The Business Expenses That Raise Red Flags for Small ABN Holders

Most ABN holders assume tax problems come from claiming the wrong expense. In practice, the bigger issue is claiming expenses that don’t make sense together.

The ATO doesn’t look at expenses in isolation. It looks at patterns.

Small ABN businesses often trigger attention when expenses appear out of proportion to income or inconsistent with the type of work being done. For example, a low-revenue business claiming high vehicle, phone, and home office costs at the same time can look unusual — even if each expense seems reasonable on its own.

Another common red flag is lifestyle overlap. When business expenses closely resemble personal spending, the line becomes harder to defend. Subscriptions, meals, travel, and technology costs are often legitimate, but only when they clearly connect to how income is earned. When those links aren’t obvious, the ATO may question whether the expense is truly business-related.

Timing also matters. Expense spikes near the end of the financial year can attract attention if they don’t line up with business activity. Sudden increases without a clear explanation can look like last-minute tax behaviour rather than genuine operating costs.

Consistency across years is another factor. When expense categories jump around from year to year without changes in income or business structure, it raises questions. The ATO expects a business story that evolves logically, not one that resets annually.

Record quality plays a role too. Expenses without clear descriptions, supporting detail, or consistent categorisation are harder to substantiate. Even valid claims can look questionable if the paperwork doesn’t clearly explain what the cost was for and how it relates to the business.

It’s important to understand that red flags don’t automatically mean wrongdoing. They simply increase the likelihood of questions. When the numbers don’t tell a clear story, the burden shifts to you to explain them.

For small ABN holders, the safest position isn’t claiming less — it’s claiming clearly. Expenses should reflect how your business actually operates, not just what you paid for during the year.

Tax issues often arise not because an expense was wrong, but because it didn’t make sense in context.

If your expense claims don’t clearly align with your income and business activity, that’s where problems tend to start.

Learn how self-employed tax returns work here:
https://www.gotax.com.au/self-employed-tax-return