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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: Residents and non-residents can deduct properly substantiated expenses incurred in earning, such as business-connected travel expenses, automobile expenses, subscriptions to professional or trade organizations, certain home office expenses, and protective clothing.
Charitable contributions: Charitable contributions of AUD 2 or more are generally deductible where you can make to entities that are eligible for deductions. However, deductions for such gifts cannot generate tax losses.
Interest expenses: Taxpayers may claim interest deductions on a financing arrangement from a related foreign entity with tax rates of 10% or less, or jurisdictions that may offer tax concessions.
Bad or forgiven debts: A deduction may be available for bad debts written off as bad before the end of an income year.
Work expenses: Businesses can claim tax deductions for work-related expenses, such as vehicle and travel expenses, home office expenses, and professional subscriptions.
It is essential for businesses to consult with a tax professional or use a reliable tax calculator to ensure they are claiming the appropriate deductions and accurately reporting their taxable income. This will help avoid potential issues with the Australian Taxation Office (ATO) and ensure that businesses are taking advantage of all available tax deductions.