide as a fringe benefit), traffic fines, private or domestic expenses like childcare fees or clothes for family members, expenses relating to earning income that is not accessible and the GST component of a purchase if it can be claimed as a GST credit on a business activity statement.
• How long should I keep records?
• In most cases, businesses are generally required to keep financial records and written evidence of expenses for five years from the date the business lodges the relevant tax return. Records may include income statements, payment summaries and receipts.

Disclaimer: The information contained in this article is general in nature and should not be considered accounting advice, nor should it be used as such. Click here for ATO guidance on business tax deductions(opens in a new tab).