From mixing personal expenses to missing instant asset write-offs, industry experts break down the most common tax mistakes draining small business profits
Small businesses represent 97 per cent of all Australian businesses, yet many owners are unknowingly triggering tax penalties through common mistakes like mixing personal and business finances, misclassifying workers, or missing crucial deductions. This week’s Let’s Talk edition brings together leading experts who reveal the silent profit killers lurking in everyday business operations, and share strategies to avoid them.
Let’s Talk!
Dale Dixon, General Manager Practice & Partner Advisory at MYOB
The simplest and most effective safeguard for avoiding tax traps is to work closely with a qualified accountant who understands your industry and can help you stay ahead of the rules.
Two of the most common pitfalls are incorrect deduction claims and issues with record-
keeping. With 75% of non-employing businesses saying they don’t have a dedicated business bank account, many SMEs inadvertently over- or under-claim expenses by mixing personal and business spending, or by relying on estimates instead of proper documentation. Income-recognition timing, especially for businesses with irregular invoicing cycles, can also leave owners facing unexpectedly large tax bills.
Cash flow can take a significant hit when BAS or PAYG instalments are missed, a problem that often arises for solo operators as their business grows and they move into higher tax brackets. Proactive advice is the safest strategy. Partnering with a trusted accountant or bookkeeper ensures you stay compliant, avoid costly penalties, and make more informed decisions come tax time.
Lynn Jensz, Managing Partner – Accounting and Business Advisory, FINDEX
Running a business can be filled with the unknown, and it is imperative that business owners understand their obligations from a tax perspective and get it right from the start, otherwise, it can be an expensive exercise to correct.
The most common trap for business owners is failing to seek advice on the appropriate structures to run their businesses through, prior to going into business. The structure determines what you can and cannot do from a tax perspective in your business.
For example, if you run your business through a Company and use the Company cheque book as your personal cheque book, then you will be deemed to have either taken a “deemed dividend” or you need to put the monies taken on a compliant loan agreement and make minimum repayments, which includes interest.
You can also run foul when using business assets as personal assets, which can trigger Fringe Benefits Tax (FBT), adjustments for GST and a reduction in depreciation allowances.
Regardless of what structure you use, you must have a good understanding of GST, including knowing what GST credits you can claim, what transactions may be GST-free free and always having valid tax invoices. Claiming GST on items incorrectly can lead to large GST adjustments being required at the end of the year.
The above is a small sample of the traps that many business owners can unknowingly fall into. No matter the size of your business, start off on the right foot when it comes to managing your tax responsibilities. Seek assistance from reputable advisors and don’t be afraid to ask questions.
Thomas Linnane, Senior Lawyer, LegalVision
Tax compliance isn’t exactly thrilling for small business owners, but ignoring tax obligations can be costly. Most businesses are across the basics like income tax returns and business activity statements lodgments. The real danger lies in the more obscure obligations that can trigger significant tax bills if you’re not paying attention. For example:
- End of year celebrations: Staff gifts and parties can trigger fringe benefits tax (FBT), with the FBT rate being 47%. Structure these events correctly to avoid the tax grinch knocking.
- Whose money is it? Company controllers often forget that the company’s money isn’t theirs personally. Directors who withdraw company funds can face adverse tax consequences if the withdrawals are not correctly accounted for.
- Lodge on time, even if you can’t pay: Late lodgments make things worse. Directors can become personally liable for company tax debts, with harsher penalties for late lodgments. Business owners should ensure lodgements are up to date, even if the business cannot afford to pay on time.
Contractors vs employees: There are several circumstances in which contractors can be treated as employees for tax purposes. Misclassifying workers carries significant costs for superannuation, PAYG withholding and payroll tax. The ATO is actively cracking down on this area.
Ian Boyd, General Manager, Australia and New Zealand at GoCardless
“The most insidious taxes aren’t the ones that appear in your debits, payable to the ATO – they’re the hidden ones silently draining your bottom line in the form of late payments.
Our 2025 Pursuing Payments report shows that nearly half of Australian small businesses are waiting longer for payments than 12 months ago. Over two-thirds of SMBs believe late payments are an ‘inevitable cost’ of doing business, and 17% have reported losing over $2,500 monthly to late payments (up from 11% in 2024).
To protect your cash flow before year-end, make these changes:
- Audit your payment processes. Set clear terms upfront and offer small discounts to reward prompt payment.
- Upgrade your payment methods. Credit cards fail 10-15% of the time, while bank-to-bank solutions like PayTo pull cash on the due date automatically.
- Automate reminders and sync payments with your invoicing platform if you’re using one.
- If you’re not, look into online systems like Xero, Chargebee or Salesforce that can automate your invoicing.
- Check if your payment provider charges customers dishonour fees. These quietly erode profits and customer loyalty.
Small businesses are fighting for margins in tough conditions. Don’t pay hidden taxes you can avoid.”
Grant Austin, CEO at pay.com.au
As tax season approaches in February, many small business owners are focused on maximising deductions, but it’s the hidden tax risks tied to everyday operational spend that catch them out every year.
The biggest headache comes from the failure to accurately track and substantiate claims for large, recurring payments like ATO bills, payroll, or superannuation. When businesses rely on fragmented payment methods – using bank transfers for suppliers and cards for others – they create a messy, incomplete data trail. This makes it difficult to prove the business nature of the expense, which can lead to compliance scrutiny and lost deduction opportunities.
A key solution is to consolidate payments through a single, smart platform. By processing all business expenses in one place, business owners naturally create the clear, digital record the ATO expects. This year-round diligence is what ultimately minimises tax season stress and risk.
Financial efficiency isn’t just about filing on time. It’s about streamlining the tracking and categorisation of every dollar spent, year-round. By using smart payment technology, small businesses can turn messy spend data into a robust, auditable record, ensuring they meet their obligations while maximising efficiency and mitigating financial risk.
Connie Paglianiti, Founder & Event Strategist, WeSocialise
I’m not a tax guru, I’m a small business owner who’s copped a couple of nasty ATO bills and thought, “Never again.”
The biggest trap? Saying “I’ll sort tax later.” Later comes, the bill lands, and you’re scrambling to find the money.
The other killer is mixing everything on one card, business, personal, coffee, petrol, groceries, then expecting your bookkeeper to magically work it out. They can’t.
Another trap no one really talks about is underquoting. When your costing is too soft and you forget to factor in GST, your own time or real expenses, it looks like profit on paper but there’s nothing left in the bank. You’re still paying tax on those numbers, even though you never truly kept the money.
And showing up once a year with a pile of receipts doesn’t help either. Your accountant isn’t a magician.
What’s actually worked for me is boring but effective: separate accounts, putting a chunk aside every time I get paid, and regular check-ins with my numbers so tax isn’t a massive shock at year’s end.
The traps aren’t complicated. They’re the simple things we ignore when we’re busy. Fix those, and you’ll save yourself a world of pain.
Greg Wilkes, CEO of Develop Coaching
Tax rarely hits an Australian small business in one big blow. It creeps up, quietly. And every year, owners get caught by the same traps.
The first is the GST trap. A business edges toward the $75k threshold, wins a few extra jobs, then realises too late that registration should have happened earlier. The ATO can backdate GST, and suddenly your profit for the quarter is gone.
Then comes the classic “profit but no cash” problem. You feel like you’ve had a strong year, but the tax bill in May tells a different story. If you’re not sweeping a percentage of revenue into a separate tax account every week, you’re playing roulette with your cashflow.
Another big one is PAYG withholding errors. Many owners hire quickly but don’t set up proper payroll processes. The ATO spots missing or late PAYG, and now you’re facing penalties on top of catch-up payments.
And then there’s personal drawings. Plenty of directors still take money out of the business informally, thinking it’s harmless. Come tax time, you’re told it’s created a Division 7A loan you never knew you had.
Small businesses don’t need more pressure. They just need tighter habits. Get ahead of tax, and you keep control of your cash.
Morgan Wilson, Founder & Director, creditte accountants & advisors
Every year we see the same tax traps catch good businesses out. The ATO isn’t just looking at your tax return anymore – it’s matching payroll, super and other data in close to real time.
Three big gotchas? Unpaid super, “drawings” instead of proper wages or dividends, and fringe benefits tax on cars and perks. Owners can treat the business like an ATM, skip super in tight months, or put the family car, holidays and entertainment through the company and assume “it’s all deductible”. It’s not – and the penalties and interest quickly turn a small cash-flow issue into a serious problem when found out.
The real issue isn’t the tax, it’s the lack of visibility and structure. If you’re only talking to your accountant at year end (or not at all!), you’re flying blind. Tight payroll processes, clean expense coding and quarterly check-ins give you what you actually need – better numbers, better decisions and no nasty surprises.
Simon Ma, CEO, OurTop10
The ATO’s latest data reveals a $27.2 billion tax trap: Australian small businesses aren’t paying 17.4% of their owed tax. This gap has grown from 12.6% in 2017-18, and the culprits are clear.
For small companies, it’s a near-even split; 49% omit income, 48% over-claim deductions. For sole traders and individuals in business, omitted income dominates at 71% of the gap, making it the single biggest tax trap facing Australian small business owners.
The ATO identifies four critical failures: misunderstanding tax obligations, poor record keeping, not declaring all business income, and claiming private expenses as business deductions. Their most telling finding? “Small businesses who reported correctly had more regular contact with a tax professional.”
This isn’t about complex loopholes or aggressive tax planning. It’s about fundamental compliance. Knowing what you owe, keeping proper records, declaring everything, and understanding what’s legitimately claimable.
The cost of getting it wrong compounds annually. The investment in getting it right? A fraction of the alternative.
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