Assistant Commissioner Angela Allen explains the recurring tax errors triggering penalties and what to do about them.
What’s happening: The Australian Taxation Office has intensified its focus on small businesses in property, construction and professional services sectors with turnovers between $1 million and $10 million. Common errors include incorrect R&D tax incentive claims, omitted income, overclaimed expenses and failure to register for GST.
Why this matters: The ATO is conducting audits and applying significant penalties and interest charges where errors are detected. Small businesses in these sectors need to understand their obligations to avoid costly mistakes and ensure they’re competing on a level playing field.
The Australian Taxation Office is tightening its scrutiny of small businesses in specific industries, with Assistant Commissioner Angela Allen warning that recurring tax errors are triggering audits, penalties and substantial interest charges.
The ATO’s latest focus targets property, construction and professional services businesses with turnovers between $1 million and $10 million, where tax obligations become increasingly complex as businesses scale.
Industries under scrutiny
The ATO is concentrating on two key sectors: the property and construction industry, including builders, contractors and tradies, and the professional, scientific and technical services sector, covering engineering, design, IT, management and consulting professionals.
“As small businesses grow, their tax and super obligations often become more complex,” says Angela Allen, ATO Assistant Commissioner. “We want to ensure that growing small businesses with a turnover of between $1 million to $10 million clearly understand their responsibilities, particularly when it comes to accurately reporting all income, deductions and offsets.”
Allen emphasises the ATO’s vigilance. “We continue to see recurring issues in specific industries. We’re watching closely, conducting audits, and applying penalties and interest where needed.”
Common costly mistakes
The ATO has identified several recurring errors, whether from mistakes, misunderstandings or deliberate behaviour. These include incorrect claims for the Research and Development tax incentive, particularly for activities that don’t meet eligibility criteria, omitting sales and income in Business Activity Statements and tax returns, including income from related entities, overclaiming expenses and GST credits, and reporting private expenses as business-related without proper apportionment.
Failure to register for GST when required and not seeking independent advice from registered tax agents, particularly in head contractor and subcontractor arrangements, are also flagged as problem areas.
Real penalties, real cases
The ATO has provided detailed examples of businesses facing significant financial consequences. One solar retail business, Suntraxion Solar Pty Ltd, claimed $1.3 million in R&D deductions between 2021 and 2024, resulting in $569,000 in refundable tax offsets, mostly for payments to associates including family members.
A subsequent review found insufficient evidence to support the claims, with most expenses being day-to-day operations rather than eligible R&D activities. Despite multiple extensions, the business provided complete records for only 7% of the total claim.
The outcome was severe: a tax shortfall of $205,000, a 25% base penalty of $51,250 for failing to take reasonable care, and interest charges of $75,153.
In another case, a construction business failed to lodge its Taxable Payments Annual Report and under-reported income. The business faced amended assessments with a tax shortfall of $180,000, a 50% base penalty of $90,000 for making false and misleading statements, plus interest charges.
Getting it right
Allen stresses that the ATO’s goal is to support businesses in meeting their obligations correctly, ensuring honest businesses aren’t disadvantaged.
“For small businesses struggling to meet their tax obligations, it is important not to ignore the problem but to seek assistance, whether that is from a tax adviser, a business adviser or the ATO directly,” she says.
The ATO recommends businesses report all assessable income including cash deposits, correctly apportion expenses between business and private use, maintain complete and accurate records for R&D claims, and seek advice from registered tax agents.
For R&D tax incentive claims specifically, businesses must ensure they’re conducting eligible R&D activities, maintain detailed records including project reports and staff timesheets, and register activities with the Department of Industry, Science and Resources, though registration doesn’t guarantee eligibility or payment.
The ATO offers free self-paced online courses covering claiming small business tax deductions, GST essentials, and strengthening small business fundamentals. Small business benchmarks are also available to compare performance against similar businesses in the same industry.
Businesses can subscribe to the ATO’s free Small Business Newsletter for updates, or contact their tax professional for advice specific to their circumstances.
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