Business Expenses That Are Not Tax Deductible

The general rule of business is that any expense that is incurred to produce assessable income is tax deductible. This means most costs that a business pays in the general course of running their business are tax deductible. Unfortunately, sometimes it’s only when tax time rolls around that business owners realise they have paid some non-deductible expenses.

What Are Non-Deductible Expenses?

Non-deductible expenses are expenses that your business has paid for that the ATO does not allow as a tax deduction. Some expenses have a timing difference between when they are paid and when they can be claimed. Since these expenses can be claimed, this isn’t what we are referring to. We are talking about expenses that will never reduce your taxable profit. These non-taxable deductions are removed from your tax return claim on a permanent basis.

1. Fines and Penalties

Fines and penalties are extra costs that are incurred because you’ve broken a law. The ATO is not going to allow you to claim a tax deduction to help offset the cost. It doesn’t matter that you incurred that speeding fine while doing deliveries for your shop. You shouldn’t have been speeding. Since a fine is a penalty for making a mistake, it is not a tax deduction. This applies to all fines and penalties.

2. Super Guarantee Charge (SGC)

While this arguably falls into the same category as the first point, it is worth highlighting separately because it also impacts the deductibility of your superannuation guarantee. Super guarantee charge (SGC) is what you have to pay when you fail to pay the minimum required superannuation guarantee for your employees, by the due date. SGC is comprised of the shortfall of superannuation that should have been paid, interest on the late payment, and an administrative penalty. The entire payment is non-deductible. Just to reiterate, yes, this includes the shortfall superannuation component, which would have otherwise been deductible if you had paid it on time. If you fail to declare your SGC, then an ATO audit may impose additional penalties. These further penalties can potentially double your non-deductible expenses again.

The moral of the story is to pay your required superannuation guarantee on time. That way the superannuation payments are deductible and you don’t risk fines and penalties.

3. Client Entertainment Expenses

If you want to wine and dine your clients to increase their loyalty, feel free. Just don’t expect the ATO cut you any breaks on the cost. Minor costs, such as basic refreshments provided at a business meeting, on your premises, are acceptable deductions. Meals, concert tickets, parties, or any other form of “entertainment” are non-deductible business expenses.

Many business owners are fooled by watching American TV where they see businesses claim lavish parties as a tax write off. The ATO does not allow such claims, even if the entertainment is provided in the course of a business meeting, to win new clients, or to retain clients.

It is important to distinguish entertainment costs for employees from entertainment costs for clients. While entertainment is non-deductible, employee entertainment is covered by fringe benefits law.

4. Gifts Are Usually Tax Deductible Unless it is a Gift of Entertainment or Lacks Any Connection to Generating Earnings.

Typically when a business gives a gift to a client or community group they do so with the expectation that this will promote their business and lead to income. Likewise, gifts are given to thank clients, or as incentives, are done so to generate earnings from these clients. Most gifts that a business gives are therefore tax deductible as a marketing cost. (Gifts to staff are covered by fringe benefits laws).

Gifts to clients, community groups, or other parties, are not tax deductible if:

• The gift is a gift of entertainment. This is because entertainment is specifically deemed to be non-deductible by the ATO as highlighted in the previous point.
• The gift is not reasonably expected to generate future earnings. For example, donating secretly to a community group that is not a registered Deductible Gift Recipient and without any sponsorship, promotion attached to the donation.

5. The GST Component of Expenses

If you are registered for GST then you cannot claim to GST component expenses as a tax deduction. This is because you are eligible to claim the GST component back as a credit against the GST you owe on your sales.

6. Private Expenses

While you’d think this goes without saying, it is a surprisingly common mistake. For instance, you may pay childcare fees so that your child is minded while you work in your business.  Because the ATO has stipulated that this is a private expense, it is a non-deductible expense. The same goes for the purchase of ordinary, non-distinctive, business clothing or other costs that the ATO considers are of a private or domestic nature. These are non-deductible expenses.

7. Personal Use of Business Items

A common mistake is claiming the full cost of expenses that are used for both business and personal use. You must always apportion such expenses as the personal use constitutes a non-taxable expense.

Common examples are laptops and mobile phones that are used both at home and the office. For business owners who work from a home office, this may include shared internet and home phone costs. In this case, the personal portion must also factor in use by other household members as personal use.

Costs can only be claimed in full as a tax deduction if they are solely used for business purposes.