Understanding Australian Tax Deductions for Small Businesses

Running a small business in Australia involves many responsibilities, including tax obligations. Knowing the available deductions can significantly reduce taxable income, improving financial sustainability.

This guide explains small business tax deductions, including simplified depreciation, GST concessions, capital gains tax exemptions, and more. 

Understanding these benefits ensures businesses maximise their tax returns while complying with the Australian Taxation Office (ATO).

Let’s Get Straight to the Point 

For those short on time, here’s a quick summary of the key tax deductions available to Australian small businesses:

• Instant Asset Write-Off – Assets under $20,000 can be fully deducted in 2024 and 2025, reducing to $1,000 from 2026.
• Trading Stock Rules – No adjustments are required if stock value fluctuates by less than $5,000.
• Pre-Paid Expenses – Insurance, rent, and memberships can be deducted in advance.
• GST Simplifications – Businesses can pay GST only on received payments and use quarterly instalments.
• Capital Gains Tax (CGT) Concessions – Special exemptions for small businesses selling active assets.
• Work-Related Deductions – Travel, advertising, bad debts, insurance, and home office expenses are deductible.
• Super Contributions – Employers must contribute to super, and business owners can claim deductions on personal contributions.
• Avoiding Deemed Dividends – Loans from a company to shareholders must be properly structured to avoid additional tax liabilities.

What Counts as a Small Business?

The ATO defines a small business with an annual turnover of less than $10 million. However, the threshold for certain tax concessions is $2 million.

It is important to note that turnover is calculated based on aggregated income, meaning revenue from connected or affiliated businesses must also be considered.

Claiming Business Expenses as Tax Deductions

It is essential to understand what business expenses can be claimed. The general rule is that expenses must be directly related to earning business income.

1. Instant Asset Write-Off & Depreciation Rules

• The $20,000 instant asset write-off applies until 30 June 2025.
• From 1 July 2026, this threshold will be reduced to $1,000.
• Larger purchases can be depreciated over time using the simplified depreciation pool.

Examples of eligible purchases:

• Technology (computers, security systems, EFTPOS machines)
• Office furniture
• Vehicles (subject to the annual depreciation limit of $69,674 in 2025)

2. Pre-Paid Expenses

Expenses paid in advance for the following financial year can be claimed immediately. This includes:

• Business insurance
• Lease and rental payments
• Memberships and subscriptions

3. Trading Stock Adjustments

If your trading stock changes in value by less than $5,000, you are not required to report the fluctuation.

4. GST Simplifications

• GST is only payable when payment is received, making cash flow management easier.
• Eligible businesses can opt for quarterly GST instalments.
• Full GST credits can be claimed upfront if business items are used privately, with adjustments made later.

Capital Gains Tax (CGT) Exemptions

When a small business sells an asset, such as a shopfront, warehouse, factory, or equipment, Capital Gains Tax (CGT) may apply. 

However, the ATO offers several CGT concessions to reduce or eliminate the tax burden on eligible businesses. These exemptions help business owners retain more profit from asset sales while staying compliant.

Who Qualifies for CGT Exemptions?

To be eligible for small business CGT concessions, the business must:

• Have an annual turnover of less than $2 million OR
• Have net business assets (including affiliates) valued under $6 million.

Additionally, the asset must have been actively used in the business rather than a passive investment.

1. 15-Year CGT Exemption

• If a business owner is 55 years or older, is retiring, and has owned the asset for at least 15 years, they may be completely exempt from CGT.
• This is the most generous CGT concession, as the entire capital gain is tax-free.

2. Retirement Exemption

• Businesses can exclude up to $500,000 of capital gains from tax, even if the owner is not retiring.
• If the owner is under 55, the exempt amount must be paid into a superannuation fund to qualify.
• This concession can be used multiple times across different asset sales as long as the lifetime cap of $500,000 is not exceeded.

3. 50% Active Asset Reduction

• If a business asset has been actively used, the taxable capital gain can be reduced by 50%.
• This can be used alongside other CGT exemptions, meaning businesses may reduce CGT significantly when selling assets.
• This reduction applies to the 50% CGT discount available to individuals and trusts.

4. CGT Rollover Relief

• The CGT can be deferred if the proceeds from a business asset sale are reinvested in a new business asset within two years.
• This means tax is not payable at the time of sale but will instead apply when the replacement asset is eventually sold.
• This strategy is useful for businesses that want to reinvest in growth without an immediate tax hit.

Why CGT Concessions Matter

Using CGT exemptions when selling business assets can save small business owners thousands in tax. Proper planning ensures maximum benefits, so it is highly recommended that they consult a tax professional before selling an asset.

Avoiding Tax Issues: Shareholder Loans & Deemed Dividends

Withdrawing money from your business without proper structuring can result in ATO penalties. The ATO treats unstructured loans to shareholders as taxable unfranked dividends, meaning the full amount is subject to personal income tax.

How to Stay Compliant

1. Repay Loans by the Tax Deadline – If fully repaid before the company’s tax return is due, the loan won’t be taxed as a dividend.
2. Declare as a Dividend—To reduce your tax liability, classify the withdrawal as a franked dividend instead of a loan.
3. Use a Formal Loan Agreement – If repayment isn’t immediate, a Division 7A-compliant loan must include:
   • ATO-set interest rate
   • Regular repayments over 7 years (or 25 years if secured by property)

Consequences of Non-Compliance

• The ATO treats the loan as personal income, leading to higher tax bills.
• No franking credits apply, making it a costly tax mistake.
• The business may face audits for improper distributions.

Best Practices

• Keep personal and business finances separate.
• Maintain clear documentation of transactions.
• Consult a tax professional before withdrawing company funds.

Following these steps allows business owners to access company funds legally without triggering unnecessary tax liabilities.

Common Tax Deductions for Small Businesses

Many everyday business expenses can be deducted from asset purchases and CGT concessions.

1. Advertising & Marketing Costs

• Online and offline advertising expenses are fully deductible.
• Sponsorship costs can be claimed, except when classified as entertainment.

2. Bad Debts

• If a client fails to pay an invoice, the unpaid amount can be claimed as a bad debt deduction.

3. Borrowing Expenses

• Fees such as legal and valuation costs can be deducted from securing a business loan.

4. Business Travel

• Travel for work-related purposes, including flights, accommodation, and meals, is deductible.
• Personal expenses mixed with business trips are not deductible.

5. Car Expenses

• Vehicles used solely for business purposes are fully deductible.
• Sole traders and partnerships must keep detailed logbooks for mixed-use vehicles.

6. Fringe Benefits & Employee Perks

• Expenses for work-related perks (e.g., corporate gym memberships) are deductible.
• Employers must pay fringe benefits tax (FBT) for some perks.

7. Home Office Expenses

• If part of your home is used for business operations, you can claim expenses such as:
  • Utilities (electricity, internet)
  • Office furniture
  • Depreciation on equipment

8. Insurance Costs

• Workers' compensation insurance
• Public liability insurance
• Fire, theft, and business interruption insurance

9. Maintenance & Repairs

• The cost of fixing business equipment, painting, and general repairs can be deducted.
• Renovations or improvements do not qualify as repairs.

10. Superannuation Contributions

• Employers must contribute to employees' super funds.
• Self-employed individuals can claim personal super contributions.

11. Wages & Salaries

• Businesses can claim employee wages as a deduction.
• Sole traders cannot claim personal salary as a deduction.

12. Tax Management Costs

• The cost of hiring an accountant, bookkeeper, or tax agent is deductible.
• Fees paid for lodging tax returns are also included.

13. Telecommunications & Internet

• Business-related phone and internet bills can be partially or fully deducted.

14. Theft & Fraud Losses

• Losses from employee fraud or theft can be claimed.

Keeping Records: The Golden Rule

The ATO requires businesses to keep financial records for at least five years to ensure compliance and maximise tax deductions. Proper record-keeping helps avoid penalties and tax audits.

What Records Must Be Kept?

• Invoices and receipts – Proof of business expenses and income.
• Bank and credit card statements – Tracks all business transactions.
• Payroll and super records – Wages, tax declarations, and super contributions.
• Vehicle logs – Required for car expense claims.
• Debt and asset registers – Details of outstanding amounts and depreciating assets.

Paper or Digital?

Records can be paper or electronic but must be clear, accessible, and backed up. Accounting software simplifies management and ensures compliance.

Why It Matters

• Avoids ATO fines and audits for missing records.
• Prevents loss of deductions due to poor documentation.
• Improves financial tracking for tax and cash flow management.

Regularly updating records and using digital tools or a bookkeeper helps businesses stay compliant and organised.

Conclusion

Tax deductions provide significant financial benefits for Australian small businesses. Business owners can reduce their tax liability and improve profitability by understanding what can be claimed and how to stay compliant.

If you are unsure about your business’s tax position, speaking with a qualified accountant or tax advisor is always smart.