With the End of Financial Year only days away, it is crucial to understand what is eligible for deduction and what isn’t as this can help to avoid complications later on. Some business owners mistakenly believe that registering a business will grant them the ability to deduct any or all expenses. However, this is not the case.

With the End of Financial Year only days away, it is crucial to understand what is eligible for deduction and what isn’t as this can help to avoid complications later on. Some business owners mistakenly believe that registering a business will grant them the ability to deduct any or all expenses. However, this is not the case.

New business owners from 1 July 2023 may make the mistake of thinking they can claim the entire purchase price of a capital item in the year of its acquisition. A capital item, such as plant/equipment or a car, has long-term value and is used to generate business revenue. Depreciation represents the progressive reduction in value over the ownership period, and it becomes an annual deductible cost against the assessable income, rather than the original full purchase price in the year of purchase. However, if you are an eligible small business, you will still be able to claim an immediate deduction in the first year the asset is used or ready to use up to a maximum of $20,000.

If you borrow money for your business’s income-generating activities, your repayments will likely consist of principal and interest. The interest portion can be claimed as a deductible expense against the business’s assessable income, but only if the borrowed amount was used solely for income-generating purposes for the business. The principal amount is not deductible for the business.

Expenses that provide personal benefits, such as a car used for both personal and business purposes, cannot be totally deducted against the business’s assessable income. Only the portion of the expense that is directly related to the business use of the item can be claimed. It is advisable to consult your advisor for guidance in your specific situation (as your structure will impact how this works) and maintain accurate and up-to-date records to substantiate the business use of the item.

Expenses incurred for personal tools, hobbies, children’s school expenses, or restoring an old car are generally private costs and cannot be claimed as business expenses, unless they are directly related to generating revenue.

It’s important to note that each business is unique and different industries have their own specific list of fully deductible items. To ensure your business is claiming the correct items, it is recommended to consult with your advisor—and not just at tax time.