For small and medium business (SMB) owners, understanding what you can deduct is one of the most effective ways to reduce your taxable income and improve cash flow. However, the line between a fully deductible expense and a capital cost can be confusing.

At Stewart & Smith Advisory, we help you navigate the complexity of the Australian tax landscape. Here’s a breakdown of what constitutes a deductible business expense, how to differentiate it from a capital cost, and a look at Fringe Benefits Tax (FBT) implications.

What is a Deductible Company Expense?

The Australian Taxation Office (ATO) allows you to claim a deduction for most expenses incurred in running your business, provided they are:

1. Incurred in gaining or earning your assessable income.
2. Not private or domestic in nature.
3. Substantiated with proper records (receipts, invoices, logbooks).

These are typically your day-to-day operating costs (or revenue expenses): wages, rent, office supplies, utilities, marketing, and the business portion of mixed-use items (like a vehicle or phone).

Revenue vs. Capital Expenses: Why the Difference Matters

The most crucial distinction for tax timing is between a revenue expense (fully deductible in the year it’s incurred) and a capital expense (deducted over several years).

1. Revenue Expenses (Immediate Deduction)

These are costs incurred in the ordinary course of running your business and maintaining its current income-earning capacity. They are generally short-term or recurring.

2. Capital Expenses (Deducted Over Time)

These are investments in the structure of your business. They create an asset or provide an enduring benefit (a long-term advantage) that improves or maintains the business’s income-earning capacity.

Case Study Examples

Legal Expenses

Repairs and Maintenance (R&M)

Timing and Deductibility of Finance and Subscriptions

The timing of your deduction often comes down to when the expense is “incurred” and whether it falls under the ATO’s prepayment rules.

1. Interest Costs (Finance Expenses)

The interest component of a loan is generally deductible, provided the borrowed funds were used for a business or income-producing purpose. The loan principal itself is not deductible.

• Deductibility: Generally, interest is a revenue expense and is deductible in the income year it is incurred (usually the period it accrues for).
• Purpose is Key: If you borrow $50,000, using 80% for business equipment and 20% for a family holiday, only 80% of the interest is deductible.
• Borrowing Costs: Fees for setting up a loan (e.g., valuation fees, legal costs, loan establishment fees) are deductible. If the total cost is $100 or less, it is deductible immediately. If the cost is more than $100, it must be deducted evenly over the life of the loan (up to a maximum of five years).
• Note on ATO Interest: Crucially, the General Interest Charge (GIC) or Shortfall Interest Charge (SIC) imposed by the ATO on overdue tax debts is not tax deductible for businesses from 1 July 2025.

2. Subscriptions, Memberships, and Prepaid Expenses

Subscriptions and professional memberships (e.g., software licences, industry publications, trade association fees) are standard operating expenses and are usually deductible. The main tax issue is the timing of the deduction for prepayments.

The Prepayment Rules

If you pay for a service (like an annual subscription or rent) in advance, the tax deduction may need to be spread over the period the service covers, rather than claimed all at once.

• Immediate Deduction Exclusions (The ’12-Month Rule’): If you are a small business entity, you can claim an immediate deduction for the prepaid expense if: The payment is for a period that does not exceed 12 months (e.g., a one-year subscription). The service period ends in the next income year (e.g., a subscription paid on 1 October 2025 covers until 30 September 2026).
• Apportionment is Required: If the service period is longer than 12 months or ends beyond the next income year, the expense must be apportioned (spread) over the eligible service period (up to a maximum of 10 years).

The FBT Connection: Taxable Benefits for Employees

Fringe Benefits Tax (FBT) is a tax paid by the employer (your company) on certain benefits provided to an employee (or their associates) in connection with their employment.

Why FBT Matters for Deductibility

The rules are simple but critical:

1. Fringe Benefits are deductible: The cost of providing a fringe benefit (e.g., the cost of a car provided for private use) is generally an income tax deduction for your company.
2. FBT is deductible: The actual FBT amount you pay to the ATO is also an income tax deduction for your company.

This means that while FBT itself is an additional tax liability, it ensures the expenditure related to the benefit is fully tax-effective for the company.

Common FBT Examples:

• Allowing an employee to use a work car for private travel.
• Paying for an employee’s private expenses (e.g., gym membership, school fees).
• Providing entertainment (e.g., non-exempt social functions or restaurant meals).

FBT Tip: Utilising the ‘otherwise deductible’ rule or providing ‘exempt’ benefits (like minor benefits under $300 or certain work-related portable electronic devices) can often reduce or eliminate your FBT liability while maintaining the expense’s deductibility.

Key Takeaways

To maximise your deductions and stay compliant:

1. Scrutinise the Purpose: Ask yourself: Is this cost for day-to-day running (Revenue), or does it create/improve a long-term asset (Capital)?
2. Keep Records: Proper substantiation is non-negotiable for all claims.
3. Don’t Ignore FBT: Account for FBT on employee benefits to ensure full deductibility for your company.

Navigating these rules is essential to optimising your SMB’s financial position. If you are unsure about the nature of a specific expense, seeking professional advice is always the safest course of action.

Would you like to schedule a consultation with one of our advisors to review your business’s current expense classifications and FBT obligations? Contact us here.