Essential Tax Deductions for Australian Small Business Owners

Written by

Jason Robinson

FCPA, Director & Co-Founder

Enthusiasm so infectious you’ll accidentally start a business after one chat.

Operating a small business in Australia can be a wild ride, but in reality, it can be manageable with the comprehension of tax concerns. Did you know that many small business owners ignore significant tax deductions that might save them thousands of dollars? According to PricewaterhouseCoopers (PwC), small and medium-sized businesses benefit from a reduced tax rate of 25%, applicable to companies with an aggregate turnover of $50 million or less. In this article, we’ll explore the essential tax deductions for Australian small businesses and provide tips on maximising your savings.

What Are Small Business Tax Deductions?

Simply put, small business tax deductions are expenses that you can write-off against your business’s income for tax purposes, effectively lowering the amount of tax you need to pay.

Think of it this way: if your business earned $100,000 in a year and you had $20,000 in eligible deductions, you’d only be taxed on $80,000. It’s like getting a discount on your tax bill!

The type of business structure you choose can affect your tax situation. Let’s break it down:

What Small Businesses Can and Cannot Deduct?

Now, let’s go into the details of tax deductions. What costs may you properly deduct to lower your tax liability? What costs can’t be claimed? Let us break it down.

What can businesses deduct?

According to the Australian Taxation Office (ATO), businesses are generally able to deduct most expenses incurred in the process of earning their income, including those related to their geographic location. Here are some common deductible expenses:

1. Operating expenses: Rent, utilities, insurance, and office supplies.
2. Employee expenses: Salaries, wages, and superannuation contributions.
3. Travel expenses: Costs related to business trips, including accommodation and meals.
4. Vehicle expenses: Fuel, repairs, and depreciation for vehicles used for business purposes.
5. Home-based business expenses: A portion of your home running costs if you work from home.

Remember the golden rules when obtaining tax deductions:

• It’s all about business: The spending must be directly tied to your company’s operations and not for personal use
• No combining business and pleasure: If an expense serves both business and personal needs, you can only claim the portion that is used for business.
• Keep the receipts: Always provide proof to back up your claims.

Expenses that are not deductible

Now, let’s talk about what you can’t claim. It’s important to understand these restrictions in order to avoid future mistakes and fines. The ATO is pretty clear about certain expenses that don’t make the cut:

1. Entertainment expenses: Client dinners may be extravagant, but they remain non-deductible for tax purposes.
2. Traffic fines: Breaking the law doesn’t pay, even at tax time.
3. Private or domestic expenses: Your personal subscriptions don’t count as business expenses 
4. Expenses relating to earning income: You can’t claim expenses for income that isn’t taxable.
5. Non-compliant payments: If you haven’t met your PAYG-W (Pay As You Go Withholding) or reporting obligations, you can’t claim the non-compliance penalty fee as an expense.
6. GST component: If you can claim the GST component as a credit on your business activity statement, you can’t deduct it as an expense.

9 Types of Tax Deductions for Small Businesses

According to the ATO, small businesses claimed over $100 billion in deductions in the 2019-2020 financial year. That’s a lot of savings! But here’s the kicker: many small business owners are still missing out on deductions they’re entitled to. Are you one of them?

It’s always a good idea to consult with a professional tax advisor like Future Advisory to ensure you’re claiming everything you’re entitled to while staying on the right side of the ATO. Let’s dive in:

#1 Motor Vehicle Expenses

When you’re travelling across town for a client meeting, you can claim these expenses. You’ve got two options: the cents per kilometre method or the logbook method. 

#2 Home-based business

You can claim a portion of your home’s running costs, including electricity, internet, and even mortgage interest. The ATO’s shortcut method allows you to claim 80 cents per hour worked from home, making it easier to get some cash back.

#3 Business travel expenses

Travel costs are deductible. This includes accommodation, meals, and transport costs. Just remember to keep those receipts!

#4 Digital product expenses

In this digital age, we’re all spending more on software and online tools. Whether it’s your accounting software, design tools, or the fancy project management app, these costs are generally deductible.

#5 Workers’ salaries, wages, and super contributions

If you’ve got employees, their salaries, wages, and retirement contributions are all tax-deductible. This even applies to your own super contributions if you’re self-employed.

#6 Claiming deductions for PAYG-W payments

PAYG-W payments you make on behalf of your employees are deductible.

#7 Repairs, maintenance, and replacement expenses

These costs are deductible. Just remember, repairs or upgrades are treated differently, so check with a pro if you’re unsure.

#8 Other operating expenses

This is the catch-all category for those miscellaneous business expenses. Think stationery, postage, and team outings. If it’s for your business, there’s a chance you can claim it. 

#9 Depreciating assets and other capital expenses

Bought some new equipment for your business? While you can’t deduct the full cost immediately, you can claim depreciation over time. It’s like the gift that keeps on giving—year after year.

Now, I know what you’re thinking—”Sounds good in theory, but how will I be able to monitor this?” That’s where Future Advisory comes in. 

We’re not just bean counters; we’re your partners in navigating the complex world of small business taxes. We can help you identify and manage these deductions efficiently, ensuring you’re not leaving money on the table.

Ready to take your business to the next level? Contact us today for a consultation!