Deductible expenses

Generally, deductions are operating expenses that are incurred in earning an organisation's assessable income. Expenses that are deductible include:

• costs of running a function solely for non-members
• costs of running a purely commercial trading activity, including employees' salary and wages
• expenses for advertising trading activities to non-members
• fees for earning bank interest, dividends or investment income
• costs of fundraising drives to the public (for example, buying promotional buttons sold to the public)
• expenses related to gaming income derived by an organisation from non-members where the organisation owns or leases, and operates, the gaming machines
• expenses related to gaming income derived by an organisation under arrangements entered into with an external gaming or Keno operator.

Find out about:

• Tips paid to employees
• Bad debts
• Sponsorship costs
• Gaming expenses
• Small business entity concessions
• Prepaid expenses
• Depreciating expenses/decline in value
• Investment expenses
• Deductions specified under income tax law
• Tax-deductible gifts
• Professional association subscriptions
• Rates and land tax

See also:

• Income and deductions for business

Tips paid to employees

If your organisation receives non-voluntary tips from customers (for example, for a pre-set amount, a surcharge or a service charge) and pays these tips to its employees or contractors, it can usually claim a deduction for the amount it paid.

The mutuality principle applies to the amount paid to employees or contractors where the customers are at a trading activity or function for members only (non-deductible expenses), or for both members and non-members (apportionable expenses). If the trading activity or function is for non-members only, the amount paid is fully deductible to the organisation.

However, if your organisation receives voluntary tips and pays all the tips to its employees or contractors, it cannot claim a deduction for the amount it paid because the tips are not assessable income to the organisation.

Bad debts

A NFP organisation can deduct a debt, or part of a debt, that it writes off as bad in an income year if the amount was included in the assessable income of the organisation for that year or for an earlier year.

Where the bad debt, or part of the debt, is related to mutual receipts, it is not deductible.

Sponsorship costs

If your organisation receives a payment for providing such things as advertising space, signage or naming rights, the costs incurred in earning this income may be deductible in full.

Your organisation's costs to sponsor others or promote itself may need to be apportioned to the extent that the sponsorship or promotion is incurred in earning its assessable income.

Advertising to attract membership is not deductible. Sponsorship of a member's interests will generally not be deductible.

Gaming expenses

If your organisation enters into arrangements with external parties under which the external party conducts or provides particular operations on your organisation's premises – including the operation of gaming machines, Keno and TAB facilities – the income from the external operators is fully assessable. The expenses your organisation incurs in earning this income are fully deductible, including gaming tax.

However, under the principle of mutuality, apportionment of gaming expenses will be necessary if gaming machines are:

• owned or leased by the organisation
• operated by the organisation
• played by members and non-members.

For example, state tax (including 'tax shortfalls') on a club's gaming machine revenue is apportioned so that only that part of the tax (or shortfall) that relates to the non-member revenue is deductible.

Some state and territory gaming laws require organisations with gaming machines to make or record contributions to community purposes, such as:

• paying a community or gambling levy
• preparing community contribution statements
• making community contributions up to a required minimum.

Related expenditure is apportioned where the principle of mutuality applies. An exception is where the expenditure on community contributions is required to claim a rebate of gaming machine tax. As the rebate is fully assessable to the organisation, the expenditure is not subject to mutuality.

Regardless of whether mutuality applies, a deduction for expenditure on community contributions cannot include:

• notional amounts claimed for providing rooms or volunteers to other community groups – only actual costs may be deductible
• claims for capital expenditure
• amounts already claimed as a tax deduction.

A contribution to a deductible gift recipient (DGR) made to meet an organisation's minimum community contribution is not considered a tax-deductible gift.

Small business entity concessions

If your organisation is a small business entity, it may be eligible for various concessions, including:

• immediate deduction for certain prepaid business expenses
• simplified depreciation rules.

Find out about:

• Small business entity
• Am I eligible for the small business entity concessions?

Prepaid expenses

Prepaid expenses are expenditure that is incurred for things done (in whole or in part) in a later income year. Where prepaid expenses are incurred in earning mutual receipts and assessable income, the expenses need to be apportioned under the principle of mutuality.

Generally, a prepaid expense is deductible over the eligible service period, or 10 years if that is less, rather than being immediately deductible.

The eligible service period:

• starts on the day the thing under an agreement begins to be done or on the day the expenditure is incurred, whichever is the later
• finishes at the end of the last day the thing under the agreement ceases to be done or 10 years, whichever is the earlier.

However, a prepaid expense may be immediately deductible if either:

• it is excluded expenditure
• the 12-month rule applies.

Excluded expenditure includes:

• amounts of less than $1,000
• amounts required to be incurred by a court order or federal, state or territory law
• payments of salary or wages (under a contract of service)
• amounts that are capital, private or domestic in nature.

If your organisation is a small business entity, it may be entitled to an immediate deduction under the 12-month rule if the prepaid expenses are incurred for an eligible service period not exceeding 12 months and the eligible service period ends in the income year following the year the expenses were incurred. If the eligible service period is more than 12 months, or ends after the next income year, you must apportion the deduction for the expenses over the eligible service period or 10 years, whichever is less.

Find out about:

• Small business entity
• Deductions for prepaid expenses

Depreciating assets/decline in value

Your organisation may be able to claim a deduction for the decline in value of its depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Examples of these assets include computers, cars, furniture and equipment.

To work out the decline in value of a depreciating asset, use either the prime cost or diminishing value method based on the effective life of the asset.

Generally, an amount for the decline in value of a depreciating asset is deducted to the extent the asset is used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.

A membership-based organisation can have a depreciating asset which, at some time when it was held, had been used or installed ready for use for a purpose other than a taxable purpose.

Under the principle of mutuality, receipts from mutual dealings with members are not assessable income. As a result, the use of depreciating assets in activities from which mutual receipts arise is not use for a taxable purpose.

Therefore, if a depreciating asset is used in part for producing assessable income, or used for part of the income year, your organisation cannot claim a deduction for the full amount.

If your organisation is a small business entity, you may choose to calculate deductions for its depreciating assets using the simplified depreciation rules.

Your organisation may need to calculate a balancing adjustment amount for an asset to include in its assessable income or to claim as a deduction when:

• it stops holding it – for example, if the asset is sold, lost or destroyed
• it stops using it and expects never to use it again
• it stops having it installed ready for use and it expects never to install it ready for use
• it has not used it and decides never to use it
• a change occurs in the holding or interests in an asset which was or is to become a partnership asset.

You work out the balancing adjustment amount by comparing the asset's termination value (such as its sale proceeds) and its adjustable value at the time of the balancing adjustment event.

If the termination value is greater than the adjustable value, you include the excess in your organisation's assessable income. If the termination value is less than the adjustable value, you can deduct the difference.

See also:

• Decline in value calculator
• Guide to depreciating assets

Investment expenses

Generally, costs incurred in earning investment income – such as rental income, interest, dividends and trust distributions – are deductible. Expenses may be for protecting and maintaining investments and can include rent collection fees, interest charged on money borrowed for investment, bookkeeping and secretarial expenses, audit fees, management fees and office expenses.

Where costs incurred relate to both assessable (investment income) and non-assessable income (mutual receipts), those expenses need to be apportioned.

Deductions specified under income tax law

Under the income tax law, there are some deductions that do not have to be incurred in deriving assessable income and the mutuality principle does not apply to them. They are:

• tax-deductible gifts
• the ATO fee to value property over $5,000 for gift deductibility purposes
• the first $42 of subscription fees to professional associations
• expenses for managing the organisation's tax affairs (for example, the costs of using a tax agent to prepare the organisation's tax return or business activity statement)
• the general interest charge or shortfall interest charge related to federal tax
• superannuation contributions for employees
• rates and land taxes on a NFP organisation's premises wholly used to produce mutual receipts and/or assessable income.

Some deductions have limits on how much your organisation can deduct. These limits are discussed in the following sections.

Tax-deductible gifts

For your organisation to claim a tax deduction for a donation it makes, the payment must be all of the following:

• made to a deductible gift recipient (DGR)
• truly a gift
• a gift of money or a certain type of property
• complying with any relevant gift conditions.

Payments to DGRs that are not gifts, cannot be claimed as a gift deduction. Examples of what you can not claim include:

• a payment for services supplied by the DGR
• a payment to a DGR made to meet an organisation's minimum required community contribution under a state or territory gaming law.

A deduction for a gift cannot add to or create a tax loss. However, your organisation can elect to spread out deductions for certain gifts over a period of up to five years.

See also:

• Tax-deductible gifts

Professional association subscriptions

Under income tax law, if your NFP organisation pays to be a member of a professional association it can deduct the first $42 of the subscription fee each year. This is regardless of whether your organisation incurs the expense in earning its assessable income.

Alternatively, under general principles, your organisation can claim a deduction if the subscription fee is incurred in earning its assessable income. However, the mutuality principle would apply. If the application of mutuality reduces the deductible amount of the subscription fee below $42, you can choose to claim the income tax law deduction of the first $42.

Rates and land taxes

Your organisation can claim a deduction for the annual rates (that includes council, water, sewerage and drainage rates) and any land tax imposed by a state or territory law on its premises if the premises is wholly used for producing mutual receipts or assessable income or both.

Your organisation cannot claim a deduction if the premises, or part of the premises, it owns is not used for producing any revenue.

Find out about:

• Apportionable expenses
• Classification of common expenses