8 common tax-deductible expenses
Do you know which of your business expenses are deductible for tax purposes? There is no point in paying more tax than you need to, yet you always want to make sure you’re not claiming more than you should!
I’ve put together a list of common tax-deductible expenses for businesses registered in Australia. As this area can be complex the following list is for information purposes only.
Common tax-deductible expenses
1. Entertainment
This is a complex area so you need to be very clear on what your business is allowed to claim. Generally anything that would have a hint of “entertainment” would not be deductible. It is best to get tax advice on these areas as it involves Fringe Benefits Tax which is a whole other story.
Your business can claim:
· alcohol as a business expense only if it is provided to a client, employee or contractor unopened for later consumption (i.e. a gift) and it is a minor fringe benefit (i.e. less than $300).
· your employee and clients share of food or drinks (including an alcoholic drink with dinner) at a restaurant or coffee shop as a business expense only if they are both on business travel. You must have the receipt and include details of who was there and the reason for the meeting. If you’re simply taking a client out for lunch as a social occasion that isn’t claimable.
· food or drinks provided at a working lunch on your premises or incidental to work.
Coffee with a client during a client meeting is not deductible and if you’re a sole trader, you cannot claim the cost of any food or drinks unless they are related to an overnight business trip.
2. Gifts
Gifts to clients are deductible. Gifts to staff may be deductible and may also be subject to Fringe Benefits Tax so this is a bit complex. If they are minor (less than $300) and infrequent they would be exempt from Fringe Benefits Tax but not deductible.
3. Home office
If you’re running your business from your home there are certain expenses that you’re able to claim if you can show that your “office” has the character of a place of business. This means that it's clearly identifiable as a place of business e.g., a separate room, and that its used exclusively for running your business.
It mustn’t be able to be easily used for personal purposes, so the corner of your dining room table would not qualify.
These expenses and the amount of expense you can claim is based on:
· the percentage of area that your office takes up in your home. That percentage can be applied to mortgage interest, rent, rates and insurance
· the percentage of usage of your office in relation to the rest of your home. That percentage can be applied to electricity, gas, cleaner
Both situations, a separate office and the corner of the dining room table, can claim the following:
· the percentage of usage in relation to the rest of your total usage. That percentage can be applied to internet, phone and depreciation of assets such as a desk.
You cannot claim tea, coffee, toilet paper etc as these are too personal in nature.
If there are items that you use both for your business and for your personal life, the costs of these need to be apportioned e.g., you use your laptop for your business as well as for gaming or doing personal activities.
You can use any method to calculate the percentage of use, so long as it's reasonable and you keep a record of your calculations. For example, keeping a diary of the business use for 4 weeks, then applying that percentage to the whole year.
4. Uniforms and clothing
You can deduct the costs of protective clothing, uniforms and costumes. They need to clearly identify your workplace e.g., chef whites. If they can be worn outside of the workplace e.g., a standard white shirt worn by a bartender, they aren’t deductible.
Compulsory work wear is deductible and must clearly identify the employer e.g., there is a logo woven into the fabric. If the bartender above is wearing a white shirt with a logo of the catering company that they work for, and that shirt is compulsory for all events, then it becomes deductible.
Conventional clothes aren’t usually considered to be protective clothing. Jeans worn by a farmer wouldn’t be deductible but overalls may be.
Sunglasses aren’t considered to be protective clothing unless they are safety rated sunglasses.
5. Motor vehicles
Only the business proportion of the expenses for a motor vehicle can be claimed.
It’s important to keep a log book of both business travel, with details of what the travel was for, and personal travel. How long you need to keep a log book for will depend on the amount of expenses you’re claiming.
6. Seminars and conferences
Seminars and conferences are only deductible if they relate to maintaining, or increasing, the knowledge or skills you need to earn your current income.
For example, a sole trader who provides kinesiology services can only claim a kinesiology session with another practitioner if that session included training for that particular type of kinesiology. Simply having a session to see how another person does their sessions isn’t deductible.
Similarly doing a course to learn remedial massage for your personal interest won’t be deductible. But if you offer remedial massage as part of your services then completing a course to expand your knowledge is deductible. There must be a clear connection between the education and how it improves your current business.
7. Travel
For non-motor vehicle travel, such as trains, planes or hotel costs, these are only deductible if the reason for the travel is related directly to the business and there is no personal time included.
If you’re going to Melbourne for a two-day conference then all travel and accommodation is deductible if you travel directly there and back. However, if you add on a three-day holiday after the conference you would need to apportion the costs between business and personal.
If you go to a conference that has two days of technical and business training and then one day of sightseeing and relaxing activities you would need to apportion the expenses 2/3 business 1/3 personal.
8. Photo shoot for marketing purposes
The cost of your photographer, makeup artist, hairstylist and any props (if bought purely for the photoshoot) would be deductible. Any clothes bought for the photoshoot would only be deductible if they were a costume or a uniform and couldn’t be worn as everyday clothing.
It's important to know what your tax obligations are so you can manage your tax well, and to understand the true cost of your business so you make better decisions about which expenses to incur.
As you can see you need up to date knowledge of tax legislation in order to correctly work out the expenses you can claim.
If you want specific advice on your business expenses then book a 20-minute call with me to discuss how I can provide that support for you. Book your call BELOW