The ATO is no longer waiting until the end of the year to check your deductions. It is matching data in real time, comparing your claims against hundreds of external sources, and flagging anything that looks out of step before your return is even processed. For Melbourne business owners, the risk is not that your deductions are illegal. It is that the line between personal and business use is blurry, your records are thin, and the ATO now has the tools to notice.

This is the enforcement side of the story. Plenty of guides explain how to claim a car or a home office. This one explains what the ATO is actually targeting in 2026, which claims are most likely to trigger a review, and how to claim safely so a legitimate deduction does not turn into an adjustment, interest, and penalties. I am Mina Baselyous, CPA and Chartered Tax Adviser at Pinnacle Accounting & Advisory, and this is the area where I see good businesses caught out most often.

Why the ATO is escalating now

Two things have changed. First, collectable tax debt has climbed past $50 billion, with small business the largest contributor, so the ATO has every incentive to protect revenue. Second, its data-matching capability has expanded dramatically. The ATO now receives information from banks, share registries, state revenue offices, motor vehicle registries, insurers, payment platforms, and hundreds of other sources, then compares your return against businesses like yours.

The ATO has also become unusually public about what it is watching. Through its small business focus areas, it now shares specific risks each quarter, including making sure business income is not treated as personal, non-commercial business losses, and deductions where private use has not been properly excluded. When the regulator tells you where it is looking, ignoring it is a choice.

The three claims most likely to trigger scrutiny

Mixed personal and business use is the common thread running through almost every deduction the ATO adjusts. These three are where it happens most.

1. Motor vehicle and car claims

Cars are the single most adjusted category for sole traders and small businesses, because private use is almost always understated. The persistent myth is that signage or business ownership makes a vehicle fully deductible. It does not. You can only claim the business-use proportion, full stop.

For 2025-26 you have two methods. The cents per kilometre method is 88 cents per kilometre, capped at 5,000 work-related kilometres, and you must be able to explain how you worked out those kilometres. The logbook method lets you claim the actual business-use percentage of all running costs, but only if you keep a valid logbook for a continuous 12-week period plus odometer readings. Where a company or trust owns the car and a director uses it privately, fringe benefits tax is almost always in play. For the detail on both methods, see our guides on claiming motor vehicle expenses and the most common car deduction questions.

What triggers a review: a high business-use percentage with no logbook, a claim that mirrors the 5,000 kilometre cap suspiciously closely year after year, or vehicle costs that look large relative to reported income.

2. Working from home

Working from home claims exploded during the pandemic and the ATO has tightened the rules in response. For 2025-26 the fixed rate method is 70 cents per hour, and it covers energy, internet, phone, and stationery. The catch that catches people is the record. You must keep a record of the actual hours you worked from home across the entire year, such as a timesheet, roster, or diary. A reasonable estimate is no longer accepted, and if you cannot produce a contemporaneous record in a review, the claim is disallowed.

The second trap is double dipping: claiming phone and internet separately on top of the 70 cent rate, when those costs are already included in it. Both are exactly the kind of pattern the ATO’s data-matching is built to surface.

3. Mixed-use assets, money, and expenses

The broadest risk is any asset or expense that serves both the business and the owner. Phones, laptops, subscriptions, tools, and equipment used partly at home all have to be apportioned, and you can only deduct the taxable-purpose portion. The ATO is equally focused on the reverse problem: business income, or business assets and money, being used privately without being properly accounted for. Its stated focus includes ensuring business income is not misreported as personal, and that non-commercial or hobby-style losses are not offset against other income.

For a full picture of what is genuinely claimable versus what is not, our complete guide to small business tax deductions works through every major category.

How the ATO actually catches you

The old assumption was that unless you were unlucky enough to be randomly audited, aggressive claims would slip through. That assumption is dead. The ATO’s modern approach is data-first: your return is scored against benchmarks for your industry and turnover, and outliers are flagged automatically. If your deductions sit well above comparable businesses, or your reported income does not reconcile with the bank, platform, and third-party data the ATO already holds, you become a candidate for a review or a benchmark audit.

Real-time matching also means the timing has shifted. The ATO increasingly identifies discrepancies as returns are lodged rather than years later, which is why a clean, defensible position at lodgement now matters more than ever.

The substantiation the ATO expects

Every work-related deduction has to meet three golden rules: you must have spent the money yourself and not been reimbursed, the expense must directly relate to earning your income, and you must have a record to prove it. The record is where most claims fall down. In practice, the ATO expects you to hold:

• Receipts or invoices for each expense, generally kept for five years;
• A valid 12-week logbook plus odometer readings for the logbook car method;
• A contemporaneous record of hours worked from home for the whole year;
• A reasonable, documented basis for every apportionment between business and private use.

If you cannot show how you arrived at a percentage, the ATO’s position is that you have not substantiated it, and the deduction is at risk regardless of how genuine the underlying expense was.

How to claim safely in 2026

The goal is not to claim less. It is to claim everything you are entitled to in a way that survives scrutiny. Four habits get you there. Apportion honestly, so the private slice is genuinely carved out rather than rounded down to zero. Keep records as you go using a tool like a diary or the ATO app, not reconstructed in July. Match your claims to your reality, so a home office claim lines up with actual work-from-home days and a car claim lines up with a real logbook. And get a second set of eyes on the grey areas before you lodge, not after a review letter arrives.

This is exactly where proactive advice pays for itself. Our tax planning service reviews your position throughout the year, so legitimate deductions are captured and documented, and the risky ones are fixed before they become a problem.

Frequently Asked Questions

What deductions is the ATO targeting in 2026?

The ATO is focused on claims where personal and business use overlap: motor vehicle and car expenses, working from home, and mixed-use assets and expenses such as phones, laptops, and subscriptions. It is also watching for business income treated as personal and non-commercial losses. These are surfaced through expanded data-matching rather than random audits.

Can the ATO really see my claims in real time?

Increasingly, yes. The ATO receives data from banks, registries, insurers, state revenue offices, and payment platforms and matches it against your return, often as it is lodged. Returns are also scored against industry benchmarks, so claims that sit well outside the norm for your business type and turnover are automatically flagged for review.

What records do I need to claim a car for business?

For the cents per kilometre method (88 cents per kilometre for 2025-26, capped at 5,000 kilometres), you need a reasonable basis for your work kilometres. For the logbook method, you need a logbook covering a continuous 12-week period, odometer readings, and receipts for running costs. Without a logbook you cannot claim a business-use percentage above the cents per kilometre cap.

Is a working from home estimate still acceptable?

No. To use the 70 cent fixed rate method for 2025-26 you must keep a record of the actual hours you worked from home across the entire year, such as a timesheet, roster, or diary. A reasonable estimate is no longer accepted, and an unsupported claim will be disallowed in a review.

What happens if I get a deduction wrong?

If the ATO disallows a deduction, you repay the tax shortfall plus interest, and penalties can apply where it considers you failed to take reasonable care. Correcting a position proactively, before the ATO contacts you, generally leads to a far better outcome than waiting for a review. If you are unsure about a claim, it is worth getting advice before you lodge.

Frequently Asked Questions

Food and drink sits right on the personal versus business boundary. If you buy groceries that partly feed the office and partly feed your household, the split matters. See our guide to staff amenities versus entertainment for what is claimable and what is not.

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