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When it comes to income and deductions it’s important to know what income to declare and what deductions you can claim. Getting it right from the beginning means you’ll avoid any issues when it’s time to complete and lodge your tax return.
Need some help to get it right? Find out about:
Income, deductions and your tax return
Most income you make from your business needs to be included in your tax return. This income is known as assessable income and is used, along with any allowable deductions, to calculate how much tax you need to pay each year.
What you need to report and how you lodge the annual income tax return for your business will depend on the type of business you run.
To help make it as easy as possible for you to understand and meet your tax responsibilities, check out the Australian Taxation Office (ATO)’s income tax return information for:
- a step by step breakdown of all that you need to lodge
- easy instructions to help you complete all the required parts of your tax return for your business type.
Did you know?
- If you operate a business as a sole trader, you need to lodge a tax return including the supplementary section - business and professional items schedule for individuals - regardless of your income.
A way to have a stress-free tax time is to keep up-to-date records. Keeping good records is essential to allow you to complete your income tax return and to back up all your claims. For information on what records to keep and how long to keep them, read our Keep the right records module or try the ATO’s Record keeping evaluation tool.
Did you know?
- If you’ve received small business income as a sole trader or from partnership or trust distributions, you’re eligible for a tax offset of up to $1,000. Find out more at Small business income tax offset.
- If you’re a sole trader you can record your business income, expenses, and vehicle trips on your smart device using myDeductions. At tax time you can upload your data to pre-fill your tax return or email it to your tax agent.
Find out more
Read the ATO's Income and expense for tax returns to find out more about the records you need for your tax return.
Working out your income
Generally, when calculating the assessable income of your business, you must include amounts you receive (or earn) in the ordinary course of running your business, such as from selling goods or providing services.
Did you know?
Special tax rules may apply to you if you are a:
Methods of accounting
The income you include in your tax return will depend on whether you use the cash or accruals method of accounting.
|Method||What to include in your assessable income|
|Cash basis||Only include the income you’ve actually received during the income year.|
|Accruals basis||Include all amounts you earned during the income year, even if you haven’t yet received payment.|
Accounting for trading stock
If you store trading stock (stock you intend to sell), you’ll also need to account for changes in the value of this stock each year when completing your tax return. Any increase in value will be treated as income while any decrease will be treated as a deduction.
Small businesses do not have to account for changes in the value of their trading stock from year to year if they reasonably estimate that the difference in value is less than $5,000. Find out more in Selling, manufacturing and sourcing products.
Visit the ATO website for more on:
Selling or disposing of business assets may result in a capital gain or loss.
This gain or loss must then be included in your assessable income in the year in which it is made.
For more information see the ATO’s information on Capital gains.
What deductions can you claim
You can claim a deduction for most expenses you incur to run your business, as long as they are directly related to how you earn your assessable income.
The expenses which you can claim are known as allowable deductions.
Did you know?
Small businesses can claim immediate deductions for expenses that have been prepaid for a period of 12 months or less.
You can claim a deduction for the cost of travel connected to your business. However there are special rules for claiming expenses which relate to the:
Claiming expenses for motor vehicle use
The amount of motor vehicle expenses which you can claim will depend on your business structure and the type of vehicle that you use. See the ATO's information on claiming motor vehicle expenses for:
Claiming expenses for overnight travel
If you stay away from home for:
- one night or more - you will generally need to keep written evidence of all expenses
- six or more consecutive nights - you will also need to keep a travel diary recording all the particulars of the business activities you undertake.
For more information read Overnight business travel expenses on the ATO website.
Repairs and maintenance
You can claim a deduction for repairs and maintenance for your business assets as long as they are not:
- substantially improving an asset (e.g. installing a new ceiling)
- performed immediately after an asset is acquired (the price you paid reflects the item’s condition)
- any other capital improvement.
For more information visit the ATO’s Repairs, maintenance and replacement expenses.
Running your business from home
If your home is used as a place for your business, the expenses you claim will depend on whether your business is run from home, or if you just have a home office and do some of your business at home.
- If you run your business from home you can claim a portion of both your running costs (utilities etc) and occupancy costs (rent, mortgage interest etc).
- If you have a home office you can only claim a portion of your running costs.
Additionally, if you run your business from home you may have to pay capital gains tax (CGT) when you sell your home. This is based on the portion of the gain relating to the part of the home which is used for business purposes.
For more information, check out the ATO’s information on:
Claiming for depreciation of your assets
You can claim deductions for the loss of value of your business assets over time (e.g. a computer that is new will be worth more than a computer that is 3yrs old). To work out how much your assets (furniture, machinery and equipment etc.) have depreciated, there are different depreciation methods you can apply.
Your claim is generally based on the effective life of the asset (the number of years a depreciating asset can be effectively used to produce income) and the depreciation method you choose.
The amount you can claim generally reduces if:
- you’ve owned the asset for less than a year
- you use the asset for both business and personal purposes
- you owned the asset before the business commenced.
Some concessions are also available for low cost and low value assets.
Did you know?
Small businesses can choose to use simplified depreciation, which allows you to:
- for assets costing less than $20,000, claim the full cost of the asset in the year they were purchased (until 30 June 2018)
- for all other depreciating assets (costing more than $20,000), create an asset pool to then claim a:
- 15% deduction for assets purchased that year
- 30% deduction each year after the first year.
- assets that can be depreciated
- how to calculate depreciation
- how to decide the period of time to depreciate the asset over (effective life)
- options for low cost and low value assets
- what to do if a depreciating asset is sold, lost or destroyed.
Claiming for capital works deductions
You can claim a deduction for the costs of construction, structural improvement or alteration of buildings and surrounding property related to your business. These types of deductions are called capital works deductions.
Other capital expenses
Capital expenditure that is not covered by other tax rules can be written off in equal amounts over 5 years. This includes capital expenditure incurred:
- before the business commenced
- when restructuring the business
- defending the business against a takeover
- when ceasing a business.
Find out more at the ATO website’s Other capital expenses page.
Did you know?
Small businesses can immediately claim a deduction for some professional expenses incurred when starting a new businesses. For more information read the ATO’s professional expenses for start-ups.