The number one question we get asked is “what business costs are tax deductible?” The simple answer is – money spent on costs to run your business, that are not capital (for example, land buildings, plant and equipment) or personal are tax deductible. But it is not that simple. Australia has over 6,000 pages of tax legislation! Here, in 2,000 words is our very brief summary of tax deductible business expenses.
Capital expenditure & the instant asset write-off
Often within our tax legislation there is an a “except for” clause and the introduction of the instant asset write-off for some businesses, after the GFC in 2008 is an example. The threshold has been changed over the years and the program extended. The most recent iteration of the instant asset write-off is from 6 October 2020 until 30 June 2022 businesses that turnover less than $5 billion can write-off the full cost of new depreciable assets. Businesses that turnover less than $50 million will also be able to instantly write-off the cost of second hand assets. The key word here is depreciable. If the asset is not subject to depreciation under the existing rules, for example land and building, then the instant asset write-off will not be available. Sadly, the unlimited asset write-off is not available for motor vehicles. The deduction will be capped at $59,136 (the luxury car limit/depreciation cost limit).
At 30 June 2022, the instant asset write-off limit will reduce to $1,000 for businesses with a turnover of less than $2 million, unless they change the rules again. For all other businesses, there will be no instant asset write-off under any threshold.
Private portion of business expenditure
Personal expenses paid for by your business aren’t tax deductible, however you can claim a deduction for the business portion of the expense that relates to your business. Some examples of these types of expenses and the records you need to keep (to support your business use percentage), in addition to your receipts and invoices are:
|Expense||Records to be kept|
|Motor vehicle:||Logbook for a 12 week period recording all business and personal trips. A new logbook to be kept every 5 years, when business usage changes or when a new vehicle is purchased.|
|Travel:||Travel diary outlining business and personal activities undertaken.|
|Mobile phone:||Diary for a four-week representative period in each income year.|
|Home office:||See below|
You need to keep records
To claim a deduction for any expense you need to be able to substantiate what the expense was. The records you need to keep could include receipts, tax invoices, and diaries to record small cash expenses. If you bought something for your business, but sometimes use it for private use, you also need to keep records showing how you worked out how much of its use is private. All records are required to:
- explain all transactions
- be in writing (electronic or paper)
- be in English or in a form that can be easily converted
- be kept for five years (some records may need to be kept longer)
You might like to check out what we have to say about using Xero and Hubdoc, for recordkeeping, in our blog 10 apps and programs that make business easier here.
Tax deductibility of GST
If you are registered for GST, all expenses that contain GST are to be claimed excluding GST. If you aren’t registered for GST, you will claim the GST inclusive cost of the expense.
With the general provisions of what makes an expense tax deductible dealt with, here’s a deeper dive into some of the specific expenses you can claim a deduction for:
Salaries, wages, allowances and bonuses paid to employees, including yourself if you are trading as a company or trust, are tax deductible, as are the associated PAYG withholding payments made on your activity statements. However rewards given to employees for a job well done that are not monetary, for example a holiday, weekend away, fancy meal or a car (including one that is salary packaged) are subject to the Fringe Benefits Tax (FBT) rules and are taxed at 47%.
Super is only tax deductible if it is paid before the 28th day after the end of a quarter. This means that the receiving super fund has allocated the super payment to the employee’s account by:
|Quarter end||Due date|
Failure to pay by the due dates, not only results in loss of tax deductibility but also there is the non-deductible payment of the super guarantee charge.
Stock is tax deductible when:
- It is sold
At the end of each financial year you need to record the value of stock on hand as an asset in the financial statements and tax return of your business.
If you’re a small business with an aggregated turnover of less than $10 million a year, and you estimate that the value of your trading stock changed by no more than $5,000 in the year, you don’t have to:
- conduct a formal stocktake
- account for the changes in your trading stock’s value.
Your estimate will be considered reasonable if either:
- you maintain a constant level of stock each year and have a reasonable idea of the value of your stock on hand
- your stock levels fluctuate but you can make an estimate, based on your records, of the stock you have purchased.
If the difference in your trading stock’s value during the year varied by more than $5,000, use the general trading stock rules.
Stock can be valued at:
- Cost price
- Market price
- Replacement value
Stock taken for your own use
If you take an item of your business’s trading stock for your private use, you need to:
- account for it as if you had sold it
- include the value of the item in your business’s assessable income.
There are two ways you can value this stock. You can either:
- keep records of the actual value of goods you take from your trading stock for your own private use and report that amount, or
- use the amounts we provide as estimates of the value of goods you have taken (updated annually by the ATO).
Advertising & marketing
Generally speaking the cost of advertising and marketing your business are tax deductible. However there are expenses you could potentially argue are advertising and marketing for which the ATO (Australian Taxation Office) has a different view. Examples of these expenses are:
Wrapping your car in business advertising
While the cost of the wrap is 100% business advertising, and therefore deductible, the same cannot be said for the running costs of your car. The usual rules apply to the deductibility of car expenses whether the car is wrapped or not. As soon as your car is parked in your driveway or garage at home it is assumed it’s available for private use and you need to keep a logbook as outlined above to support your business use so the appropriate adjustments can be made at tax time.
Lunches and dinners attended by clients, potential clients or referral partners
Lunches and dinners attended by clients are tax deductible if business is being discussed and the food is for sustenance while the meeting is taking place. However once you add alcohol or other entertainment into the mix it is not, and any for any employees attending the Fringe Benefits Tax (FBT) implications will need to be considered. The more elaborate a meal is, the more likely that it will be entertainment (for example tickets to a fund raising or gala event, even the staff Christmas party).
If you operate some or all of your business from your home, you may be able to claim tax deductions for home-based business expenses in the following categories:
- occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)
- running expenses (such as electricity, phone, decline in value of plant and equipment, furniture and furnishing repairs, cleaning)
To claim occupancy expenses you must have a separate room in your home that is solely for business use. For example you cannot claim occupancy expenses if you have a corner set aside in your lounge room or in your spare bedroom where guests occasionally stay. The proportion of the occupancy expenses you can claim are the percentage of your home office floor area compared to the whole floor area of your home.
You cannot claim a proportion of the occupancy costs of your laundry, garage, kitchen, bathroom or other space that may have some business use. You also can’t claim home occupancy costs if you receive personal services income (for example if you are a contractor who earns more than 80% of your income from one source).
To claim running expenses you can use the same method for claiming occupancy expenses for electricity, cleaning etc. For phone and internet you will need to keep a diary for one month of all usage to establish your business proportion. Plant, equipment and furnishings are subject to the capital expenditure rules.
When you sell your home, you may have to pay capital gains tax (CGT). It’s important to keep the right records to work out your deductions or CGT. CGT is calculated on the percentage of your floor space of your home used for business over the period of time you conducted business in your home. For example if 10% of your home, that you owned with your partner, is your home office floor space and you had your business for 10 years of the 20 that you lived there then you would be taxed on this portion of the gain: 10% x 10 years/20 years x 50% (your share) x (50% CGT discount) = 1.25% So if the gain was $500,000 then the taxable portion would be $6,250 and assuming a marginal tax rate of of 37% the tax would be $2,312.50.
Fringe Benefits Tax (FBT)
FBT is a whole other topic, but worth a mention. Here is what you need to know:
A fringe benefit is a ‘payment’ to an employee, but in a different form to salary or wages.
For FBT purposes, an employee includes a:
- current, future or past employee
- director of a company
- beneficiary of a trust who works in the business.
Examples of fringe benefits include:
- allowing an employee to use a work car for private purposes
- giving an employee a discounted loan
- paying an employee’s gym membership
- providing entertainment by way of free tickets to concerts
- reimbursing an expense incurred by an employee, such as school fees
- giving benefits under a salary sacrifice arrangement with an employee.
The value of a fringe benefit is taxed at 47% and benefits of under $300 that are minor and infrequent are exempt from the tax. You will receive a tax deduction for the value of any benefits paid as well as FBT paid.
What you can’t claim
There are some expenses that are not deductible, such as:
- entertainment expenses
- traffic fines
- private or domestic expenses, such as childcare fees or clothes for your family
- expenses relating to earning income that is not assessable, such as money you earn from a hobby
- the GST component of a purchase if you can claim it as a GST credit on your business activity statement.
- Some expenses that are usually allowed to business, however if you earn Personal Services Income (PSI) they are not
Does that make sense?
What you can and can’t claim as a business expense can be very complex when you get down to the nitty gritty. If you have any doubts about what you can and can’t claim, discuss it with your accountant and they will guide you as to the correct treatment and how to minimise any FBT consequences.
If you would like specific advice tailored to your business and circumstances, Accounting Heart offers affordable service packages where you can work with Sonia one-on-one to help you get with your business. Book your FREE Discovery Call to find out more.
Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and / or other advice as may be appropriate having regard to their particular circumstances.