Tax deductions: What can you claim?

You need to be able to show a connection between the expense and the earning of income. Direct business costs like stock health, fodder, rates or wages are easy to describe as incurred to earn income but some other costs may be harder to explain. For example sponsorship of a local sporting club may not be deductible as advertising for someone who only sells cattle to the meat works as this is not going to increase their sales. The answer would be different if your business was a sports store.

Where the expense is only partly for business you need to only claim that percentage which is business. For motor vehicle costs we have rules that require a log book is kept for at least 12 weeks to determine the business use percentage. Other costs such as electricity and telephone require a reasonable estimate of your business use. If asked by the ATO you are required to have some rationale behind how your percentage was worked out, for example on average three out of four phone calls are business therefore you claim 75 per cent of your telephone costs.

You also need to retain records to prove that you have incurred an expense. This would include the tax invoice and bank statements to show where you have made the payment. If you have paid by cash the ATO may ask where the cash has come from especially if you have no record of cash withdrawals from your bank account. These records need to be keep for a period of five years after that year's income tax return has been lodged. I usually tell my clients to keep them for six years. The records can be stored digitally as long as they can be easily accessed later. Several cash book programs allow you to attach your invoices to the payments which is a great idea to reduce office clutter.