Introduction: Australian Tax Business Start-Up Deductions for 2026
Early spending shapes your cash flow and your taxable income. But an expense isn't deductible just because it supports a new venture.
The ATO's 2025-26 compliance update lists private claims, incorrect GST credits and weak records among common small-business errors. Its 2025-26 audits uncovered over $210 million in unpaid tax.
This guide is for businesses operating in Australia and uses ATO guidance for the 2025-26 income year. It separates pre-launch costs, ongoing operating expenses and capital expenditure, because each follows different rules.
Key Takeaways
- Startup, operating and capital costs get different tax treatment, so classify each payment first.
- Professional fees, advertising, software, wages, premises, vehicles, insurance and borrowing costs are common deduction areas.
- GST input tax credits and income tax deductions are separate claims with separate evidence.
- Check current thresholds and rates with the ATO or a registered tax professional.
Which Startup Costs Are Deductible in Australia?
Startup, operating and capital costs
Section 8-1 of the ITAA 1997 allows a deduction for an outgoing to the extent it is incurred in earning assessable income or carrying on a business for that purpose. It excludes amounts that are capital, private or domestic.
Three questions sort most purchases:
- Does it relate to earning assessable business income?
- Is any part private or domestic?
- Is it revenue or capital in nature?
Examples make the difference clear:
- Ongoing advertising subscription: an operating expense, usually deductible.
- Equipment or a shop fit-out: capital, claimed through depreciation or capital works.
- Pre-opening market study: depends on timing and whether the business has commenced (see below).
The same purchase can be treated differently depending on its purpose, timing and business use. Mixed-use costs must be apportioned and backed by records.
Pre-business and preparatory expenditure
Two routes may apply to costs incurred before you trade.
- Immediate deduction: eligible professional advice on structure or operations, plus qualifying Australian Government establishment fees. Generally available to small businesses under $10 million aggregated turnover, with extra conditions if trading has not started.
- Five-year write-off: under section 40-880, qualifying business-related capital expenditure is written off at 20% a year over five years. It must relate to a former, current or proposed business (more than a bare intention), even if the business never starts.
Exclusions include private spending, the cost of depreciating assets or land, amounts in a CGT cost base, and amounts dealt with under another provision. Don't apply US startup-cost limits; they have no role here.
Entity formation and professional setup costs
ASIC fees, legal advice, accounting setup, trust deeds, partnership agreements and structure advice each need individual classification.
Structure advice may qualify for the immediate deduction, while the ATO treats ASIC annual fees as ordinary operating expenses. Creating or changing a legal structure can differ from advice used to run the business day to day.
Keep these documents:
- Tax invoices and engagement letters
- ASIC and ABN registration records
- Trust deeds or partnership agreements
- A note on the business purpose of each cost
When does the business actually commence?
Commencement matters because it decides whether a cost is a startup cost or an ordinary expense. The ATO's business test guidance points to a decision to start, acquiring the minimum assets needed, and beginning business activities.
Evidence you were ready to operate:
- You can supply goods or services
- You can accept customers
- Required registrations are held
- You advertise and offer to the public
Investigating an idea without deciding to proceed is preliminary. A business that never launches isn't automatically shut out of section 40-880, if the spending was genuinely related to a proposed business. A dormant business with no intention to resume may be treated as having ceased.
Capital expenditure and depreciating assets
Equipment, vehicles, fit-outs and substantial improvements are usually capital. Repairs can be deducted immediately, but replacing an entirety, or fixing defects that existed at purchase, is capital.
Current options for 2025-26 are covered in the asset section below.
Essential Business Deductions to Review in 2026
Premises, rent and home-based business costs
Commercial rent, utilities, repairs and security are generally deductible when incurred for the business.
For a home-based business, the ATO's fixed rate is 70 cents per hour for 2025-26. You need a record of hours for the full year. The rate covers energy, phone, internet, stationery and computer consumables, so don't claim those again.
- Occupancy costs (rent or mortgage interest) only apply if the area has the character of a place of business.
- Apportion by floor area and time used.
- Using part of your home for business can affect the main-residence CGT exemption on sale.
Professional services, marketing and technology
Accounting, tax agent, advertising and insurance costs are common operating expenses. Technology spend is treated differently:
- Website development is generally capital
- Hosting, maintenance and software subscriptions are usually revenue
- Periodic domain fees are usually revenue
- Prepaid fees covering more than 13 months are spread over the period
Record the supplier, date, business purpose, GST component, period covered and whether the cost recurs.
Employees, contractors and training
Wages and eligible super contributions can be deductible, once PAYG withholding and reporting obligations are met. Super guarantee is 12% for 2025-26, up from 11.5%. Payday Super starts on 1 July 2026, so it doesn't apply to 2025-26.
Worker status turns on the contract's legal rights and obligations, not the label. Misclassifying an employee as a contractor creates PAYG and super exposure.
A sole trader or partner can't deduct salary paid to themselves, and drawings aren't wages. A company or trust may claim qualifying wages paid to an owner.
Travel, motor vehicles, meals and business use
For 2025-26, the cents-per-kilometre rate is 88 cents, capped at 5,000 business kilometres per car. No logbook is needed, but you must show how you calculated the kilometres. Above that, use the logbook method, which needs 12 continuous weeks of representative records.
- Companies and trusts use actual costs, not cents per kilometre.
- Overnight travel needs a business reason to stay away, and sole traders need a travel diary.
- Exclude private use. Check ATO guidance on meals and entertainment, as FBT and GST treatment can limit claims.
Trading costs, finance, insurance and business assets
- Stock: a stock increase is assessable and a decrease is deductible. Simplified rules apply if the estimated change is $5,000 or less.
- Borrowing costs: generally spread over the loan period, unless total costs are $100 or less.
- Bad debts: need accruals accounting, prior inclusion in income and an actual write-off.
- R&D tax incentive: an offset, not an ordinary deduction. Entities under $20 million turnover may get a refundable offset at the company tax rate plus 18.5 points; register with DISR within 10 months of year-end.
- Energy incentive: it covered 1 July 2023 to 30 June 2024 only, not new 2025-26 spending.
How Structure, Timing and Asset Treatment Affect Deductions
Sole trader, partnership, trust and company differences
| Structure | Reporting | Owner payments and losses |
|---|---|---|
| Sole trader | Owner's individual return | No deduction for own salary |
| Partnership | Partnership return, shares reported by partners | Drawings aren't wages |
| Trust | Trust return, distributions reported | Losses can't pass to beneficiaries |
| Company | Own tax return | Qualifying wages may be deductible |
No structure is automatically the most tax-effective. Payroll, record keeping and private expense handling differ for each.
Company tax rates
For 2025-26 the company tax rate is 25% for base rate entities and 30% otherwise. The rate that applies depends on taxable income, deductions, losses and base rate entity eligibility.
A base rate entity has aggregated turnover below $50 million and no more than 80% of assessable income from passive income.
Company tax is separate from GST, PAYG withholding, super and the personal tax on salary or dividends.
Timing and accounting method
A cost is incurred when you have a present, unavoidable liability, even before payment. Your accounting method (cash or accruals) affects income timing.
A typical timeline:
- Investigate the idea (preliminary)
- Decide to proceed and set up the structure
- Acquire minimum assets and register
- Launch and make the first sale
- Ongoing operations (ordinary expenses)
Where you sit on that timeline matters. An invoice for similar services can be treated differently before and after step 3 or 4.
Small businesses may also claim the 12-month prepayment rule for eligible prepaid expenses.
Depreciation, asset write-offs and capital works
For 2025-26, businesses with aggregated turnover below $10 million can write off eligible assets costing less than $20,000 each, if first used or installed ready for use between 1 July 2025 and 30 June 2026. Claim only the business-use portion.
- Simplified depreciation: pooled at 15% in year one, then 30%.
- Capital works: generally 2.5% or 4% of construction cost. Land isn't deductible.
Don't buy an asset just for a deduction. A deduction reduces taxable income; it doesn't refund the cost.
Losses, concessions and tax planning
Startup losses don't produce an instant refund. Individuals may need to pass the non-commercial loss rules to offset other income, such as assessable income of $20,000 or more.
Company losses carry forward indefinitely if ownership and control tests are met. Trust losses stay in the trust.
The lowest tax result this year isn't always the best commercial outcome. Cash flow, funding and financial reporting should drive decisions.
Documentation, GST and Filing Workflow
Building a deduction-ready record system
- Open a separate business account.
- Set clear expense categories.
- Capture invoices digitally.
- Note the business purpose of each cost.
- Reconcile transactions regularly.
Add extra evidence for:
- Home office hours
- Vehicle logs and travel diaries
- Contractor payments
- Asset purchases
- Costs a founder paid personally
Keep most records for five years, in English or readily convertible to English.
GST input tax credits versus income tax deductions
GST registration is generally required at $75,000 turnover. A tax invoice is needed for taxable purchases above $82.50. Input tax credits are claimed on the BAS, separately from the income tax deduction.
Work through each purchase:
- Identify the total invoice and the GST component.
- Apply the business-use percentage.
- Claim the input tax credit on the business portion.
- Deduct the cost net of the credit; if no credit is available, the cost may include GST.
Preparing for returns and ongoing obligations
Reporting depends on entity type: individual, company, trust or partnership returns, plus BAS, PAYG instalments, PAYG withholding and super.
Before filing:
- Reconcile books to bank statements
- Check asset classifications
- Confirm GST treatment
- Separate private transactions
Confirm current lodgement and payment dates on the ATO website rather than relying on a fixed calendar.
Common Mistakes and When to Seek Professional Advice
Mistakes that can invalidate or weaken a claim
- Claiming private expenses or mixing personal and business funds
- Treating capital assets as ordinary expenses
- Ignoring business-use apportionment
- Claiming GST credits without a valid tax invoice
- Missing invoices, vague descriptions and duplicate claims
Self-review each claim:
- Was it business-related?
- Was it incurred in the correct period?
- Is it revenue or capital?
- Was GST handled correctly?
- Is the evidence complete?
A practical 2026 review before lodging
Before you lodge, work through this checklist:
- Chart of accounts and startup-cost schedule
- Asset register, plus vehicle and home-office records
- Contractor details and GST reconciliations
- Latest ATO guidance, rates and concessions for the year
Rules shift between years, so confirm nothing has changed before you finalise the return.
This article is general information. Complex structures, cross-border activity, property, investors or related-party dealings need personalised advice.
Where accounting and cross-border support can help
A professional review helps founders classify startup costs, produce timely reports and keep complete records as the business grows. VJM Global supports Australian businesses with accounting outsourcing, covering bookkeeping, tax compliance and payroll. It also helps those expanding into India with business setup, accounting and back-office support. If you run Australia-India operations, request a discussion about your accounting and compliance requirements.
Frequently Asked Questions
Can I claim expenses before a business starts?
Some pre-business costs may qualify. Treatment depends on the expense, your business purpose, when trading starts, whether the cost is capital in nature, and current ATO rules. Keep evidence and get a professional review.
How much tax will I pay as a company?
It depends on taxable income, deductions, losses and eligibility for the 25% base rate entity rate versus 30%. Check current ATO rates and get personalised advice.
What startup costs can a new business deduct in Australia?
Common categories include professional fees, advertising, research, training, software, premises and travel. Capital, private and non-business costs follow different rules.
Are business registration and setup costs tax deductible?
They must be classified individually and may not be treated like ordinary operating expenses. Check current ATO and ASIC guidance.
When can I claim depreciation on equipment bought for a new business?
The asset generally needs to be used for business. You may claim depreciation or the $20,000 instant asset write-off, subject to eligibility, timing and private-use adjustments.
What records do I need to keep for business tax deductions?
Keep tax invoices, receipts, proof of payment, business-purpose notes, GST details, asset records, vehicle or travel logs, and home-office calculations.
