Description: Find out which tax deductions Australian small businesses can claim, what’s changed for 2025–26, and the records that make a claim hold up at tax time.
Tax deductions in Australia let small business owners reduce their assessable income by subtracting eligible business expenses, meaning you pay tax on a smaller amount, not on what you invoiced. The rules are clear in principle. The mistakes happen in practice.
Most small business owners we work with across Melbourne don’t lose deductions because they didn’t earn them. They lost them because the records didn’t hold up. A missing tax invoice. A vague bank statement description. A personal vs. business split that was never documented. The deduction is only as solid as the bookkeeping behind it.
This guide covers what counts as a tax deduction, what doesn’t, what’s changed for the 2025–26 financial year, and the records that make a claim defensible if the ATO asks questions later.
What is a tax deduction?
A tax deduction is an eligible business expense you can subtract from your assessable income to work out what you pay tax on. Lower taxable income means a lower tax bill.
The Australian Taxation Office uses a simple formula: assessable income minus tax deductions equals taxable income. If your business invoiced $200,000 and you have $40,000 in legitimate deductions, you’re taxed on $160,000, not the original $200,000.
Two things people often misunderstand.
A tax deduction reduces your taxable income, not your tax bill directly. A $1,000 deduction at a 30% tax rate saves you around $300, not $1,000.
Tax deductions and tax write-offs are the same thing. The terms get used interchangeably in conversation, articles, and ATO guidance. There’s no functional difference.
How do tax deductions work in Australia?
Three conditions have to be true for a business expense to qualify as a tax deduction. The ATO is direct about this:
You spent the money yourself, and it wasn’t reimbursed. The expense relates directly to earning your business income. You have a record to prove it.
Sounds straightforward. In practice, the third one is where most claims fall over. We see it constantly. A business owner knows the expense was legitimate, but six months later there’s no invoice, the bank statement description is too vague to identify the supplier, and the deduction quietly disappears.
If the expense is partly business and partly personal (phone bill, car, home internet) you can only claim the business portion. You also need to show how you worked out that portion. A reasonable estimate based on a representative usage log is acceptable for most things. A percentage pulled out of thin air at year-end isn’t.
Difference between a tax deduction, tax offset, and tax credit
These three get used loosely, but they do different things.
A tax deduction reduces your taxable income before tax is calculated.
A tax offset (sometimes called a rebate) reduces the tax you owe, dollar-for-dollar, applied after the tax is calculated.
A tax credit is a payment already made toward your tax, usually PAYG withholding from employees’ wages, or franking credits attached to dividends, that gets credited against your final tax bill.
Practical version: deductions shrink the income you’re taxed on. Offsets and credits shrink the tax itself. Common offsets include the Seniors and Pensioners Tax Offset (SAPTO), the Low Income Tax Offset, and the Private Health Insurance offset. Eligibility for each is narrow and changes regularly, so check current rules before assuming you qualify.
What business expenses can you claim?
Most costs involved in running a business are deductible, provided they meet the three conditions above. The common categories:
Work-related expenses
Tools, equipment, computers, software subscriptions, and anything else used directly in earning income.
Vehicle and travel expenses
Car running costs (using either the cents-per-kilometre or logbook method), parking and tolls for work travel, public transport for genuine work trips, and airfares for business travel. Travel between home and your regular workplace doesn’t count. That’s commuting, and it’s not deductible.
Uniform and laundry deductions
Clothing with a registered business logo, occupation-specific uniforms (chef’s whites, hi-vis), and protective clothing. Plain conventional clothing isn’t deductible, even if you only wear it to work.
Depreciating assets
Anything with a useful life of over a year. Office furniture, machinery, equipment. Smaller assets can usually be written off immediately under the instant asset write-off (covered below). Larger assets get depreciated over their effective life.
Home office and working from home expenses
Covered separately below, because the rules changed in 2023 and again in 2024.
Business operating costs
Rent, utilities, insurance, software, marketing, professional services (your accountant, your bookkeeper), and bank fees on business accounts.
Personal super contributions
After-tax super contributions can be claimed as a deduction, up to the concessional contribution cap, if you’ve lodged a Notice of Intent with your fund before lodging your return.
Training and self-education
Courses, conferences, and professional development that maintain or improve your current income-earning skills. Retraining for a new career generally doesn’t qualify.
Memberships, fees and donations
Professional association fees, union fees, and donations of $2 or more to organisations with Deductible Gift Recipient (DGR) status.
How to claim working from home tax deductions
Two methods, and the right one depends on your setup.
Fixed rate method
70 cents per hour for the 2024–25 and 2025–26 income years. The rate covers electricity, gas, internet, mobile and home phone, stationery, and computer consumables, all bundled in. You can’t then claim those items separately. You can still claim depreciation on assets like computers and office furniture on top, plus repairs and maintenance.
Actual cost method
Work out the work-related portion of each individual expense, with records for each one. More paperwork, but usually a bigger claim if you’ve got a dedicated home office, heavy-use equipment, or a high-energy setup.
The 70-cent rate suits most hybrid workers. The actual cost method tends to win for full-time home-based workers and sole traders running their business from home.
One trap worth flagging. From 1 March 2023 onwards, the ATO no longer accepts a four-week representative diary for the fixed rate method. You need a record of every hour worked from home for the entire income year, kept at the time, not reconstructed afterwards. We’ve seen otherwise valid claims thrown out because the records were estimated at year-end.
The instant asset write-off: what’s available before 30 June 2026
The instant asset write-off lets eligible small businesses claim the full cost of an asset in the year it’s first used or installed, instead of depreciating it over several years.
For 2025–26:
- The threshold is $20,000 per asset (excluding GST if you’re registered).
- Your business needs an aggregated annual turnover under $10 million.
- The asset must be first used or installed ready for use between 1 July 2025 and 30 June 2026.
- The threshold applies per asset, so multiple assets under $20,000 can each be written off.
- Both new and second-hand assets qualify.
After 30 June 2026, the threshold is currently legislated to drop to $1,000 unless the government extends it again. That’s a significant difference. A $15,000 piece of equipment installed before 30 June 2026 means a $15,000 immediate deduction. The same asset bought a week later would only get a $1,000 immediate deduction, with the rest depreciated over the years.
The thing that catches owners out: ordering the asset isn’t enough. It has to be installed and operational by 30 June. We’ve seen tradies and trade businesses lose the entire deduction because their equipment was sitting in a warehouse waiting on installation when the financial year closed.
Common eligible assets:
- Vehicles used for business (business-use portion only)
- Tools and trade equipment
- Computers, laptops, monitors, office furniture
- Commercial kitchen equipment, point-of-sale systems
- Software, which qualifies as an asset
Assets costing $20,000 or more go into the small business depreciation pool. 15% in the first year, 30% each year after.
What expenses are not tax-deductible
Some expenses look deductible at a glance and aren’t:
- Commuting between home and your regular workplace
- Parking fines, speeding fines, and other penalties
- Conventional clothing, even if you only wear it for work
- Most gym memberships, unless extreme fitness is a genuine requirement of your job
- Coffee, snacks, and household groceries while working from home
- Watches and smartwatches, except for very specific occupational uses (a nurse’s fob watch, for example)
- Personal grooming, including haircuts, makeup, and skincare
- Entertainment, including most staff functions and Christmas parties (FBT rules apply separately)
- Anything reimbursed by your employer or another party
A useful test: if you’d buy or do this thing whether you worked or not, it’s probably personal.
Records you need to keep for tax deductions
Tax deduction records have to meet a few standards under Australian tax law:
- In writing, paper or digital
- In English, or readily convertible to English
- Kept for five years from the date you lodged the return claiming the deduction
- Detailed enough to identify the expense, date, amount, supplier, and business purpose
A bank statement line saying “Bunnings $342” isn’t a record. The tax invoice is.
What we typically see hold up under ATO review:
- Tax invoices for purchases (for items over $82.50, the invoice needs the supplier’s ABN, the GST amount where applicable, and a description of what was bought)
- Logbooks for vehicle claims using the logbook method (kept for 12 continuous weeks every five years, or sooner if business use changes significantly)
- Hour-by-hour records for working from home claims, kept throughout the year
- A clear paper trail for the business-use percentage on mixed-use items
- Notice of Intent forms lodged with your super fund before claiming personal super contributions
Cloud accounting systems make most of this manageable. Xero, MYOB, and QuickBooks all have receipt capture built in. Properly categorised transactions throughout the year mean nothing has to be reconstructed at tax time.
The mistake we fix most often: receipts saved in a folder or photo album, never matched to transactions, never categorised. They’re records on paper, but useless without context. The reconciliation work is what makes them defensible.
How to reduce taxable income in Australia
A few common levers small business owners can pull, all of them straightforward.
Bring forward eligible expenses before 30 June
Prepay subscriptions, insurance, or professional services where it makes commercial sense. The expense becomes deductible in the current financial year.
Time asset purchases
If you’re going to buy equipment anyway, buying and installing before 30 June 2026 means accessing the $20,000 instant asset write-off. After that date, the threshold drops sharply unless extended.
Make personal super contributions
Eligible after-tax contributions can be claimed as a deduction, up to the concessional contribution cap. You need to lodge a Notice of Intent with your super fund before lodging your tax return. This one’s often missed.
Write off bad debts before 30 June
If a customer debt is genuinely uncollectable, writing it off before year-end means the bad debt is deductible in that year.
Review your depreciation schedule
Old assets no longer in use can sometimes be written off. Worth a check at year-end.
None of this is aggressive tax planning. It’s just timing. Making sure the deductions you’ve earned land in the right financial year, with the records to back them up.
Where bookkeeping fits in
Tax agents lodge the return. Accountants advise on strategy. Bookkeepers do the work that makes both possible.
Most missed deductions we see at tax time aren’t strategic failures. They’re record failures. A receipt that wasn’t captured. A category that was wrong. A personal expense run through the business account, or a business expense run through the personal one. By the time the tax return is being prepared, the trail’s gone cold.
Clean books, kept current, mean the deductions are already there when your accountant lodges. No scramble. No reconstruction. No deductions were quietly written off because the evidence couldn’t be found.
This is the upstream piece most businesses underinvest in, and the one that usually pays for itself the first time tax planning works the way it’s supposed to. If your records have been pushed back month after month, outsourcing your bookkeeping is usually the first step toward getting it under control.
If you’re not confident your bookkeeping will hold up at tax time, that’s usually the right time to bring someone in. We work with Melbourne small businesses to keep books accurate, BAS lodged on time, and the records ready for whoever’s preparing your return. Contact us to talk through your setup.
Frequently asked questions
What tax deductions can I claim without receipts?
The ATO allows up to $300 in total work-related expenses without written evidence, provided the claims are reasonable, and you can show how you calculated them. Beyond $300, written evidence is required for each individual claim. A few items have separate rules. Laundry expenses up to $150 don’t need receipts, but still need a basis for the calculation, and small expenses under $10 (up to $200 total) can be recorded in a diary instead of via individual receipts.
Is a tax write-off the same as a tax deduction?
Yes. The terms are used interchangeably in Australia. A tax write-off, a tax deduction, and a deductible expense all mean the same thing: an eligible business expense that reduces your taxable income.
How far back can the ATO audit my tax deductions?
For most individuals and small businesses, the ATO has up to two years from the date of assessment to amend a return. For more complex situations or where fraud is suspected, the period extends to four years or longer. You’re required to keep records for five years, regardless, which is the safer benchmark to plan around.
Can I claim my home internet and phone if I work from home?
Yes, but how you claim depends on the method you use. The 70-cent fixed rate method bundles internet, phone, and several other running costs into a single hourly rate. You can’t then claim them separately. The actual cost method lets you claim the work-related percentage of each bill, but you need usage records to back up the split.
What’s the difference between depreciation and the instant asset write-off?
Depreciation spreads the cost of an asset over its effective life, with a portion claimed each year. The instant asset write-off lets eligible small businesses claim the full cost upfront in the year the asset is installed, provided it’s under the threshold ($20,000 per asset for 2025–26). The total deduction is the same. The difference is timing, and timing matters for cash flow.
Do I need a tax agent or a bookkeeper?
Most small businesses need both, doing different things. A bookkeeper keeps your records accurate throughout the year, lodges BAS, and runs payroll. A tax agent prepares and lodges your tax return, gives tax advice, and handles ATO matters that fall outside BAS scope. The bookkeeper produces the records that the tax agent works from. When the books are clean, the tax return is straightforward, and the deductions are claimable.
