Small business tax deductions for 2025⁠–⁠26 and 2026⁠–⁠27

Small business tax deductions can make a real difference to your tax bill, but only when they're claimed correctly and backed by records. This guide is for sole traders and small business owners finalising their 2025⁠–⁠26 returns and planning purchases for 2026⁠–⁠27. It covers the main deductions and concessions, what changed on 1 July 2026 and the records you'll need.

First, are you a small business entity?

Many of the concessions below depend on being a small business entity, which generally means your aggregated turnover is less than $10 million. Aggregated turnover includes the turnover of businesses connected with or affiliated to yours, so it's worth checking if you have more than one.

The basic rules apply to everyone:

• an expense must be incurred in carrying on your business
• you can only claim the business portion of anything you also use privately
• capital purchases are generally depreciated over time rather than deducted at once, unless a concession applies
• if you're registered for GST, you generally claim expenses excluding the GST you get back as a credit

If you're a sole trader, our sole trader tax guide covers the bigger picture, including tax rates and the small business income tax offset.

Small business tax deductions for assets: the instant asset write-off

The instant asset write-off lets an eligible small business deduct the business portion of an asset's cost in the year it's first used or installed ready for use, instead of depreciating it over several years.

The permanent threshold was legislated in the Treasury Laws Amendment (Tax Reform No. 2) Act 2026. Key conditions:

• you must be a small business entity using the simplified depreciation rules
• the threshold applies per asset, so several assets can each qualify
• if you can claim a full GST credit, the cost is worked out excluding GST
• the whole cost must be under $20,000, even though you only deduct the business portion
• buying an asset isn't enough; it must be first used or installed ready for use in the income year

Example (illustrative only): a GST-registered business buys equipment for $13,200, including GST, and starts using it in March 2026, 80% for business. Its cost for the write-off is $12,000, which is under the threshold, so the business may deduct $9,600 (80% of $12,000) in its 2025⁠–⁠26 return.

The simplified depreciation pool

Assets costing $20,000 or more can go into the small business pool, where they're depreciated at 15% in the first year and 30% each year after that. If the pool's balance at the end of the year is less than $20,000, you can generally write off the whole balance.

Example (illustrative only): a $30,000 asset added to the pool would give a deduction of $4,500 (15%) in the first year and $7,650 (30% of the remaining $25,500) in the second, assuming full business use and no other pool assets.

Home-based business expenses

If you run your business from home, you may be able to claim running expenses in one of two ways:

• Fixed rate method: 70 cents per work hour for 2024⁠–⁠25 and 2025⁠–⁠26. It covers electricity and gas, phone and internet, stationery and computer consumables. You'll need a record of all the hours you work from home and evidence of each type of expense covered.
• Actual cost method: the business portion of each expense, supported by detailed records.

Under either method you may also be able to claim depreciation on items like a desk or computer separately.

Occupancy expenses, such as rent, mortgage interest, council rates and home insurance, are different. You can generally only claim them if part of your home has the character of a place of business. If you own your home, that part generally loses the main residence capital gains tax exemption when you sell, whether or not you actually claim the expenses, so get advice first.

If you also work from home as an employee, our guide to work from home deductions covers the rules that apply to employees.

Motor vehicle expenses

Sole traders and some partnerships can choose between two methods for a car.

The 2026⁠–⁠27 rate includes a one-off uplift of 2 cents per kilometre. The cents per kilometre rate covers all running costs, including depreciation, so you can't claim those separately. Companies and trusts claim actual costs, and private use of a business vehicle can raise fringe benefits tax issues.

Example (illustrative only): 3,000 business kilometres at 88 cents gives a 2025⁠–⁠26 deduction of $2,640. The same travel in 2026⁠–⁠27 would give $2,730.

Prepaid expenses and the 12-month rule

If you're a small business entity, you may be able to claim an immediate deduction for prepaid expenses, such as insurance, rent or subscriptions. The eligible service period must be 12 months or less and must end by the end of the next income year. Businesses that would be small business entities under a $50 million turnover threshold can also use this rule.

Example (illustrative only): paying a year of business insurance on 1 June 2026, covering 1 June 2026 to 31 May 2027, may be deductible in full in 2025⁠–⁠26.

Prepaying moves a deduction earlier; it doesn't create a new one. It only makes sense if the cash flow works, which is why prepayments are best discussed as part of tax planning before 30 June.

Super for employees: timing and Payday Super

Super guarantee is 12%, and from 1 July 2026 it's calculated on each employee's qualifying earnings. Employer contributions are generally deductible in the income year the super fund receives them, not when you pay a commercial clearing house.

For your 2025⁠–⁠26 return, that timing matters. Contributions for the April to June 2026 quarter were due by 28 July 2026. Any that reached funds after 30 June 2026 are generally deductible in 2026⁠–⁠27, not 2025⁠–⁠26. The exception is payments made through the ATO's Small Business Superannuation Clearing House: under the ATO's compliance approach in PCG 2020/6, payments made to it before close of business on 30 June 2026 can generally be claimed in 2025⁠–⁠26.

From 1 July 2026, Payday Super applies:

• super must be paid with each pay run, not quarterly
• contributions must reach the employee's fund within 7 business days after payday
• the ATO's Small Business Superannuation Clearing House closed on 1 July 2026, so you'll need another way to pay

If contributions are late, the super guarantee charge for periods from 1 July 2026 is deductible, but the general interest charge and penalties on it aren't. Paying on time remains much cheaper.

Bad debts

If you account for income on an accruals basis, you may be able to claim a deduction for a debt you've already included in your assessable income, provided you write it off as bad before the end of the income year. Record the write-off and your recovery efforts.

If you account for income on a cash basis, unpaid invoices were never counted as income, so writing them off has no tax effect.

Trading stock

Under the simplified trading stock rules, a small business entity only needs to account for changes in stock value if the difference between opening stock and a reasonable estimate of closing stock is more than $5,000. If it's $5,000 or less, you don't need a formal stocktake, although you can still do one and account for the change if you prefer.

Private use: claim the business portion only

Many expenses are part business and part private, such as your phone, internet, car and home. You can only claim the business portion, and you need a reasonable basis for the percentage you use, such as a diary, logbook or itemised bills. Keeping that evidence makes your claim much easier to support if the ATO asks about it.

Record keeping

Keep most records for five years, generally from when you prepared or obtained them or completed the transaction, whichever is later. For deductions, that includes:

• invoices and receipts, including for assets you've written off
• depreciation and pool calculations
• car logbooks and odometer readings
• records of hours worked from home
• stock estimates or stocktake sheets
• bad debt write-off records
• super payment dates and amounts

How Jan can help

Jan helps small businesses and sole traders on the Northern Beaches and online across Australia claim what they're entitled to, from 2025⁠–⁠26 returns to planning purchases for 2026⁠–⁠27. See how Jan prepares company, trust and partnership returns, or book a free intro call to talk through your deductions.