ATO steps up action on over-claimed business expenses and GST credits

• The Australian Taxation Office (guidance updated 1 July 2026, reinforced 8 July 2026) is targeting small businesses that claim expenses and GST credits they aren’t entitled to. To be deductible, an expense must relate directly to earning business income, not be private, and be supported by valid records.
• Common errors include over-claiming deductions or GST credits, claiming GST credits where no GST was in the price, treating private costs as business expenses, and poor record-keeping. Enhanced data-matching lets the ATO detect discrepancies earlier and open reviews before refunds issue, with audits, adjusted liabilities and penalties following.
• A published example — a bistro with two merchant facilities but only one linked to its accounting software — produced $141,900 in overstated expenses (including $12,900 of GST credits) and $194,000 of omitted income, leading to shortfalls and 50% penalties totalling roughly $115,725 after audit.

Extended article

The ATO has sharpened its compliance posture toward small businesses that over-claim expenses and GST credits. In refreshed guidance (1 July 2026) and a newsroom item (8 July 2026), it reiterated the core rule: a deductible expense must directly relate to earning business income, must not be private, and must be supported by valid records. Where use is mixed, only the business portion is claimable.

For GST-registered businesses, GST credits can be claimed on the GST included in business purchases — but the same GST cannot also be claimed as an income-tax deduction. The ATO’s list of common errors covers over-claiming in returns and Business Activity Statements (BAS); claiming GST credits where GST was never in the price; misclassifying private expenses; and record-keeping too poor to substantiate positions.

The enforcement change is one of intensity and technique: data analytics now allow earlier detection, and reviews can open before refunds are paid. The published case study — Sebastian’s Scallop Bay Bistro — ran two merchant facilities (Tyro and Square) but linked only one to its accounting software, so cash and Square sales went unrecorded. The audit produced $141,900 in overstated expenses (including $12,900 of GST credits) and $194,000 of omitted income, generating an income-tax shortfall of nearly $50,000 plus a $23,499 penalty, and a GST shortfall of $30,516 plus an $11,807 penalty — around $115,725 total. The ATO’s advice: keep valid tax invoices, apportion mixed-use items, reconcile POS/merchant facilities to the accounting system, and correct errors early via BAS revisions.

External links

• ATO — Over-claiming expenses and GST credits (focus area)
• ATO — Stronger action on over-claimed expenses and GST credits
• VATupdate — ATO steps up action on over-claimed expenses and GST credits