Top 5 tax deductions mistakes to avoid in 2025

Introduction

Lodging a tax return is more than just paperwork. The ATO is not just reviewing your submission; it is analysing every detail. With advanced tools and access to vast financial data, spotting mistakes has never been easier. You could set yourself up for trouble if you consider adding extra deductions or leaving out certain income.

While most sources of income are already reported to the ATO, deductions require careful review. The ATO assesses claims based on your profession, income level, and industry benchmarks. Any inconsistencies can raise concerns and may lead to further scrutiny.

Whether you are a salaried employee, freelancer, self-employed professional, or small business owner, this blog post will help you identify common tax deduction mistakes and how to avoid them. Understanding these errors will ensure your tax return is accurate, compliant, and optimised for the best possible outcome.

What are tax deductions?

Tax deductions are certain expenses individuals and businesses can claim to lower their taxable income. Most deductible expenses are directly related to generating income, such as work-related costs, investment expenses, and self-funded super contributions.

However, some deductions, like charitable donations, do not need to be linked to income generation but still qualify under tax laws.

By claiming eligible deductions, taxpayers reduce the portion of income subject to taxation, which can result in lower tax liability or a larger refund.

How do tax deductions work?

Tax deductions work by subtracting allowable expenses from assessable income. The process is as follows:

• Assessable income: Total earnings from employment, business, or investments.
• Minus allowable deductions: Eligible expenses related to work or financial activities are deducted.
• Equals taxable income: The remaining amount after deductions is the basis for tax calculation.

Taxpayers should use appropriate tax return sections to claim deductions correctly and follow ATO guidelines. Some industries have specific rules, so checking occupation-based tax guides can help maximise deductions.

Deductions you can claim in Australia

Here is the list of eligible expenses that can help reduce your taxable income and lower your overall tax liability:

Avoid these 5 tax deduction mistakes for a bigger return

Below, we will outline five common tax deduction mistakes. Avoid these, and there’s a higher chance of maximising your eligible claims while staying compliant with ATO regulations.

Claiming deductions for private assets:

Claiming deductions for assets used entirely for private purposes is a common mistake that can lead to penalties. The ATO does not allow businesses to deduct expenses related to personal assets, even if they are purchased under the business name.

For example, if a company buys a boat claiming it will be used for business activities but fails to generate income from it and primarily uses it for private purposes, the deduction will be disallowed. The ATO reviews such claims, and businesses misusing deductions may have to repay the tax shortfall, interest, and penalties.

To avoid this, ensure all claimed assets are genuinely used for business purposes, maintain clear financial records, and have proof of commercial use.

Creating an FBT liability:

An FBT liability may arise when a business purchases an asset that is used privately by an employee or their associate. If the asset is not used solely for business purposes, the ATO may classify it as a fringe benefit, requiring proper reporting and tax payments. Both the business and the employee must ensure compliance to avoid penalties..

For example, if a company purchases a boat claiming it is for marketing but primarily uses it for private trips and entertainment, the ATO may disallow deductions and impose FBT. The company would then need to lodge an FBT return and pay the tax liability, along with any interest and penalties.

To prevent issues, businesses should track asset usage closely and establish clear guidelines on personal use. Keeping well-organised records of business transactions and documenting any private use of company assets can help ensure FBT compliance. Regular reviews of asset use and tax obligations can further reduce the risk of errors.

Overstating expenses:

Overstating expenses can result in ATO audits, penalties, and repayment of disallowed deductions. The severity of the penalty depends on the nature of the mistake.

If you fail to take reasonable care, such as miscalculating expenses or lacking proper documentation, you may face a 25 percent penalty. Recklessness, where excessive deductions are knowingly claimed without verification, can lead to a 50 percent penalty.

If expenses are intentionally overstated to reduce tax liability, the penalty increases to 75 percent. To avoid costly penalties and compliance issues, ensure all deductions are accurate and consult a professional if uncertain about your claims.

Forgetting to include all sources of income:

Many individuals fail to report all taxable income, particularly from secondary or irregular sources such as freelance work, rental income, dividends, cryptocurrency earnings, and gig economy jobs. Some mistakenly believe that smaller earnings do not need to be declared.

However, the ATO cross-checks tax returns with bank records and financial databases, making it easy to detect undeclared income.

To prevent this issue, reviewing all sources of earnings before filing a tax return is essential. Checking financial statements and payment records helps ensure everything is properly declared, avoiding potential discrepancies that could raise concerns with tax authorities.

Incorrectly claiming home office expenses:

Many individuals miscalculate home office deductions, especially with the rise of remote and hybrid work arrangements. A common mistake is claiming an excessive percentage of rent, utilities, or internet costs without properly calculating business use. The ATO closely reviews home office claims, and incorrect deductions can be denied.

To ensure compliance, taxpayers must use one of the ATO’s approved methods:

• Fixed-rate method: A set rate per hour covering electricity, phone, and internet expenses.
• Actual cost method: A proportionate claim based on the area used for work and actual expenses incurred.

Choosing the appropriate method and ensuring deductions align with business use helps prevent issues and ensures accurate tax reporting.

Common tips for avoiding tax deduction mistakes

Here are key tips to help you avoid common tax deduction mistakes:

• Educate yourself on tax rules: Staying informed about tax laws can prevent mistakes. Regularly check the ATO website or attend tax-related workshops to understand deduction limits and eligibility criteria.
• Avoid estimations – Use Exact Figures: Guessing deduction amounts can lead to errors and potential audits. Always refer to receipts, invoices, or financial statements to ensure accuracy.
• Track expenses year-round: Instead of rushing at tax time, maintain a log of deductible expenses throughout the year. This helps prevent overlooked deductions and last-minute mistakes.
• Use digital tools for accuracy: Leverage tax calculators, accounting software, or ATO’s myDeductions tool to minimise errors and track deductible expenses efficiently.
• Double-check before submission: Incorrectly entering amounts or misplacing figures can lead to unnecessary complications. Reviewing all deduction claims before filing ensures accuracy and compliance.
• Seek professional advice:Consulting a registered tax agent or accountant ensures compliance and helps maximise deductions legally. Professional guidance is especially useful for complex tax situations.

Final words

Have you made any of these common tax deduction mistakes? Never let mistakes put you down; instead, use them as an opportunity to learn and grow. By understanding where things went wrong, you can make smarter decisions moving forward and maximise your savings in the future.

If you are unsure about the deductions you can claim or have questions about your tax return, ZedPlus is here to help. Our team of tax experts will work closely with you to identify all eligible deductions while ensuring full compliance with ATO guidelines.

Whether you are a salaried employee, freelancer, self-employed professional, or small business owner we provide personalised assistance tailored to your situation. Contact us today to avoid future tax mistakes and ensure you get the most out of your tax return!