What the ATO’s Crackdown on Small Business Deductions Means for You

The Australian Taxation Office (ATO) is sharpening its focus on small business deductions this financial year, and it's more than just a gentle reminder to play by the rules. With more audits and scrutiny, your deductions must be accurate and well-documented.

For small and medium-sized businesses, this means it's time to review what you're claiming and how you're recording it.

Know What You Can Claim

Small businesses can still claim deductions for rent, utilities, depreciation and business vehicle use. But remember, if you can't prove it, you can't claim it.

According to the ATO's guide on deductions for small businesses, expenses must be directly related to earning assessable income, not personal in nature, and supported by documentation. This means invoices, receipts, bank statements or logbooks must clearly show how the expense relates to business activity.

Common red flags include over-claiming vehicle use, misclassifying personal expenses and failing to separate private and business portions of shared costs, such as home internet or mobile use.

Compliance Is Tightening

The ATO has emphasised that small business tax compliance remains a key focus in 2024. According to the ATO's latest figures, the net small business income tax gap is $17.7billion. This means that small businesses paid only about 87cents of every dollar owed for the 2021–22 period.

The ATO uses analytics, third-party reports and AI to detect anomalies. Its random enquiry program has uncovered that nearly 60% of the gross gap, around $11.2billion, is due to practices such as under-reporting income and inflating deductions. If your deductions significantly exceed industry benchmarks or your records don't clearly justify your claims, your business could be flagged for review.

Maintaining clear, comprehensive and well-organised documentation is your strongest defence. That means keeping receipts, invoices, mileage logs and other proof that ties each expense directly to your business. With the ATO's enhanced focus on deduction accuracy, staying proactive is essential to safeguarding your business against penalties or audits.

Get Your Records Right

The best defence against an audit is accurate, up-to-date recordkeeping. This means not only saving receipts and invoices, but also tracking them consistently throughout the year. Cloud-based software helps simplify recordkeeping and reduce errors.

But digital systems are only effective if used correctly. That's where professional support can make all the difference. An experienced accountant can review your expense categories, ensure compliance with current ATO rules and help you claim everything you're entitled to without crossing any lines.

WMC Accounting helps you stay compliant and audit-ready, guiding you through current ATO rules and helping you claim what you're entitled to — accurately and with confidence. Contact us today to protect your business and maximise your deductions.