Sole trader tax deductions: what you can claim and what you cannot

The three rules

The ATO applies the same test to every claim:

• You spent the money and were not reimbursed by anyone.
• The expense relates directly to earning your business income, not to a private purpose.
• You have a record that shows what you bought, when, from whom, and how much.

If an expense is partly business and partly private, you claim the business portion and need a reasonable basis for the split, such as a logbook, a diary of hours, or a floor-area calculation.

Common deductions for sole traders

• Operating costs: materials, stock, consumables, subcontractors, merchant and bank fees, software and subscriptions.
• Vehicle: business-use portion of running costs via logbook, or the cents-per-kilometre method for cars. See motor vehicle deductions.
• Home office: running costs for the hours you work from home. See home office deductions.
• Equipment and tools: written off immediately if under the instant asset write-off threshold, otherwise depreciated. See instant asset write-off.
• Insurance: public liability, professional indemnity, income protection (outside super), tools and equipment cover.
• Professional costs: accountant and bookkeeping fees, registrations, licences, memberships, and the cost of managing your tax affairs.
• Education: courses that maintain or improve skills you use in your current business.
• Marketing: website, advertising, printing, sponsorship of a local team.
• Phone and internet: business-use portion.
• Travel: flights, accommodation and transport for business trips; meals only when you are away overnight.
• Super: personal contributions you claim as a deduction, with the right paperwork.
• Interest on money borrowed for the business, and bad debts written off if you report on an accruals basis.

What you cannot claim

• Private or domestic expenses, including the private share of anything mixed.
• Fines and penalties, including parking and speeding fines incurred on the job.
• Entertainment: client lunches, drinks, tickets, and the GST on them.
• Ordinary clothing, even if you only wear it for work. Uniforms with a logo, protective clothing and occupation-specific clothing are different.
• Travel from home to your regular place of work.
• The GST component of an expense if you claim it as a credit on your BAS.
• Expenses related to earning exempt or non-assessable income.
• Amounts you have not actually incurred yet, such as a quote or an unpaid invoice on a cash basis.
• Drawings, loan principal repayments and your own super guarantee (which does not exist for sole traders).

Apportioning mixed expenses

Phones, cars, internet, laptops and home offices are almost always mixed. The ATO does not prescribe a method for most of them but expects a reasonable basis you can explain. A four-week diary of phone calls, a 12-week logbook, a year of working-from-home hours, or a floor-area measurement are all accepted approaches. Pick one, record it, and apply the same percentage to the GST credit on your BAS.

Timing: when to claim

On a cash basis, an expense is deductible in the year you pay it. A subscription paid in June is claimed in that year even if it covers the next 12 months; small businesses can claim prepaid expenses up front if the service period is 12 months or less and ends by the end of the next income year.

Assets are different. Equipment over the write-off threshold is depreciated across its effective life, and the asset must be installed and ready for use, not just ordered, before 30 June to be claimed in that year.

Claim the right amount

If you are registered for GST and claim the GST credit on a purchase, your income tax deduction is the ex-GST amount. If you are not registered, the deduction is the full amount including GST. A $1,100 laptop is a $1,000 deduction plus a $100 GST credit for a registered business, or a $1,100 deduction for an unregistered one.

Keep the records

Receipts, tax invoices, bank statements, logbooks and diaries need to be kept for five years. A bank statement line alone is often enough for small amounts, but for anything the ATO might question you want the invoice as well. Software that categorises each transaction and lets you attach the receipt, such as FlowFi, keeps the evidence with the claim. See record keeping requirements.