Small business tax deductions in Australia: What you can claim in 2026-27

Published Monday 24 August 2026

Table of contents

• What is a small business tax deduction?
• Common business expenses you can claim
• The instant asset write-off explained
• Expenses you can't claim
• Record-keeping tips for tax deductions
• What changed from 1 July 2026
• Simplify your tax deductions with Xero
• FAQs on small business tax deductions

Key takeaways

• You can claim a tax deduction for any expense directly related to earning your business income, as long as you have records to back it up.
• The instant asset write-off threshold is $20,000 per asset and became permanent from 1 July 2026, removing the need for annual extensions.
• The Australian Taxation Office (ATO) requires you to keep business records for at least five years, so store your receipts and invoices digitally to stay organised.
• As of 1 July 2026, Payday Super requires you to pay super on the same day as wages, and the superannuation guarantee rate remains at 12%.

What is a small business tax deduction?

A tax deduction reduces your taxable income by letting you claim legitimate business expenses against the income your business earns. The lower your taxable income, the less tax you pay.

To qualify as a small business for ATO purposes, your business needs an aggregated turnover of under $10 million. This applies whether you're a sole trader, partnership, company, or trust.

The general rule is straightforward: the expense must be directly related to earning your assessable income, as the ATO outlines in its guidance on business deductions. If you buy something purely for personal use, you can't claim it. If it's partly for business and partly personal, you can claim the business portion.

How you claim depends on your business structure. Sole traders claim deductions through their individual tax return. Companies, partnerships, and trusts claim through their respective business tax returns.

Common business expenses you can claim

Australian small businesses can claim deductions across a wide range of everyday expenses. Below is a breakdown of the most common categories and what to keep in mind for each.

Operating costs

Your day-to-day business running costs are generally deductible. These include:

• Rent and lease payments for your business premises
• Utilities such as electricity, gas, and water
• The business-use portion of your internet and phone bills
• Office supplies and stationery
• Cleaning and maintenance costs for your workplace

If you run your business from a commercial premises, these costs are usually fully deductible. If you work from home or share expenses between business and personal use, you'll need to calculate the business portion. A guide to understanding business expenses can help you work out which costs qualify.

Motor vehicle expenses

If you use your vehicle for business purposes, you can claim those costs using one of two methods.

The cents-per-kilometre method lets you claim 91 cents per kilometre for 2026-27 (up from 88 cents in 2025-26), up to a maximum of 5,000 business kilometres per year. This method suits you if your business travel is relatively low and you want a simple calculation.

The logbook method requires you to keep a logbook for at least 12 continuous weeks, recording every trip. You then claim the business-use percentage of your total vehicle costs, including fuel, insurance, registration, and depreciation. This method often returns a higher deduction if your business use is significant.

Whichever method you choose, keep records of your business trips, including the date, destination, and purpose of each journey.

Working from home

If you work from home, you have two options for claiming your home office expenses.

The fixed rate method lets you claim 70 cents per hour for every hour you work from home. This rate covers electricity, internet, phone, stationery, and computer consumables. You'll need a record of your actual hours worked, such as a timesheet, roster, or diary.

The actual cost method requires you to calculate the exact proportion of each expense used for work. This takes more effort but can result in a larger deduction if your costs are high. You'll need receipts and a reasonable basis for working out the business-use percentage.

Employee costs

If you employ staff, their costs are some of your biggest deductible expenses.

• Wages and salaries paid to employees
• Superannuation contributions at the current guarantee rate of 12%
• Workers' compensation insurance premiums
• Staff training and professional development costs
• Payments to contractors for work done on your behalf

Keep your payroll records accurate and up to date, as the ATO can audit these at any time.

Travel expenses

Business travel expenses are deductible when you travel away from your home overnight for business purposes. You can claim accommodation, meals, and transport costs.

There's an important distinction between travel and commuting. Commuting from your home to your regular workplace is a personal expense; only travel beyond your regular workplace qualifies as a deduction. Travelling from your workplace to a client site, or to a different location for a business meeting, is business travel and can be claimed.

Insurance

Most business insurance premiums are deductible, including:

• Public liability insurance
• Professional indemnity insurance
• Income protection insurance (premiums only; benefits received are assessable income)

Personal insurance policies such as life insurance and private health insurance fall outside the category of deductible business expenses, even for sole traders.

Marketing and advertising

Expenses you incur to promote your business are deductible. This includes website hosting and development costs, digital advertising spend, printed marketing materials, and sponsorship costs where the primary purpose is business promotion.

Professional services

Fees you pay for professional advice related to your business operations are deductible. This covers accountant and tax agent fees, legal fees for business matters, and bookkeeping services. You can also claim the cost of preparing and lodging your business tax return.

Depreciation and capital expenses

Not all business purchases can be claimed in full in the year you buy them. Capital assets generally need to be depreciated over their effective life. However, there are some useful shortcuts.

• Assets costing $300 or less can be claimed as an immediate deduction in the year you purchase them.
• The instant asset write-off lets you immediately deduct assets costing less than $20,000 each (more on this below).
• Assets that don't qualify for the instant write-off can be placed in the small business pool, where you claim 15% in the first year and 30% in each subsequent year.

The instant asset write-off explained

The instant asset write-off lets eligible small businesses immediately deduct the full cost of assets costing less than $20,000 each, rather than depreciating them over several years.

To be eligible, your business must have an aggregated turnover of under $10 million. For the 2026-27 financial year, the asset must be first used, or installed ready for use, from 1 July 2026 onward.

Both new and second-hand assets qualify, as long as they're used for business purposes. The $20,000 threshold applies per asset, so you can claim multiple items in the same financial year.

For example, if you purchase a $15,000 van and a $4,500 computer setup for your business, you can write off both in full because each item costs less than $20,000.

See the section below for details on the permanent threshold now in effect.

Expenses you can't claim

Not every business expense qualifies as a tax deduction. Knowing what you can't claim is just as valuable as knowing what you can.

• Personal expenses, or the personal portion of expenses shared between business and personal use
• Entertainment and social events, unless you pay fringe benefits tax (FBT) on them
• Fines and penalties, including parking fines and speeding tickets
• Capital costs that need to be depreciated rather than claimed immediately (unless they qualify for the instant asset write-off)
• Donations to organisations that are not deductible gift recipients (DGRs)

As a sole trader, your business profit counts as your income; wages you draw from the business are treated as personal drawings rather than a deductible expense.

Record-keeping tips for tax deductions

Good record-keeping is the foundation of a successful tax deduction claim. The ATO's three golden rules are simple: get a record, keep the record, and store the record safely.

You're required to keep your business records for at least five years from the date you lodge your tax return. This includes receipts, invoices, bank statements, and any other documents that support your claims.

Digital record-keeping makes this much easier. Use accounting software or a dedicated receipt-capture app to photograph and store your receipts as you receive them. This removes the risk of faded paper receipts and makes it simple to find what you need at tax time.

Separating your business and personal bank accounts is one of the most practical steps you can take. It gives you a clear trail of business transactions and makes it much faster to identify deductible expenses when you're preparing your return.

For shared expenses such as your home office, vehicle, or phone, keep a log of how you split costs between business and personal use. The ATO expects you to have a reasonable basis for the split you claim. You can find more detail in the ATO's guidance on record-keeping for small business.

What changed from 1 July 2026

Several important changes took effect from 1 July 2026, affecting how you manage deductions and employee costs in the 2026-27 financial year.

Payday Super is the biggest shift. Since 1 July 2026, you've needed to pay your employees' superannuation on the same day as their wages, rather than quarterly. This means your cash flow planning and payroll processes need to reflect this now.

The superannuation guarantee rate stays at 12% for 2026-27, with no further increase currently legislated.

The $20,000 instant asset write-off threshold is now permanent, removing the uncertainty of annual extensions.

Simplify your tax deductions with Xero

Tracking your business expenses doesn't have to be a manual, time-consuming process. Accounting software can help you capture receipts, categorise expenses, and keep your records organised year-round, so you're always ready for tax time.

With Xero, you can connect your bank accounts, automate expense tracking, and generate reports that help you identify deductions you may be entitled to. Sign up to get one month free and see how much simpler tax time can be.

FAQs on small business tax deductions

Here are answers to some of the most common questions Australian small business owners have about tax deductions.

Can I claim the cost of a laptop for my business?

Yes; if it costs $300 or less you can claim it immediately, if it costs up to $20,000 you can use the instant asset write-off, and anything above that is depreciated over its effective life. The method depends on the purchase price.

What is the difference between a tax deduction and a tax offset?

A tax deduction reduces your taxable income before your tax is calculated, while a tax offset (also called a rebate) directly reduces the amount of tax you owe after it's been calculated. Deductions lower the income figure your tax rate applies to; offsets reduce the final tax bill.

How do I claim working-from-home expenses?

You can use either the fixed rate method (70 cents per hour, with a record of hours worked) or the actual cost method (keep receipts and calculate the business-use proportion of each expense). Both are claimed through your tax return at the end of the financial year.

Do I need receipts for every deduction I claim?

The ATO requires records that prove each deduction; for purchases of $10 or less (up to a total of $200) a diary entry may suffice, but for all other claims you'll need the original receipt, invoice, or bank statement. Keeping digital copies is the safest approach.

Can sole traders claim superannuation contributions?

Sole traders can claim a deduction for personal super contributions they make to a complying super fund, up to the concessional contributions cap of $32,500 per year for 2026-27 (up from $30,000 in 2025-26). You need to lodge a notice of intent with your super fund and receive an acknowledgement before you can claim.