Working capital is the cash tied up running your business day to day: debtors, plus stock and work in progress, less what you owe suppliers. It is money you have already spent but not yet collected. Shortening the time cash spends in that cycle releases funds into your bank account without a single extra sale.

Almost every business owner who has ever asked “we made a profit, so where is the money?” is asking a working capital question. The profit is real. It is just sitting in someone else’s bank account, or on a shelf, or in a half finished job.

I am Mina Baselyous, a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent in Melbourne. This article shows you how to measure the cash trapped in your business, work out what it is costing you, and release a meaningful amount of it within a quarter.

What Working Capital Is and How to Calculate It

Net working capital is current assets less current liabilities. For most trading businesses the operating version that matters is simpler still: debtors, plus inventory and work in progress, less trade creditors. That figure is the amount of your own money permanently locked into running the business, and it has to be funded by profits, by the owner, or by the bank.

Two things follow from that definition. First, working capital is not profit and it is not on your profit and loss statement. It lives on the balance sheet, which is precisely why owners who only ever read the profit and loss are blindsided by it. Second, it grows with sales. Double your revenue and, unless something else changes, you roughly double the cash locked up.

People often ask about the working capital ratio, which is current assets divided by current liabilities. It is a useful solvency check, and a ratio comfortably above 1 means short term assets cover short term obligations. But the ratio tells you almost nothing about speed, and speed is where the cash is. For that you need the cycle.

The Working Capital Cycle: Where Your Cash Actually Goes

The working capital cycle measures how many days pass between paying for something and being paid for it. It has three components: how long stock or work in progress sits before it is invoiced, how long customers take to pay, and how long you take to pay suppliers. Add the first two, subtract the third, and you have your cash conversion cycle.

Debtor Days

Debtors divided by annual sales, multiplied by 365. This is usually the largest and most fixable number in the cycle. It is also the one most businesses never measure. If your terms are 30 days and your debtor days are 70, the gap is not a customer problem, it is a systems problem, and our guide to debtor management walks through how to close it.

Context helps here. The Payment Times Reporting Regulator’s update published 24 August 2026, covering Reporting Cycle 10 (1 July to 31 December 2025), reports that the average common payment term used by large reporting businesses has been stable at 29 days across three reporting cycles. Your large customers have standardised their terms. Most small suppliers have not.

Inventory and Work in Progress Days

Inventory divided by cost of goods sold, multiplied by 365. For service businesses the equivalent is work in progress: hours or stages delivered but not yet invoiced. Unbilled work in progress is the most invisible form of trapped cash there is, because it does not even appear on the debtors ledger where someone might chase it.

Creditor Days

Trade creditors divided by cost of goods sold, multiplied by 365. This is the one component where a higher number helps your cash, because supplier credit is free funding. The limit is commercial and ethical rather than mathematical: stretching suppliers damages relationships, costs you discounts, and eventually costs you supply.

The Cash Conversion Cycle

Debtor days plus inventory days less creditor days. A cycle of 80 days means that every dollar of cost you incur takes roughly 80 days to come back as cash. The lower the number, the less funding your business needs to operate at any given size. Some businesses run a negative cycle, which is why they can grow without ever needing an overdraft.

Worked Example: Finding $308,000 in a $3 Million Business

Numbers make this concrete. Take a business with $3,000,000 of annual sales excluding GST, cost of goods sold of $1,800,000, debtors of $600,000, stock of $300,000 and trade creditors of $250,000. All of these come straight off the balance sheet and profit and loss. Here is what the cycle looks like.

Step 1: Measure the Cycle

• Debtor days: $600,000 divided by $3,000,000, times 365 = 73 days
• Inventory days: $300,000 divided by $1,800,000, times 365 = 61 days
• Creditor days: $250,000 divided by $1,800,000, times 365 = 51 days
• Cash conversion cycle: 73 plus 61 less 51 = 83 days
• Net operating working capital funded by the business: $600,000 plus $300,000 less $250,000 = $650,000

Read that last line carefully. This business has $650,000 of its own money permanently parked in the working capital cycle. If it is borrowing to fund that at, say, 9 per cent, the cycle is costing roughly $58,500 a year in interest before anyone has made a sale.

Step 2: Tighten Two Numbers

Now assume the business does nothing heroic. It invoices the day the job finishes instead of at month end, turns on automated reminders, and calls anything over 30 days. Debtor days fall from 73 to 45. Separately, it reviews slow moving stock lines and cuts inventory days from 61 to 45.

• Debtors at 45 days: $3,000,000 times 45 divided by 365 = $369,863, releasing about $230,000
• Stock at 45 days: $1,800,000 times 45 divided by 365 = $221,918, releasing about $78,000
• Total cash released: roughly $308,000
• New cash conversion cycle: 45 plus 45 less 51 = 39 days, down from 83

That is $308,000 of cash appearing in the bank account with no new customers, no price rise and no cost cutting. It is the single highest return activity available to most established businesses, and it is almost always ignored in favour of chasing more sales.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), when a client tells me they need funding to grow, the first place I look is the working capital cycle. More often than not the money they want to borrow is already sitting in their own debtors ledger.

Why Growth Makes the Problem Worse, Not Better

Growth consumes cash. When sales rise, debtors and stock rise immediately, while the profit from those sales arrives weeks or months later. A business growing 40 per cent a year with an 83 day cycle needs a great deal more funding this year than last, which is why fast growing and profitable businesses fail.

Work it through on the example above. Take that business from $3,000,000 to $4,200,000 of sales with the cycle unchanged, and the working capital requirement rises from $650,000 to roughly $910,000. The business has to find another $260,000 of cash purely to stand still operationally, on top of any capital expenditure the growth requires.

This is why we insist on a forward looking cash flow forecast alongside the budget rather than a profit budget on its own. A profit forecast will tell you the growth is a good idea. Only the cash forecast tells you whether you can survive it. Our guide to building a budget your business will actually follow is the starting point, and how much your business actually needs to make covers the other side of the same question.

Seven Ways to Release Trapped Cash

Every lever in working capital is either about invoicing sooner, collecting faster, holding less, or paying later. None of them require more sales, and most can be implemented within one quarter. Start with the two that move the most money in the typical Australian small business: the invoicing lag and the debtors ledger.

• Invoice the day the work is done. The gap between completion and invoicing is pure, free delay that you control entirely.
• Take deposits and bill in stages. Progress claims convert work in progress into debtors, and deposits convert it into cash before you start.
• Run a real follow up system. Automated reminders before and after the due date, then a phone call. See debtor management for the full ladder.
• Cut slow moving stock. Rank inventory by turns. The bottom 20 per cent of lines usually holds a disproportionate share of the cash and the obsolescence risk.
• Negotiate supplier terms deliberately. Ask for 45 days rather than 30 at renewal, and take early settlement discounts only when the discount beats your cost of funds.
• Review your GST method. If your customers are slower than your suppliers, reporting GST on a cash basis stops you funding the ATO ahead of your own collections. See GST cash vs accruals.
• Separate the money you are holding for someone else. GST, PAYG withholding and superannuation are not working capital, even though they sit in your account. Our article on the six bank accounts every business owner needs sets out the structure.

The Tax Angle Nobody Mentions

Working capital has a tax dimension that makes the squeeze worse. If you report on an accruals basis you are taxed on invoiced sales and you remit GST on invoiced sales, whether or not the customer has paid. So the very debtors that are consuming your cash are also generating tax and GST liabilities that consume more of it.

The same applies to stock. Closing stock is not deductible, it sits on the balance sheet, so a business that buys hard in June to “reduce tax” achieves the opposite: it converts cash into an asset with no deduction and worsens the working capital position going into the new year. Real EOFY planning works the other way around, which is what we cover under tax planning.

There is a genuine tax benefit available at the other end of the cycle. Where a debt is truly unrecoverable and you write it off correctly before year end, you get an income tax deduction and, on an accruals GST basis, a decreasing adjustment for the GST. That is real cash recovered, and the mechanics are set out in our bad debt write off guide.

How Much Working Capital Do You Actually Need?

There is no universal answer, because it depends entirely on your cycle. The practical way to size it is to take your daily cost of operating, multiply by your cash conversion cycle in days, and add a buffer for seasonality and one large customer failing. That figure is your minimum operating cash requirement.

Using the example business, daily cost of goods is about $4,932 and total daily operating cost will be higher once overheads are included. On an 83 day cycle the business needs to be able to fund roughly three months of operating cost before collections catch up. At 39 days it needs to fund less than half that. Same business, half the funding requirement, achieved purely through process.

Track four numbers monthly: debtor days, inventory or work in progress days, creditor days, and the cash conversion cycle. Put them on the front page of your management pack next to the five financial numbers every business owner must know and review them at the same meeting every month. That single discipline is worth more than most cost cutting exercises.

If nobody in your business currently owns these numbers, that is the gap a Virtual CFO engagement fills. And if you are eventually selling the business, a short cash conversion cycle is one of the things a buyer pays for, because it reduces the working capital they have to inject on day one. Our guide to valuing a business in Australia explains why.

Frequently Asked Questions

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On the cash method you report GST when money is actually received or paid. On the accruals (non-cash) method you report GST when the invoice is issued or received, whichever comes first. Businesses with an aggregated turnover under $10 million can generally choose. Cash accounting usually suits businesses whose customers pay slowly.

Most business owners inherited their GST method from whoever set up their file years ago and have never revisited it. That is a mistake, because for a business carrying a large debtors ledger the choice is worth real money in the bank every single quarter.

I am Mina Baselyous, a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent in Melbourne. This article explains how each method works, who is eligible for the cash method, what the difference looks like in dollars on a real quarter, and how to change if the wrong one is costing you.

What the Two Methods Actually Mean

The two methods change the timing of when GST hits your business activity statement, not the total amount of GST you eventually pay. Cash accounting follows the money. Accruals accounting follows the paperwork. Over the life of the business the two produce the same result, but the cash flow consequences quarter by quarter can be substantial.

The Cash Method

Under the cash method you account for GST on the activity statement covering the period in which you receive or make payment. You report GST on a sale in the reporting period in which you receive the payment, and you claim GST credits on a purchase in the reporting period in which you make the payment. An unpaid customer invoice creates no GST liability at all.

The Accruals or Non-Cash Method

Under the non-cash method the trigger is the invoice. As the ATO states in its choosing an accounting method guidance, current as at September 2026, you account for the GST payable on the sales you make in the reporting period in which you issue a tax invoice or receive full or part payment, whichever happens first.

The same logic runs the other way on purchases. You claim GST credits in the period you receive the supplier’s invoice or make the payment, whichever happens first. So you can claim credits on bills you have not yet paid, which is the main advantage of the method.

Worked Example: The Same Quarter on Both Methods

The cleanest way to see this is to run one quarter twice. Take a business that invoices $330,000 including GST during the quarter but only collects $220,000 of it, and receives supplier invoices of $110,000 including GST of which it pays $88,000. Same business, same quarter, two very different BAS outcomes.

On the Accruals (Non-Cash) Method

• GST on sales: based on invoices issued, $330,000 divided by 11 = $30,000
• GST credits on purchases: based on invoices received, $110,000 divided by 11 = $10,000
• Net GST payable for the quarter: $20,000

On the Cash Method

• GST on sales: based on cash received, $220,000 divided by 11 = $20,000
• GST credits on purchases: based on cash paid, $88,000 divided by 11 = $8,000
• Net GST payable for the quarter: $12,000

The business keeps $8,000 more in its bank account this quarter on the cash method. Note the calculation method in both cases: these are GST inclusive figures, so the GST is one eleventh of the amount, not 10 per cent of it. Dividing a GST inclusive figure by 11 and multiplying a GST exclusive figure by 10 per cent give different answers, and mixing them up is one of the most common BAS errors we correct.

Is the $8,000 permanent? No. It is timing. When the outstanding $110,000 is collected next quarter, the GST on it falls due then. The advantage is that you never fund the ATO ahead of your customers. The exception is the one that matters: if that invoice is never paid at all, a cash basis business never remits the GST in the first place, while an accruals business has to remit it and then claim it back later as a bad debt adjustment.

We walk through that bad debt adjustment, and the income tax deduction that goes with it, in our guide to debtor management and writing off bad debts.

Who Can Choose the Cash Method?

Not everyone gets the choice. The ATO allows the cash method for businesses with an aggregated turnover of less than $10 million, for entities that account for income tax on a cash basis, and for enterprises that are not carrying on a business with a GST turnover of $2 million or less. Certain entities, including government schools and endorsed charities, can use it regardless of turnover.

Those thresholds are set out in the ATO’s accounting method guidance, current as at September 2026. Aggregated turnover is not just your own turnover: it includes the turnover of connected entities and affiliates, so a group of related trading companies can lose the choice even where no single entity is near $10 million. If you operate through multiple entities, check the aggregation before you assume you are eligible.

If you are not yet registered for GST at all, start with our guide to GST registration in Australia, because the method question comes up at registration and the default you accept then tends to stay in place for years.

When the Cash Method Wins

Cash accounting suits any business where money goes out well before it comes in. If you invoice on 30 day terms and get paid on 50, if you carry a large debtors ledger, or if you have had bad debts in the past, the cash method stops you funding the ATO on revenue you have not collected. It is the default answer for most service businesses with slow paying customers.

• Slow paying customers. Construction, professional services, labour hire and anyone billing large corporates or government.
• A history of bad debts. On cash you never remit GST on an invoice that is never paid, so there is no adjustment to chase later.
• You pay your suppliers quickly. If you pay on time anyway, you lose very little by only claiming credits when you pay.
• Simplicity. Reconciled bank transactions drive the BAS, so there is less to get wrong.
• Tight working capital. If the business is growing fast and cash is the constraint, the timing benefit is real. Our guide to working capital explains why growth consumes cash rather than creating it.

When Accruals Wins

Accruals accounting wins where you buy on credit and sell for cash, or where you need your reports to reflect what the business actually earned rather than what happened to clear the bank. Retailers, hospitality and any business taking payment at the point of sale while running 30 day accounts with suppliers are usually better off on accruals.

• You get paid immediately but pay suppliers later. You claim the credits on supplier invoices before you have paid them, which is a genuine cash benefit in reverse.
• Large capital purchases on terms. The credit can be claimed when the invoice is received rather than when the final payment clears.
• Better management reporting. Accruals reporting matches revenue to the period it was earned, which is what makes a profit and loss statement meaningful month to month.
• Turnover above the threshold. Once aggregated turnover reaches $10 million the choice is generally gone anyway.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the business that suffers most is the one on accruals with 60 day debtors and no idea that a choice exists. They spend years paying GST a quarter early, then borrow to cover the gap and call it a cash flow problem.

There is one more consideration that has nothing to do with cash. Accruals reporting produces better information, and better information is what a buyer, a bank or a valuer wants to see. If you are building towards a sale, our guide to how to value a business in Australia explains why the quality of your reporting affects the number.

Your GST Method and Your Income Tax Method Are Two Different Questions

This is the point that confuses most business owners. Choosing the cash method for GST does not mean you return income on a cash basis for income tax. They are separate decisions under separate rules, and for most trading businesses the income tax answer is not a choice at all.

For income tax, whether you return income on a receipts basis or an earnings basis depends on which method gives a substantially correct reflex of your income, a question the Commissioner addresses in Taxation Ruling TR 98/1. Broadly, a business whose income depends on trading stock, employees and substantial capital is generally on an earnings basis, while some individual professionals providing personal services may be on a receipts basis.

The practical consequence matters. A trading company can be on the cash method for GST and still be assessed on an earnings basis for income tax, which means it is taxed on invoiced sales even though its BAS follows the bank account. If that is your situation, the bad debt rules become important, and you should read them alongside this article.

How to Change Your GST Method

You can change methods if you are eligible, but you cannot do it mid quarter. The ATO’s position is that changing from the cash method to the non-cash method can only take effect on the first day of a tax period, and in the transition you must account for previously uninvoiced sales and unclaimed credits so nothing is counted twice or missed.

Practically, the steps are:

• Confirm eligibility. Check aggregated turnover including connected entities and affiliates.
• Model both methods. Run the last four quarters on each basis using your actual debtors and creditors. The right answer is usually obvious once it is in dollars.
• Pick the changeover date. It must be the first day of a tax period, so the start of a quarter or a month depending on your reporting cycle.
• Handle the transition. Identify the sales and purchases straddling the changeover so the GST on each is reported once and only once. This is where the errors happen.
• Change the setting in your software and tell your adviser. Changing the setting in Xero or MYOB without adjusting for the straddling transactions will produce a wrong BAS.

Get the transition wrong and you either double count GST or miss a quarter of it, and the error usually surfaces at year end when the BAS figures will not reconcile to the accounts. It is not complicated work, but it does need to be done deliberately. If you are lodging in Xero, our guide to lodging your BAS using Xero covers the mechanics, and GST coding explained covers the coding errors that distort either method.

How to Decide

Answer three questions. How long does it actually take your customers to pay you? How long do you take to pay your suppliers? And is aggregated turnover across your group under $10 million? If customers are slower than suppliers and you are under the threshold, the cash method is probably costing you nothing and saving you a quarter’s worth of GST timing.

Then keep the two jobs separate in your head. Use the method that suits your cash position for GST reporting, and keep producing accrual based management reports so you can still see what the business actually earned. That is standard practice in any Virtual CFO engagement: the BAS follows the rules, the management pack follows the economics.

If you are not sure what your current method even is, look at your last BAS or ask whoever lodges it. It is also worth reading why we think your accountant rather than your bookkeeper should lodge your BAS, since decisions like this one rarely get raised at the bookkeeping level. For background on the statement itself, see what a BAS is and what an IAS is.

Frequently Asked Questions

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When you sell a car that cost more than the car limit, you pay GST of one eleventh of the full sale price even though your GST credit on purchase was capped. For income tax, the termination value is scaled down in proportion to the car limit, so the taxable profit is much smaller than the raw proceeds suggest.

This is one of those areas where the intuitive answer is wrong in both directions. Business owners assume the GST will be small because the credit was small, and it is not. They then assume they will be taxed on the full sale price less written down value, and they are not. Get it wrong either way and you either overpay tax or get a surprise on your next BAS.

I am Mina Baselyous, a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent in Melbourne. This article works through exactly what happens when a business sells a car that cost more than the car limit, with a full worked example on a $150,000 vehicle sold for $95,000.

What the Car Limit Is and What It Cost You on the Way In

The car limit caps the amount you can depreciate on a passenger car. For the 2026-27 financial year the limit is $69,883, and the maximum GST credit you can claim on a car above that limit is $6,353, being one eleventh of the car limit. Spend more than that on a car and the excess is permanently outside the tax system.

Those figures are published by the ATO in its car thresholds from 1 July guidance for 2026-27. For comparison, the limit was $69,674 for both 2024-25 and 2025-26, with a GST credit cap of $6,334. The limit that matters to you is the one for the financial year in which you first used the car, not the year you sell it.

Mechanically, two provisions of the Income Tax Assessment Act 1997 do the work. Section 40-230 reduces the first element of the cost of a car to the car limit where the cost exceeds it. Subdivision 27-B strips out the GST credit you were entitled to before that cap is applied. So the sequence is: purchase price, less the capped GST credit, then reduced to the car limit.

It is worth being clear about what the car limit is not. It is not the luxury car tax threshold, which sits at $91,661 for fuel efficient vehicles and $80,809 for all other vehicles in 2026-27. Those are two different numbers doing two different jobs, and confusing them is one of the more common errors we see on client files.

The car limit also applies under the simplified depreciation rules. As the ATO states in its assets and exclusions guidance, if the cost of your car in the year you start to hold it exceeds the car limit, the car’s cost is reduced to the car limit for that year. There is no instant asset write off workaround for an expensive car. If you want the background on how depreciation itself works, see our guides to tax depreciation and the $20,000 instant asset write off.

The GST Trap on the Way Out

Here is the part that catches people. The car limit caps what you can claim on the way in. It does nothing at all on the way out. The ATO’s position is plain: when you dispose of a motor vehicle used in your business and the disposal is a taxable sale, you will generally be liable to pay GST of one eleventh of the sale price of the vehicle.

There is no proportional reduction, no cap, and no adjustment to reflect the fact that you only got $6,353 back when you bought it. The ATO sets this out in its guidance on disposing of a motor vehicle, current as at September 2026, and it applies equally to a trade in. Trading a vehicle in against a new one is still a taxable sale, even though no cash changes hands for that leg of the deal.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), this is the number that ruins a quarter. A client sells a car for $95,000, treats it as a windfall, spends the money, and then finds out in April that $8,636 of it belonged to the ATO. The GST on the sale of one car can exceed an entire quarter’s normal net GST position for a small services business. It is reported on the activity statement for the period of the sale, so if you are unsure how that works start with what a BAS is.

The Income Tax Side: How the Balancing Adjustment Works

For income tax, selling a depreciating asset triggers a balancing adjustment under section 40-285. You compare the termination value with the adjustable value, which is the written down value for tax purposes. If the termination value is higher, the difference is assessable income. If it is lower, you get a deduction. There is no capital gains tax on a car used wholly for business.

For a cost limited car, two adjustments happen before that comparison is made, and this is where most of the value sits.

Adjustment One: Strip Out the GST

Section 27-95 reduces the termination value of a depreciating asset by the GST payable on the sale where the disposal is a taxable supply. So if you sell for $95,000 including GST, the starting termination value for income tax purposes is $86,364, not $95,000. This is the same logic that made your original cost GST exclusive.

Adjustment Two: Scale It Down for the Car Limit

This is the provision almost nobody knows about, and it is the one that saves you. Section 40-325 says that where the cost of a car was worked out by applying the car limit, the termination value is multiplied by a fraction: the car limit plus any second element cost amounts, divided by the total cost of the car ignoring the car limit, after applying Subdivision 27-B.

In plain English: you were only allowed to depreciate part of the car, so you are only taxed on the matching part of the sale proceeds. If the car limit represented 48 per cent of what you actually paid, only about 48 per cent of the sale proceeds counts as your termination value. Without this provision, the tax result on selling a cost limited car would be brutal.

Note the wording: the car limit used in the fraction is the limit for the financial year in which you first used the car for any purpose. If you bought the car three years ago, you use that year’s limit, not the current one.

Worked Example: A $150,000 Car Sold for $95,000

Take a company that buys a passenger car for $150,000 including GST in 2026-27, uses it 100 per cent for business, and sells it three years later for $95,000 including GST. The economic result is a $55,000 loss. The tax result is $8,636 of GST payable and roughly $12,500 of assessable income. Here is how you get there.

Step 1: The Purchase

• Purchase price including GST: $150,000
• GST included in the price: $150,000 divided by 11 = $13,636
• GST credit actually claimable: capped at one eleventh of the car limit = $6,353
• GST you never get back: $13,636 less $6,353 = $7,283
• Cost after Subdivision 27-B: $150,000 less $6,353 = $143,647
• First element of cost after section 40-230: reduced to the car limit = $69,883
• Cost permanently outside the depreciation system: $73,764

Step 2: Three Years of Depreciation

Assume the company claims $40,401 of decline in value over three years on the capped cost of $69,883, leaving an adjustable value of $29,482. The exact numbers depend on the depreciation method and effective life you use, but the principle holds: you are only ever depreciating the capped amount, never the full $150,000.

Step 3: The Sale, GST First

• Sale price including GST: $95,000
• GST payable on the sale: $95,000 divided by 11 = $8,636
• GST credit claimed on purchase: $6,353
• Net GST position across the life of the car: $2,283 worse off

Read that last line again. The business paid more GST out on a car that halved in value than it ever claimed back. That is the direct consequence of a cap on the credit with no matching cap on the liability.

Step 4: The Sale, Income Tax

• Termination value before adjustment: $95,000 less GST of $8,636 = $86,364
• Section 40-325 fraction: $69,883 divided by $143,647 = 48.65 per cent
• Adjusted termination value: $86,364 multiplied by 48.65 per cent = $42,016
• Less adjustable value: $29,482
• Assessable balancing adjustment: $12,534

Now compare that with what would happen if section 40-325 did not exist. The termination value would be $86,364, the adjustable value $29,482, and the assessable amount $56,882. The car limit adjustment reduces the assessable income by more than $44,000 on this single transaction. It is worth making sure your accountant has actually applied it.

Step 5: The Full Picture

The company spent $150,000, recovered $95,000, and is $55,000 out of pocket in cash terms. Across the three years it claimed $40,401 in depreciation and $6,353 in GST credits. On sale it owes $8,636 in GST and adds $12,534 to its taxable income, which at a 25 per cent company rate is about $3,134 of tax. Roughly $73,764 of the original cost was never deductible at all. That is before you count the opportunity cost of $150,000 of working capital locked into a depreciating asset rather than funding the business.

That is the real cost of buying an expensive car through a business, and it is why we run the numbers before the purchase rather than after. If you are weighing up vehicle decisions more broadly, our guide to car tax deductions and the cents per kilometre rate for 2026-27 cover the alternatives.

Do You Pay Luxury Car Tax When You Sell?

Usually not. Luxury car tax does not apply to a car that has not been imported and was manufactured more than 2 years before the supply, or where the car was imported more than 2 years before the supply. For most business owners selling a car they have owned for a few years, LCT is simply not in the picture.

That 2 year rule, along with the other exclusions, is set out in the ATO’s when LCT does not apply guidance. Where it does bite is on a near new car sold within two years of manufacture or import, above the relevant threshold, in the course of your business. If you are flipping a vehicle quickly, get the LCT position checked before you sign anything.

Five Things That Change the Answer

The worked example above assumes the simplest possible facts: a passenger car, 100 per cent business use, held directly, sold at arm’s length for cash. Change any of those and the numbers move. These are the five variations we see most often on client files, and each one is worth checking before the sale rather than after.

1. Private Use

If the car was used partly for private purposes, the balancing adjustment is reduced to reflect the non taxable use, in the same proportion that your depreciation deductions were reduced. You cannot depreciate the private portion and you are not taxed on it either. You need a defensible log book or usage record to support the split, and our guide to claiming motor vehicle expenses covers what the ATO expects.

2. The Vehicle Is Not a Car

The car limit applies to a car designed mainly for carrying passengers. A vehicle designed to carry a load of one tonne or more, or nine or more passengers, is not a car for these purposes, so the limit does not apply and neither does the GST credit cap. This is why a genuine one tonne ute or a truck is treated completely differently to a large passenger SUV of the same price.

3. The Car Sits in a Small Business Pool

If you use simplified depreciation, the car limit still restricted what went into the pool in the first place, but the mechanics on disposal differ. The proceeds reduce the pool balance rather than producing a standalone balancing adjustment, which can change both the amount and the timing of the taxable outcome. Have your adviser confirm the treatment for your specific pool position.

4. It Is a Trade In, Not a Cash Sale

A trade in is a taxable sale. The trade in allowance is your sale price for both GST and income tax purposes, and it is easy to miss because the dealer nets it off against the new vehicle. Check the contract: the trade in figure needs to be recorded as a sale in your accounts, with GST accounted for on it, not just deducted from the cost of the replacement.

5. You Are Selling to Yourself or a Related Entity

This is where the most expensive mistakes happen. Transferring a car out of a company to its owner at a token price is not a private matter. Under the GST rules, supplies to associates for no or inadequate consideration are generally taxed on market value where the associate is not entitled to a full input tax credit, and under Division 7A a transfer of company property for less than market value can be treated as a deemed dividend.

In our experience, this is the single most common way a simple vehicle transfer turns into a Division 7A problem that has to be unwound years later. If you are moving a vehicle between entities you control, get the valuation and the paperwork right first. Our guide to Division 7A explains what is at stake.

How to Plan the Sale Properly

The tax outcome on a vehicle sale is largely set by the time you sign the contract, but three decisions are still in your hands: the timing of the sale, the way the proceeds are documented, and whether the cash for the GST and tax is set aside. Deal with those before you list the car, not when the BAS falls due.

• Model the numbers before you sell. Work out the GST payable and the balancing adjustment on the expected sale price, and check which financial year the sale lands in.
• Quarantine the GST immediately. The moment the funds hit the account, move one eleventh of the sale price into a separate account. It is not your money.
• Consider the timing. A balancing adjustment in a year you already have high profits is worse than one in a quieter year. Where there is flexibility in settlement dates, use it.
• Check the replacement decision at the same time. If you are replacing the vehicle, the car limit will apply again on the new one, and the choice between owning, novated leasing or an electric vehicle changes the answer materially. Our article on the electric vehicle FBT exemption covers one of those options.
• Keep the file. Contract, trade in documentation, odometer readings, log book and the depreciation schedule. If the ATO reviews the balancing adjustment, this is what defends it.

This is straightforward work when it is done in advance and expensive when it is not. It is exactly the kind of decision that belongs in a tax planning conversation in April or May, alongside the rest of your small business deductions, rather than being discovered at lodgement in the following March.

Frequently Asked Questions

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Debtor management is the system you use to get invoices out on time, follow up overdue accounts, and fix the reasons clients do not pay. Done properly it turns profit on paper into cash in the bank. Where a debt is genuinely unrecoverable, Australian tax law lets you claim a deduction if you write it off before year end.

Most business owners who come to us with a cash flow problem do not have a profit problem. They have a debtor problem. The work has been done, the margin is there, the profit and loss looks fine, and yet there is nothing in the bank account on the 25th when superannuation and wages are due.

Worse, an unpaid invoice does not sit there quietly. It actively takes money out of your business, because you are taxed on the profit and you remit the GST whether or not the client ever pays. I am Mina Baselyous, a Certified Practising Accountant (CPA) and Chartered Tax Advisor (CTA) in Melbourne, and this article walks through exactly what an unpaid invoice costs you, how to build a debtor system that runs without you chasing it, and how to recover the tax and the GST when a client genuinely will not pay.

What an Unpaid Invoice Actually Costs You

An unpaid invoice is not neutral. If you report on an accruals basis, raising the invoice books the sale, lifts your profit, and creates a tax liability. It also creates a GST liability you pay to the ATO dollar for dollar. So the invoice costs you the work, the materials, the wages, the GST and the income tax, all before a cent arrives.

Most owners have never seen this laid out in numbers, so here it is.

Worked Example: One $110,000 Invoice That Never Gets Paid

A company completes a job in May and invoices the client $110,000 including GST. The job cost $77,000 including GST in materials, subcontractors and wages, all already paid. The company reports GST quarterly on an accruals basis and pays company tax at 25 per cent. The client goes quiet.

• Revenue recognised: the invoice is $110,000 GST inclusive, so $110,000 divided by 11 is $10,000 of GST, and $100,000 is assessable income.
• Costs deducted: $77,000 GST inclusive, so $7,000 of GST credits and $70,000 of deductible cost.
• Taxable profit on the job: $100,000 less $70,000 equals $30,000.
• Company tax at 25 per cent: $7,500, payable through PAYG instalments or at lodgement.
• Net GST on the job: $10,000 collected on the sale less $7,000 credits on the costs equals $3,000 remitted on the next BAS.
• Cash received from the client: nil.

Add it up. The business has already spent $77,000 delivering the job, and it now has to find another $3,000 for the ATO on the BAS and $7,500 in income tax on a profit it has never seen. That is $87,500 of cash out the door against zero cash in. The profit and loss says the business made $30,000. The bank account says it is $87,500 down.

This is the mechanism behind almost every “profitable but broke” conversation we have. If you want the full picture of how profit and cash diverge across debtors, stock and work in progress, see our guide to working capital and the cash trapped in your business.

The pain is not unique to you. The Australian Small Business and Family Enterprise Ombudsman’s small business data portal records that in 2025-26, payment disputes were the second most common issue small businesses brought to the Ombudsman, with 707 cases, and notes plainly that delayed or unpaid invoices place pressure on cash flow.

Does Your GST Method Change This? Cash vs Accruals

Yes, substantially. On the accruals (non-cash) method you report GST in the period you issue the tax invoice or receive payment, whichever happens first, so you fund the ATO before the client funds you. On the cash method you report GST only when the money actually arrives, so an unpaid invoice creates no GST liability at all.

The ATO’s choosing an accounting method guidance, current as at September 2026, sets out the rule directly: on the non-cash basis you account for the GST payable on your sales in the reporting period in which you issue a tax invoice or receive full or part payment, whichever happens first. Businesses with an aggregated turnover of less than $10 million can choose the cash method.

In the example above, the same job on a cash basis produces no GST liability until the client pays. That is a $3,000 difference in cash on one invoice. Across a year of slow paying customers, it is often the difference between needing an overdraft and not needing one.

It is not a free lunch, because you also cannot claim GST credits on your purchases until you have paid them, and the income tax treatment is a separate question from the GST method. We have set out the full comparison, the eligibility rules and how to switch in our guide to GST on a cash versus accruals basis. If your debtors ledger is consistently large and slow, reviewing your GST method is one of the fastest cash wins available to you.

One caution before you switch: the bad debt deduction and the GST bad debt adjustment discussed later in this article are mostly relevant to accruals taxpayers. If you are on a cash basis you never paid the tax or the GST in the first place, so there is nothing to claim back.

Question One: Are Your Invoices Actually Going Out on Time?

Before you blame the client, check the calendar. If the job finished on the 3rd and the invoice went out on the 28th, your 30 day terms just became 55 day terms and nobody is late but you. Invoicing delay is the single most common and most fixable cause of a blown out debtors ledger, and it costs you nothing to fix.

Work through this honestly:

• How many days pass between the work being completed and the invoice being raised? Measure it for the last twenty jobs.
• Who is responsible for raising the invoice, and is it their job or something they do when they get a chance?
• Are you waiting to batch invoices at month end? That habit alone can add three weeks to your collection cycle.
• Do progress claims go out on schedule, or only when someone remembers?
• Is the invoice correct the first time? A wrong purchase order number or a missing reference can park an invoice in a client’s exceptions queue for a month.

For larger clients, invoicing correctly matters as much as invoicing quickly. If their accounts payable system needs a purchase order number, a cost centre, a signed variation or a timesheet attached, a missing field does not generate a phone call. It generates silence. Ask each major customer once what their accounts payable process requires, then build it into your invoice template.

Invoicing on time also depends on the books being in a fit state to invoice from. If job costing, timesheets and purchase coding are behind, the invoice cannot go out. That is one of the practical reasons we treat bookkeeping as the foundation of every advisory engagement rather than an afterthought.

Question Two: Is Anybody Actually Following Up?

Most small businesses have no reminder system at all. They have a memory, a sense of unease, and an awkward phone call once the debt is three months old. A reminder ladder fixes this: a fixed, scheduled, escalating sequence of contact that happens automatically whether or not the owner is thinking about it that week.

A Follow Up Ladder That Works

• Day 0: invoice issued, emailed to the correct accounts contact, not just the person who engaged you.
• Day minus 3 (before due date): a short, friendly automated reminder that the invoice falls due shortly. This one email prevents more late payments than everything that follows.
• Day 1 overdue: automated reminder, polite, with the invoice attached and payment options repeated.
• Day 7 overdue: a phone call from a real person. Not an email. The purpose is not to demand payment, it is to find out what the problem is.
• Day 14 overdue: written follow up confirming what was discussed on the call and the agreed payment date.
• Day 30 overdue: formal letter from the business owner, work paused if appropriate, payment plan offered if the client is genuinely struggling.
• Day 45 to 60: letter of demand, then referral to a collection agent or your solicitor.

Two things make this work. First, it is automated where it can be, so nothing depends on somebody remembering. Xero, MYOB and most accounting platforms will send scheduled reminders for you. Second, the phone call at day 7 is non negotiable. Email chasing is comfortable and largely useless. A two minute call tells you within thirty seconds which of the four problems below you are actually dealing with.

Keep every reminder, every call note and every letter. It is good practice, and as you will see further down, it is also what the ATO expects to see if you later want to claim the debt as a deduction.

Question Three: Why Is This Client Not Paying?

There are only four real reasons a client has not paid you: they forgot, they were surprised by the price, they are unhappy with what was delivered, or they cannot afford it. Each one has a completely different fix, and chasing all four the same way is why so many follow up systems fail. Diagnose first, then chase.

1. They Forgot

This is the majority of overdue invoices and the easiest to solve. The invoice went to the wrong inbox, it landed while the bookkeeper was on leave, or it simply got buried. The fix is systems, not relationship management: correct accounts contact, automated reminders, clear payment options, and a statement at the start of each month. If most of your debtors fall into this bucket, you do not have a client problem, you have a process gap.

2. They Were Surprised by the Price

The invoice is larger than the client expected, so instead of arguing they simply do not pay it and hope you do not ask. This is almost always a quoting and scope problem, not a collections problem. Variations were done on a handshake, scope crept, or the original quote was vague enough that both sides heard what they wanted to hear.

The fix sits upstream. Quote in writing with inclusions and exclusions spelled out. Price variations before you do them, not after. Where a job is going to run over, tell the client while it is happening rather than at invoice time. In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the businesses with the cleanest debtors ledgers are almost never the toughest at chasing money. They are the clearest at setting expectations before the work starts.

If your pricing itself is the problem rather than the communication, that is a different conversation again, and our article on profit margins is the better starting point.

3. The Work Was Not Delivered the Way They Expected

A withheld payment is often a complaint that nobody escalated. Something was late, something was wrong, someone did not call back, and the client has decided that not paying is the cleanest way to get your attention. It usually works, which is exactly why it keeps happening.

If this is a recurring theme across several debtors, the problem is not your collections process, it is your service delivery. Look at handover, communication during the job, quality control, and whether anyone owns the client relationship after the sale. Fixing that lifts your margins, your referrals and your debtor days all at once. It is the same principle we apply when helping clients read the operational story behind their numbers in a profit and loss statement: the ledger is telling you something about how the business actually runs.

4. They Genuinely Cannot Pay

Some clients are in trouble. The earlier you find this out, the better your position, because the businesses that get paid in a cash squeeze are the ones that asked first. Offer a structured payment plan in writing, secure what you can, stop supplying on credit, and consider whether you need to be registered on the Personal Property Securities Register for goods you have supplied.

This is also the group where credit checks earn their keep. Running a credit check before extending significant terms to a new customer, and setting a credit limit you are comfortable losing, is cheaper than the write off. And if the squeeze is happening in your own business rather than your customer’s, deal with it early: our guides to ATO payment plans and the ATO’s renewed debt collection activity explain what the Commissioner is doing in 2026 and why waiting is the expensive option.

Fix the System, Not Just the Symptom

Chasing debtors harder treats the symptom. The structural fix is to change the terms of trade so less money is at risk in the first place. Deposits, progress claims, shorter terms, direct debit authorities and clear written agreements do more for your cash position than any amount of follow up, because they change the rules rather than the effort.

• Take a deposit. For project work, 30 to 50 per cent up front is normal in most industries. A client who will not pay a deposit is telling you something.
• Bill in stages. Progress claims against milestones keep your exposure small and surface problems early.
• Shorten your terms. Fourteen days is a legitimate commercial term for most small business work. Thirty days is a habit, not a law.
• Make paying easy. Card, direct debit and payment links on the invoice remove friction. The small merchant fee is cheaper than 40 extra debtor days.
• Get it in writing. A signed engagement letter or terms of trade, with interest on overdue amounts and recovery costs specified, is what your solicitor will need if it ever goes that far.
• Set a stop supply rule. Decide in advance at what point work pauses, and apply it consistently. Continuing to supply a client who is 90 days overdue is a decision to lend them money.
• Separate the money. Keeping GST and tax in their own accounts, rather than one operating account, stops you spending money that was never yours. Our article on the six bank accounts every business owner needs sets out the structure we recommend.

Measure It: Debtor Days and the Ageing Report

You cannot manage what you do not measure. Two numbers tell you almost everything: debtor days, which is average debtors divided by annual sales multiplied by 365, and the aged receivables report broken into current, 30, 60 and 90 plus day buckets. Review both monthly, at the same meeting, against a target you have actually set.

If your terms are 30 days and your debtor days are 62, you are funding roughly a month of sales out of your own pocket. On $1.5 million of turnover that is about $130,000 of working capital tied up for no return. Bringing it back to 40 days releases roughly $90,000 in cash without selling anything extra.

Debtor days is one of a small handful of numbers that actually run a business. If you are building a monthly reporting pack from scratch, start with our list of the five financial numbers every small business owner must know.

The 90 plus column is the one to watch. Debts rarely improve with age, and the older bucket is where your eventual write offs are already sitting. If it is growing quarter on quarter, escalate now rather than at year end. This is exactly the kind of number a Virtual CFO engagement puts in front of you every month, alongside your budget and cash flow forecast, so the conversation happens while there is still time to act.

None of this works on bad data. If your bank feeds are not reconciled and payments are not allocated against the right invoices, your ageing report is fiction and you will end up chasing clients who have already paid. Clean books come first, which is why we start every advisory engagement with the ledger and a proper bank reconciliation process.

When the Debt Is Genuinely Bad: Writing It Off for Tax

If you have chased a debt properly and it is not coming, you can claim a tax deduction for it. The ATO requires three things: the amount must have been included in your assessable income, the debt must actually be bad rather than merely doubtful, and you must write it off as bad in writing before the end of the income year in which you claim it.

Those three conditions come straight from the ATO’s guidance on deductions for unrecoverable income (bad debts), current as at September 2026. The detail sits in Taxation Ruling TR 92/18, which remains the Commissioner’s stated view on when a debt is bad and what writing off actually means.

What Makes a Debt Bad Rather Than Just Old

Age alone is not enough. TR 92/18 is explicit that a debt will not be accepted as bad merely because a set period such as 180 or 270 days has passed with no payment. What is required is a bona fide commercial judgement, based on the facts, that there is little or no likelihood of recovery. A debt that is merely doubtful does not qualify.

The ruling accepts a debt as bad where, for example, the debtor has died leaving insufficient assets, cannot be traced, is a company in liquidation or receivership with insufficient funds, the debt has become statute barred, or on an objective view of the facts there is little or no prospect of recovery. You do not have to exhaust every legal avenue, but you do have to make a genuine, evidenced assessment.

Document What You Did to Collect

This is where the follow up ladder pays you back a second time. TR 92/18 lists the steps that support a write off, and the ATO’s own guidance points to evidence such as reminder notices issued and attempts to contact the debtor by phone or mail. The taxpayer carries the onus of proof, so your file needs to show the work, not just the conclusion.

Depending on the size of the debt, a defensible file typically includes some or all of the following:

• Copies of the original invoice and the reminder notices issued.
• A record of telephone and email contact attempts, with dates.
• A reasonable period elapsed since the due date, judged against the size of the debt and your credit arrangements.
• A formal letter of demand where the amount warranted it.
• Any summons issued, judgment obtained, or enforcement action taken.
• Correspondence from a liquidator, administrator or trustee in bankruptcy.
• A file note recording your assessment of why the debt is not recoverable.

The Write Off Must Happen Before Year End

This is the trap that costs business owners the deduction. A provision for doubtful debts is not a write off. The decision to write the debt off as bad must be made and recorded in writing before 30 June, not when the accounts are being prepared in October. TR 92/18 makes clear that a balance day adjustment made after the year has closed is too late.

The good news is that the recording does not need to be elaborate. A board minute, a written recommendation approved by a director, or a dated file note authorising the write off is sufficient, even if the accounting entry is processed afterwards. What is fatal is having nothing in writing before year end. This is precisely why we run a bad debt review with clients in May and June as part of tax planning, rather than discovering the problem at lodgement.

Claim the GST Back as Well

If you account for GST on an accruals basis, you have already paid the ATO the GST on an invoice your client never paid. You can claim a decreasing adjustment to get it back where you made a taxable sale, paid the GST, have not received the consideration, and have either written the debt off as bad or the debt has been overdue for 12 months or more.

The adjustment is claimed in the tax period in which you write off the debt, or in which you become aware that the debt has been overdue for 12 months or more. In our experience it is one of the most commonly missed adjustments on small business BAS returns, which is one of several reasons we argue that your accountant, not your bookkeeper, should lodge your BAS.

Worked Example: The Same $110,000 Invoice, Written Off

Go back to the job from earlier. The client has gone into liquidation and the liquidator has confirmed there will be no distribution to unsecured creditors. The debt is bad. The company records the write off in writing in June, before year end. Here is what comes back.

• Income tax deduction: $100,000, being the GST exclusive amount previously included in assessable income. At 25 per cent that is $25,000 of tax relief, which offsets the $25,000 of tax originally attributable to that revenue.
• GST decreasing adjustment: $10,000, claimed on the BAS for the period in which the debt was written off.
• Net position on the job: the company is out of pocket the $70,000 of GST exclusive costs it actually incurred, and nothing more.

That is the whole point of doing this properly. Handled correctly, a bad debt costs you your costs. Handled badly, by missing the write off deadline or never claiming the GST adjustment, it costs you your costs plus $25,000 of tax plus $10,000 of GST on income you never received. A bad debt you documented is a deduction. A bad debt you ignored is just a loss.

Four Traps to Watch

• Cash basis taxpayers cannot claim. If you return income on a cash receipts basis, the unpaid amount was never included in your assessable income, so there is no deduction available. TR 92/18 is clear on this, and the same logic applies to the GST adjustment.
• Companies face continuity tests. A company claiming a bad debt deduction must satisfy a continuity of ownership test or, failing that, a same business style test between the year the debt arose and the year it is written off. If your shareholding has changed, get advice before claiming.
• Related party debts attract attention. The ATO has flagged the arm’s length treatment of debts within closely held groups as an area it examines, along with the genuine nature of the bad debt and the supporting documentation. Writing off a loan to a related entity is not the same as writing off a customer invoice, and if the debtor is your own company you are also in Division 7A territory.
• Recoveries are assessable. If the client later pays, the recovered amount goes back into your assessable income in the year you receive it. Writing a debt off does not release the debtor from the liability, so keep the file open.

Where to Start This Month

Pick the three actions that move the most cash: measure the gap between job completion and invoice date, turn on automated reminders including one before the due date, and pull your aged receivables report to identify everything past 90 days. Those three steps alone typically release a meaningful amount of working capital within a quarter.

Then deal with the old debt properly. Work through the 90 plus column, decide which debts are genuinely recoverable, escalate those, and build the file on the ones that are not so the write off is defensible before 30 June. At the same time, ask whether your GST accounting method still suits the way your customers actually pay you.

This is the sort of work that sits between compliance and strategy, which is where most accountants never go. If your accountant only speaks to you after year end, you may find it useful to read our take on the signs you have outgrown your accountant.

Frequently Asked Questions

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Food and drink your business buys for employees is deductible when it is light refreshment consumed on your business premises during working hours, such as tea, coffee, fruit, biscuits and sandwiches. It is not deductible when it amounts to entertainment, which covers client lunches, restaurant meals, staff social functions and, in most cases, alcohol.

That single distinction, staff amenities on one side and entertainment on the other, decides thousands of dollars of deductions in a typical small business every year. It is also one of the most commonly mishandled areas we see when we take on a new client, usually because the whole grocery receipt has been coded to one account without anyone asking what the food was for.

I am Mina Baselyous, a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent in Melbourne. This guide sets out exactly what you can claim, what you cannot, and the practical factors that make a claim more likely to stand up.

What are staff amenities?

Staff amenities are the everyday consumables a business provides so its people can work comfortably: tea, coffee, milk, sugar, bottled water, fruit, biscuits, nuts, bread and spreads kept in the office kitchen. Because they are refreshment rather than hospitality, they sit outside the entertainment rules and are deductible in full.

The word “amenities” is doing real work here. It signals food provided so staff can get through the working day, not food provided as an occasion. That is the line the entire area turns on.

The general rule: entertainment is not deductible

Division 32 of the Income Tax Assessment Act 1997 contains a general prohibition. Section 32-5 says that to the extent you incur a loss or outgoing in respect of providing entertainment, you cannot deduct it under section 8-1, subject to the exceptions in Subdivision 32-B. Entertainment includes entertainment by way of food, drink or recreation.

The critical point, and the one most business owners miss, is that providing food and drink does not automatically amount to entertainment. The Commissioner says so directly in Taxation Ruling TR 97/17, which remains the ATO’s main public ruling on entertainment by way of food or drink. Whether a given purchase is entertainment is a question of fact, decided on an objective analysis of the circumstances.

The four-factor test the ATO actually applies

TR 97/17 sets out four factors for deciding whether food or drink is entertainment: why it is provided, what is provided, when it is provided and where it is provided. The ruling states that no single factor is determinative, but that why and what are the more important two. Most people only remember when and where.

Why the food is provided

This is a purpose test. Food provided for refreshment does not generally have the character of entertainment. Food provided in a social setting, where the point of the gathering is for people to enjoy themselves, does.

What food is provided

Morning and afternoon teas and light meals are generally not entertainment. The more elaborate the food becomes, the more likely it is that it crosses over. A tray of sandwiches is not the same as a catered three-course lunch, even in the same room on the same day.

When the food is provided

Food provided during work time, during overtime, or while an employee is travelling is less likely to be entertainment, because it is usually there for a work purpose. A staff social function held during work time is still entertainment, so timing alone does not save it.

Where the food is provided

Food provided on your business premises or at the employee’s usual place of work is less likely to be entertainment. Food provided in a function room, hotel, restaurant, cafe or coffee shop, or consumed alongside other entertainment, is more likely to be.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most is a business owner relying on “it was on the premises” as if that settles it. It does not. Premises is the weakest of the four factors, and it will not rescue a catered function.

What you can claim

The following are generally deductible, and generally carry no fringe benefits tax when consumed by employees on your business premises on a working day. This is the category the ATO describes as food or drink consumed by employees on your business premises.

• Tea, coffee, milk, sugar and bottled water for the office kitchen.
• Fruit, nuts, biscuits and snacks kept for staff.
• Bread, spreads and sandwich ingredients for staff lunches on site.
• Morning and afternoon teas provided during working hours.
• Light working lunches, such as sandwiches brought in for a meeting that runs through lunchtime.
• Meals provided to employees working genuine overtime, on site.

What you cannot claim

These are entertainment. The deduction is denied by section 32-5, and where no fringe benefit arises there is no offsetting relief. Coding them to “staff amenities” in your accounting software does not change their character.

• Client lunches and dinners, wherever they are held.
• Restaurant and cafe meals as hospitality rather than travel.
• Christmas parties, staff drinks and social functions.
• Tickets to sporting events, concerts and corporate boxes.
• Alcohol in most settings, discussed below.
• Elaborate or catered meals, even on your own premises.
• Your own groceries as a sole trader, discussed below.

Alcohol: the general rule and the one real exception

Alcohol is generally entertainment and generally not deductible. TR 97/17 explains that consuming alcohol usually has social connotations and affords diversion or amusement, which gives it the character of entertainment. There is, however, a narrow category where alcohol is incidental to a larger work-related activity.

The clearest example in the ruling is an employee travelling on a business trip who has an evening meal at a restaurant accompanied by some wine. The Commissioner’s view is that the employee is travelling in the course of employment, the meal is of a type normally consumed at home, and it is impractical to suggest that drinking wine in those circumstances changes the nature of the meal. That meal, wine included, is not meal entertainment and is deductible.

Read that exception narrowly. It covers wine accompanying a meal while genuinely travelling for work. It does not cover a bar tab, drinks with a client, or a night out that happens to occur while you are away from home.

Travel, meals and the travel diary

Meals you buy while travelling overnight for business are deductible as travel expenses rather than being denied as entertainment. The substantiation rules are where these claims usually fail, and there is one threshold every business owner should know.

Section 900-20 of the Income Tax Assessment Act 1997 requires you to keep travel records if your expense is for travel that involves being away from your ordinary residence for six or more nights in a row. The travel may be within or outside Australia. In plain terms, once a trip runs past five nights you need a travel diary.

A travel record means recording each business activity: what it was, the day and approximate time it started, how long it lasted and where it happened. Write it as you go. Reconstructing a diary months later, after the ATO asks, is exactly the situation the rule exists to prevent.

Why your business structure decides the answer

This is the part that catches people out, and it is the single most important thing in this article. The staff amenities treatment works because the food is provided to employees. If nobody is an employee, the reasoning collapses and the food is a private expense.

The ATO’s position is explicit. For fringe benefits tax purposes, an employee includes a current, future or past employee, a director of a company, and a beneficiary of a trust who works in the business. The ATO then states that if you are a sole trader or a partner in a partnership, you are not an employee, and benefits you provide to yourself are not subject to FBT.

• Company. You are a director, so you are an employee for these purposes. Amenities provided to you on the business premises can be treated the same as for any other staff member.
• Trust. If you are a beneficiary who actually works in the business, the same reasoning applies.
• Sole trader or partnership. You are not an employee of anything. Food for your own consumption is private and not deductible, no matter where you eat it.

One further trap worth naming. If you operate through a company or trust but take only dividends or trust distributions and never draw a salary or director’s fees, whether you are a current employee for these purposes becomes far less clear. If your structure relies on that point, have it reviewed rather than assumed. Our guide to business structures in Australia explains how the entities differ.

The $300 minor benefit trap

Many business owners know that a minor benefit under $300 can be exempt from FBT. Fewer realise that where meal entertainment is exempt as a minor benefit, it is no longer a fringe benefit, so the exception in section 32-20 does not apply and the income tax deduction is denied. You get the FBT exemption and lose the deduction.

The minor benefits exemption in section 58P of the Fringe Benefits Tax Assessment Act 1986 requires the notional taxable value to be less than $300, together with a test of how infrequently and irregularly similar benefits are provided. The ATO confirms that entertainment may be exempt from FBT where it is a minor benefit, taxi travel, or food or drink consumed by employees on your business premises (ATO guidance, last updated 12 January 2023).

The practical consequence is that a modest Christmas party can be FBT free and non-deductible at the same time. That is not a mistake in the law, it is how the two systems interact. If you want the deduction, the answer is usually to keep the spend inside genuine staff amenities rather than to chase the exemption. Our guide on how to minimise fringe benefits tax works through the trade-offs.

Factors that increase the likelihood you can claim

Beyond the four factors themselves, there are practical things that make a claim far more defensible. In our experience working with Melbourne business owners, these are what separate a deduction that survives review from one that does not.

• Keep it light. Tea, coffee, fruit and biscuits are unarguable. The more elaborate the food, the weaker the position.
• Keep it on site. Consumed on your business premises on a working day is the strongest fact pattern available.
• Keep it for employees. The moment clients are in the room, that portion is entertainment.
• Use a separate account code. Code staff amenities away from entertainment in your ledger, so the two never blur.
• Keep the receipts and note the purpose. A receipt that says who the food was for and why takes minutes and settles the question later.
• Split mixed purchases. If one shop covers office supplies and your own groceries, split it at the point of entry, not at year end.
• Do not salary package it. The on-premises exemption does not apply to food or drink provided under a salary packaging arrangement.
• Write the travel diary as you go for any trip of six nights or more.

These habits cost almost nothing to build and they hold up. The ATO’s current focus on the boundary between personal and business spending makes them more valuable than they used to be, as we cover in our article on the ATO crackdown on personal versus business deductions.

Where this sits in the bigger picture

Food and drink is a small line in most profit and loss statements, but it is a good test of whether a business is being run tightly. A business that codes its amenities correctly is usually a business that has its structure, its records and its advice in order.

If you want the full picture of what else is available to you, start with our complete guide to small business tax deductions in Australia, and read it alongside our overview of fringe benefits tax in Australia, since the two systems have to be read together.

Frequently Asked Questions

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Property investment is one of Australia’s favourite wealth-building strategies — but owning investment property without the right tax advice is like running a business without looking at the numbers. The difference between a property investor who understands their tax position and one who doesn’t isn’t a rounding error — it can be tens of thousands of dollars per year, and hundreds of thousands over a full investment cycle. In this post, I’ll walk you through the key tax considerations for Australian property investors and how to structure your portfolio for long-term wealth.

Why Property Investors Need a Specialist

Property investment sits at the intersection of income tax, CGT, land tax, GST (in some cases), and state-based regulations. Most general accountants can handle the basics — declaring rental income and claiming basic deductions — but very few have the depth to advise on optimal structure for holding multiple properties, CGT minimisation on eventual disposal, and depreciation optimisation through quantity surveyor reports.

Negative Gearing Explained

Negative gearing occurs when the expenses of holding an investment property exceed the rental income — creating a net loss. This loss is deductible against your other income (salary, business income, etc.), reducing your overall tax bill.

For example: you earn $200,000 from your business and have a rental property that generates $30,000 in rent but costs $45,000 to hold. The $15,000 net loss is deductible against your $200,000 income — saving you approximately $7,050 in tax at the 47% rate.

Interest Deductions: What Qualifies?

• Only interest on funds borrowed to acquire or improve the investment property is deductible
• Mixed-purpose loans must be apportioned between investment and personal use
• Loan fees and establishment costs are deductible over the term of the loan (not immediately)

Depreciation Schedules and Quantity Surveyors

Depreciation is one of the most underutilised tax deductions available to property investors. You can claim:

• Division 43 (building allowance): 2.5% of the original construction cost per year for residential properties built after 17 July 1985
• Division 40 (plant and equipment): Fixtures and fittings — carpets, blinds, appliances, hot water systems, air conditioning

A depreciation schedule from a registered quantity surveyor (typically $500–$700) pays for itself many times over in the first year’s deductions.

Land Tax Across States

Land tax is a state-based tax with different rates and thresholds in each state. Land tax planning is essential as a portfolio grows — the structure in which you hold property affects land tax significantly.

Using a Trust to Hold Investment Property

Holding investment property in a family trust offers income splitting, the 50% CGT discount, and asset protection. However, negatively geared properties in a trust cannot offset losses against personal income — trust losses are trapped. The trust structure works best for positively geared or high-growth properties.

CGT on Sale of Investment Property

• If held for more than 12 months, the 50% general CGT discount applies
• Timing the sale to a year when your other income is lower reduces the effective tax rate
• Capital losses from other assets offset capital gains first

SMSF and Property

An SMSF can hold residential or commercial property with rental income taxed at only 15% in accumulation phase, and 0% in pension phase. This makes it an extraordinarily tax-effective vehicle for property investment — but the property cannot be used by members or related parties for personal purposes.

How Pinnacle Approaches This With Property Investors

Property investor clients at Pinnacle get a comprehensive review of their entire portfolio and tax position. We look at each property — its income, expenses, depreciation, and projected capital gain — and advise on the most tax-effective structure. Learn more about our tax planning approach here.

To discuss your property investment tax position, contact Pinnacle today for an obligation-no-obligation consultation.

Frequently Asked Questions

Is negative gearing still available in Australia?

Yes. As of 2026, negative gearing is fully available for Australian property investors. Current ATO rules allow rental losses to be offset against other assessable income.

Can I use my SMSF to buy a property I live in?

No. The superannuation laws prohibit an SMSF from acquiring residential property from, or leasing it to, a related party including fund members.

What is the main residence exemption?

The main residence exemption excludes capital gains on the sale of your main home from CGT. If you used part of your home for income-producing purposes, or rented it out while treating it as your main residence, the exemption is apportioned.

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Much of the capital gain on Australian property is inflation, not real wealth. If every home rises together, selling one to buy an equivalent leaves you no better off, yet you are taxed on the whole nominal gain. Property largely protects wealth against inflation; a business is the asset whose value you can actually control and create.

Sell your house, buy the identical house down the street, and you pay the same price. So where was the gain? That one question undoes a lot of what Australians assume about property and wealth. I am Mina Baselyous, a Chartered Tax Advisor (CTA), CPA and Registered Tax Agent, and this is a perspective piece, general information rather than personal advice, and not a recommendation to buy or sell anything. The aim is to give established business owners a sharper lens: work out how much of a “gain” is real, how Australia taxes it, and which asset you would rather be compounding.

The house next door: where did the gain actually go?

Here is the intuition pump. If your home doubled in value, but so did every comparable home in your suburb, you have not become wealthier in the only market that matters to you, which is housing. Sell for the higher price and the replacement costs the higher price too. The number on the contract changed; your position did not. A paper gain only becomes real wealth if you leave the asset class, trade down to something cheaper, or move to a market that rose less. Otherwise the “gain” is a change in the measuring stick, not an increase in what you can actually buy.

Take a simple, like-for-like example. You bought a home in 2004 for $400,000. Today an equivalent home costs $900,000, and you sell your original for $900,000. On paper you gained $500,000. But if you want to keep living in a similar home, the replacement also costs $900,000, so in housing terms you are exactly where you started. In our experience working with business owners, this is the single most misunderstood number on a balance sheet: people see the headline gain, feel wealthy, and never ask whether it is spendable or just the market re-pricing everything at once.

How much of a “gain” is just the dollar shrinking?

Layered on top of that is plain currency inflation. A 2024 dollar buys far less than a 2004 dollar, so part of any long-run gain is simply the dollar losing purchasing power. Economists call the headline figure the nominal gain and the purchasing-power increase the real gain. Since the Reserve Bank adopted its 2 to 3 per cent inflation target in 1993, CPI inflation has averaged about 2.5% a year (RBA: Australia’s inflation target; see also the ABS history of inflation, both as at September 2026).

Apply that to the example. Assume general prices rose about 70% over those two decades, roughly in line with an average of 2 to 3 per cent a year (an illustration only; check the actual cumulative change against the ABS CPI for your dates). Your $400,000 needed to grow to about $680,000 just to stand still in purchasing-power terms. That means the real gain, the genuine increase in wealth, was closer to $220,000, and the other $280,000, more than half the headline number, was the dollar losing value.

Property has, over long periods, risen faster than general inflation: CoreLogic data puts national dwelling value growth at roughly 6.8% a year over the 30 years to 2022, and the Reserve Bank has documented that housing prices have grown strongly and well above CPI over the long run (RBA Bulletin: Long-run Trends in Housing Price Growth, September 2015). That varies a lot by city and period, so treat any single average with care. The point is not that property never rises in real terms; it often does. The point is that a large slice of the headline number is inflation of one kind or another, and part of what is left is a market you did not steer.

You are taxed on that inflation, and Australia used to index for it

Australia does have capital gains tax, and it applies. That is not in dispute. The sharper, more honest point is what CGT is applied to: under today’s rules you are taxed on the nominal gain, inflation included, not on the real gain alone. It was not always this way. For assets acquired before 11.45am on 21 September 1999, the law let you index the cost base to inflation, so tax fell only on the gain above inflation.

That indexation was frozen. Following the Ralph Review of Business Taxation, the New Business Tax System changes stopped cost-base indexation at 30 September 1999 and replaced it, from 21 September 1999, with the 50% CGT discount for individuals and trusts. According to the ATO, if a CGT event happens on or after that date you can only index the cost base up to the September 1999 quarter (ATO: Indexing the cost base, as at September 2026). For an asset bought before that date and held at least 12 months, you can still choose the frozen-indexation method or the discount method, whichever gives the lower gain.

Two things about that old indexation are worth noting. First, it used the CPI, a measure of general consumer prices, so it only ever stripped out general inflation, never property-specific or share-specific inflation. Second, the same CPI method was applied across every asset class, from property to shares to, today, crypto, even though each inflates at a different speed. Indexing by CPI was always a blunt instrument. The 50% discount that replaced it is blunter still: it halves every gain by the same amount regardless of whether you held for one year or twenty, or whether inflation over that time was low or high. In our worked example, the discount taxes you on $250,000 (half of the $500,000 nominal gain), which is more than the entire real gain of $220,000. Even after the discount, you can be taxed on more than the wealth you genuinely created.

The plot twist: indexation returns from 1 July 2027 (and this is now law)

The government has effectively conceded the point. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 replaces the 50% CGT discount for individuals, trusts and partnerships with cost-base indexation plus a 30% minimum tax rate on capital gains, applying from 1 July 2027. The ATO’s own explanation is that the cost base will be indexed for inflation using the CPI “so that only real (inflation-adjusted) gains are subject to tax” (ATO: Reforming negative gearing and capital gains tax, as at September 2026). This is law: the Act received Royal Assent on 26 June 2026, with the CGT and negative gearing measures commencing 1 July 2027.

Read that again. The reason given for reintroducing indexation is precisely the argument in this article: taxing inflationary gains was never fair. In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most is owners assuming a “50% discount” and a “30% minimum tax on real gains” are the same deal. They are not, and for some higher-income investors the new regime can be less generous, not more, even though it taxes only the real gain. And notice it still uses CPI, so it will strip general inflation but not the property-specific inflation the earlier sections described.

Two accuracy points matter here. First, negative gearing is being limited to new builds and key housing priorities from the 2027-28 income year, not abolished; losses on existing residential property bought after 7:30pm on 12 May 2026 will still be deductible, but only against residential property income including capital gains, with property held before that time grandfathered. Second, a separate 30% minimum tax on discretionary trusts has been announced but is not yet law; it is proposed to start from 1 July 2028 and should be treated as a proposal, not a settled rule. These are different measures with different statuses, and they are easy to confuse.

Reframing property honestly: wealth protection, not wealth creation

If a large slice of property’s nominal gain is inflation, and the rest is a market you cannot steer, the honest reframe is this: residential property is largely an inflation hedge that preserves purchasing power, more than a wealth-creation engine that multiplies it. That is not a criticism. Property does some things very well. It is a real, tangible asset, banks will lend against it cheaply so leverage can amplify your equity returns, it enforces a savings discipline through the mortgage, it can sit outside your trading entity for asset protection, and rents tend to rise broadly with inflation.

What property does not give you is control over value creation. You cannot buy a $1 million house, renovate it, and make it worth $10 million; a renovation moves the needle at the margin, but the market carries the rest, and you do not steer that market. It is driven by interest rates, migration, credit policy and sentiment, none of which you influence. When conditions turn, your only levers are to hold or to sell. Two honest caveats keep this balanced: gearing genuinely amplifies property returns on the way up, and trading down or moving to a cheaper market does realise a real, spendable gain. Property earns a legitimate place in a plan. It just tends to protect wealth rather than create it.

The asset you control: your business

A business is the opposite kind of asset. Market forces still apply, but on top of them you control value creation. You can lift prices, improve margins, add a product line, hire a better team, systemise operations, enter a new market, or cut a service that loses money. You can genuinely take a business worth $1 million and, through customers, strategy, stage and hundreds of decisions, build it toward $10 million. That is real, controllable wealth creation, and it compounds: a business that grows its profit also grows the multiple that profit is worth on sale. Yes, a business carries more risk and effort than a passive property, but that is the point. Because you control it, you can influence the outcome.

The tax system also treats a well-structured business sale more kindly than most people expect. The four small business CGT concessions can dramatically reduce, and in some cases eliminate, the tax on a business sale for eligible owners, and those concessions are being retained under the 2026 reforms. That is a level of tax outcome a standard residential investment property simply cannot access. The catch is that these outcomes depend heavily on getting your business structure right years before you sell, which is exactly the sort of decision most owners make too late.

This is where an advisor earns their keep. A good Virtual CFO relationship is about steering the asset you control: reading the numbers, making the strategic call when the market shifts, and compounding the result. In our experience, the owners who build lasting wealth are the ones who treat their business as the primary engine and property as the ballast, not the other way around.

So where does this leave you? A framework, not a recommendation

None of this is advice to sell your property or pour everything into your business. Both assets have legitimate roles, and the right mix depends entirely on your circumstances, risk appetite, debt, stage of life and goals. The point is to see each asset clearly. Ask of any “gain”: how much of this is real and spendable, and how much is inflation I will be taxed on? Ask of any asset: can I actually influence its value, or am I just hoping the market is kind?

For most established business owners we work with, the answer reframes their whole plan. Property earns its place as a stable, protected, inflation-hedging store of value. The business earns its place as the controllable, compounding, concession-friendly wealth engine. Getting the balance, the ownership structure and the timing right, before the 1 July 2027 changes and before any sale, is where proactive advice pays for itself many times over.

Frequently Asked Questions

For the mechanics behind all of this, see our plain-English guides to how capital gains tax works and the 50% CGT discount rule. If property is part of your plan, our guides to negative gearing and buying an investment property in a trust are worth reading, and if the business is your real engine, start with exit and succession planning or a proactive tax planning review.

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You can pay yourself from your company through salary or wages, franked dividends, a complying Division 7A loan, or trust distributions where a trust owns the company. Most owners use a combination. Salary is tax deductible to the company and carries super and PAYG withholding, while dividends pass on franking credits for tax the company has already paid. The best mix depends on your marginal rate against the company rate.

Once your business runs through a company, the money in the company bank account is not yours to spend. It belongs to a separate legal entity, and how you move it into your own hands decides how much tax you pay and whether you stay on the right side of the Australian Taxation Office. Do it well and you can smooth your income, use franking credits and keep your overall rate down. Do it carelessly and you can trigger a Division 7A deemed dividend that taxes the same money twice. Mina Baselyous, a Chartered Tax Advisor (CTA), CPA and Registered Tax Agent, structures owner remuneration for established Melbourne businesses. This guide walks through every option, the trade offs, and how to combine them tax effectively.

Salary and wages: deductible to the company, taxed to you

Paying yourself a salary or director’s wage is the simplest option. The company claims a tax deduction for the wage, so it reduces company profit, but you pay tax at your personal marginal rate, the company must withhold PAYG tax and remit it, and superannuation guarantee applies on top. It is clean and predictable, and it builds your super, but it offers no rate advantage once your income is high.

The numbers drive the decision. The company tax rate is 25 percent for a base rate entity, a company with aggregated turnover under $50 million and no more than 80 percent passive income, or 30 percent otherwise for the 2025-26 year, per the ATO company tax rates. Your top personal marginal rate is 47 percent including the Medicare levy on income above $190,000. A salary is fully deductible, but every dollar taken as wage above the middle brackets is taxed far higher than it would be if left in the company. Superannuation guarantee is also compulsory on your ordinary earnings at 12 percent from 1 July 2025, per the ATO super guarantee rate, which is a genuine cost but also a concessionally taxed way to build wealth.

Dividends and franking credits: sharing the tax the company already paid

Dividends are paid to you as a shareholder out of the company’s after tax profits. Because the company has already paid tax on those profits, it can attach franking credits to the dividend, and you receive a credit for that tax under the imputation system. You are taxed on the grossed up dividend but offset the franking credit against your bill, so the profit is not taxed twice.

Under the ATO rules on dividend imputation, you include both the dividend and the attached franking credit in your assessable income, then claim a tax offset equal to the credit. If your marginal rate is below the company rate, the excess franking credit can be refunded; if it is above, you top up the difference. Unlike a salary, a dividend is not deductible to the company and carries no PAYG withholding or super, so it is a different lever entirely. How and to whom dividends can be paid also depends on your share structure and classes of shares, which is why the share register is worth getting right early.

Division 7A: the trap of just taking the money

The most expensive way to pay yourself is to simply transfer company money to your personal account and sort it out later. If a private company lends money to a shareholder or associate and it is not repaid or put on a complying loan agreement by the company’s lodgement day, Division 7A treats it as an unfranked deemed dividend, taxable to you in full with no franking credit. It is the single most common structuring mistake we see.

The fix is to formalise the loan. Under the ATO rules on Division 7A, a complying loan needs a written agreement, interest charged at least at the ATO benchmark interest rate, a maximum term of seven years unsecured (or 25 years if properly secured over real property), and minimum yearly repayments. As Mina Baselyous (CPA, CTA) puts it, Division 7A does not stop you accessing your company’s money, it just insists you do it as a real loan, a real wage or a real dividend rather than pretending the question does not exist. For a fuller treatment, see our guide to what Division 7A is and how it works.

Trust distributions when a trust owns your company

If a family trust owns your trading company, or the trust runs the business and distributes profit to a company, you gain another lever. A discretionary trust can distribute income to a bucket company, capping the tax on retained profit at the company rate of 25 or 30 percent rather than your top marginal rate, and the money can later be paid to you as a franked dividend. This is a structuring decision, not a year end afterthought.

The classic arrangement pairs a trust with a bucket company to hold profits you do not need to live on, taxed at the company rate, and released to you as franked dividends in later, lower income years. Where a company is held inside a trust, the interaction of franking credits, the holding period rules and who can use the credits gets technical, as we explain in our post on a company held in a family trust. Used well, this is one of the most powerful ways to control the timing and rate of the tax you personally pay.

Drawings and the shareholder loan account

Drawings are simply money you take from the company during the year before it is classified as wage, dividend or loan. They are not a separate tax free method of paying yourself: every drawing sits in your shareholder loan account and must eventually be squared off as salary, a franked dividend or a complying Division 7A loan. Left unreconciled, drawings are exactly what triggers a deemed dividend.

In our experience working with Melbourne business owners, the loan account is where good intentions unravel. Owners draw what they need through the year, then discover at tax time that the balance has to be dealt with. The discipline is to decide the mix deliberately and clear the loan account each year, not to let it drift. This is bread and butter work for a proactive accountant, and one of the reasons a tax planning engagement pays for itself.

How to combine them to manage your effective tax rate

The tax effective answer is almost never one method. It is a deliberate blend: a salary up to the point where your marginal rate is still reasonable, franked dividends to pass on company tax already paid, retained profit taxed at the company rate where you do not need the cash, and a bucket company or trust to hold surplus. The goal is to smooth income across years and keep your overall effective rate down.

The right blend is personal. It depends on how much you need to live on, your other income, your marginal rate this year versus next, your super position and whether a trust sits in the structure. In practice we model several combinations and choose the one with the lowest lifetime tax, not just the lowest tax this June. Getting this right, year after year, is what separates a compliance accountant from a proactive advisor, and it is the kind of forward planning a business owner should expect from their business structure.

Frequently Asked Questions

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Yes, GST usually applies to commercial property. Selling or leasing commercial premises is generally a taxable supply, so a GST registered seller adds 10 percent to the price and a registered buyer or tenant can claim it back. Two concessions, the going concern exemption and the margin scheme, can legally reduce or remove that GST.

For an established business owner, buying or selling the premises you trade from is one of the largest transactions you will ever make, and GST can swing the numbers by tens of thousands of dollars. Get the contract wording right and the sale can be GST free or taxed only on the margin. Get it wrong and you can hand the Australian Taxation Office an extra 10 percent that was avoidable. Mina Baselyous, a Chartered Tax Advisor (CTA), CPA and Registered Tax Agent, has structured commercial property deals for trading businesses across Melbourne. This guide explains when GST applies, how the going concern exemption and the margin scheme work, how to claim input tax credits, how GST works on commercial rent, and the traps that catch owners out.

When does GST apply to a commercial property sale or purchase?

GST applies when the seller is registered, or required to be registered, for GST and sells the property in the course of running an enterprise. The sale is then a taxable supply and 10 percent GST is built into the price. Selling privately owned premises with no enterprise, by contrast, is usually outside the GST system.

The GST rate has been 10 percent since the tax began on 1 July 2000, and on a straightforward taxable sale the GST is one eleventh of the price. Registration is compulsory once your GST turnover reaches the $75,000 threshold, and a one off property sale can itself push you over that line or count as an enterprise in its own right, so a seller who assumes they are not in the GST net can be caught out. The ATO guidance on selling commercial premises and on the $75,000 registration threshold is the place to confirm your position before you sign.

Who bears the GST comes down to the contract. If the price is expressed as GST inclusive, the seller wears it out of the sale proceeds. If the contract says the price is exclusive of GST, or is silent, the buyer can end up paying an extra 10 percent on top. In our experience working with buyers and sellers, the GST clause in the contract of sale matters as much as the price itself.

The going concern exemption: how to sell commercial property GST free

The sale of a going concern is GST free, meaning no GST is added to the price and none is remitted to the ATO. It commonly applies when a commercial property is sold with a tenant and lease already in place, because the leasing enterprise continues uninterrupted. All the legislated conditions must be met, and both parties must agree to it in writing before settlement.

Under the ATO rules on selling a going concern, the supply is GST free only if all of the following apply: the sale is for payment; the purchaser is registered or required to be registered for GST; the buyer and seller agree in writing that the sale is of a going concern; the seller supplies to the buyer everything necessary for the continued operation of the enterprise; and the seller carries on the enterprise until the day of the sale. Miss one condition and the concession fails, turning a supposedly GST free deal into a taxable one.

The most common use is a tenanted investment property: the enterprise is the leasing business, so the property must be sold subject to the existing lease with the tenant remaining. Selling vacant premises you occupied yourself is much harder to structure as a going concern. As Mina Baselyous (CPA, CTA) puts it, the going concern exemption is not a box you tick at settlement, it is a set of conditions you have to engineer into the deal from the first draft of the contract.

The margin scheme: paying GST on the margin, not the full price

The margin scheme lets an eligible seller calculate GST as one eleventh of the margin, that is the sale price less what they originally paid for the property, rather than one eleventh of the whole selling price. On a property that has grown in value, that can cut the GST bill substantially. The scheme can only be used on a taxable sale, and the buyer and seller must agree to it in writing on or before settlement.

Eligibility is the catch. Under the ATO rules on eligibility to use the margin scheme, you generally cannot use it if you originally bought the property through a sale that was fully taxable and did not itself use the margin scheme. In other words, the history of how you acquired the property determines whether you can pass the margin scheme on when you sell. The calculation of the GST payable then rests on your purchase price or, in some cases, an approved valuation.

The trade off for the buyer is important: when you buy under the margin scheme you cannot claim an input tax credit for the GST included in the purchase price. So the margin scheme suits a sale to a buyer who is not registered or who cannot use the credit anyway, and it is a poor fit where the buyer would otherwise claim the full credit back. Working out whether going concern or the margin scheme gives the better result is exactly the kind of forward planning that proactive tax planning is built around.

Claiming input tax credits when you buy commercial premises

If you buy commercial premises in a taxable sale and you are registered for GST, you can generally claim the GST in the price back as an input tax credit, provided you buy the property to use in your enterprise. On a full taxable purchase the credit is one eleventh of the price, which can be a very large one off refund that materially changes the cash you need at settlement.

Two conditions govern the claim. You must hold a valid tax invoice, and the purchase must relate to your taxable or GST free business activity rather than to making input taxed supplies such as residential rent. There is also a timing point: the credit is claimed in your business activity statement, so the GST is often paid at settlement and recovered weeks later, creating a genuine funding gap you should plan for. Remember too that if the property is bought under the margin scheme, no input tax credit is available at all. The ATO overview of GST and commercial property sets out how these credits work.

GST on commercial rent for landlords and tenants

Leasing commercial premises is a taxable supply, so a GST registered landlord charges 10 percent GST on the rent and outgoings, and a GST registered tenant claims that GST back as an input tax credit. This is the opposite of residential rent, which is input taxed: no GST is charged and the landlord cannot claim credits on the associated costs.

For most business to business leases the GST washes through, the landlord remits it and the tenant reclaims it, so the real cost is neutral. It matters most where one side is not registered. A landlord below the $75,000 threshold who is not registered does not charge GST but also cannot claim credits on the building’s running costs, while a tenant who is not registered wears the GST on the rent as a true cost. The distinction between commercial and residential is also why owners holding property in different structures, for instance through a family trust earning residential rent, face very different GST outcomes, and why the ownership structure should be decided with GST in mind.

The GST traps that catch business owners buying or selling premises

Most GST damage on commercial property is done in the contract, not the tax return. The recurring traps are assuming a going concern applies when a condition is not met, agreeing to the margin scheme too late, buying through a structure that cannot claim the credit, and forgetting that a single price can be quoted GST inclusive or exclusive. Each of these is fixable before signing and expensive afterwards.

• Going concern that quietly fails. The buyer is not registered by settlement, the tenant vacates before completion, or the written agreement is missing. Any one of these turns a GST free sale into a taxable one, often with no price adjustment to cover it.
• Margin scheme agreed too late. The written agreement to apply the margin scheme must be in place on or before settlement. Leaving it to the accountant after the deal has settled is too late, and the concession is lost.
• Buying where you cannot claim the credit. Purchasing in a structure that makes input taxed supplies, or under the margin scheme, means the GST in the price is a permanent cost, not a recoverable credit.
• GST inclusive versus exclusive confusion. A price that looks competitive can carry an extra 10 percent if the contract says GST is payable in addition, so read the GST clause before you fall in love with the number.
• Wrong entity on the contract. The buyer named in the contract should match the entity that will be registered and claim the credit, which ties directly to your overall business structure.

These decisions rarely sit in isolation. If you are weighing whether to hold the premises personally, in a company, in a trust or inside super through the business real property strategy in an SMSF, the GST treatment, stamp duty, income tax and asset protection all interact. That is a conversation to have before you sign a contract of sale, not after.

Frequently Asked Questions

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Yes, a self-managed super fund can buy a residential investment property, but the rules are strict. The property must satisfy the sole purpose test, cannot be bought from or lived in by you or any related party, and must be leased at arm’s length. Since 10 August 2026, new residential purchases can no longer be funded by borrowing, so the fund must use its own cash.

SMSF property investment is one of the most misunderstood strategies in Australian superannuation. Done properly, holding a residential investment property inside your fund can build wealth in a concessionally taxed environment. Done carelessly, it can make your fund non-complying and cost you close to half its value in tax. As a Chartered Tax Advisor (CTA), CPA and Registered Tax Agent, I wrote this guide so established business owners can see exactly what is allowed, what changed in 2026, and whether the strategy actually suits them before committing hundreds of thousands of dollars of their retirement savings.

Self-managed super is a large and growing part of the system. As at 30 June 2025 there were more than 653,000 SMSFs holding around $1.05 trillion in assets, according to the ATO SMSF quarterly statistical report (June 2025), and residential real property makes up roughly five per cent of those assets. It is popular, but it is also the area where we see the most expensive mistakes.

Can your SMSF actually buy a residential investment property?

Your SMSF can buy a residential investment property outright, provided the purchase is a genuine investment for members’ retirement and meets the superannuation rules. The property must be bought from an unrelated party at market value, held solely to provide retirement benefits, and never used or occupied by you, your family, or any related party. It is an investment asset, not a lifestyle or family asset.

This is the point most people miss. A residential property in your SMSF is treated completely differently from one you own personally. You cannot spend a weekend in it, you cannot let your adult child rent it, and you cannot buy the unit you already own and shift it into the fund. The residential rules are far tighter than the rules for commercial premises, which is why we treat the two strategies as entirely separate conversations. If your interest is in owning the premises your business trades from, that is a commercial strategy, and you should read our guide on buying your business premises through your SMSF instead.

The big 2026 change: you can no longer borrow to buy residential property

This is the most important development in years. From 10 August 2026, an SMSF can only use a Limited Recourse Borrowing Arrangement (LRBA) to buy real property if that property is business real property. In plain terms, new borrowing to acquire a residential investment property inside super is no longer available. Your fund can still buy residential property, but it must now use its own cash.

The change came in through the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received Royal Assent on 26 June 2026, and it is now law. The ATO confirms the new rules apply to LRBAs entered into on or after 10 August 2026, and that LRBAs are not banned entirely: funds can still borrow to acquire business real property (such as commercial premises), and existing arrangements continue. See the ATO’s guidance on the changes to LRBAs for property from 10 August 2026.

According to the ATO, three situations are unaffected by the change: existing LRBAs entered into before 10 August 2026, the refinancing of those existing LRBAs, and binding contracts to acquire real property that were exchanged before 10 August 2026, even if the contract settles or the loan is entered into after that date. If you were already part-way through a residential purchase under an old contract, you are grandfathered. If you are starting fresh, borrowing for residential is off the table.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most is owners still assuming they can gear a residential property inside super the way they could in 2024. That door is closed for new purchases. The mechanics of the old borrowing structure, the bare trust and the LRBA, still matter for existing arrangements and for commercial property, and we explain them in our guide to the SMSF bare trust and how LRBAs work.

The rules you cannot break

Every SMSF investment must exist for one reason only: to provide retirement benefits to members. For residential property this creates several hard rules that override any commercial logic or family convenience. Break one of them and the ATO can make your fund non-complying, which means it loses its concessional tax status and can be taxed at the top marginal rate on its assets. These are the non-negotiables.

It must pass the sole purpose test

The sole purpose test requires that the property is held solely to provide retirement benefits, with no present-day benefit to any member or related party. The ATO is explicit that no one associated with your SMSF should get a present-day benefit from its investments. A single night’s stay by a member or relative is enough to breach it, and there is no brief use exception. See the ATO’s guidance on SMSF investment restrictions.

You cannot buy it from a related party

An SMSF generally cannot acquire an asset from a related party. Business real property and listed securities are exceptions; residential property is not. This means you cannot sell your own investment unit to your fund, buy your sister’s apartment, or transfer a property held in your family trust into the SMSF. Residential property must be bought from an unrelated third party at arm’s length, or the fund breaches the related-party acquisition rules.

No one related can live in it or rent it

A residential property owned by your SMSF cannot be lived in or leased by you or any related party, at any price. Unlike commercial premises, which can be leased back to your own business at market rent, residential property must be tenanted only by genuinely unrelated tenants on an arm’s length lease. Renting to your children, parents or business partners is a straight breach, even if they pay full market rent.

Arm’s length and the in-house asset rule

Every dealing must be on arm’s length, market-value terms. If a transaction is not at arm’s length, the income can be taxed as non-arm’s length income at the top marginal rate. The fund must also keep in-house assets to no more than 5 per cent of total assets. A directly held residential property tenanted by strangers is not an in-house asset, but the moment a related party is involved, the in-house asset and related-party rules come into play. These interlocking rules are why residential SMSF property needs proper structuring, the same discipline we apply across trusts and asset-protection structures.

How your SMSF pays for it now: cash, liquidity and diversification

With new residential borrowing gone, your fund now needs enough cash to buy the property outright, plus a buffer. That is a high bar. A fund buying a $700,000 property needs the full purchase price and costs available, and it still has to hold enough liquidity to pay members’ pensions, insurance premiums, and the annual accounting and audit fees. This is where many SMSF property plans fall over.

Liquidity and diversification are the two risks we watch most closely. A single property can swallow the majority of a fund’s balance, leaving it concentrated in one illiquid asset that cannot be sold in part. If a member moves into pension phase and needs to draw a minimum pension, or an unexpected cost arrives, a fund with almost everything tied up in bricks and mortar can be forced to sell at the wrong time. Your fund’s investment strategy, which the ATO requires you to document and review, must genuinely address this.

The tax on SMSF residential property

The tax treatment is the reason the strategy is attractive. Rental income inside a complying SMSF in accumulation phase is taxed at 15 per cent, well below the marginal rates of up to 47 per cent that apply to property held personally. If the fund holds the property for more than 12 months, the capital gain on sale receives a one-third discount, bringing the effective tax rate to 10 per cent. In retirement (pension) phase, income and capital gains supporting a pension can be entirely tax-free.

That 0 per cent outcome in pension phase is the headline. A property that has grown in value for years can, with the right timing and advice, be sold with no capital gains tax at all once the fund is wholly supporting retirement-phase pensions. See the ATO’s guidance on how SMSFs are taxed for the current rates. Getting the timing of a sale right relative to pension phase is exactly the sort of forward planning that belongs in a proper tax planning conversation, not an afterthought at sale.

Pros, cons and who it actually suits

Residential property in an SMSF suits a specific type of owner: someone with a strong super balance, stable contributions, a long time horizon, and a genuine tolerance for holding a single illiquid asset. It is rarely the right move for a fund with a modest balance that would become dangerously concentrated. The honest answer for many owners is that a commercial premises strategy, or keeping property outside super, serves them better.

The advantages are real: concessional tax on rent, a discounted or nil rate on capital gains, and an asset held for retirement inside a protected structure. The trade-offs are just as real: no more borrowing for new residential purchases, high cash requirements, concentration and liquidity risk, the strict no-personal-use rules, and higher ongoing compliance costs. In our experience working with clients, the strategy works best as one considered part of a broader wealth and structuring plan, not a standalone punt on the property market.

How Pinnacle helps, and who else you need

SMSF property is a team effort, and it matters that each professional stays in their lane. As your registered tax agent and SMSF accountant, Pinnacle handles the fund’s establishment and structure advice, annual accounting, tax return and audit coordination, compliance review against the sole purpose test and in-house asset rules, and how the property fits your wider business and personal tax strategy. We are the advisor in the room before the decision is made, not just the firm that files the paperwork afterwards.

Two things sit outside our licence. A licensed financial adviser must advise on whether the property is a suitable investment for your fund and on contribution and pension strategy. A solicitor handles the conveyancing and any deed work. We coordinate closely with both so the structure is compliant and tax-efficient from day one. If you want to know whether residential property genuinely belongs in your fund, that is the conversation to have with us first.

Frequently Asked Questions

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