Opening a physical retail shop in Australia involves significant upfront costs — lease deposit, fit-out, shelving, signage, inventory, and equipment.
The good news: the ATO allows you to claim many of these costs as tax deductions, reducing your taxable income.
However, some costs must be claimed immediately, others depreciated over years, and some are not deductible at all.
This guide explains every deduction available to a new shop owner, with examples and record-keeping requirements.
1. Immediate Deductions (Claim 100% in Year of Purchase)
The ATO allows you to immediately deduct certain small business costs in full, even if they provide a future benefit.
- Assets costing less than $20,000 (instant asset write-off): For small businesses with aggregated turnover under $10 million, you can instantly deduct assets like a coffee machine, air conditioner, security camera, or computer. This applies per asset. Check the current threshold (updated each budget — $20,000 is common).
- Shop fit-out costs under $20,000: If individual fit-out items (e.g., a single counter or display case) cost less than $20,000, claim immediately.
- Initial trading stock: The cost of your first inventory (goods to sell) is deductible when purchased (not when sold) if you are a small business entity. Alternatively, you can deduct when sold — choose whichever benefits you most.
- Business portion of home office (if you run admin from home): Claim a portion of electricity, internet, phone, and even a deduction for using your home (52 cents per hour as fixed rate for 2025-2026).
Example: You buy a $15,000 walk-in cooler for your butcher shop. Under the instant asset write-off, you deduct the entire $15,000 in year one (instead of depreciating over 10 years).
2. Depreciating Assets (Claim Over Several Years)
If an asset costs more than the instant write-off threshold, you must depreciate it (claim a portion each year).
Common shop assets that require depreciation:
- Leasehold improvements: New flooring, walls, built-in cabinets, lighting systems (depreciate over 5-40 years depending on the asset's effective life).
- Expensive equipment: A commercial oven costing $30,000 or a point-of-sale (POS) system worth $25,000.
- Motor vehicles (for deliveries or collection): Deduct using either cents per km method (up to 5,000 km at 85 cents/km for 2025-26) or logbook method.
- Intangible assets: Software licenses, website development, or franchise fees (depreciate over 2-5 years).
Use the ATO's Depreciation and capital allowances tool to calculate effective life.
3. Operating Expenses (Fully Deductible in Year Incurred)
Once your shop is open, ongoing costs are fully deductible. These include:
- Rent (shop lease) and outgoing such as council rates, water, and land tax.
- Utilities: Electricity, gas, internet, phone.
- Wages, superannuation, workers compensation insurance.
- Repairs and maintenance (painting a wall, fixing a shelf).
- Advertising (flyers, Google Ads, social media promotions).
- Bank fees, merchant fees (EFTPOS), and interest on business loans.
- Cleaning supplies, security monitoring, and business insurance (public liability, fire, theft).
4. Start-up Costs (Special Rules)
Costs incurred before your shop starts trading are treated differently. The ATO divides them into:
- Pre-business expenses (claim over 5 years): Feasibility studies, initial market research, legal fees for registering a company, obtaining licenses (e.g., liquor license). These are deductible over 5 years.
- Business establishment costs (deduct immediately): Lease deposit (subject to conditions), initial stock, and assets under $20,000.
Pro tip: Keep every single receipt from the day you start looking at shop locations. Even a coffee meeting with a potential landlord or accountant — if it relates to setting up the business, it may be deductible.
5. What Is NOT Deductible?
Avoid claiming the following (common errors that trigger ATO audits):
- Private expenses: Your personal coffee, lunch, or family groceries (even if bought from your shop).
- Fines or penalties: Speeding tickets, parking fines, or ATO penalties.
- Entertainment: Taking clients to the footy or a restaurant (generally not deductible unless it's a work event with a clear business purpose — strict rules apply).
- Drawings or wages to yourself (sole trader): You cannot pay yourself a 'wage' as a sole trader and claim it as a deduction. Only companies can claim director salaries.
- Capital improvements that add value: Extending the shop building (this is depreciated over decades, not deducted immediately).
6. Record-Keeping — Essential for All Deductions
Without written evidence, you cannot claim a deduction — even if you genuinely spent the money.
The ATO requires you to keep records for 5 years (sometimes longer). Minimum requirements:
- Tax invoices (for purchases over $82.50 including GST): Must show supplier's ABN, date, description, and GST amount.
- Bank statements and receipts: Even for cash purchases under $82.50, keep a receipt or log.
- Logbook (for car expenses): A 12-week continuous logbook is required if using the logbook method.
- Asset register: A list of all depreciating assets with purchase date, cost, and depreciation method.
Critical: The ATO uses 'benchmarking' — comparing your deductions to typical shops in your industry. If your deductions are unusually high for a shop of your size, expect a review or audit.
In summary, claim every legitimate deduction but never guess or invent figures. Work with a registered tax agent for your first year of operation — they will identify deductions you might miss (e.g., depreciation on the fit-out) and ensure you stay compliant.