Ordinary and Necessary Expenses: Mastering Business Deductions in 2025

When it comes to maximising your business tax deductions in Australia, the concept of ‘ordinary and necessary expenses’ (O&NE) is central. Whether you’re a sole trader, startup, or established SME, understanding what the ATO considers deductible can make the difference between smart savings and compliance headaches.

What Are Ordinary and Necessary Expenses?

In simple terms, ordinary and necessary expenses are costs that are both typical (‘ordinary’) and essential (‘necessary’) for running your business. The Australian Taxation Office (ATO) uses this concept to determine which expenses can be claimed as deductions. While the ATO doesn’t use the exact phrase ‘ordinary and necessary’ in its legislation, the principle is embedded in tax law and guides auditors and business owners alike.

For 2025, as tax compliance scrutiny increases and digital record-keeping becomes standard, knowing the difference between a legitimate deduction and a questionable claim is more important than ever. Here’s how the distinction works in practice:

• Ordinary: An expense that is common in your industry. For example, software subscriptions for a marketing agency.
• Necessary: An expense that is helpful and appropriate for your business, though not necessarily indispensable. For instance, professional development courses for your team.

2025 Policy Updates: What’s Changed?

This year, the ATO has rolled out several updates that impact how businesses substantiate deductions. Enhanced data-matching programs and real-time reporting mean expenses must be clearly documented and justifiable. Key 2025 highlights include:

• Digital Receipts: The ATO now encourages digital record-keeping. Cloud-based accounting apps are accepted as primary evidence, reducing paperwork but requiring accurate categorisation.
• Stricter Scrutiny on ‘Mixed Use’: If an expense serves both personal and business purposes, only the business-related portion is deductible. For example, a home internet plan must be apportioned based on business use.
• Industry Benchmarks: The ATO has published updated industry benchmarks to flag outlier claims. Staying within typical ranges for your sector can help avoid audits.

These changes mean that business owners should regularly review their expense policies and ensure staff are trained on the latest rules.

Examples of Ordinary and Necessary Expenses in Australia

To bring these concepts to life, let’s look at practical examples from different industries:

• Cafés and Restaurants: Ingredients, chef uniforms, kitchen equipment, and point-of-sale software are all considered ordinary and necessary.
• Tradies: Tools, vehicle expenses for work-related travel, safety gear, and trade association fees are typically deductible.
• Professional Services: Office rent, cloud storage subscriptions, client entertainment (with limitations), and continuing education are all O&NE expenses.

Expenses that are not considered ordinary and necessary include fines, personal expenses (such as family holidays), and capital improvements (which are usually depreciated over time rather than immediately deducted).

How to Maximise Your Deductions (and Stay Compliant)

Staying on the right side of the ATO while optimising your deductions is about more than just keeping receipts. Here are actionable strategies for 2025:

• Document Everything: Use digital tools to snap receipts and label expenses in real time. Attach notes explaining the business purpose where it’s not obvious.
• Apportion Wisely: For expenses with both business and personal elements (like a mobile phone), calculate the percentage used for work and claim only that amount.
• Review Regularly: Conduct quarterly expense audits to spot anomalies, eliminate non-deductible items, and stay within industry norms.
• Train Your Team: If staff incur expenses, provide clear policies and regular updates on what is—and isn’t—deductible under current rules.

Real-world example: An architecture firm in Sydney recently automated their expense process. They cut down rejected claims by 30% and reduced audit risk by aligning expenses with ATO benchmarks, all by implementing smarter record-keeping and clearer internal guidelines.

Conclusion: Put O&NE at the Heart of Your 2025 Tax Strategy

Mastering the ordinary and necessary expense rules is essential for any Australian business looking to maximise deductions and minimise ATO risk in 2025. By staying up-to-date with policy changes, leveraging digital record-keeping, and training your team, you can ensure every claim is robust, justified, and ready for review.