Tax deduction is deductions are expenses you can deduct from your income, so that you only pay tax on the surplus. The more expenses you have, the less tax you will pay.
To clarify, a tax deduction does not equate to reducing the tax itself; rather, it involves deducting allowable expenses from your total income, which results in a lowered assessment of company profit and, by extension, a reduced tax liability on that adjusted profit. It is crucial to distinguish between the expense deduction and the direct deduction of tax.
In Australia, businesses, including sole traders and corporations, are eligible for tax deductions on a wide array of operating expenses. While many of the permissible deductions are similar for both business structures, certain specific rules can vary between sole proprietorships and limited liability companies. It’s important for business entities to be familiar with the deduction entitlements specific to their respective structures to maximise tax efficiency.
How does my company get tax deductions?
In Australia, businesses can obtain tax deductions for various expenses and investments. Some common types of tax deductions include:
Depreciation and depletion: A capital allowances regime allows a deduction for the decline in value of depreciating assets held by a taxpayer. The holder of the asset is entitled to the deduction and may be the economic, rather than the legal, owner.
Employment expenses: Both people living in the country and non-residents can deduct work-related expenses that can be verified. This includes money spent on business travel, using a car for work, joining professional or trade groups, some home office costs, and protective clothing.
Giving to a registered charity: If you donate AUD 2 or more, gifts to qualified charity are deductible from your taxes. However, there cannot be a loss on these donations due to the tax benefit of the deductions.
Interest expenses: If foreign corporations are subject to 10% or less in taxes, taxpayers may deduct interest paid on loans from those companies. It’s a good idea to find out whether the country offers any tax reductions.
Work expenses: Various business-related expenses can be deducted from taxes. This includes costs for home offices, travel and transportation, and fees for professional memberships.