Small business deductions and record keeping

Most small businesses don’t over-claim. They under-claim, and they do it for an unromantic reason: at tax time they can’t prove what they spent. The deduction was legitimate, the money genuinely went out, and the receipt is gone.

That makes deductions less a question of tax knowledge than of record keeping. Knowing what’s claimable is a short lesson. Being able to substantiate it eleven months later is the actual work.

General information, not tax advice. The ATO is the authority - see ato.gov.au or ask a registered tax or BAS agent.

The test

An expense is generally deductible if it meets three conditions:

1. It was incurred in earning your assessable income - there’s a genuine connection to the business, not just to being a person who happens to run one.
2. It’s not private or domestic in nature. Lunch is lunch whether or not you were working.
3. You have a record of it.

The third one is doing more work than people expect. An expense that passes the first two tests and fails the third is not deductible in any practical sense, because you cannot substantiate it.

The mixed-use problem

Almost every difficult deduction is a mixed-use one - something you use for both business and private purposes. The rule is that you claim the business portion only, and you need a reasonable basis for the split.

Your phone and internet. Claim the work-related percentage. To do that credibly you need a representative sample - typically a four-week record of use - and then you apply that percentage for the year. Claiming 90% of a phone bill with nothing behind the number is exactly what gets adjusted on review.

Your vehicle. Two methods for cars. The cents-per-kilometre method is simpler, capped at a set number of business kilometres a year, and needs a reasonable basis for the distance you’re claiming. The logbook method requires a continuous 12-week logbook establishing your business-use percentage, which you then apply to actual running costs including depreciation. The logbook is more work and almost always produces a bigger claim if your business use is high. Travel between home and work is private; travel between job sites is not.

Working from home. You can claim the running costs attributable to work - electricity, internet, phone, and the decline in value of office equipment. The methods and rates change reasonably often, so check the current ones. For most sole traders, occupancy costs like rent and mortgage interest are not claimable, and trying to claim them can affect the capital gains tax exemption on your home. That’s a conversation to have with an accountant before you do it, not after.

Tools and equipment. Items under the instant asset write-off threshold can generally be deducted in the year you buy them. Above it, they’re depreciated over their effective life. The threshold has changed repeatedly, so confirm the current figure and the date the purchase counts from - which is when the asset was first used or installed ready for use, not when you ordered it.

Commonly missed

Things sole traders routinely forget to claim:

• Bank and merchant fees - account keeping fees, and the card surcharges you absorb. Small individually, meaningful over a year.
• Software subscriptions - every monthly tool, including the ones charged to a personal card.
• Professional memberships, licences and registrations relevant to your trade or profession.
• Insurance - public liability, professional indemnity, and income protection.
• Training and education with a sufficient connection to your current income-earning activity. Courses that qualify you for something new generally aren’t claimable; courses that maintain or improve what you already do generally are.
• Interest on business borrowings, including the business portion of a loan.
• Accounting and tax agent fees, including the cost of preparing last year’s return.
• Advertising and marketing, including domain names and hosting.
• Bad debts you’ve written off, where the income was previously brought to account.
• Protective clothing and occupation-specific uniforms. Note that ordinary clothing you happen to wear to work is not deductible, however smart it needs to be.

What the ATO expects you to keep

Records must be in English, must explain the transaction, and must be kept for five years from when you prepared or obtained them, or the transaction was completed - whichever is later. If you have an asset you’ll eventually pay capital gains tax on, keep those records for five years after you dispose of it.

For a purchase, the record needs to show the supplier, the amount, the nature of what was bought, and the date. A bank statement line alone usually doesn’t cut it, because it shows the amount and the merchant but not what was actually purchased - “$340 at the hardware store” doesn’t distinguish between job materials and a new barbecue.

Digital copies are fine. A photo of a receipt is a valid record provided it’s clear, complete, and you can produce it. This is worth knowing, because thermal receipt paper fades to blank within months in a glovebox. If your only record of a $600 purchase is a physical docket, you probably don’t have a record of a $600 purchase.

Why records fail

Three failure modes cover almost everything:

The receipt was never captured. It went into a pocket, a van door, or a bag, and by the time anyone looked it was faded or gone. The window for capturing a receipt is about thirty seconds after the transaction; after you’ve walked to the car, the odds drop sharply.

The expense was captured but not categorised. You have a folder of 400 photos and no idea which were materials, which were tools, and which were the private purchases you made on the same card. Sorting that in July is miserable and, being done from memory, inaccurate.

Business and personal are mixed. Everything goes through one account, and separating them at year end becomes an archaeology project. A separate business bank account is the single highest-value administrative change most sole traders can make - not for tax reasons but because it turns an ambiguous transaction list into an unambiguous one.

Making it routine

The fix for all three is the same: capture the expense at the moment it happens, with its category and GST attached, and never touch it again.

Photograph the receipt at the counter. Record what it was for while you still remember. Then it’s done - it flows into your quarterly BAS figures, it’s there at tax time, and it’s retrievable in four years if anyone asks. This is exactly the kind of handoff that goes missing when expenses, invoices and tax figures live in separate tools - see the real cost of disconnected business tools.

This is genuinely all that separates a business claiming everything it’s entitled to from one claiming what it can still prove in July. Not tax expertise. Thirty seconds of habit at the point of purchase.

Before you lodge

A short review that reliably finds money:

• Scan twelve months of bank and card statements line by line for business expenses you never recorded - subscriptions and annual renewals are the usual finds.
• Check for personal-card purchases that were genuinely for the business.
• Confirm your phone, internet, and vehicle percentages are based on something you could show someone, not a number you picked.
• List assets bought during the year and check each against the write-off threshold that applied at the time.
• Identify invoices you’ve genuinely given up on, and write them off properly.

Then hand it to a registered tax agent. Their fee is itself deductible, and on anything beyond a very simple return they typically find more than they cost - particularly on the mixed-use items, where the difference between a defensible claim and an optimistic one is worth having someone else’s judgement on.