Our focus
We’re seeing small businesses claim expenses and GST credits that don’t meet the rules for deductibility.
To claim a business deduction, an expense must:
- directly relate to earning your business income
- not be private in nature
- be supported by valid records.
If there’s a mix of business and private use, you can only claim the business portion.
If you’re registered for GST, you can claim GST credits for the GST included in the price of goods and services you buy for your business. If you claim a GST credit, you can’t also claim the GST amount as a deduction in your income tax return.
Common errors we see
- Overclaiming deductions and GST credits – including unsupported claims and errors in tax returns and Business activity statement (BAS) such as overclaimed expenses and GST credits.
- Double claiming expenses and GST credits – including claiming a GST credit in a BAS and then claiming the GST component of the same expense as a deduction in an income tax return.
- Incorrect claims – including claiming GST credits where GST is not included in the price.
- Claiming private expenses – where private expenses are wrongly claimed as business deductions or not correctly apportioned.
- Poor record keeping – leading to incorrect claims or an inability to substantiate expenses.
How to get it right
- You can claim a tax deduction for most business expenses if they’re directly related to earning your income.
- Apportion expenses correctly where there is a mix of business and private use.
- Correctly report your expenses and business deductions in your tax return and BAS.
- Use digital tools and keep accurate records to help you manage daily activities and cash flow.
For more information about when you can and can’t claim see Claiming GST credits.
Example: claiming private expenses as business deductions
Jordan is the sole director of a disability support service company in New South Wales. The business was selected for review as part of a Government payments pilot program.
We audited the 2020–21 to 2022–23 income years and BAS from 1 July 2021 to 30 June 2023.
Our audit identified concerning behaviours, including:
- overclaimed GST credits and business deductions
- poor record keeping
- using business funds for private expenses
- failure to report all business income.
During the audit, we found:
- GST credits and business deductions were overclaimed
- private expenses were paid from business accounts and treated as business expenses for tax purposes – these expenses included
- family court fees
- child support
- private health insurance
- childcare fees
- groceries and household items, and
- travel, legal, and entertainment expenses that could not be demonstrated to have a business purpose
- the company claimed substantial amounts as business deductions but could not provide evidence they were related to business activities.
We adjusted the business's tax position to reflect overclaimed credits, disallowed deductions and unreported income, resulting in:
- $118,860 in reduced GST credits
- $565,360 in additional income tax liabilities.
This resulted in total primary liabilities of $684,220.
As the business made false or misleading statements, penalties were applied:
- $106,500 for activity statement shortfalls
- $508,800 for income tax shortfalls
- $3,270 for failing to withhold pay as you go (PAYG).
Total penalties were $618,570, bringing total liabilities to $1,302,790.
This shows how important it is for small businesses to:
- keep accurate records to support all claims
- claim GST credits only when entitled to do so
- claim only legitimate business expenses
- understand their tax obligations when operating a company
- keep business and personal finances separate, and avoid claiming private expenses through the business.
Key takeaways
This shows how important it is for small businesses to:
- keep accurate records of all transactions
- report all income, including cash
- ensure you only claim expenses and GST credits you're entitled to
- understand your tax obligations, even if you use a tax agent, as ignoring them can lead to serious consequences.
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:
- Claiming small business tax deductionsExternal Link
- Claiming GST credits
- Recording business income and expensesExternal Link
- Essentials to strengthen your small businessExternal Link – a suite of courses to help you build confidence in managing your obligations.
- Small business benchmarks – compare your performance against similar businesses in your industry.
You can also:
- Subscribe to our free Small business newsletter to get updates that might affect your business.
- Speak with your tax professional to obtain advice specific to your business needs.