For business owners, tax deductions are one of the most effective ways to manage cash flow and reduce tax—but they’re also an area where mistakes are easy to make.
Not every cost is immediately deductible, not every “business” expense qualifies, and timing matters more than most people realise. Here’s how deductions really work for businesses, and what to watch out for.
The Three Types of Business Deductions
Business expenses generally fall into one of three categories:
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General deductions
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Specific deductions
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Denied deductions
Knowing which bucket an expense belongs in determines if you can claim it and when.
General Deductions: The Core Rule for Businesses
A general deduction is available where an expense is:
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Incurred in earning assessable income, or
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Necessarily incurred in carrying on a business that earns assessable income.
In plain terms:
👉 Is this expense genuinely connected to running and earning income from your business?
However, even if the expense is business-related, it won’t be deductible if it’s:
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Capital in nature (big, long-term assets),
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Private or domestic,
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Related to earning tax-free income, or
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Specifically denied under tax law.
If an expense is partly business and partly private (very common), only the business portion is deductible—and you need records to support how you calculated it.
Tradie Example: What’s Deductible and What’s Not?
Let’s say Sam runs a plumbing business.
Deductible expenses may include:
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Tools and equipment used on jobs,
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Work vehicle running costs (business portion),
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Job-related materials and supplies,
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Business insurance,
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Accounting and bookkeeping fees.
Not immediately deductible (but still relevant):
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A new work vehicle → claimed over time via depreciation,
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Major equipment → depreciated rather than claimed upfront.
Not deductible at all:
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Traffic fines,
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Private family expenses,
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Personal portion of home electricity unless correctly apportioned,
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Club memberships unrelated to business.
This is where many tradies get caught—assuming “I needed it for work” automatically means “I can claim it”.
Timing: When Does a Business Claim a Deduction?
For tax purposes, expenses are usually claimed when they are incurred, meaning when the business is legally obliged to pay them—not necessarily when the cash leaves the bank.
This matters particularly for:
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Contractor invoices,
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End-of-year expenses,
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Accrued costs recorded in your accounts.
Capital Costs: Still Deductible, Just Over Time
Large or long-term purchases aren’t lost deductions—they’re just claimed differently.
Common examples include:
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Vehicles,
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Machinery,
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Tools above certain thresholds,
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Fit-outs and major improvements.
These are typically claimed over several years through depreciation, rather than all at once.
Specific Deductions: Special Rules Override the General Rule
Some business expenses fall under specific deduction rules, which can override the general deduction rules.
For example:
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Repairs and maintenance,
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Borrowing costs,
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Certain work-related travel,
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Lease and rental-related costs.
Where a specific deduction applies, it usually takes priority. You can’t double-dip, but you should claim under the rule that best fits the expense.
Denied Deductions: Red Flags for Businesses
Some expenses are clearly off-limits, even if they feel business-related.
These include:
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Fines and penalties,
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Certain interest and royalty payments,
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Political donations,
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Recreational or social club expenses,
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Payments that don’t meet compliance rules (e.g. non-compliant contractor payments).
Claiming these is a common trigger for ATO reviews.
Prepaid Expenses: Can Businesses Bring Deductions Forward?
Prepaid expenses (such as insurance, rent, advertising, or software subscriptions) often span more than one financial year.
In most cases, deductions must be spread over the period the benefit is received.
However, many small businesses can use the 12-month rule, which allows an immediate deduction if:
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The service period is 12 months or less, and
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The benefit ends in the next income year.
This can be a legitimate tax-planning strategy—but only when applied correctly.
The Bottom Line for Business Owners
For businesses, deductions aren’t just about spending money—they’re about:
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Understanding why the expense was incurred,
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Knowing which rule applies, and
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Getting the timing right.
A well-managed deductions strategy improves cash flow and reduces tax risk. A poorly managed one can lead to denied claims, penalties, or audits.
If you’re unsure whether an expense is deductible, depreciable, or denied altogether, it’s far better to check before lodging—not after.
