Deductible Business Expenses
What Australian sole traders and company directors can claim under s 8-1 ITAA 1997: the general deduction provision, home office methods, motor vehicle rules, travel, clothing, substantiation requirements, and the expenses the ATO will not allow.
Section 8-1 of the Income Tax Assessment Act 1997 permits deductions for losses or outgoings incurred in gaining or producing assessable income or necessarily incurred in carrying on a business, provided they are not capital, private, or domestic in nature. Mixed-use expenses must be apportioned to the business portion. The home office fixed rate for 2025-26 is 70 cents per hour. Motor vehicle deductions can be claimed at 88 cents per kilometre (capped at 5,000 business km) or via the logbook method using actual costs.
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The general deduction provision: s 8-1 ITAA 1997
Section 8-1(1) permits deductions for any loss or outgoing to the extent it is either incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The expense must not be of a capital nature (capital items are depreciated, not expensed) and must not be private or domestic. The test is always whether there is a sufficiently close connection (nexus) between the expense and the income-earning activity.
Apportionment for mixed-use expenses
When an expense serves both business and private purposes, only the business-use portion is deductible. The ATO's three golden rules: the expense must be for the business (not private use), must be apportioned if mixed, and must be supported by records showing how you calculated the business portion. Common examples include mobile phone bills, home internet, and vehicle running costs.
Home office expenses: fixed rate and actual cost methods
Self-employed Australians working from home can claim using either the fixed rate method or the actual cost method. The two methods differ in simplicity, record-keeping burden, and the deduction they produce.
Fixed rate method (70 cents per hour)
For 2025-26, the fixed rate covers electricity, gas, phone, internet, stationery, and computer consumables. You must keep a record of every hour worked from home across the entire income year, using timesheets, rosters, diaries, or similar contemporaneous documents. You must also retain at least one bill for each expense type the rate covers to prove you incurred those costs. Decline in value of home office furniture and equipment is claimed separately on top of the fixed rate.
Actual cost method
Calculate your actual expenses and multiply by your business-use percentage. Determine the percentage using a representative four-week diary to establish how much of your electricity, gas, internet, and phone relates to work. This method can produce a larger deduction than the fixed rate for high-use home offices but requires significantly more detailed records.
Occupancy expenses
Rent, mortgage interest, council rates, and home insurance are only deductible if the area used for business is set aside exclusively and used regularly as a place of business. Claiming occupancy expenses may have CGT implications on a future sale of the home. Most sole traders working from a shared living space cannot claim occupancy expenses.
Motor vehicle expenses
Two methods are available for self-employed taxpayers claiming car expenses. The choice depends on business kilometres, vehicle running costs, and record-keeping capacity.
Cents-per-kilometre method
Rate for 2025-26 is 88 cents per business kilometre. Maximum of 5,000 business kilometres per car per year, giving a maximum deduction of $4,400. The rate covers all vehicle expenses including registration, insurance, maintenance, repairs, fuel, and decline in value. No detailed records are required beyond a reasonable estimate of business kilometres. Best suited to low-mileage business use or as a simple fallback.
Logbook method
Keep a logbook for a continuous 12-week period recording every trip: date, odometer readings, kilometres driven, and business-or-personal classification. The logbook is valid for five years unless circumstances change. Calculate business-use percentage by dividing business kilometres by total kilometres during the logbook period, then apply this percentage to all running costs plus decline in value. All receipts for car expenses must be retained.
Travel expenses
Accommodation, meals, and incidentals for business travel are deductible at actual cost or using ATO reasonable allowance rates published annually in Taxation Determinations (TD 2025/4 for 2025-26). Travel between work sites and travel to client meetings is deductible. When travel includes both business and private components, only the business portion is deductible.
Travel diary requirement
A travel diary is mandatory when travelling for six or more consecutive nights for work purposes. The diary must record dates and times of departure and return, business activities undertaken each day, people met for business purposes, and expenses incurred with supporting receipts. Without a valid diary, the ATO can deny the entire travel deduction for that trip.
Clothing and protective equipment
Occupation-specific clothing that is distinctive and particular to your trade is deductible. Protective clothing and personal protective equipment (PPE) are deductible. Conventional clothing is not deductible even if your employer or client requires you to wear it, because it is considered private or domestic in nature.
Laundry claims
For eligible work clothing, laundry expenses of $150 or less per year can be claimed without written evidence. Above $150, full substantiation (receipts or a reasonable calculation) is required.
Other common deductions for self-employed Australians
The following are deductible to the extent they relate to your business, subject to the general s 8-1 nexus test and substantiation requirements under Division 900.
Expenses the ATO will not allow
Certain categories of expenditure are specifically non-deductible regardless of business connection.
Substantiation rules: what to keep and for how long
Written evidence is required for all deductions exceeding $10, with limited exceptions for laundry under $150 and cents-per-km car claims. Records must be kept for five years from the date of lodgement of the return in which the deduction is claimed. Digital records are fully acceptable provided they are accurate, legible, and reproducible. Division 900 of the ITAA 1997 sets out these requirements.
Statute references
- Income Tax Assessment Act 1997 s 8-1 (general deduction provision)
- Income Tax Assessment Act 1997 s 8-5 (specific deductions)
- Income Tax Assessment Act 1997 Division 28 (car expenses)
- Income Tax Assessment Act 1997 Division 900 (substantiation rules)
- TD 2025/4 (reasonable travel allowance amounts for 2025-26)
- ATO PCG 2023/1 (home office fixed rate method)
Frequently asked questions
Can I claim home office expenses if I do not have a dedicated room?+
What records do I need to claim motor vehicle expenses?+
Are fines and penalties deductible?+
How long must I keep records for claimed deductions?+
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