5 Red Flags the ATO Is Looking For in Your Tax Return

Tax time shouldn’t feel like a suspense thriller, but for many young professionals, freelancers, and sole traders in Australia, it can come close. Everyone wants to maximise their refund, yet nobody wants to trigger the ire of the Australian Taxation Office (ATO). The ATO has become increasingly savvy – using data-matching and AI to scrutinise tax returns – so staying off their radar means knowing what raises red flags. In this post, we’ll walk through five common red flags the ATO is watching for in your tax return in Australia, why they attract attention, and practical tips on how to avoid waving these flags. Let’s dive in and keep your tax return in the ATO’s good books.
Claiming Private or Over-the-Top Work Expenses
What it is: Trying to deduct personal or extravagant items as work-related expenses. This includes creative claims like expensive coffee machines, home gym equipment, gaming consoles, or even an engagement ring. These types of expenses are not genuinely work-related and stick out like a sore thumb.
Why the ATO cares: The tax law in Australia is clear that you can only claim deductions for expenses that are directly tied to earning your income – not private or domestic costs. If you put something outrageous on your return, it’s an immediate red flag for a review or audit.
How to avoid it: Only claim legitimate work-related expenses that you actually paid for and used in the course of your work. Remember the ATO’s three golden rules for deductions:
- You must have spent the money yourself (and weren’t reimbursed by your employer).
- It must directly relate to earning your income.
- You must have a record to prove it.
Leaving Out Income (Side Hustles, Gigs or Investments)
What it is: Not declaring all your income. This includes forgetting to report bank interest or investment dividends, or deliberately omitting earnings from freelance jobs, ride-share driving, Airbnb rentals, or other side gigs.
Why the ATO cares: Failing to include all income is one of the top errors the ATO is cracking down on. Thanks to expanded data-matching programs, the ATO can see income from platforms and third parties that was once hidden. If you don’t report it, they’ll eventually find it.
How to avoid it: Declare all income, no matter how small or occasional. This includes: salaries, freelance payments, ride-share or delivery income, rental income, interest, dividends, crypto or stock sale profits, and non-cash earnings. Wait until late July when most of your income data is pre-filled into your tax return to avoid missing something.
Dodgy Rental Property Deductions
What it is: Making questionable claims on investment or rental property expenses. Common examples include claiming deductions for a property that wasn’t actually rented out or available to tenants, inflating expenses, or misclassifying capital improvements as repairs.
Why the ATO cares: Rental property claims are a major focus area for the ATO. They often see mistakes where people don’t apportion expenses correctly or confuse improvements with repairs. If your claims seem too high or inconsistent, they’ll investigate.
How to avoid it: Keep your rental property claims clean and accurate. Only claim expenses for the period the property was actually rented or genuinely advertised at market rates. Distinguish between capital improvements and repairs, and keep solid documentation for all claims.
Shoddy Record Keeping and Tax Return Errors
What it is: Filing your return with mistakes, inconsistencies, or unsupported numbers. This could be typos, arithmetic errors, or claims with no receipts. Rounding all your expense claims or reusing last year’s figures without updates are also red flags.
Why the ATO cares: The ATO’s systems are good at picking up anomalies. A return full of round numbers or estimates suggests poor record-keeping and may lead to an audit. Errors or lack of proof signal to the ATO that a closer look is needed.
How to avoid it: Be diligent and accurate. Keep all receipts, invoices, logs, and proof for every claim. For car use, keep a proper logbook. For home office costs, maintain timesheets and utility bills. Double-check your return for mistakes before lodging.
Missing Lodgement Deadlines or Ignoring ATO Notices
What it is: Consistently lodging your tax returns late or not lodging at all, as well as ignoring letters or reminders from the ATO. Small business owners and self-employed folks often put tax tasks on the back burner, but this behaviour raises flags.
Why the ATO cares: Late or unlodged returns suggest you might be hiding something. The ATO tracks who hasn’t lodged by the due date and follows up. There are penalties for late lodgement and, in extreme cases, non-lodgement can lead to prosecution.
How to avoid it: Always lodge your tax return on time. Mark the deadline in your calendar. If you’re struggling, use a registered tax agent. Communicate with the ATO if something is amiss. Keeping up with your obligations shows diligence and reduces your audit risk.
Conclusion
Navigating tax time as a self-employed person or young professional doesn’t have to be stressful. By steering clear of these five red flags – dodgy deductions, undeclared income, rental property mistakes, poor records, and missed deadlines – you can confidently submit your return without attracting unwanted attention. The ATO rewards honesty and good record-keeping, so play by the rules, keep your receipts, and don’t be afraid to get professional help if you need it. Staying compliant means peace of mind – and maybe even a decent refund.
Any advice is general in nature only and has been prepared without considering your needs, objectives or financial situation. Before acting on it, you should consider its appropriateness for you, having regard to those factors. Before making any decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement.
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