You can claim a deduction for most expenses you incur in running your business as long as they are directly related to earning your assessable income.
Generally, working or operating expenses (such as office stationery and wages) can be claimed in the year you incur them. However, capital expenses (such as buying plant and equipment) are claimed over time.
When an expense is incurred depends on the accounting system you use. There are different rules for expenses you pay in advance (prepaid expenses).
What is an allowable deduction?
Most expenses you incur in running your business can be claimed as deductions to reduce your assessable income. You can’t claim private or domestic expenses, such as childcare fees. If you incur an expense that relates to both business and private use of an asset, you can only claim the business portion.
Expenses you can claim in the year you incur them
Working or operating expenses you incur for the everyday running of your business (such as office stationery, wages and rent of business premises) are called revenue expenses. You can generally claim a deduction for these expenses in the year you incur them.
Expenses you can claim over time
Assets that have a longer life, such as motor vehicles, furniture, and plant and equipment, are called capital assets. Generally, you can’t claim the total cost of a capital asset in the first year. Instead, you claim an amount for the decline in value, or depreciation, of the asset each year over a number of years.
You can also ‘pool’ most capital assets and claim depreciation for the pool, which is simpler than depreciating the individual assets.
When is an expense incurred?
You can generally claim a deduction for an expense in the income year you receive an invoice to pay it. Many small businesses use the cash basis method of accounting and claim deductions in the income year they pay the expense. If you pay in advance for something that won’t be wholly delivered until a later income year, there may be limits on how much you can claim in the year you pay the expense.
Ref: ATO deduction for business
