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Allowable & Non-allowable Income Deductions

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Last updated 10 September 2012

Allowable deductions

    

VEA ?

Permissible reductions of business and investment income

Section 52ZZO VEA

Australian resident

Section 5G(1) VEA

VEA ? (go back)

Allowable deductions from the business income of a private trust or private company are as follows:

  • expenses:
  • incurred while earning taxable income, or
  • necessary for the conduct of a business with the purpose of earning taxable income,
  • depreciation:
  • allowed on plant and equipment actually used, or ready to be used, in producing assessable income,
  • not allowed on plant and equipment which only provides an external environment for the income producing activity,
  • superannuation deductions up to the limit of the superannuation guarantee, paid to a complying superannuation fund (as per the SIS Act 1993) for employees and stakeholders who are:
  • residents of Australia, or
  • engaged in producing income, which is taxable in Australia,
  • interest of no more than 10%p.a. paid in respect to genuine non-commercial loans,
  • rent or mortgage interest, when business is conducted from the pensioner's home
  • a deduction is allowed from the gross income, only for rent or mortgage interest on the portion of the premises actually involved in conducting the business,
  • environmental impact assessments, and
  • environmental protection activity.
Non-allowable deductions

Non-allowable deductions from the business income of a private trust or private company are as follows:

  • prior year losses (Income Tax Assessment Act (ITAA) section 80),
  • offsetting losses from unrelated businesses,
  • building depreciation,
  • borrowing expenses (ITAA sections 67 & 67A),
  • contributions to complying (as per the Superannuation Industry (Supervision) (SIS) Act 1993) personal superannuation funds, in excess of the superannuation guarantee,
  • contributions to non-complying (as per the SIS Act 1993) superannuation funds,
  • donations (ITAA subsection 78(1)(a)),
  • income equalisation deposits/farm management bonds; (ITAA subsections 159GA-159GDA)),
  • double wool clip (ITAA subsection 26BA),
  • forced disposal of livestock (ITAA sections 36AAA or 36(3)(7)),
  • trading stock valuation adjustments (ITAA section 28),
  • premiums for personal life insurance policies or funds,
  • private health insurance premiums,
  • obsolescence (ITAA section 31(2)),
  • industry concessions/incentives,
  • amortisation of intangible assets,
  • provisions to defer taxation,
  • capital expenditure deductions,
  • entertainment, and
  • deductions for research & development.    

Simplified Depreciation Rules

The ATO allows small business entities to use the rules in Division 40 of the ITAA to calculate their business deductions, or alternatively to use the provisions in Division 328 that allow depreciating assets to be pooled and depreciated as a single asset.  This is known as the simplified depreciation rules.

As Division 328 of the ITAA is not identified in the Veterans' Entitlements (Attribution of Income –Ineligible Deductions) Determination 2001 as an ineligible deduction, depreciation calculated under this provision of the ITAA is an allowable deduction from business income.