23 June 2021
The deductibility of business expenses is always on the ATO radar. So, it is important to understand the correct way to claim business tax deductions as well as exactly what your business can claim.
A business entity can only claim a tax deduction for expenses incurred in running the business or otherwise incurred in relation to deriving assessable income. It is essential to keep invoices so you have records to substantiate any business expenses you intend to claim
Generally, operating expenses such as office stationery and wages are deducted in the year the business incurs them whereas capital expenses such as machinery and equipment are deducted over a longer period if the business does not qualify for the full expensing of depreciating assets (FEDA) or instant asset write-off (IAWO) measures.
Tax deductions on expenditure of a personal nature, such as entertainment expenses (unless subject to FBT), traffic fines, childcare or hobby expenses, are not deductible for business entities.
For example, if a business entity buys a laptop to use exclusively in the business, the full laptop price can be claimed as a deduction (either upfront or depreciated over a number of years). However, if the laptop is also used privately, the deduction will have to be apportioned.
Furthermore, a business entity cannot claim the GST component of a purchase as a deduction if the business is registered for GST and able to claim it as a GST credit on their Business Activity Statement (BAS).
Business entities that prepay expenses of $1,000 or more for goods or services that they will receive in whole or in part in a later income year, will usually need to apportion the expenses over the whole supply or service period if they won’t receive the goods or services in full within 12 months or are not eligible for an immediate deduction.