The ATO has been handed extra funding in this year’s Federal Budget, which means they have more resources than ever to zero in on small business compliance!
Let’s unpack the ATO’s focus areas for this year and the simple steps you can take to stay ahead…
Contractors and missing income
One of the biggest focus areas for the ATO in 2025 is contractors. Certain industries are being watched more closely than others, particularly construction, cleaning, IT services, security, and courier or delivery work. Why these? Because they often involve lots of contractor payments and cash flow moving in and out, which historically has been under-reported.
The ATO uses the Taxable Payments Reporting System alongside sophisticated data-matching tools. This means that if your client reports paying you, but you forget (or choose not) to declare it, the ATO will see the gap!
For business owners who pay contractors, if you don’t correctly report those contractor payments, or you miss deadlines, it can quickly attract the ATO’s attention. Ultimately, the ATO is also moving closer to having real-time visibility over both sales and contractor payments. Through systems such as Single Touch Payroll, e-invoicing and data-matching, the ATO can already see far more than most people realise.
At Freshwater, our reminder system ensures that all clients with Taxable Payments Reporting obligations are reminded when action is required. Our team are here to help you get this done correctly and on time.
GST and BAS reporting
One of the ATO’s ongoing focus areas is GST compliance. Many small businesses find themselves caught out by missed registrations, late BAS lodgements, or claiming GST credits they are not actually entitled to. The ATO is no longer letting these issues slide. In fact, they have started moving non-compliant businesses from quarterly BAS lodgements to monthly lodgements as a way of forcing them to keep up. This means more reporting, less breathing space, and higher risk if your systems are not watertight.
The simplest safeguard is to use cloud accounting software such as Xero that tracks GST automatically and reduces room for error. We also recommend setting aside funds in a dedicated account every time income comes in, so you are never scrambling to find cash at BAS time. And if you know BAS deadlines are something you struggle with, consider joining our BAS service: our team will manage the process for you, keeping you compliant, on time, and free from that last-minute stress.
Small Business Boost incentives
The Skills and Training Boost and the Technology Investment Boost were meant to give small businesses a little extra help by allowing bigger deductions on eligible spending. The idea was simple: invest in your people or your tech and get rewarded at tax time.
The ATO has since found plenty of mistakes. Some businesses claimed training that was not delivered by a registered provider, others claimed tech expenses outside the eligible period. Nice try, but no, that new coffee machine for the office does not count as “technology investment.”
If you have claimed either Boost, take a moment to check the details. Training must be with an approved provider and tech spending needs to fit within the right dates and caps. If you are unsure, ask your accountant to review it. And if you do spot an error, fix it before the ATO finds it for you!
Non-commercial business losses
Side businesses and passion projects can be a great outlet, but they do not always come with a tax advantage. If your activity looks more like a hobby than a genuine business, the ATO will not let you use the losses to reduce your other income. In their eyes, a weekend market stall selling candles is lovely, but it does not mean your full-time salary suddenly deserves a tax break.
To claim a sole trader loss against your other tax return income, you need to meet at least one of the non-commercial loss tests, such as earning over $20,000 from the activity or showing a profit in three of the past five years. If you do not meet a test, the loss must be carried forward until your business makes a profit. The best way to stay safe is to keep super clear records and make sure your business genuinely stacks up as commercial.
Capital Gains Tax concessions
The small business CGT concessions are incredibly valuable when selling a business or business asset, but they are also complicated. The ATO is checking that only genuinely eligible businesses are using them. Common errors include treating investment assets as business assets or miscalculating turnover and asset thresholds.
Solution: If you are planning to sell a business or asset, get advice well before the transaction. Make sure you understand which concessions may apply and keep detailed records to back up your eligibility. This is not an area to leave until the last minute.
Personal use of business funds
Another area under scrutiny is the blurred line between business and personal spending. Taking money out of your company without following the correct rules can trigger Division 7A problems, with loans reclassified as unfranked dividends and unexpected tax bills.
Company directors – PLEASE keep business and personal finances completely separate! If you need to draw from the company, talk to your accountant about the right way to do it. Setting up regular wages or dividends is far safer than dipping in and out of the business account.
Conclusion
These focus areas are an important reminder of the areas where small businesses most often stumble. With good record keeping, clear separation between business and personal finances, and a proactive approach to planning, you can stay compliant and stress free.
At Freshwater Tax we help business owners set up systems that take the guesswork out of tax. If reading this has left you wondering whether you are on the ATO’s radar, reach out. We can review your situation, give you peace of mind, and help you grow your business without the worry of hidden surprises.
