Deductions
General deductions
General deductions are the everyday expenses you can claim under the main deduction rule if they are incurred in earning assessable income or running a business and are not private, capital or related to exempt income.
General deductions are those claimed under the broad, general deduction provision in the income tax law, rather than under a specific rule dealing with one type of expense. The test is wide. A loss or outgoing is deductible to the extent that it is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
There are limits built into the rule. You cannot claim a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature. Nor can you claim amounts that are private or domestic in nature, or amounts incurred in producing exempt income or non-assessable non-exempt income. Other provisions may also deny a deduction, such as for certain penalties and fines.
Typical examples include wages, rent of business premises, insurance, accounting fees, advertising, bank fees, and the day-to-day running costs of a vehicle used for business. A repair that restores something to its previous state is generally deductible, while an improvement that adds value is generally a capital cost. The line between the two is a common area of disagreement.
Timing matters. Generally a deduction is claimed in the income year in which you incur the cost, and under the cash basis that usually means when you pay. Prepaid expenses may be spread, particularly for larger businesses, while eligible small businesses may be able to deduct some prepayments immediately. The rules on prepayments are specific, so check the ATO guidance.
The nexus between the expense and your income must be shown. A cost incurred before you start earning income, or after the business has ended, may or may not be deductible depending on the facts. Costs of starting a business are often not deductible immediately, although some may be deductible over time as blackhole expenditure. Seek guidance for start-up costs.
Always record the reason you spent the money, as well as the amount and date. For GST-registered businesses, claim the GST-exclusive amount where you have a credit. Records are needed for five years. This is general information only, so confirm what counts as a general deduction for you with the ATO or a registered tax professional.
Worked example
A cafe owner pays $2,200 including $200 GST for advertising, $4,400 including $400 GST for equipment repairs and $11,000 for a new coffee machine. The advertising and repairs are general deductions of $2,000 and $4,000 on a GST-exclusive basis. The machine is a capital item, so it is recovered through depreciation or an asset write-off rule rather than as a general deduction.
Practical tips
- Separate repairs from improvements, because repairs are generally deductible and improvements are generally capital.
- Write down the business reason for unusual expenses at the time you incur them.
- Check the ATO guidance on start-up and prepaid costs, since timing rules apply.