Tax Deductions – ATO Ruling on ChatGPT and AI Tools

February 20, 2024
minutes to read
Jaala Alex
Table of Contents

The massive rise in popularity of AI tools like ChatGPT has created questions for many businesses about what they claim at tax time. In this post, we'll explore the ATOs ruling on tax deductions for ChatGPT and AI tools. Understanding the rules and regulations surrounding deductions is essential for optimising your business's financials. We'll provide insights on how much you can claim, what you need for successful deductions, and answer common questions. We'll also explain how Thriday, an automated accounting tool that simplifies tax deductions and receipt reconciliation for small businesses, can unlock potential benefits for your business.

What Rules Apply for Tax Deductions?

To apply valid tax deductions for your business tax return, you need to understand the rules and guidelines set forth by the Australian Taxation Office (ATO). By familiarising yourself with these regulations, you can ensure your deductions are valid and compliant. Here are some key points to consider:

  1. Valid Claims: Your expenses must meet specific criteria when claiming a tax deduction. Firstly, they must be incurred in the course of running your business. Additionally, they should be directly related to your business activities and have a clear business purpose. It's important to note that personal expenses cannot be claimed as business deductions.
  2. Accurate Records: Keeping accurate records is paramount when claiming tax deductions. Maintaining well-organised records and receipts is essential for substantiating your claims and providing evidence in case of an audit. Consider using digital accounting tools like Thriday to streamline your record-keeping process and ensure that all relevant documents are stored in the cloud.
  3. Time Limits: Lodging your tax return on time is crucial to claim deductions within the applicable financial year. The ATO imposes strict deadlines for lodgment, and failure to meet these deadlines may result in penalties or the loss of deductions. Stay informed about the due dates and ensure that you file your tax returns promptly.

By adhering to these rules, you can confidently claim business tax deductions that are both valid and compliant. In the next section, we'll explore the specifics of claiming tax deductions for ChatGPT and AI tools, shedding light on the ATO's recent ruling and its benefits to your business.

Claiming Tax Deductions for ChatGPT and AI Tools

Over the last 12 months, ChatGPT and other AI tools have become integral to the operations of many small businesses. These innovative technologies offer efficiency, accuracy, and improved customer experiences. But how do they fit into the realm of tax deductions?

The ATO has recently confirmed that ChatGPT and AI tools can be legitimate business expenses eligible for tax deductions. However, it's essential to understand the specifics and limitations surrounding these deductions. Here are three requirements to make a valid ChatGPT claim:

  1. Business Use: To claim deductions for ChatGPT and AI tools, you must demonstrate that they were used for business purposes. This includes using these tools for customer support, data analysis, or other activities directly related to your business operations.
  2. Apportionment of Expenses: In cases where ChatGPT or AI tools are used for business and personal purposes, it's necessary to apportion the expenses accordingly. The ATO requires you to determine the proportion of business use and only claim deductions for the business-related portion of the expenses. For example, if you purchase a ChatGPT subscription and only use the tool half the time for business use, only 50% of your monthly subscription cost can be claimed.
  3. Substantiating the Expense: As with any tax deduction, keeping accurate records and receipts to substantiate your claims is essential. Maintain documentation showing the expenses incurred for acquiring and utilising ChatGPT or AI tools. Thriday can be your trusted companion in this process, offering automated accounting features that effortlessly capture and categorise your expenses.

Understanding the ATO's ruling on tax deductions for ChatGPT and AI tools is crucial for maximising the benefits of these technologies while remaining compliant. Thriday's automated accounting capabilities can streamline the process, making tracking and categorising your expenses more manageable.

The following section will delve into the rules and guidelines for claiming tax deductions, helping you determine how much you can claim for ChatGPT and AI tools.

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How Much Can You Claim for ChatGPT?

Several types of expenses related to ChatGPT and AI tools can be considered for tax deductions. These may include the cost of acquiring the tools, ongoing subscription fees, maintenance and support charges, training undertaken to learn the tools, and any other expenses directly associated with using and operating these technologies for business purposes. However, it's crucial to ensure that these expenses are not of a capital nature, as capital expenses are typically treated differently. Understanding and adhering to these rules allows you to claim tax deductions for ChatGPT and AI tools expenses confidently.

Determining the amount you can claim as a tax deduction for ChatGPT and AI tools ultimately depends on how much you are spending. Let's review some examples to show you can manually calculate your claim.

Full Business Use - 100%

If you subscribe to a ChatGPT Plus plan, which is currently USD$20 a month, and use it 100% for business purposes, you can claim the total amount from the date you subscribed to the end of the financial year. For simple purposes, if you registered on 1 November 2022 for the paid plan, you could claim 8 months (Nov 2022 - July 2023) of USD$20, which would be USD$160 for the year.

Proportionate Business Use - 50%

If you use ChatGPT for personal and business purposes, you must apportion the expense accordingly based on the business use percentage. As an example, if you have used ChatGPT for personal use 50% of the time since you subscribed, and you signed up for the paid ChatGPT Plus plan on 1 August 2022, you could claim 11 months (Aug 2022 - July 2023) at USD$10 (50% of the USD$20 plan). This equates to a $USD110 tax deduction for the year.

Training Costs

In addition to the subscription cost of using ChatGPT and AI tools, training costs may be associated with their use. For example, if you undertook online training or subscribed to online publications that helped you maximise ChatGPT and AI tools, these ongoing costs can also be claimed as tax deductions. Still, again, proportionate business use needs to be considered.

What You Need to Claim ChatGPT Tax Deductions

To successfully claim tax deductions for expenses related to ChatGPT and AI tools, gathering the necessary documentation and maintaining accurate records is essential. Here's what you need to have in order:

  1. Receipts and Invoices: Keep copies of receipts and tax invoices that clearly outline the expenses incurred for acquiring ChatGPT and AI tools. These documents should include details such as the vendor's name, date of purchase, description of the tools, and the amount paid. Thriday's automated receipt scanning capabilities can simplify this process by digitally capturing and organising your receipts.
  2. Expense Description: Provide a clear and concise description of the purpose and business use of the ChatGPT and AI tools. Include information on how these tools enhance your business operations, such as improving customer service, streamlining processes, or analysing data.
  3. Usage Documentation: Maintain documentation that showcases the practical application of ChatGPT and AI tools in your business. This can include screenshots, reports, or other evidence that illustrates their utilisation for business purposes. Such documentation helps substantiate your claim and demonstrates the active use of these tools in generating income.

Gathering and organising these essential documents can strengthen your claim for tax deductions related to ChatGPT and AI tools. Thriday's automated accounting features can simplify the process, allowing you to easily manage and track your expenses, receipts, and documentation in one centralised location.

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Tax Deduction FAQs

Are ChatGPT and AI tools eligible for tax deductions? 

ChatGPT and AI tools can be eligible for tax deductions if they are used primarily for business purposes. Demonstrating the true business purpose and keeping records to support your claim is essential.

Can I claim the total expense of ChatGPT and AI tools? 

The amount you can claim depends on the proportionate business use. You can typically claim the entire expense if the tools are used solely for business purposes. You must apportion the cost accordingly if they are used for personal and business purposes.

Can training fees be claimed as tax deductions? 

Yes, ongoing costs associated with ChatGPT and AI tools, such as training fees, can be claimed as tax deductions. Again, proportionate business use must be considered when determining the deductible amount.

What records do I need to support my tax deduction claim? 

Keeping receipts, tax invoices, and other relevant documentation showing the expenses incurred for ChatGPT and AI tools is essential. Also, maintain records demonstrating these tools' business use and benefits.

Key Takeaways

Navigating the world of tax deductions for business expenses, including ChatGPT and AI tools, requires a solid understanding of the rules and guidelines set by the ATO. ChatGPT and AI tools can be eligible for tax deductions if used primarily for business purposes. You need accurate records, including receipts, to substantiate your claim. With Thriday's automated accounting features, managing your tax deductions and organising your financial records becomes more streamlined, freeing up your time to focus on growing your small business.

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360 AFSL 241167 (Regional Australia Bank). Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you. Team Thrive No 2 Pty Ltd ABN 26 677 263 606 (Thriday Accounting) is a Registered Tax Agent (No.26262416).

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