Claiming Business Expense Deductions in Australia: What Counts and What Doesn't
The basic principle of claiming expenses
Australian tax law lets a business deduct expenses connected to earning assessable income. The core idea: the expense must genuinely be for a business purpose — not a personal expense reclassified as a business one.
The ATO checks three questions: (1) Did the expense actually occur? (2) Was it incurred to earn assessable income? (3) Is there evidence (an invoice, a receipt)? If the answer to all three is yes, the expense is usually accepted.
Expenses usually accepted
Day-to-day operating costs:
- Rent for premises
- Electricity, water, phone, and internet related to the business
- Stationery and consumable supplies
- Materials and stock
- Advertising and marketing
- Bank and merchant fees
Staff costs:
- Employee wages
- Superannuation for employees
- Workers compensation insurance
Professional costs:
- Accountant and tax agent fees
- Solicitor fees for business matters
- Consultant fees related to the business
Business insurance: Premiums for public liability, professional indemnity, and property insurance related to the business.
Courses and training: Courses that directly improve your skills for your current work in the business — not courses to move into a different field.
Loan interest: Interest paid on a loan used to buy business assets or to fund business operations.
Expenses usually refused
Purely personal expenses: Personal meals, everyday clothing (apart from uniforms or protective gear), and the cost of travelling from home to your usual place of work.
Fines and penalties: Fines from the ATO, traffic fines, or other legal penalties — these cannot be deducted.
Initial capital investment: Money spent to buy long-term assets (land, buildings, large equipment) cannot be deducted in full in one year — they are spread over time through depreciation.
Deductions before you have income: Many expenses incurred before the business starts earning income have special rules — they are not automatically deductible like ordinary operating costs.
Grey areas to watch
Working from home: If you use a room at home for the business, part of your home costs (electricity, internet, rent) may be deductible. But the ATO has specific rules on how to calculate this and what evidence to keep — it is not “the business uses 50% of the house, so I deduct 50%”.
Mixed use (vehicle, phone, internet): If a car, phone, or laptop is used for both business and personal purposes, you can only deduct the business portion. The ATO requires you to work out a reasonable percentage and keep records to support it.
Meals and entertainment: Strict limits apply. Most entertainment costs (client functions, business meals) are restricted as deductions and are often subject to Fringe Benefits Tax if they involve employees. Ask your accountant before claiming.
Client gifts: There are limits and conditions — not every gift is fully deductible.
Records are the evidence — no records, no deduction
The ATO can ask for evidence of any deduction, usually within a few years of when you lodge. Invoices and receipts are the basic evidence — without them, the deduction is refused.
Good habit: keep every invoice (email or scan, not just a printout that fades), note the business purpose where it is not obvious, and classify expenses monthly rather than leaving it to year-end.
The ATO sets the record-keeping period — check it at ato.gov.au/business/record-keeping.