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What makes a business expense tax deductible?

Posted 20 Jun '25

What makes a business expense tax deductible?

You’re a business owner, so you’ll incur a fair number of business expenses over the course of your average week. Costs for client entertaining, petrol to put in your car and toner for the office printer to name just a few.

But are any of these expenses’ deductible against your taxable income?

The Australian Taxation Office (ATO) recently published some wild claims that business owners had attempted to make when claiming for business-related expenses:

A mechanic tried to claim an air fryer, microwave, 2 vacuum cleaners, a TV, gaming console and gaming accessories as work-related. The claim was denied as these expenses were personal in nature.
A truck driver tried to claim swimwear because it was hot where they stopped in transit and they wanted to go for a swim. The claim was denied as these expenses are personal in nature.
A manager in the fashion industry tried to claim well over $10,000 in luxury-branded clothing and accessories to be well presented at work, and to attend events, dinners and functions. The clothing was all conventional in nature and was not allowed.

Needless to say, none of these expense claims cut the mustard for the ATO.

So, what expenses CAN you claim?

Business expenses the ATO allows you to claim

Most expenses you incur in the everyday running of your business can be claimed, but to qualify, the expense must be directly related to earning your assessable income.

This can include day-to-day operating expenses, purchases of products or services for your business and even certain capital expenses, such as the cost of depreciating assets.

The ATO has three golden rules that an expense must pass to be tax deductible:

The expense must have been for your business, available as an allowable deduction and not for private use.
If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
You must have records to prove it.

As a rule of thumb, if your expense is in any way related to personal usage, then it’s not tax deductible as a business expense.

For example, NONE of the following expenses can be claimed with the ATO:

Entertainment expenses, other than those you provide as a fringe benefit.
Traffic fines, even if it was during business travel.
Private or domestic expenses, such as childcare fees or clothes for your family.
Expenses relating to earning income that is not assessable.
Payments for which you have not met your PAYG withholding or reporting obligations – non compliant payments.
The GST component of a purchase if you can claim it as a GST credit on your business activity statement.

Still unsure?

If you’re unsure whether a cost qualifies as a business expense, or whether you can make a claim to the ATO, do come and talk to our team.

We’ll help you review your operational expenses, so you can maximise the tax deductions and lighten the load on your cashflow.