Tax Deductions for Residential Builders in Australia

What it is

A tax deduction is a business expense the ATO accepts as a reduction in assessable income. Section 8-1 of the Income Tax Assessment Act 1997 sets the general rule: a builder can deduct an expense to the extent it is incurred in gaining or producing assessable income, and is not capital, private or domestic in nature. A second set of rules in Division 40 and Division 328 covers depreciation of tools, vehicles and equipment that last longer than one income year.

For a residential builder the deduction list runs across tools, vehicles, materials, subcontractor payments, site costs, professional fees, insurance, software, licence renewals and home office use.

Common deductible costs

The ATO publishes specific guidance for tradies and small construction businesses. The clearly deductible costs include: hand tools and power tools used on site, work clothing with the business logo, protective gear like safety boots and hard hats, materials bought for client work, subcontractor invoices, scaffold hire, equipment hire, fuel and running costs for work vehicles, bank fees for the business account, accounting and bookkeeping fees, professional indemnity and public liability insurance, builders licence renewals and continuing professional development courses.

A builder running from a home office can also claim a portion of electricity, internet and phone using the ATO fixed rate method (70 cents per hour from 1 July 2024) or the actual cost method. Floor space deductions for home office are limited because most builders do not have a dedicated area used exclusively for work.

$20,000 instant asset write-off

Small businesses with aggregated turnover under $10 million can immediately deduct the business portion of eligible assets costing less than $20,000 each. The Treasury Laws Amendment (Strengthening Financial Systems and Other Measures) Act 2025 extended the threshold to cover assets first used or installed ready for use between 1 July 2025 and 30 June 2026.

The threshold applies per asset, so a builder can write off multiple assets in the same year as long as each one is under $20,000. Vehicles are eligible but car limits apply: the depreciation cap for passenger vehicles is $69,674 for 2024-25, indexed annually. A ute classified as a commercial vehicle (over one tonne payload or designed to carry more than nine passengers) is not subject to the car limit and can be written off in full if under the $20,000 threshold.

Assets over $20,000 go into the small business simplified depreciation pool and depreciate at 15 per cent in the first year and 30 per cent each year after.

Motor vehicle deductions

A builder using a vehicle for work has two methods. The cents per kilometre method is capped at 5,000 work-related kilometres per car per year at 88 cents per kilometre for 2024-25. The logbook method requires a 12 week continuous logbook plus odometer readings and lets the builder claim the work-related percentage of all car running costs including fuel, registration, insurance, servicing and depreciation.

The logbook method almost always produces a bigger deduction for a builder doing more than 5,000 work kilometres a year. The 12 week logbook stays valid for five years unless the work pattern changes.

Utes and vans designed to carry more than one tonne or more than nine passengers are not "cars" under the ATO definition, so the cents per kilometre cap does not apply and 100 per cent business use is straightforward to justify.

Subcontractor and labour costs

Payments to bona fide subcontractors are fully deductible in the year incurred. The builder must also lodge a Taxable Payments Annual Report by 28 August each year listing every contractor paid for building and construction services during the previous financial year. Payments to employees are deductible but trigger Pay As You Go withholding, Single Touch Payroll reporting and 11.5 per cent superannuation guarantee from 1 July 2024 (rising to 12 per cent from 1 July 2025).

The ATO treats a worker as an employee or contractor based on the substance of the relationship, not the label. Sham contracting (paying a worker as a contractor when they are really an employee) carries penalties under section 357 of the Fair Work Act 2009 enforced by the Fair Work Ombudsman.

Where builders get it wrong

Three deduction errors come up repeatedly in ATO reviews of builders. First, claiming private use of a ute as 100 per cent business when the builder drives it home each night and on weekends. Second, claiming materials bought for the builder's own home as deductions against business income. Third, claiming work clothing without a logo as a uniform deduction (plain workwear is private).

A clean record keeping habit, a real logbook and a separation between the builder's own renovation and client jobs solves all three.