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.
- 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: Overclaimed expenses
Sebastian is a small business operator who runs Scallop Bay Bistro within a surf club in the Northern Beaches, NSW. His business is registered for GST.
He uses 2 merchant facilities, Tyro and Square, with payments deposited into separate bank accounts. However, his accounting software is only linked to one account. This means sales from the Square facility and cash sales were not recorded, resulting in incomplete reporting.
Sebastian engaged a tax agent who was unaware of the second merchant facility and bank account. As a result, BAS and income tax returns were prepared using incomplete information.
An audit of their 2022–23 income tax return and BAS (covering 1 July 2022 to 30 June 2023) identified multiple issues.
The audit detected:
- poor record keeping and incomplete reporting of income
- overclaimed expenses, including GST credits on expenses that did not include GST in the price
- omitted income from cash sales and an unrecorded merchant facility
- business income deposited into personal accounts and used for private purposes
- wages incorrectly reported.
We found:
- overstated expenses of $141, 900 (including GST credit of $12,900)
- omitted income of $194,000 (with GST payable of $17,600).
As a result, amended assessments were raised that significantly increased Sebastian's tax payable.
- Tax payable from the income tax shortfall was almost $50,000, with a 50% administrative penalty of $23,499 applied due to false or misleading statements.
- Tax payable from the GST shortfall was $30,516, with a 50% penalty of $11,807 applied for omitted income due to reckless behaviour.
The total tax payable was $80,419, with a total of $35,306 penalties applied.
The overall amount payable following the audit was $115,725.
End of exampleKey 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.