Tax for Australians · PUBLISHED 04 JUL 2026 · VERIFIED 04 JUL 2026 · AU EDITION

5 Tax Return Mistakes the ATO Flags First in 2026

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In the 2024–25 financial year, the ATO corrected over 140,000 individual tax returns for errors in employment income, interest, welfare, Medicare levy exemptions and private health insurance, meaning thousands of people had their refunds reduced and were charged interest on underpaid tax.

The number that matters

140K — number of individual returns the ATO corrected for income and related errors in 2024–25 — ABC News summarising ATO data, 2025

This figure shows how quickly the ATO’s data-matching systems are picking up mistakes, especially unreported income and incorrect offsets, before taxpayers ever get away with them.

How it quietly costs you

Mechanism: ATO data-matching catches missing and incorrect income first

The ATO now receives live data from employers, banks, welfare agencies, share registries, crypto exchanges and digital platforms, allowing it to automatically match what you lodge against third-party records. When your return is lodged, their analytics immediately flag discrepancies such as:

• Missing employment income compared with STP/payroll reports.
• Bank interest, dividends and managed fund distributions not reported but visible in ATO data.
• Side-gig, platform, rental and crypto income missing or understated versus platform and registry data.

According to ABC reporting on ATO figures, this led to over 140,000 individual returns being corrected in 2024–25 for inconsistencies in employment income, interest, welfare, Medicare levy exemptions and private health insurance.

What the ATO flags first

Based on ATO guidance and practitioner commentary, the returns most quickly flagged are those where:

• Declared employment income does not match employer-reported data.
• Interest and dividend income are missing despite bank and registry reports.
• Side gig / digital platform income is missing while platform data shows payments.
• Capital gains from shares or crypto are not reported despite registry or exchange data.

Growthwise notes that undeclared income is “easy to detect” because the ATO receives data from many sources including employers, banks, platforms and investment providers.

Impact: immediate corrections + penalties and interest

When the ATO detects a discrepancy, it can automatically amend your assessment, increase your taxable income and reduce or reverse your refund. If that amendment creates an underpayment of tax:

• The ATO can charge General Interest Charge (GIC) on the unpaid amount from the original due date until it’s paid.
• If they decide you didn’t take reasonable care, they can impose a penalty of up to 25% of the tax shortfall.
• If behaviour is reckless, the penalty can increase to 50% of the shortfall, and if there is intentional evasion, up to 75% of the shortfall.

Latitude Accountants summarise these ATO penalty tiers: up to 25% for lack of reasonable care, 50% for recklessness and 75% for deliberate evasion.

Concrete dollar impact

For a typical salary earner who “forgets” to include:

• $5,000 of side-gig income (e.g. platform work) in the 32.5% tax bracket:
• Extra tax: $1,625 (5,000 × 0.325).
• A 25% “failure to take reasonable care” penalty would be $406 (1,625 × 0.25).
• GIC then accrues on the $1,625 shortfall from the original due date until paid.

That turns a “small” omission into roughly $2,000+ in extra tax, penalties and interest, often months after the taxpayer thought their return was “done”.

Old vs better behaviour

• Old: Lodge quickly and rely on memory, ignoring some side income and assuming “small amounts don’t matter.”
• Better: Use ATO pre-fill via myGov and cross-check it against your own records for employment, interest, dividends and platform income, then add any missing sources before lodging.

According to the ATO, there is even a specific topic and subject (“Income tax” → “Pre-filled tax return data incorrect”) for reporting pre-fill errors, emphasising how central data-matching and pre-fill are to their compliance process.

The second, compounding trap

Mechanism: over-claimed work-related and working-from-home deductions

The second thing the ATO flags early in 2026 is deduction claims that don’t match occupation norms or the new working-from-home rules. The ATO’s analytics highlight returns where:

• Total work-related deductions are unusually high relative to income or occupation.
• There is a sudden spike in deductions compared to prior years.
• Claims don’t align with ATO data (for example, logbook data or employer reimbursements).

Growthwise notes the most common mistakes are claiming deductions without records, claiming private expenses as work-related, and forgetting to declare income. Working-from-home and rental property claims are described as “two of the highest-risk areas right now.”

ABC reporting of ATO focus areas for 2024–25 and 2025–26 highlights that the ATO is scrutinising:

• Work-related deductions generally.
• Working-from-home claims, especially double-dipping.
• Car expenses and clothing, where commuters often mis-claim private travel and non-uniform clothing.
• Rental property deductions, including interest on mixed-use loans and misclassified renovations.

On work-related deductions, tax practitioner Lisa Greig outlines three ATO “golden rules”: you must have incurred the expense yourself, it must be directly related to earning income, and you must have a valid receipt.

Key 2026 trap: working-from-home fixed rate and double-dipping

For working from home, ABC and tax practitioners warn that taxpayers must avoid double-dipping. Under the current fixed-rate method, the rate already includes specific running costs (such as internet, phone, electricity and stationery), meaning you cannot claim these again separately.

A tax education video on maximising the 2025/26 tax return explains that the fixed rate includes home and mobile internet/data, mobile and home phone usage, electricity and gas, and stationery/computer consumables. It explicitly warns that many people go wrong by claiming the fixed rate and separate phone or internet costs, which is not allowed.

Impact: disallowed deductions, amended assessments and penalties

When the ATO reviews a return and finds that deductions don’t meet the golden rules or that double-dipping has occurred, they can:

• Disallow the deduction, increasing taxable income.
• Issue an amended assessment, reducing the refund or creating a new tax bill.
• Apply penalties if they judge the behaviour careless, reckless or deliberate (25–75% of the tax shortfall, as above).

For example, a taxpayer on a $90,000 salary who incorrectly claims:

• $3,000 in “extra” home office costs that are already covered by the fixed-rate method.
• At a marginal tax rate of 32.5%, that deduction wrongly reduces tax by $975 (3,000 × 0.325).
• If the ATO later disallows the claim, the taxpayer must repay $975, plus GIC on the shortfall.
• If they decide the taxpayer was reckless (e.g. obviously double-counting costs with no records), a 50% penalty would add another $488 (975 × 0.5).

That single mistake can lead to roughly $1,400+ in unexpected liabilities for one year.

Long-run cost of inaction

If a taxpayer repeats a similar $3,000 over-claim every year for 10 years, and the ATO later reviews and adjusts several years:

• Disallowed deductions: $30,000 total.
• Extra tax across 10 years: $9,750 (30,000 × 0.325).
• A 25% “lack of reasonable care” penalty would add $2,438 (9,750 × 0.25).
• GIC would further increase the total over time.

This turns a “harmless” pattern of padding deductions into over $12,000 of tax and penalties once the ATO finally intervenes.

What this looks like in practice

Persona

• Name: Sarah
• Age: 37
• Job: Marketing manager (employee)
• Gross income: $95,000 salary
• Side income: $8,000 from freelance social media work on digital platforms
• Superannuation: Employer contributions only
• Tax situation: Lodges her own individual tax return via myGov
• Work pattern: Hybrid — three days per week at home, four rental property investments
• Years to retirement: Approximately 30 years

Discovery 1 — Missing platform and investment income

Using ATO pre-fill and bank statements, Sarah realises she has not been declaring all of her side income and investment earnings:

• Digital platform income: $8,000 per year not reported in prior returns.
• Bank interest and dividends: Combined $600 per year appearing in ATO data but not on her returns.

Total undeclared income per year: $8,600.

At her approximate marginal tax rate for $95k income (about 34.5% including Medicare), that is roughly $2,967 of underpaid tax per year (8,600 × 0.345).

When the ATO corrects her latest return, she faces:

• Extra tax: ≈$3,000.
• A potential 25% penalty for lack of reasonable care: ≈$750.
• GIC accruing on the $3,000 shortfall until paid.

Compared with what she thought—“the ATO doesn’t notice small side incomes”—the ATO’s data-matching shows her error immediately in 2026.

Discovery 2 — Double-dipped working-from-home deductions

Sarah claimed both the fixed-rate working-from-home method and separate deductions for phone and internet, assuming it was allowed.

Her 2025/26 return shows:

• Fixed-rate claim (illustrative): $1,500 working-from-home deduction.
• Additional claimed phone and internet: $1,200.

But the fixed rate already covers home and mobile internet/data and phone usage, so the extra $1,200 should not have been claimed.

At a 34.5% marginal rate, this improperly reduced her tax by $414 (1,200 × 0.345). When corrected, she must repay that $414, and could be penalised if the ATO views it as careless or reckless.

Compared with her belief that “the fixed rate is just a base and you add costs on top”, the corrected benchmark is that the fixed rate replaces separate claims for included categories.

Discovery 3 — Rental property interest and repair claims

Sarah owns four rental properties and has been claiming:

• Full interest on a mixed-use loan, where part of the borrowing funded a personal renovation.
• Renovation costs (e.g. kitchen upgrade) as immediate repairs, not capital improvements.

ABC reporting of ATO focus areas notes common rental errors such as claiming full interest on loans partly used for personal purposes, misclassifying renovations as repairs, and failing to adjust deductions for private use of holiday homes.

On one property:

• Annual loan interest: $18,000, of which only $12,000 relates to the income-producing portion.
• Renovation costs incorrectly claimed as repairs: $5,000 in one year.

Total over-claimed deductions: $11,000 in that year (6,000 excess interest + 5,000 renovations).

At 34.5% marginal tax, that wrongly reduces her tax by $3,795 (11,000 × 0.345). Once the ATO reviews and adjusts her rental schedules, she must pay this $3,795, plus possible penalties and GIC.

Compared with her assumption that “all loan interest and renovation costs are deductible,” the benchmark is that only interest and repairs directly linked to producing rental income are deductible, and mixed-purpose loans and capital improvements must be treated differently.

The full cost of doing nothing

For Sarah, combining Problem 1 (undeclared income) and Problem 2 (over-claimed deductions) leads to a significant lifetime cost.

Annual combined correction (illustrative)

From the discoveries above:

• Undeclared platform and investment income: Tax shortfall ≈$2,967 per year.
• Double-dipped working-from-home deductions: Extra tax when corrected ≈$414 per year.
• Misclaimed rental interest and repairs (one year example): Extra tax when corrected ≈$3,795.

A typical year where all issues apply yields an ATO correction of approximately:

• $2,967 + $414 + $3,795 = $7,176 in additional tax.

If the ATO decides Sarah has not taken reasonable care (rather than deliberate evasion), penalties at 25% of the shortfall could add another ≈$1,794 (7,176 × 0.25).

Total annual hit once audited: ≈$8,970 in extra tax and penalties, plus GIC on the $7,176 shortfall.

Long-run modelling (30 years to retirement)

Assuming Sarah continues similar behaviours for 10 years before ATO action catches multiple years simultaneously and applies typical “failure to take reasonable care” penalties:

• Total corrected tax over 10 years: ≈$71,760 (7,176 × 10).
• Penalties at 25%: ≈$17,940 (71,760 × 0.25).

Combined impact over the decade: ≈$89,700 in extra tax and penalties.

If this money could instead have been invested at a 5% annual return for the remaining 20 years to retirement, the future value of $89,700 would be over $230,000 (modelling basis: standard compound interest approximation).

This demonstrates that repeated small “mistakes” in returns can compound into a six-figure lifetime cost, between tax, penalties and lost investment growth.

What to do about it

Move 1 — Audit all income using ATO pre-fill

1. Action: Reconcile every income source with ATO pre-fill reports before lodging.
2. Tool/portal: myGov → ATO Online → Pre-filled tax return data for the 2026 year.
3. Steps:

• Log into myGov, link your ATO account (if not already), and start your 2025/26 return.
• Open the pre-fill data for income: employment, interest, dividends, managed funds, welfare, private health, and digital platform payments.
• Cross-check against your own records (bank statements, platform dashboards, rental statements), and manually add any income not appearing in pre-fill, including side gigs, cash jobs and crypto disposals.

4. What “good” looks like:

• All income fields in your return match or exceed ATO pre-fill for that year, with no missing employment, interest, dividends, platform or welfare income.

Move 2 — Clean up work-related and working-from-home deductions

1. Action: Apply the ATO’s three golden rules and ensure you are not double-dipping under the working-from-home fixed rate.
2. Tool/portal: ATO guidance on work-related expenses and working-from-home methods (via ATO website; accessed through ATO Online help).
3. Steps:

• Identify each work-related deduction (car, clothing, tools, courses, home office) and check whether you personally incurred the cost, whether it is directly related to earning income, and whether you have a receipt or diary evidence.
• If you use the fixed-rate working-from-home method, list all costs it covers (internet, phone, electricity, gas, stationery, computer consumables) and remove any separate claims for these categories.
• Compare your total deductions to typical ranges for your income and occupation using ATO examples, and reduce or remove anything that is private or unsupported.

4. What “good” looks like:

• All work-related deductions satisfy the golden rules and are fully documented, and there is no double-claiming of costs included in the fixed rate; your total claims are reasonable relative to your income and occupation norms.

Move 3 — Review rental property loan and repair claims

1. Action: Re-assess rental property deductions, focusing on loan interest allocation and repairs vs renovations.
2. Tool/portal: ATO rental property deduction guidance (via ATO website; referenced in ABC coverage).
3. Steps:

• For each rental property loan, determine what portion of the borrowing was used for income-producing purposes vs personal use; apportion interest so only the income

Sources

• https://www.ato.gov.au/tax-and-super-professionals/for-tax-professionals/prepare-and-lodge/pre-filling-service/pre-filling-reports/pre-filling-2026
• https://www.ato.gov.au/tax-and-super-professionals/for-tax-professionals/prepare-and-lodge/tax-time/overview-of-key-changes

Researched 2026-07-04.

Corrections & disclosure: an AI-assisted, human-reviewed guide. Every figure is dated and sourced above. Spot something out of date or wrong? Tell us and we’ll correct it — corrections are noted here and in the video description.