Small Business Tax Deductions in Australia: What to Claim

Most of what a small business spends to keep trading is deductible. The catch is treating a deduction as money back. Small business tax deductions in Australia reduce taxable income, so each dollar claimed saves your tax rate on that dollar, not the dollar itself. For a sole trader with taxable income between $45,001 and $135,000, $1,000 of deductible spending saves $320, the 30% rate plus the 2% Medicare levy, and still costs $680. For a company on the 25% base rate entity rate it saves $250. A purchase made in June only for the deduction leaves the business $680 poorer than not buying it.

The rules below come from the ATO’s own pages: the three tests every claim has to pass, the main groups of deductions, the list the ATO won’t accept, which year a cost lands in, and the records behind it all.

How small business tax deductions work

A business can claim most of what it spends in running the business, provided the cost relates to earning its income. The wording on the ATO’s business deductions page is that you can claim “most expenses you incur in carrying on your business if they are directly related to earning your assessable income”. It sets out three golden rules for a valid claim:

1. It was for the businessThe expense must have been for your business, allowable as a deduction, and not for private use.
2. Only the business shareWhere an expense is a mix of business and private use, you claim only the business portion.
3. You can prove itYou must have records to back the claim.

For anything also used privately, the business share has to be worked out on a fair and reasonable basis, with a record of how you got there. The ATO’s own example is a laptop used half for the business: half the cost of a repair to it is deductible.

GST sits outside the deduction for a registered business. You can’t deduct the GST in a purchase if you can claim it as a GST credit on your BAS, so a registered business claims the credit and deducts the rest of the price.

Where the deductions go depends on the structure. A sole trader claims them in the business and professional items schedule of their personal return. A partnership, trust or company claims them in its own return.

What a deduction is actually worth

A deduction comes off taxable income, so the tax it saves is your rate multiplied by the amount claimed. For a sole trader, business profit is taxed at the individual sole trader tax rate brackets, and the 30% band runs from $45,001 to $135,000 in both 2025-26 and 2026-27. With the 2% Medicare levy on top, a deduction in that band saves 32 cents in the dollar. A company paying the 25% base rate entity rate saves 25 cents.

On lower income the saving is smaller, and on income under the $18,200 tax-free threshold there’s no tax for a deduction to save. So the useful question about any purchase is whether the business needs it. The deduction then reduces what it costs, by your rate.

The main deductions for a small business

Most claims fall into the groups below, and the business-share rule applies to every one of them.

Running costs

Day-to-day operating costs are deductible in the year you incur them. For a small business that typically means:

• rent on business premises
• advertising and marketing
• business insurance, such as public liability and professional indemnity
• software subscriptions, domain names and website hosting
• tax agent, accountant and bookkeeping fees
• annual fees to bodies such as ASIC

Penalties and late fees charged by a statutory body are not deductible, even where the annual fee they relate to is. Your accountant’s fee for a return is deductible in the year you pay it, so the fee for preparing the 2025-26 return, paid in 2026-27, is an accountant fee deduction on the 2026-27 return.

Staff wages and super

Wages paid to employees are deductible, and so is super paid on time to a complying fund for employees and some contractors. Both carry a condition on the ATO’s wages and super page: you must have met your PAYG withholding and reporting obligations for each payment. A payment made without the withholding it required isn’t deductible.

Payday Super changed one rule from 1 July 2026. Super guarantee charge you pay is now deductible, though penalties and interest that build up after an SGC assessment still aren’t.

The owner is the exception. A sole trader is the owner of the business, not its employee, so a wage paid to yourself is, in the ATO’s words, “a distribution of profit”, and it isn’t a deduction. Partners are in the same position. A company or trust can deduct wages it pays you, through payroll with tax withheld.

Your own super, as a sole trader

With no employer paying your super, a personal contribution is deductible in your own return. It needs paperwork first: you must give your fund a notice of intent to claim and receive its acknowledgment before you claim the deduction. The notice has to reach the fund by the earlier of the day you lodge your return and the end of the following income year, so lodging first and sending the notice afterwards loses the deduction.

Vehicles

A vehicle’s running costs and its purchase price are both deductible, on the business-use share. How you work out the claim turns on whether the vehicle is a car for tax purposes (designed to carry under one tonne and fewer than 9 passengers) and who owns it. A sole trader with a car can use cents per kilometre, at 88 cents for 2025-26 and 91 cents for 2026-27 on up to 5,000 business kilometres, or a logbook. A one-tonne ute or a van is claimed on actual costs, and so is every vehicle a company or trust owns. Driving between home and your place of business is private use unless you run a home-based business.

Claiming a ute through the business brings two more rules that catch people at purchase: the $20,000 write-off tests the vehicle’s full price, not the business share, and a company ute used privately can attract FBT.

Working from home

A home-based business can claim running costs, such as electricity, internet and phone, without a room set aside for the business. The ATO’s home-based business page gives a fixed rate of 70 cents per hour worked from home for 2025-26, covering electricity, gas, internet, phones, stationery and computer consumables. It needs a record of every hour worked from home across the whole year, such as timesheets or a diary, so an estimate doesn’t qualify.

Occupancy costs, such as rent, mortgage interest, council rates and house insurance, are only claimable where part of the home has the character of a place of business, and the PSI rules can rule them out. A place of business at home can also bring capital gains tax when the home is sold, even if no occupancy costs were claimed.

Equipment and other assets

Equipment, tools, computers, phones, furniture and vehicles are depreciating assets, and their cost is claimed as they decline in value. A small business using the simplified depreciation rules can instead write off the business share of an asset in one year under the instant asset write-off, provided its full cost is under $20,000.

The $20,000 limit is permanent from 1 July 2026, though some guides still say it drops to $1,000. An asset costing $20,000 or more goes into the small business pool, which deducts 15% in the first year and 30% of the balance each year after.

The business share applies here too. The ATO’s example is an asset used 60% for business, where 60% of its decline in value is deductible. An asset you owned privately and bring into the business counts from the day business use starts, not from the day you bought it. For a trade business, tradie tax deductions applies these rules to tools, gear and the ute.

Setting-up costs

Costs of setting up a business are generally claimed over five years. A small business can claim two kinds immediately instead:

• professional advice and services for the set-up, such as advice on the structure, setting up legal arrangements or business systems, viability advice and due diligence, and a business plan
• fees to Australian Government agencies for establishing the business or its structure, such as the fee for registering a company

The rule doesn’t cover buying assets for the business, which are depreciated or written off.

What you can’t claim

Some costs are out whatever their connection to the business. The ATO’s own list:

• entertainment, unless you provide it as a fringe benefit
• traffic fines
• private or domestic costs, its examples being childcare fees and clothes for your family
• costs of earning income that isn’t assessable
• payments where you didn’t meet your PAYG withholding or reporting obligations
• the GST in a purchase, where you claim it as a GST credit
• general interest charge and shortfall interest charge incurred from 1 July 2025

That last one affects anyone on an ATO payment plan: interest charged from 1 July 2025 isn’t deductible, where it was before. Land under business premises isn’t deductible either.

Personal services income brings its own limits. If the PSI rules apply to your income, they restrict the deductions you can claim against it, including rent and mortgage interest on a home office. The private share of anything stays out, however the expense is paid for.

When you can claim it: timing and prepayments

An operating expense is deductible in the year you incur it, which the ATO treats as the point you have a legal obligation to pay. An invoice isn’t needed for that, but a record is. Assets are claimed over time unless written off. For a business on a 30 June year, that makes 30 June the line every claim is measured against, and the small business tax calendar sets out the dates that follow it.

Paying ahead pulls next year’s cost into this year, and a small business gets a concession for it. Under the ATO’s 12-month rule for prepaid expenses, a small business can claim a prepayment immediately where both:

• the prepaid period is 12 months or less, and
• it ends by the last day of the next income year.

The ATO’s own example is the trustee of a small business trust prepaying rent on the business premises:

Stretch the period past 12 months and the concession goes. The ATO’s other example is a company paying $15,000 on 31 May 2026 for advertising across 395 days. It claims $1,139 in 2025-26 and $13,861 in 2026-27, in proportion to the days falling in each year.

Two kinds of prepayment skip the rules altogether. Anything under $1,000, before GST credits, is deductible when incurred, and so is a payment a law requires in advance, such as a vehicle registration. A prepayment still costs the cash: the 12-month rule changes the year of the deduction, not the 32 or 25 cents it saves.

Records behind every claim

The third golden rule needs records that outlast the return. Keep business records for five years from when the record was made or the transaction finished, whichever is later. A company also answers to ASIC, which requires records kept for seven years. Records for a depreciating asset are kept while you own it and for five years after you sell or dispose of it.

Each record should show the date, the amount, what was bought, the GST and what it was for. How long to keep tax records varies by type, and the variations are set out in the ATO’s record-keeping overview.

Getting the deductions right on your return

Most deductions are settled by what was recorded during the year: the hours log for working from home, the vehicle logbook, the receipts, the super fund’s acknowledgment. At tax time the work is putting each claim in the right place and the right year.

A sole trader tax return is $330 with your personal return included, with home office, tools and one vehicle logbook inside that fixed fee, and $440 if you’re registered for GST. Fixed fees assume tax-ready records, and a spreadsheet, or your bank transactions plus a list of expenses, is a fine place to start.