Ordinary and Necessary Expenses: Navigating Business Deductions in 2026

An ordinary and necessary expense is a cost that is both typical for your industry ('ordinary') and appropriate for running your business ('necessary'). While the ATO may not use this exact phrase in legislation, the principle is embedded in Australian tax law and influences how deductions are assessed.

• Ordinary: An expense that is common and accepted in your line of work. For example, a marketing agency would typically incur costs for design software.
• Necessary: An expense that is helpful and appropriate for your business operations, even if it is not strictly essential. For instance, attending industry conferences can be considered necessary for professional development.

Understanding this distinction helps you decide whether a particular cost is likely to be deductible.

The ATO continues to refine its approach to business deductions, with several updates relevant for the 2026 financial year:

Emphasis on Digital Record-Keeping

Digital receipts and cloud-based accounting systems are now widely accepted as primary evidence for business expenses. This shift reduces paperwork but places greater responsibility on businesses to accurately categorise and store records.

Closer Scrutiny of Mixed-Use Expenses

Expenses that serve both business and personal purposes—such as home internet or mobile phones—must be apportioned. Only the business-related portion can be claimed. For example, if you use your home internet for both work and personal use, you should calculate the percentage used for business and claim only that amount. More information on apportioning expenses can be found at our finance page.

Industry Benchmarks

The ATO uses industry benchmarks to identify claims that fall outside typical ranges. If your deductions are significantly higher than those of similar businesses, you may be more likely to face questions or an audit. Regularly reviewing your expenses against these benchmarks can help you avoid unwanted attention.

The types of expenses considered ordinary and necessary can vary depending on your industry. Here are some examples:

Hospitality (Cafés and Restaurants)

• Ingredients and food supplies
• Chef uniforms and kitchen equipment
• Point-of-sale software
• Cleaning and maintenance supplies

Trades (Electricians, Plumbers, Builders)

• Tools and equipment
• Vehicle expenses for work-related travel
• Safety gear
• Trade association fees

Professional Services (Consultants, Accountants, Designers)

• Office rent and utilities
• Cloud storage and software subscriptions
• Professional development and training
• Client meeting expenses (with limitations)

What’s Not Deductible?

Some expenses are generally not considered ordinary and necessary, including:

• Fines and penalties
• Personal expenses (e.g., family holidays)
• Capital improvements (these are usually depreciated over time rather than immediately deducted)

Maximising your deductions while staying compliant involves more than just collecting receipts. Here are practical steps to help you manage your business expenses:

1. Keep Accurate Digital Records

Use digital tools to capture and store receipts as soon as you incur an expense. Many accounting apps allow you to photograph receipts and categorise them instantly. Add notes to clarify the business purpose, especially if the expense might not be self-explanatory.

2. Apportion Mixed-Use Expenses

For costs that have both business and personal components, calculate the percentage used for business and claim only that portion. For example, if you use your mobile phone 60% for work and 40% for personal calls, only 60% of the costs are deductible.

3. Review Expenses Regularly

Conduct regular (e.g., quarterly) reviews of your expenses. This helps you identify any non-deductible items, spot unusual claims, and ensure your records are up to date. Comparing your expenses to industry benchmarks can also highlight areas that may need adjustment.

4. Train Your Team

If your staff incur business expenses, provide clear guidelines on what is and isn’t deductible. Regularly update your policies to reflect any changes in ATO guidance or business practices. This reduces the risk of incorrect claims and helps everyone understand their responsibilities.

To illustrate how these principles work in practice, consider the following scenarios:

• A café owner claims costs for ingredients, staff uniforms, and kitchen equipment. These are all ordinary and necessary for running a food business. However, if the owner tries to claim a family holiday as a business expense, this would not be accepted.

• A tradie purchases new tools and safety gear for work. These are deductible. If the same tradie buys a new television for their home, this is not a business expense and cannot be claimed.

• A consultant works from home and uses their internet connection for both business and personal use. They calculate that 70% of their usage is for work, so they claim 70% of the internet costs as a deduction.

ATO compliance is about more than just claiming deductions—it’s about being able to justify every claim you make. Here are some tips to help you stay on track:

• Be prepared to explain each expense. If an auditor asks why a particular cost was claimed, you should be able to show how it relates to your business.
• Avoid over-claiming. Only claim what is reasonable for your business size and industry.
• Stay informed. Keep up to date with any changes to tax rules or industry benchmarks that may affect your claims.

Understanding and correctly applying the ordinary and necessary expense rules is key to effective tax management for Australian businesses in 2026. By keeping thorough records, apportioning mixed-use expenses, and regularly reviewing your claims, you can maximise your deductions while staying compliant with ATO requirements. Clear policies and ongoing staff training further reduce the risk of errors and help ensure your business is well-prepared for any review.

For more guidance on managing your business finances, visit our finance page.