Australia: ATO Targets Over-Claimed Business Expenses and GST Credits

Small businesses often misclaim expenses and GST credits that don’t adhere to deductibility rules, resulting in overclaims and poor record-keeping. Accurate reporting, separating personal and business expenses, and understanding tax obligations are essential to avoid significant penalties and audit shortfalls.

Small businesses are increasingly claiming expenses and GST credits that do not meet the deductibility rules.

To claim a business deduction, an expense must directly relate to earning business income, must not be private in nature, and must be supported by valid records. Where an expense has mixed business and private use, only the business portion can be claimed. If a business is registered for GST, it can claim GST credits on purchases for business use, but it cannot also claim the GST component as an income tax deduction.

Common Errors

• Overclaiming deductions and GST credits, including unsupported claims.
• Claiming GST credits where no GST was charged.
• Incorrectly claiming private expenses as business deductions.
• Poor record keeping, leading to inaccurate reporting.

How to Comply

Businesses should claim only expenses directly related to earning income, correctly apportion mixed-use expenses, report accurately in tax returns and BAS, and maintain proper records using digital tools.

Example:

• Poor record keeping and incomplete income reporting
• Overclaimed expenses, including GST credits on transactions without GST
• Omitted income from cash sales and the unrecorded merchant facility
• Business income deposited into personal accounts and used privately
• Incorrectly reported wages

The audit found $141,900 in overstated expenses (including $12,900 GST credits) and $194,000 in omitted income (with $17,600 GST payable).

Outcome:

• Income tax shortfall: almost $50,000 + $23,499 penalty (50%)
• GST shortfall: $30,516 + $11,807 penalty (50%)
• Total payable after audit: $115,725

Main Takeaways

This case highlights the importance for small businesses to keep accurate records of all income and transactions, report all income (including cash), claim only entitled expenses and GST credits, and understand their tax obligations — even when using a tax agent.