ATO guidance: Business tax deductions

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What you can claim

You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.

There are 3 golden rules for what we accept as a valid business 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.

For example, if you buy a laptop and you only use it for your business, you can claim a deduction for the full purchase price. However, if you use the laptop 50% of the time for your business and 50% of the time for private use, you can only claim 50% of the amount as a deduction.

You can’t claim the GST component of a purchase as a deduction if you can claim it as a GST credit on your business activity statement.

Remember you can also claim deductions for expenses related to protecting staff from safety hazards involved in performing their duties. For example, infection from COVID-19 or other transmissible diseases. This may include hand sanitiser, sneeze or cough guards, face masks, gloves, other personal protective equipment, antibacterial wipes and other cleaning supplies that are used for business purposes.

For more information, watch our Claiming small business tax deductions webinar.

You may provide your employees with benefits you do not usually provide because of COVID-19. This includes paying for items that allow your employees to work from home. Find out more about COVID-19 and fringe benefits tax and FBT, COVID-19 tests and the otherwise deductible rule.

If you need assistance with understanding some of the tax and super terms, see our definitions.

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
the GST component of a purchase if you can claim it as a GST credit on your business activity statement.

Remember, if you earn PSI your deductions may be limited.

When you can claim your deduction

The type of expense – operating expense or capital expense – determines when you can claim your deduction. Generally, you can claim:

operating expenses (such as office stationery and wages) in the year you incur them
capital expenses (such as machinery and equipment) over a longer period – however, under the current temporary full expensing rules, you may be eligible to claim an immediate deduction for the business use portion of depreciating assets you acquire for your business.

Find out more about claiming a tax deduction for depreciating assets and other capital expenses. You can also refer to the Guide to depreciating assets 2022 to help you.

For operating expenses, you generally incur the expense when you have a legal obligation to pay for the goods or services. An invoice is not necessary for an expense to have been incurred, but you do need a record of the expense.

If you use an item in your business for only part of a year, you generally need to restrict your claim to the period it was used for the business.

Claiming a deduction for a prepaid expense

There are different rules for expenses you pay in advance – that is, expenses you incur now for goods or services you will receive (in whole or in part) in a later income year.

Where the expense is $1,000 or more, you will usually need to apportion (or distribute) the expense across the whole supply or service period if you:

won’t receive the goods or services in full within 12 months
are not eligible for an immediate deduction.

Find out more about Deductions for prepaid expenses 2022.

How to claim your tax deduction

How to claim your business deductions depends on your business type:

Sole trader – claim the deductions in your individual tax return in the ‘Business and professional items’ schedule, using myTax or a registered tax agent.
Partnership – claim the deductions in your partnership tax return.
Trust – claim the deductions in your trust tax return.
Company – claim the deductions in your company tax return.