What makes a business expense tax deductible?

The ATO recently published some ‘wild claims’ that business owners had tried to make for business expenses. But what CAN you claim and what CAN’T you claim? We have the answers.

What Business Expenses Are Tax Deductible? What the ATO Will and Will Not Allow

As a small business owner, it is likely you incur a range of costs each week – from petrol and printer supplies to client hospitality and business-related purchases. However, not all business expenses are treated equally by the Australian Taxation Office (ATO) when it comes to tax deductibility.

Common Mistakes the ATO Has Rejected

The ATO recently shared examples of claims that were disallowed because the expenses were found to be personal in nature:

A mechanic attempted to claim an air fryer, microwave, two vacuum cleaners, a television, a gaming console and gaming accessories. These were not related to business activities and were therefore denied.
A truck driver tried to claim swimwear because they wished to go swimming during a break. The claim was rejected as the expense was not work-related.
A fashion industry manager claimed over $10,000 in designer clothing and accessories to appear well-presented at events. The ATO found the items to be conventional clothing and therefore not deductible.

What Expenses Are Tax Deductible?

Most expenses incurred in the ordinary course of running your business can be deductible, provided they meet the ATO’s criteria. To be eligible, the expense must be directly connected to generating your business income.

This can include operational costs, purchases of goods and services for your business, and certain capital costs such as depreciable assets.

The ATO’s 3 Requirements for a Deductible Expense

To qualify as a tax deduction, an expense must meet all of the following:

It must have been incurred for your business – not for personal use.
If the expense has both business and private elements, only the business-related portion can be claimed.
You must keep adequate records – such as receipts or invoices – to substantiate the expense.

If an expense includes any personal component, the private portion is not tax deductible.

Expenses You Cannot Claim

The following are examples of expenses that are specifically excluded from tax deductibility:

Entertainment costs, unless they are provided as a fringe benefit.
Traffic or parking fines, even when incurred during business travel.
Private or domestic expenses, such as childcare fees or family clothing.
Costs associated with income that is not assessable.
Payments where you have not met your pay-as-you-go withholding or reporting obligations.
The Goods and Services Tax (GST) component of a purchase, if you are entitled to claim it as a GST credit through your activity statement.

Need Guidance?

If you are unsure whether a cost qualifies as a business expense, please contact us.

We can help review your business expenses to ensure you are maximising tax deductions, with the aim of improving overall cash flow.