Understanding Tax Deductions

As a business owner, you can claim tax deductions for various expenses incurred in running your business. This not only helps to lower the amount of income you are taxed on but also ensures that you are maximizing your eligible deductions. 

It is essential to understand which expenses you can claim, the optimal timing for claiming them, and the necessary records to maintain to substantiate your claims. By doing so, you can effectively manage your taxes while optimising your financial position.

How tax deductions work

When filing your tax return, you can claim a wide range of business expenses as tax deductions, reducing your taxable income. 

Considering these deductions, the Australian Taxation Office (ATO) employs a specific formula to calculate your taxable income.

Assessable income – tax deductions = taxable income

The majority of the income generated from running your business is considered assessable income, meaning it is subject to taxation.

Expenses you can claim as a deduction

You can deduct the majority of expenses associated with operating your business. However, it's essential to ensure:

• They directly relate to your income.
• The expense was for business, not private use.
• For combined business and personal expenses, only claim the portion used for your business.
• You have records to back your claim.

You may be able to claim deductions for certain business expenses, including:

• Motor vehicle expenses
• Home business expenses
• Business travel expenses
• Salaries, wages, and super contributions of workers.
• Repair, maintenance, and replacement costs.
• Depreciating assets and capital expenses

As a contractor or consultant, your personal services income can impact the deductions you can claim. If you need help with claimable deductions, consult your accountant, business adviser, or the ATO.

Records you need to keep for deductions

To claim business tax deductions, you must keep records substantiating your claims. These records should explain all transactions and comply with tax law requirements.

• In writing, whether on paper or electronically
• In English or a readily convertible form
• Keep records for five years (some may require longer retention)

Tax deductions offer significant financial advantages for individuals and businesses, helping to lower taxable income. By identifying eligible expenses and adhering to tax laws, taxpayers can reduce their tax liability and keep more of their earnings.