In Australia, large and small business owners can claim a tax deduction for many expenses incurred in running their business, as long as they’re directly relevant to the company earning a taxable income and reducing their income tax.
While this might sound simple enough, people underestimate how much they can actually claim, especially when they are unsure which deductions are eligible for business expenses. With the right guidance, business owners can maximise their return, gaining more cash back than initially thought.
In this guide, we show you how to do just that, giving you everything you need to know about your taxable income and obligations and how to use your deductions to increase your refund.
How Does Income Tax Work?
Income tax in Australia is a progressive tax system, meaning that the more you earn, the higher the tax rate you pay on your taxable income. The Australian financial year runs from July 1 to June 30, and tax returns are generally due by October 31 for individuals.
Tax Rates and Thresholds for 2024-25
As of the 2023-24 financial year, the tax rates and thresholds for Australian residents are:
Taxable Income | Tax on This Income |
$0 – $18,200 | 0% |
$18,201 – $45,000 | 19% for each $1 over $18,200 |
$45,001 – $120,000 | $5,092 plus 32.5% for each $1 over $45,000 |
$120,001 – $180,000 | $29,467 plus 37% for each $1 over $120,000 |
$180,001 and over | $51,667 plus 45% for each $1 over $180,000 |
Which Business Expenses Can You Claim Tax Deductions For?
A common misconception is that a tax deduction entails lodging a tax return and getting back the entire amount from the Australian Tax Office (ATO).
Deductions minimise your assessable taxable income and, as a result, you only receive part of the amount for the deductible items. Additionally, tax offsets can directly reduce the amount of tax payable on your taxable income, further lowering your overall tax liability.
To help you navigate these complexities, here are three of the most important things to remember when it comes to tax-deductible expenses:
- These expenses are explicitly needed to earn an income and you are unable to do so without them.
- The expenses are only used for business purposes (not personal or private.)
- You need to keep records for up to five years (like receipts) to substantiate your claim.
Examples of Deductible Expenses on Taxable Income
- Vehicle or transport expenses. (This refers to work-related travel expenses when you need to use your car or other transport in order to do your job. This doesn’t include travelling to and from your workplace every day.)
- Business travel expenses.
- Internet expenses. (If these are used for work and private purposes, you must work out the percentage relevant for work use.)
- Employee superannuation payments, wages and salaries.
- Insurance premiums. (This includes those taken out to protect the loss of income rather than personal premiums such as life insurance.)
- Tools and equipment expenses. (If they cost $300 or less and don’t make up part of a set, you can claim them as an immediate deduction; if they cost over $300, or are part of a set, their decline in value is claimable.)
- Repairs, maintenance, replacement, and
- Depreciating eligible assets and capital expenses. (The Instant Asset Write-Off may also be available to you. As of July 2024, the Instant Asset Write-Off threshold for eligible businesses is $150,000 per asset.)
Which Home Office Expenses Can You Claim Deductions For?
More and more people are choosing the freedom of working from home. Luckily, as this trend continues to rise across the globe, countries are shifting to more generous tax guidelines to suit this change. For example, the following home office expenses now apply for a tax deduction in Australia:
- Business travel expenses
- Occupancy expenses (mortgage interest, council rates, land taxes, house insurance costs)
- Property depreciation (plant and equipment items like desks, chairs, computers)
- Running expenses (electricity, phone, furniture, repairs, cleaning)
Additionally, having private health insurance can affect the amount of Medicare levy surcharge a person is required to pay, depending on their income and the extent of their coverage.
However, it’s important to note that you can’t claim deductions for general things that you’d typically get at an office, but that are also found in a household – like coffee, tea, milk and sugar. Additionally, children and their education also aren’t claimable expenses, for example, if they are home-schooled or are schooling online.
A Note On Working Out Your Own Expenses
You can quite easily calculate your expenses using the fixed-rate or shortcut methods. Working out your home office deductions using the actual cost method is a bit more tricky, so it’s best to consult with a registered tax agent. Additionally, using an income tax calculator can help you accurately calculate your home office deductions by understanding your tax offsets, levies, and effective tax rate.
What Aren’t Tax-Deductible Business Expenses?
A business tax return can only include the costs incurred that are needed in order for the venture to operate. Any expenses related to the following things are not tax-deductible:
- Entertainment expenses
- Expenses used to earn an income that’s not assessable (like a hobby)
- Private or domestic expenses (such as school fees)
- Fines
Additionally, the tax-free threshold allows Australian residents to earn a certain amount before being liable to pay tax, which is part of Australia’s progressive tax system.
When Can You Claim Your Tax Deduction?
Expenses are divided into two groups, and these will typically determine when your deduction can be claimed:
- Operating Expenses – office supplies, stationery, wages
All operating expenses must be claimed during the same financial year they were paid for, and you must have a record of this business expense. Deductions for operating expenses reduce your assessable income, thereby lowering the amount of income tax payable.
- Capital Expenses – equipment, machinery
In the 2023-24 financial year, Australian businesses can claim an immediate tax deduction for the full cost of eligible depreciating assets, such as equipment and machinery, under the instant asset write-off scheme if the asset costs less than $20,000.
How Do You Claim Your Tax Return?
Claiming deductions will differ according to the type of business you operate in:
- Sole trader: deductions are claimable through your individual tax return. A tax professional will file this under ‘business and professional items’ or you can do it yourself using myTax.
- Partnership: deductions are claimable through your partnership tax return.
- Company: deductions are claimable through your company tax return.
- Trust: deductions are claimable through your trust tax return.
Regardless of the type of business, you are obligated to pay tax on various sources of income when claiming deductions.
What Records Do You Need To Keep?
All deductions must have records kept aside. This can be in writing, whether on paper or electronic, and it should be in English – or any other language or form that is easily convertible into English. These records must be kept for up to five years from the date of the transaction – even after you’ve lodged your claim. Keeping accurate records is crucial for calculating taxable income tax, as it ensures that you can correctly determine the tax payable based on different income brackets.
Examples of records that need to be kept include:
- Contracts;
- Income statements/payment summaries from your employer and Services Australia;
- Dividend statements;
- Receipts or invoices for expense claims and repairs, equipment or asset purchases and sales;
- Summaries from managed investment funds;
- Statements from your bank showing the interest you earn during the income year; and
- tenant and rental records.
Why Should You Employ a Tax Professional for Medicare Levy Surcharge?
As small business owners, it’s often assumed that hopping online and lodging your tax return yourself is quicker, but this is almost never true. It can take some time to gather all your information, calculate your deductions and then double (or triple-check) you haven’t made any mistakes or missed important details. In comparison, an appointment with a professional from KNS Accountants takes only one hour.
Additionally, when you lodge your return yourself, you are solely responsible. The ATO doesn’t care how small or accidental a mistake is—you will be held liable for fines, interest, or penalties if they find anything suspicious.
Therefore, the benefit of employing an official agent to look through your assessable income and obligations is ideal for peace of mind. They will also ensure you remain compliant with relevant laws, so you needn’t worry about anything being incorrect. Tax professionals like us can help optimise tax strategies by considering the marginal tax rate, ensuring you take advantage of all possible deductions and concessions.
Finally, you can claim back the services of a tax professional on your next tax returnl, too! It’s a win-win.
Key Takeaways on Taxable Income
Most expenses that are instrumental to the running of your business are tax-deductible, such as internet connection, tools and equipment. Entertainment and other private or domestic expenses aren’t applicable.
Operating expenses must be claimed within the same financial year, and capital expenses are claimable over a longer period. (Unless the capital expense is under $30,000, it will then be claimed as a small business asset write-off.)
The ATO requires records of each business tax deduction, and the best option is to do so in writing. Understanding how much tax is owed based on your taxable income and deductions is crucial for accurate financial planning.
Because this can be a lot to wrap your head around, employing the services of a professional tax accountant can make your tax return process simple and seamless. Contact KNS Accountants today and we’ll discuss many tax savings strategies to help you save money.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
