Small businesses in Australia can claim deductions for most costs incurred in earning income, including wages, rent, equipment, vehicle and travel costs, insurance, marketing, professional fees and the business portion of home and phone expenses. Claiming everything you are entitled to, with records to support it, is the simplest way to reduce tax. If your company experiments or innovates, the R&D Tax Incentive can be worth far more than an ordinary deduction.

One of the most reliable ways to reduce your tax bill is to make sure you’re claiming every deduction you’re legitimately entitled to. But most Australian small business owners are either leaving money on the table by not claiming everything they can, or — just as problematically — claiming things they can’t and exposing themselves to ATO scrutiny. In this comprehensive guide, I’ll walk you through every major category of deduction available to Australian small businesses in 2026–27, including what the ATO looks for and the mistakes I see most often.

The Golden Rule of Business Deductions

Before we get into the categories, let’s establish the rule that underpins all of them. Under Section 8-1 of the Income Tax Assessment Act 1997, you can deduct a loss or outgoing to the extent it is:

• Incurred in gaining or producing your assessable income, or
• Necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income

If an expense doesn’t meet this test — if it’s personal, private, or domestic in nature — it’s not deductible. The key is nexus: there must be a direct connection between the expense and your income-earning activities.

Operating Expenses

Day-to-day operating expenses are the bread and butter of business deductions. These are generally fully deductible in the year they’re incurred:

• Rent for business premises (office, retail space, warehouse)
• Utilities (electricity, gas, internet, phone) for business use
• Office supplies, stationery and consumables
• Software subscriptions (Xero, MYOB, Microsoft 365, Slack, project management tools)
• Bank fees and merchant fees charged on business accounts and transactions
• Insurance premiums — business insurance, professional indemnity, public liability, income protection (if not through super)
• Subscriptions and memberships directly related to your business or profession
• Postage and courier costs
• Repairs and maintenance on business assets (not capital improvements)

The distinction between a repair and a capital improvement matters: a repair restores something to its original condition (deductible now) while a capital improvement adds new functionality (must be depreciated over time).

Vehicle and Travel Expenses

Vehicle expenses are one of the most scrutinised categories by the ATO — and one of the most commonly overclaimed or underclaimed. Here’s what you need to know:

For businesses: If a vehicle is used for business purposes, the business proportion of costs is deductible. This includes fuel, registration, insurance, maintenance, depreciation, and lease payments. You must keep a logbook for 12 continuous weeks (at least once every five years) to establish the business-use percentage.

For vehicles under the instant asset write-off: Eligible small businesses can immediately deduct the cost of a qualifying vehicle up to the instant asset write-off threshold. For passenger vehicles, the car limit for 2026–27 is $69,674 — the deduction is capped at this amount regardless of the purchase price.

Travel expenses:

• Flights, accommodation, meals, and taxis for genuine business travel are deductible
• If travel combines business and personal purposes, only the business portion is deductible
• Travel between home and your regular workplace is not deductible — this is considered private travel
• Travel from your regular workplace to another business location (client visit, second site, etc.) is deductible

Home Office Expenses

If you work from home — whether as your primary office or as part of your role — you can claim a portion of your home running costs. The ATO offers two methods:

Fixed rate method: 70 cents per hour for every hour worked from home. This covers electricity, internet, phone, computer consumables, and stationery. You still need to separately calculate depreciation on home office equipment. You must keep records of hours worked.

Actual cost method: Calculate the actual expenses attributable to your home office — a proportion of rent/mortgage interest, electricity, internet, cleaning — based on the floor area of your office as a proportion of your total home area. This method requires more detailed records but may produce a larger deduction.

Important: If you claim your home office expenses as a business deduction through a company or trust, be careful about the interaction with the main residence CGT exemption. If part of your home is used exclusively for business, part of any future capital gain may be taxable. Seek advice before making this election.

Staff and Superannuation

Employment costs are fully deductible:

• Wages and salaries paid to employees (including family members, provided the amount is commercially reasonable for the work performed)
• Superannuation guarantee contributions — for 2026–27, the SGC rate is 12%. These are deductible in the year they are actually paid — not when accrued. Make sure super is paid by 30 June if you want the deduction this year.
• Workers’ compensation insurance premiums
• Payroll tax (where applicable, based on your state’s threshold)
• Fringe benefits tax (FBT) — deductible when paid
• Staff training and professional development
• Recruitment costs — job ads, agency fees, background checks

Timing of super payments matters significantly. Super contributions paid after 30 June but for the previous financial year are only deductible in the year they are actually paid. Missing the deadline costs you the deduction for that year. Read about the 2026 payday super changes here.

Asset Write-Offs and Depreciation

Small businesses have access to generous immediate deduction rules for depreciating assets. For 2026–27, eligible small business entities (aggregated annual turnover under $10 million) can immediately deduct the full cost of eligible depreciating assets under the small business simplified depreciation rules.

Eligible assets include:

• Computer equipment, printers, servers
• Plant and equipment (manufacturing, construction, trade tools)
• Office furniture and fit-out
• Vehicles (subject to the car cost limit)
• Signage

The instant asset write-off for small businesses has been a significant planning tool. Read our detailed 2026 guide to the instant asset write-off here. Timing asset purchases around 30 June — buying before the end of the financial year rather than after — can bring the deduction forward by a full year.

Professional Fees and Advisor Costs

Fees paid for professional services relating to your business are deductible:

• Accounting and tax agent fees — including fees for preparation of business tax returns, BAS preparation, and advisory services
• Legal fees relating to business contracts, employment disputes, debt recovery (not capital expenditure)
• Financial planning fees to the extent they relate to managing income-producing investments
• Consulting fees for business strategy, IT, marketing, HR

Note: legal fees relating to the purchase or sale of a capital asset (like a business or property) are capital in nature and are not immediately deductible — they form part of the cost base for CGT purposes.

Marketing and Advertising

Expenses incurred to promote your business are deductible:

• Google Ads, Facebook Ads, LinkedIn advertising
• Website development (ongoing costs; initial build may be capital)
• SEO and content marketing services
• Print advertising, brochures, flyers, business cards
• Sponsorships (if they have a clear commercial promotional purpose)
• Trade show and exhibition costs
• Promotional gifts (subject to FBT and income tax rules on entertainment)

Entertainment — taking clients to dinner, events, or experiences — is not deductible and not claimable as a business expense under Division 32 of the ITAA 1997, even if it has a business purpose. This surprises many business owners. Meals during travel or meals provided to employees in a break room (minor benefit) have different treatment.

Training and Professional Development

Expenses for training and education are deductible when they are directly related to your current income-earning activities:

• Courses and workshops related to your current profession or trade
• Professional memberships (CPA, CA ANZ, industry bodies)
• Books and publications directly relevant to your work
• Conferences and seminars

Training to enter a new field or secure a different type of employment is generally not deductible — it must be connected to your current role or business.

What You Cannot Claim

This is where many small business owners get into trouble:

• Personal or private expenses: Groceries, personal clothing (unless it’s protective or a specific uniform), private school fees, personal holidays
• Entertainment: Client dinners and entertainment are not deductible under Division 32
• Travel between home and your regular workplace
• Capital expenditure (generally) — the cost of purchasing a business, buying a building, or major structural improvements must be depreciated over time or claimed under specific rules
• Fines and penalties — ATO penalties, parking fines, regulatory fines are not deductible
• Private use portion of mixed expenses — you can only claim the business proportion

Mistakes to Avoid

The ATO regularly reviews small business deductions. Common errors that attract attention include:

• Claiming 100% of a vehicle without a logbook
• Claiming private expenses through the business
• Not keeping receipts and records (you need to be able to substantiate every claim)
• Claiming entertainment as a deductible expense
• Overclaiming home office without a proper calculation
• Failing to apportion mixed-use expenses correctly

The ATO’s data-matching capabilities have expanded significantly — they receive data from banks, share registries, state revenue offices, and hundreds of other sources. For more on what the regulator is now targeting and how to stay safe, see our guide to the ATO crackdown on personal versus business deductions. If your claims look out of step with comparable businesses, you may be selected for review.

How Pinnacle Approaches This With Small Business Clients

At Pinnacle, we help small business clients identify every legitimate deduction they’re entitled to — and make sure the ones they’re claiming are properly documented and defensible. We review your accounts throughout the year (not just at tax time) so we’re picking up missed deductions and flagging issues before they become problems.

We also advise on the timing of deductions — whether to prepay expenses before 30 June, whether to bring an asset purchase forward, and how to structure discretionary spending to maximise deductibility. These timing decisions can make a meaningful difference to your annual tax bill.

If you’re not confident you’re claiming everything you’re entitled to — or if you’re worried you might be claiming something you shouldn’t — get in touch with Pinnacle for a review. We’re here to make sure every dollar works for you. Explore our full range of tax planning services here.

Frequently Asked Questions

Do I need receipts for every deduction?

For most expenses over $10, yes — the ATO requires documentary evidence. This can be a receipt, invoice, bank statement, or other document that shows what was purchased, the date, the amount, and the supplier. Keep records for at least five years. For vehicle expenses using the logbook method, keep the logbook and odometer records.

Can I claim my home internet if I work from home?

Yes, but only the business-use proportion. If you use the internet 50% for business and 50% personally, only 50% of the cost is deductible. Under the fixed rate method (70 cents per hour), internet is already included in the rate — you cannot claim it separately.

Are client gifts tax deductible?

Generally no — gifts to clients are considered entertainment or private expenses and are not deductible. There are narrow exceptions, such as gifts with a genuine promotional purpose (e.g. branded merchandise), but even these require care. Gifts of food, wine, or entertainment are not deductible.

Can I claim my mobile phone as a business expense?

Yes — the business-use proportion. If your mobile phone is used 70% for business and 30% personally, 70% of the plan cost and handset depreciation is deductible. Keep records to support your claimed percentage.

Can I claim the cost of setting up my company or trust?

Yes — formation costs such as ASIC fees and solicitor fees for setting up your business structure are deductible as business formation expenses, typically claimed in the first year of operation under the blackhole expenditure provisions.

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Frequently Asked Questions

Claiming everything you are entitled to is easier with a proactive tax accountant in Melbourne reviewing your return through a tax-planning lens.

Food and drink is one of the most commonly miscoded deductions of all. Tea, coffee, fruit and biscuits provided to staff are deductible amenities, while a client lunch is entertainment and is not. Our guide to staff amenities versus entertainment sets out the four-factor test the ATO applies.

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