Definition
A tax deduction is an expense that can be subtracted from a business’s or individual’s assessable income before calculating the tax owed. The deduction does not eliminate tax, but it reduces the income on which tax is calculated, which lowers the overall tax liability.
How Tax Deductions Work
For a business paying company tax at 25%, a $10,000 deductible expense reduces taxable income by $10,000, resulting in $2,500 less tax payable. The business still spent $10,000 but received $2,500 back through the reduced tax bill, making the effective after-tax cost of that expense $7,500.
What Expenses Are Tax Deductible in Australia?
In Australia, the ATO allows businesses to deduct expenses that are incurred in the course of producing assessable income. This includes costs like employee wages, rent, utilities, professional services, advertising, stock purchases, and depreciation on business assets. The general rule is that the expense must have a direct connection to the business’s income-producing activities.
Non-Deductible Expenses
Some expenses are explicitly excluded from deductibility. Private or domestic expenses are not deductible, even if incurred by a business owner. Entertainment expenses are subject to strict rules under the Fringe Benefits Tax regime. Capital expenditure (spending on long-term assets) is not immediately deductible but is instead claimed as a depreciation deduction spread over the asset’s effective life.
The Instant Asset Write-Off and Record-Keeping
The instant asset write-off is a policy that has periodically allowed eligible Australian small businesses to immediately deduct the full cost of eligible assets purchased during the year, rather than depreciating them over time. The threshold and eligibility criteria have changed several times, so checking the current ATO guidance is advisable.
Good record-keeping is the foundation of legitimate tax deductions. The ATO requires businesses to substantiate their claims with receipts, invoices, bank statements, and other records. A deduction claimed without supporting documentation is at risk of being disallowed during an audit.