Small Business Tax Deductions in Australia: The Complete List

For Australian small businesses, understanding which expenses are tax-deductible makes a direct difference to the year-end tax bill. A business with $100,000 in assessable income and $40,000 in legitimately claimed deductions pays tax on $60,000, not $100,000. At the 25% small business tax rate, the difference is $10,000.

This guide covers the complete list of deductible expenses for Australian small businesses (companies, sole traders, partnerships, and trusts), the rules that determine deductibility, the current 2025-26 rates and thresholds, and what cannot be claimed. For individual employee deductions (WFH, uniform, self-education), see our individual tax deductions guide.

The Three Golden Rules for Business Tax Deductions

Before the specific list, three fundamental rules from the ATO determine whether any expense is deductible. An expense must satisfy all three:

Complete List of Small Business Tax Deductions: 2025-26

Key Deduction Categories Explained

Wages, Salaries, and Superannuation

Employee wages and salaries are fully deductible in the year they are paid. The superannuation guarantee at 12% of ordinary time earnings for 2025-26 is also fully deductible, but only in the year the contribution is paid to the super fund, not merely accrued. A super contribution you intend to make before 30 June but which does not clear the fund until 3 July is deductible in the next financial year. Allow at least 3-5 business days for super contributions to clear before the 30 June cut-off.

From 1 July 2026 (payday super): super must be paid with each pay run rather than quarterly. This significantly changes the cash flow management of superannuation businesses as they will need to adjust their payroll systems before the 2026-27 financial year.

Motor Vehicle Expenses

Vehicle expenses for business use are deductible in proportion to the business use. Two methods:

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  Logbook method: requires a 12-week contemporaneous logbook establishing business-use percentage. Claim that percentage of all vehicle expenses: fuel, registration, insurance, servicing, lease payments, depreciation. Most accurate for high-business-use vehicles
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  Cents-per-kilometre method (sole traders and individuals): 88 cents per kilometre for 2025-26, up to 5,000 km. No logbook required, you must be able to show how you calculated the km. This method is not available to companies (companies must use the logbook or actual cost method)

For vehicles used exclusively for business (commercial vehicles, utes, vans, trucks not used for private purposes), 100% of expenses are deductible without apportionment. Passenger cars with mixed use require apportionment.

Home-Based Business Expenses

This is different from the employee WFH deduction (70c/hr fixed rate). Business owners who operate from a home-based office can claim a proportion of actual home costs:

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  Mortgage interest or rent apportioned for the area dedicated to business
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  Electricity and gas apportioned for business use
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  Internet and phone business use proportion
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  Depreciation of office furniture and equipment (business use only)

The apportionment is based on the floor area dedicated to business as a proportion of the total home area, combined with the time used for business if the space has mixed use. The ATO requires the space to be a genuine, dedicated workspace; a corner of the lounge room used occasionally for business does not qualify for home occupancy costs.

The 70c/hr fixed rate is specifically for employees working from home; it cannot be used by business owners claiming home-based business expenses through their business entity.

Instant Asset Write-Off and Depreciation

For the 2025-26 financial year, eligible small businesses (aggregated turnover < $10M using simpler depreciation rules) can immediately deduct assets costing less than $20,000 per asset (net of GST for GST-registered businesses) in the year they are first used or installed ready for use. The asset must be installed and operational by 30 June 2026.

Assets costing $20,000 or more go into the small business pool: a 15% deduction in the first year (regardless of when the asset was purchased), then 30% of the declining balance each subsequent year. See our instant asset write-off guide for current thresholds and the 2026-27 Budget announcement on permanent expansion.

Prepaid Expenses

Small businesses (not medium or large businesses) can prepay up to 12 months of deductible expenses before 30 June and claim the full amount in the current financial year. Expenses that qualify for prepayment include:

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  Business insurance premiums (up to 12 months in advance)
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  Software subscriptions (annual prepayment)
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  Professional memberships and registrations
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  Interest on business loans (up to 12 months)
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  Rent (up to 12 months of business lease)

Timing matters: the prepayment must be made before 30 June and must cover a period no longer than 12 months beyond the end of the following financial year. The prepayment deduction strategy is particularly useful for businesses that have had a high-income year and want to bring forward deductions.

Bad Debts

A business can claim a deduction for a bad debt if:

(1) the amount was previously included in assessable income (i.e., you invoiced for it on an accruals basis)
(2) you have made genuine attempts to recover it
(3) the debt is formally written off in your accounting records before 30 June

A diary note, a formal write-off journal entry in Xero, or a board/director resolution documenting the write-off satisfies the requirement. You cannot write off a debt on 5 July and claim it in the previous financial year.

Entertainment: The Common Mistake

Entertainment expenses are specifically excluded from deductibility under Section 32-5 of the ITAA 1997. This applies regardless of how business-connected the activity appears: a dinner with a client, tickets to a sporting event, a staff Christmas party at a restaurant all are non-deductible entertainment expenses for income tax purposes.

Note that some entertainment may be subject to FBT (Fringe Benefits Tax) if provided to employees, which has its own set of rules and exemptions. The non-deductibility for income tax purposes and the FBT treatment are separate issues. See our FBT service page for how FBT interacts with entertainment costs.

Personal Concessional Super Contributions (Sole Traders and Directors)

Business owners who pay themselves a salary can claim their employer super contributions as a business deduction. But sole traders and directors can also make personal concessional super contributions and claim a deduction in their individual tax return (not the business return). The concessional cap is $30,000 for 2025-26 including employer SG contributions. A Notice of Intent to Claim a Deduction must be lodged with the super fund before the personal return is lodged.

What Small Businesses Cannot Claim

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  Private or personal expenses: personal groceries, family clothing, private travel, personal subscriptions even if paid from a business account
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  Entertainment: client meals, sporting events, Christmas parties at restaurants. A narrow FBT-exempt exception applies for certain employer entertainment (e.g., minor benefits < $300 per employee per occasion)
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  Fines and penalties: ATO late lodgment penalties, FTL penalties, speeding fines, parking fines, and penalties imposed by law are not deductible
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  Capital costs: costs of purchasing a business, acquiring goodwill, and legal fees to establish a company structure; these are capital in nature and not immediately deductible
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  Non-business interest: interest on personal loans used to fund private expenses is not deductible, even if the loan is in the business name
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  Costs of earning exempt income: expenses associated with income that is exempt from tax (e.g., some government grants) are not deductible

Record Keeping for Business Deductions

Every claimed deduction requires written evidence at the time you lodge, not gathered afterwards when the ATO asks. Electronic records (scanned invoices, PDF statements, digital receipts via Dext or Hubdoc) are fully acceptable. Records must be kept for 5 years from the date of lodgment of the relevant return.

For mixed-use expenses (vehicle, home office), you must also keep records of how you calculated the business-use percentage, a vehicle logbook, floor area calculations, or a diary of business hours in a home workspace. Estimates and reconstructed records are not acceptable for these categories.

See our complete ATO record-keeping guide for the full retention schedule by record type.

How The Kalculators Can Help

Maximising legitimate business deductions while avoiding errors that trigger ATO reviews is core to good small-business tax preparation. Our small business tax return service covers sole trader, company, partnership, and trust returns, applying all relevant deductions correctly, reviewing depreciation schedules, and timing claims (super, prepayments, bad debts) to the most advantageous financial year.

For businesses whose bookkeeping is maintained in Xero throughout the year, we can confirm deduction coding is correct at regular intervals rather than discovering errors at year-end. Our bookkeeping service codes transactions to the correct expense accounts throughout the year, ensuring the tax return accurately reflects every legitimate deduction.