ATO Crack Down on Over-Claimed Expenses and GST Credits

ATO Crack Down on Over-Claimed Expenses and GST Credits

The ATO is ramping up compliance action against businesses that deliberately over-claim expenses and GST credits, and small businesses are firmly in its sights.

Using sophisticated data matching and analytics, the ATO is now identifying incorrect claims faster and taking firmer action where businesses don't play by the rules. For small business owners, that means it's more important than ever to understand exactly what you can and can't claim, and to have the records to back it up.

Why the ATO Is Cracking Down

The ATO says it's seeing a pattern of small businesses claiming expenses and GST credits that simply don't meet the rules for deductibility. This creates an uneven playing field for the businesses that do the right thing, and it's a key reason compliance action is intensifying.

The consequences can be significant. Businesses found to be non-compliant may face:

  • Formal audits
  • Adjusted tax liabilities
  • Financial penalties

A Real-World Example of What Can Go Wrong

The ATO's recent case studies highlight just how costly getting it wrong can be. In one example, a bistro operator was found to have deliberately over-claimed expenses, including claiming GST credits on purchases where GST wasn't actually included in the price. The outcome:

  • $141,900 in overstated expenses (including $12,900 in incorrect GST credits)
  • $194,000 in omitted income
  • Over $35,306 in penalties

It's a clear reminder that "creative" claiming, whether deliberate or the result of poor record-keeping, carries real financial risk.

The Most Common Errors the ATO Is Seeing

According to the ATO, the most frequent mistakes businesses make include:

  • Over-claiming deductions or GST credits
  • Claiming private expenses as business costs
  • Making incorrect claims in BAS or tax returns, including claiming GST credits where GST wasn't included in the price
  • Failing to keep adequate records, or having records go missing

Many of these errors aren't necessarily intentional, they often come down to disorganised bookkeeping or a misunderstanding of what qualifies as a legitimate business expense.

How to Claim Correctly

To claim a valid business deduction, your expense must:

  • Directly relate to earning your business income
  • Not be private in nature
  • Be supported by valid, accurate records

If an expense is partly private, you can only claim the business-related portion, not the whole amount. And if you're GST-registered, you can only claim a GST credit where GST was actually included in the price of what you purchased. Importantly, you can't claim both a GST credit and the GST amount as an income tax deduction on the same expense, it's one or the other.

The ATO's message is clear: correctly report your expenses and deductions in your tax return and BAS, keep accurate records, and double-check every claim before you lodge.

Protecting Your Business From ATO Scrutiny

With data analytics making it easier than ever for the ATO to flag inconsistencies, the businesses most at risk are those with:

  • Inconsistent or missing records
  • Claims that don't align with industry benchmarks
  • GST credits claimed on expenses without GST included in the price
  • A blurred line between personal and business spending

Good bookkeeping practices, separating business and personal accounts, and having a registered tax professional review your BAS and tax return before lodgment are some of the simplest ways to reduce your risk.

Get Your Deductions and BAS Right With Cashflow Financial

Facing an ATO audit or adjusted liability over incorrect claims can be costly and stressful, but it's entirely avoidable with the right processes and advice in place.

The team at Cashflow Financial helps small businesses across Sutherland, Wollongong and Sydney get their expense claims, GST credits and BAS lodgments right the first time. From accurate bookkeeping to proactive tax planning, we make sure your business claims what it's entitled to, and nothing it isn't. Contact Cashflow Financial today for a review of your business's tax compliance.