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Tax risks: property, construction and professional services

As small businesses grow, they must report income and claim deductions and offsets correctly.

Last updated 1 October 2025

Our focus

As small businesses grow, their tax and super obligations often become more complex. We want to ensure that growing small businesses with a turnover of between $1 million to $10 million clearly understand their responsibilities, particularly when it comes to accurately reporting all income, deductions and offsets.

We continue to see recurring issues in specific industries. We’re watching closely, conducting audits, and applying penalties and interest where needed.

Our focus is on small businesses in:

  • the property and construction industry – including builders, contractors and tradies.
  • the professional, scientific and technical services sector – such as engineering, design, IT, management and consulting professionals.

In these industries, we continue to see recurring issues due to mistakes, misunderstandings or deliberate behaviour. Common errors include:

  • incorrect claims for the R&D tax incentive (R&DTI), especially for activities that don't meet the eligibility criteria
  • omitting sales and income in the BAS and tax returns, including income from related entities
  • overclaiming expenses and GST credits
  • private expenses incorrectly reported as business-related, or not properly apportioned between business and personal use
  • failure to register for GST when required
  • not seeking independent advice from a registered tax agent, particularly in head contractor and subcontractor arrangements.

While most small businesses try to do the right thing, these areas remain a concern. We'll continue to detect, treat and address those deliberately not meeting their obligations to ensure all small businesses can compete on a level playing field.

Our goal is to support small businesses in getting it right – so they can meet their tax and GST obligations with confidence and honest businesses doing the right thing aren't disadvantaged.

Example: incorrectly claimed R&D tax incentive

Joe and Angus run a solar retail business, Suntraxion Solar Pty Ltd, selling solar panels, batteries and installation services. The business is structured to operate autonomously, outsourcing core functions to overseas suppliers who work with local contractors for installations.

In 2021, the business registered its research and development (R&D) activities with the Department of Industry, Science and Resources (DISR). The purpose of the activities were to develop software that enabled users to design and quote their own solar system and installation. Between 2021 and 2024, Suntraxion Solar Pty Ltd claimed $1.3 million in deductions, resulting in $569,000 in refundable R&DTI offsets, mostly for reporting payments to associates, including family members.

Suntraxion Solar Pty Ltd was selected for review due to their large refunds, payments to associates and their outsourced business model. The review found there was insufficient evidence to support the R&DTI claims, especially for payments to associates and because most expenses claimed were part of the business's day-to-day operations.

Despite multiple extensions, Suntraxion Solar Pty Ltd only provided complete records for 7% of the total claim.

As a result, Suntraxion Solar Pty Ltd made a voluntary disclosure, reducing the R&DTI claim by 93%. We issued the business with:

  • a tax shortfall of $205,000
  • a 25% base penalty of $51,250 for failing to take reasonable care
  • interest charges of $75,153 on the outstanding amount.
End of example

Claiming the R&DTI offset: key considerations

We've been seeing some small businesses get the following requirements wrong when claiming the R&DTI offset. When claiming it, ensure:

  • you're conducting eligible R&D activities – you can only claim the R&DTI offset if you've actually undertaken eligible R&D activities during the income year
  • your notional deductions are eligible – only certain R&D-related expenses qualify for the offset, including eligible R&D expenditure, the decline in value of R&D assets and contributions made under the Cooperative Research Centres ProgramExternal Link
  • you're maintaining accurate and complete records – you must keep detailed records that clearly demonstrate the R&D activities undertaken and support the amount claimed, including documentation such as project reports, staff timesheets and evidence of who conducted the activities and when
  • your R&D activities are registered with Department of Industry, Science and Resources (DISR) – while registration with DISR is mandatory, it does not confirm eligibility or guarantee payment of the tax offset
  • you're seeking advice from a registered tax agent – discuss your intent to claim the R&DTI offset with a registered tax agent and be cautious of R&D consultants who don't ask you for supporting evidence or who suggest claims that seem overly generous or too good to be true.

We have detailed information available about the Research and development tax incentive to help you get it right.

Example: omitting income and overclaiming expenses

Rakesh, a sole trader in the IT sector, earned income during the 2024 income year from 2 income sources:

  • $66,000 from a contract with a large IT company, for developing a software program. This work was performed on the company's premises.
  • $55,000 from additional IT services – including computer repairs, upgrades and website design – generated via social media and word of mouth.

While preparing his BAS and tax return, Rakesh correctly reported the $66,000 from the IT company, as this amount was prefilled in his tax return based on data submitted through the Taxable payments annual report (TPAR). However, he failed to report the additional income of $55,000, assuming it would go undetected since he'd used the funds to purchase a new car and caravan.

Rakesh was selected for an audit following a tip-off from another small business owner. The tip-off alleged that Rakesh requested payment into his personal account and didn't issue a valid tax invoice. The audit revealed:

  • undeclared income deposits in Rakesh's bank account
  • large cash payments made towards the car and caravan
  • incorrect expense claims, including mortgage interest on his private residence, despite not operating a business from home.

As a result, we amended Rakesh's tax return and BAS to reflect the correct income, and disallowed the deductions. We issued him with:

  • an amended assessment with a tax shortfall of $15,575 and GST payable of $5,000
  • a 50% base penalty for reckless behaviour, amounting to $10,287
  • interest charges on the outstanding amount of $1,468.
End of example

Example: failure to report contractor payments and business income

Liam operates a construction business, Biophilix Build Pty Ltd, contracting for large developers. During the 2024 income year, Liam engaged several subcontractors to assist with a series of property developments. One of these subcontractors was Maya, a sole trader who he paid $85,000 for carpentry and finishing work.

Liam failed to lodge the Taxable payments annual report (TPAR) by 28 August 2024 deadline, and didn't report the payments made to Maya and other subcontractors. We identified this omission during a data-matching review and, as a result, we selected Biophilix Build for an audit.

Our audit revealed that the business had failed to lodge its TPAR, omitting subcontractor payment details. We then issued the business with a failure to lodge penalty of $1,650, and required the business to submit its overdue TPAR with accurate contractor payment details.

Our further investigation uncovered that Biophilix Build had also under-reported income earned from contracting work. We issued the business with:

  • amended assessments with a tax shortfall of $180,000
  • a 50% base penalty for making false and misleading statements amounting to $90,000
  • interest charges.

We also audited Maya and found she had under-reported her business income in her tax return. We issued her with:

  • an amended assessment with a tax shortfall of $25,500
  • a 50% base penalty for false and misleading statements amounting to $12,720
  • interest charges.
End of example

How to get it right

To get it right you need to:

  • Report all assessable business income
    • Include cash income and any deposits into business or private accounts that relate to your business activities
    • If your income is primarily generated from your personal skills and effort, the personal services income (PSI) rules may apply. You'll need to complete specific questions in your tax return and associated schedules.
  • Correctly report business expenses and deductions
    • Ensure all business expenses are accurately reported
    • If an asset is used for both business and private purposes, you must apportion the expense correctly
    • Only claim deductions that are directly related to your business activities and supported by appropriate records.
  • Correctly claim the R&DTI offset
    • You can only claim the offset if you've actually carried out eligible R&D activities during the income year
    • Ensure your notional deductions – such as R&DTI expenses, asset depreciation and contributions under the Cooperative Research Centres Program – are eligible
    • Maintain complete and accurate records that detail the R&DTI activities, who conducted them and the time spent
    • Register your R&DTI activities with the Department of Industry, Science and Resources (DISR). Note: registration does not confirm eligibility or payment of the offset.

If we suspect you may not have met your reporting obligations, we may:

  • contact you or your tax professional to review your engagement processes and help reduce exposure to high-risk subcontractor arrangements
  • request that you fix a mistake or amend your tax return or adjust or fix your BAS
  • seek further information to understand your circumstances and determine whether amendments are required
  • conduct a review or audit of your business – if we identify non-compliance, penalties and interest charges may apply.

Keep up to date

Keep your small business on track by staying up to date with the latest tax and compliance information. Learn more by taking our free self-paced online courses designed to help small businesses get it right:

You can also:

  • Subscribe to our free Small business newsletter to get updates that might affect your business.
  • Contact your tax professional to obtain advice specific to your business needs.

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