Lessons from 2025: Tax Mistakes to Avoid in 2026

The clearest lesson from 2025 for Australian accounting practices is that most 2026 tax compliance failures will not arise from “complex tax law” but from preventable process breakdowns: poor substantiation, inconsistent GST/BAS treatment, payroll and super errors, late and incorrect reporting, and governance failures (especially for trusts, Division 7A and small business concessions). In 2026, the ATO’s data-matching and justified trust programs will continue to identify anomalies quickly, so practices must prioritise evidence quality, reconciliations, and end-to-end workflow controls—particularly where bookkeeping systems, payroll, and tax lodgments do not align.

What were the biggest ATO-aligned compliance lessons from 2025?

The major 2025 lesson is that ATO compliance outcomes increasingly depend on the quality of the taxpayer’s “system of record” and evidence trail, not just the final tax return. The ATO’s public guidance continues to emphasise contemporaneous records, correct characterisation of transactions, and alignment between source data (banks, payroll, STP, merchant data) and lodged positions.

• Lodgments were technically “on time” but supported by weak workpapers and inconsistent reconciliations.
• GST and payroll errors often flowed through to income tax errors (and vice versa).
• Division 7A and trust distribution issues remained highly litigated and frequently reviewed.

• ATO guidance on record keeping and substantiation (ATO website guidance and rulings/PCGs as relevant).
• PAYG withholding and STP obligations (Taxation Administration Act 1953 and ATO STP guidance).
• Superannuation Guarantee (Administration) Act 1992 obligations and ATO SGC guidance.
• GST law under A New Tax System (Goods and Services Tax) Act 1999 and ATO GST rulings/determinations.

What are the top tax compliance mistakes to avoid in 2026?

The top 2026 mistakes are predictable and repeatable. They should be treated as controllable operational risks within the practice.

1) Why is “poor substantiation” still the #1 mistake in 2026?

Poor substantiation remains the most common and most expensive mistake because it converts otherwise allowable deductions into adjustments, penalties, and extended review cycles. ATO record-keeping expectations are well established, and the ATO routinely applies them in audits and reviews.

• Work-related expenses claimed without adequate records (especially where private use is mixed).
• “Laundry, WFH, phone/internet” claims supported by generic estimates rather than evidence.
• Contractor and labour hire invoices lacking detail (who/what/when/why).

• It is established that deductions require a nexus to assessable income and are denied to the extent they are capital, private or domestic (Income Tax Assessment Act 1997, section 8-1).
• Record-keeping obligations are mandated and practical ATO expectations are set out in ATO record-keeping guidance for business and individuals (ATO website guidance).

• Mandate “evidence-first” scanning and attachment standards at source-document stage, not at year-end.

• A professional services client claims substantial “computer and home office” costs. The practice finalises without a WFH diary, floor area basis, or clear apportionment rationale. If reviewed, the ATO commonly disallows the private portion and requests contemporaneous evidence; the cost is not just the adjustment but the time spent reconstructing support.

2) How do GST and BAS errors create income tax risk (and vice versa)?

GST/BAS misclassifications frequently lead to incorrect taxable income because the same underlying transactions drive both regimes. In 2025, many practices saw BAS prepared from coding that was not aligned to year-end adjustments, resulting in avoidable ATO queries and amended activity statements.

• Claiming GST credits where no creditable acquisition exists (for example, mixed purpose or input-taxed supplies).
• Incorrect GST treatment of motor vehicles, fuel, and entertainment.
• Not reconciling GST control accounts to BAS lodged figures.
• Coding errors around exports, GST-free and input-taxed items.

• GST credit entitlement depends on a creditable acquisition and correct tax invoices (GST Act 1999 and ATO GST guidance).
• BAS accuracy is increasingly tested against third-party data and merchant reporting.

• Implement a GST exception workflow: any transaction coded GST-free or input-taxed must have a reason captured in the workpaper notes.

• A medical or financial services client (input-taxed/complex GST footprint) has standard 10% GST applied to costs that are partly relating to input-taxed supplies. BAS claims are overstated. Even if income tax is correct, the BAS exposure stands alone and can lead to SGC-style compounding effects through penalties and interest.

3) What payroll, STP and Super Guarantee mistakes will attract ATO attention in 2026?

Payroll compliance errors are increasingly visible because STP provides the ATO near real-time payroll data. The most common 2025 issues were classification and timing errors rather than intentional non-compliance.

• Incorrect employee vs contractor classification (leading to PAYG withholding, super and payroll tax flow-on issues).
• Super Guarantee underpayments due to incorrect OTE base or missed payments.
• STP reporting mismatches against payroll journals and PAYG withholding accounts.
• Failure to correctly treat allowances, reimbursements, bonuses and terminations.

• Superannuation Guarantee (Administration) Act 1992 obligations and ATO SGC guidance.
• ATO STP employer guidance and PAYG withholding rules (Taxation Administration Act 1953 framework).

• Monthly payroll-to-GL reconciliation and a quarterly SG “proof of payment” pack (clearing house confirmations, bank evidence, payroll reports).

• A trades client uses a mix of employees and “contractors” paid regularly, with tools and supervision provided by the business. The practice treats all as contractors without a defensible classification memo. An ATO review can reclassify, creating retrospective PAYG and SG liabilities, plus interest and penalties.

4) Why is Division 7A still one of the most avoidable private company mistakes?

Division 7A remains a persistent failure point because the compliance tasks are procedural and time-sensitive: documentation, interest at benchmark rates, minimum yearly repayments, and correct tracking of loan accounts.

• Leaving shareholder loan accounts overdrawn at year-end without a complying loan agreement or alternative treatment.
• Failing to calculate and evidence Minimum Yearly Repayments (MYR).
• Incorrect interest calculations using ATO benchmark rates.
• Poor loan account governance across multiple entities.

• Division 7A rules in the Income Tax Assessment Act 1936 (Part III, Division 7A).
• ATO guidance on Division 7A benchmark interest rates and complying loan terms (ATO website guidance updated annually).

• Lock a “Division 7A checkpoint” into the practice year-end checklist well before lodgment; ensure documentary execution dates are met.

• A client director draws funds through the year. The practice identifies it after year-end and tries to “journal it away” without proper documentation. The ATO commonly treats this as a deemed dividend unless corrected within strict rules and timeframes.

5) What trust distribution documentation mistakes from 2025 must be eliminated in 2026?

Trust compliance failures are frequently not computational; they are documentary and governance failures. The ATO has been clear that trustees must make valid resolutions and comply with the deed and relevant tax law requirements, particularly where adult beneficiaries, bucket companies and streaming are used.

• Trustee resolutions not executed by the required deadline in the deed or not specifying entitlements correctly.
• Streaming outcomes that are not supported by deed powers and records.
• Mismatches between trust accounts, resolutions, beneficiary statements, and tax return disclosures.
• “Circular” distributions or unpaid present entitlements (UPEs) managed without proper governance (which can intersect with Division 7A where a private company beneficiary is involved).

• Trust tax provisions in Income Tax Assessment Act 1936 (notably Division 6 concepts around present entitlement).
• ATO guidance on trust distributions and integrity concerns (ATO website guidance and relevant rulings/PCGs where applicable).

• Adopt a standard trust distribution pack: deed extract, resolution, beneficiary statements, company minutes (if bucket company), and reconciliation from accounting profit to taxable income.

• A family trust “distributes” to multiple beneficiaries, but the signed resolution is missing or ambiguous. When reviewed, the ATO can treat the distribution as ineffective, triggering default assessments and disputes that are time-consuming and reputationally damaging.

6) How do small business concessions get incorrectly claimed?

Small business CGT concessions and aggregated turnover tests are frequently misapplied when group structures are complex or where active asset tests and connected entity rules are not properly evidenced.

• Assuming eligibility based solely on turnover of the trading entity (ignoring connected entities and affiliates).
• Poor support for active asset tests and period requirements.
• Not documenting the CGT event, ownership structure and concession choice pathway.

• Small business CGT concessions and connected entity/affiliate concepts sit primarily in ITAA 1997 (including Div 152 and related definitions).

• Prepare a one-page “eligibility memo” for every concession claim with group chart, aggregated turnover calculation, and active asset support.

7) Why are reconciliations and ATO account alignment non-negotiable in 2026?

ATO reviews increasingly begin with mismatches: accounting system vs BAS vs STP vs ATO integrated client account. Weak reconciliation is therefore a root cause of escalations.

• Lodging BAS/IAS without reconciling GST/PAYG control accounts.
• Not reconciling ATO integrated client account balances to internal ledgers.
• Treating year-end journals as “tax only” without audit trail and supporting workpapers.

• Implement an ATO account reconciliation step: align ATO statements (RBA, IAS/BAS accounts, income tax accounts) with the client file before sign-off.

How should Australian practices adjust workflows for 2026 to prevent repeats?

Preventing 2026 mistakes requires systematic control design, not more “end-of-year heroics”.

What minimum controls should be embedded in every 2026 compliance file?

• Monthly or quarterly reconciliations:
• Evidence standards:
• Governance checkpoints:

What does “ATO-ready” documentation look like in practice?

• Each material balance has a workpaper trail to source documents.
• Each tax position has a short justification referencing law/ATO guidance.
• Each reconciliation has sign-off, timing, and exception notes.

How do these lessons connect to AI accounting software and automated bank reconciliation?

The practical lesson from 2025 is that compliance risk is often created upstream in transaction processing and coding. AI accounting software in Australia is increasingly used to reduce manual touchpoints, but the compliance benefit comes from consistency, audit trail, and exception handling—not merely speed.

• Reduces manual coding drift across staff
• Enforces GST treatment rules consistently
• Produces reliable reconciliations quickly enough to be performed more often
• Captures exceptions for human review rather than letting them slip into lodgments

This is where automated bank reconciliation materially improves outcomes, because frequent reconciliation reduces downstream BAS and year-end surprises.

How does MyLedger help prevent 2026 compliance mistakes compared with Xero, MYOB and QuickBooks?

MyLedger is designed for Australian accounting practices and is positioned as an AI accounting software Australia solution that automates the compliance bottlenecks that typically cause errors: reconciliation, GST enforcement, working papers, and ATO alignment.

Is MyLedger better than Xero for preventing reconciliation-driven compliance errors?

For reconciliation-heavy practices, MyLedger is materially stronger where the goal is speed, standardisation, and exception-based review.

• Reconciliation speed: MyLedger = 10–15 minutes per client, Xero/MYOB/QuickBooks = commonly 3–4 hours in manual-heavy workflows (approximately 90% faster; ~85% time reduction).
• Automation level: MyLedger = AI-powered reconciliation with ~90% auto-categorisation and bulk operations, Xero/MYOB/QuickBooks = more manual review and rule maintenance in many files.
• GST enforcement: MyLedger = built-in GST tracking and enforcement at the transaction/category layer, competitors = typically rely on correct coding discipline and manual review.
• Working papers: MyLedger = automated working papers (including BAS reconciliation and Division 7A automation), competitors = working papers often remain Excel-based or separate.
• ATO integration accounting software depth: MyLedger = direct ATO portal integration (client data, lodgment history, due dates, ATO statements/transactions), competitors = commonly limited and/or indirect ATO interactions depending on stack and add-ons.
• Pricing model: MyLedger (beta free; expected $99–199/month unlimited clients), competitors = commonly per-client fees (often cited at ~$50–70/client/month for many practice stacks depending on plan mix and add-ons).

How does MyLedger reduce Division 7A and working paper errors?

MyLedger reduces Division 7A risk by embedding the calculation and documentation workflow in the same platform as the ledger and reporting.

• Automated MYR calculations using ATO benchmark rates
• Loan tracking across accounts with combined schedules
• Automated journal entries generated from working papers
• Reduced reliance on manual spreadsheets that are hard to review and easy to version incorrectly

Why does ATO integration matter operationally (not just “nice to have”)?

ATO integration reduces the risk of lodging based on stale or incomplete information. When client due dates, ATO statements and transactional ATO data can be imported and reconciled, the practice can detect issues earlier and document them more defensibly.

What ROI should practices expect if they address these mistakes with automation?

The economic impact of avoiding 2026 mistakes is primarily time and rework reduction. The most measurable lever is reconciliation time and the downstream flow-on effects (BAS accuracy, control accounts, fewer amendments).

• If a 50-client compliance book saves ~125 hours/month through faster reconciliation and less rework, at $150/hour, that is ~$18,750/month of capacity value.
• Compared to an all-in-one platform cost expected at $99–199/month (unlimited clients), the ROI is typically positive within the first month where workflows are adopted.

Next Steps: How Fedix can help your practice in 2026

Fedix builds MyLedger to prevent the specific compliance failures that repeatedly occur in Australian practices: manual reconciliation drift, inconsistent GST coding, spreadsheet-based working papers, and weak ATO alignment. Learn more about how MyLedger can support automated bank reconciliation, ATO integration accounting software workflows, and automated working papers so your team can spend time reviewing exceptions rather than rebuilding files.

• How to automate bank reconciliation for BAS accuracy
• Division 7A automation and MYR governance checklists
• Building an ATO-ready substantiation pack for common deductions

Frequently Asked Questions

Q: What were the most common ATO audit triggers in 2025 that will matter in 2026?

Q: How can an accounting practice reduce GST and BAS errors before lodgment?

Q: Does MyLedger replace Xero, MYOB or QuickBooks?

Q: Can automation increase tax risk if AI categorises transactions incorrectly?

Q: What is the single best process change to implement before the 2025–2026 lodgment peak?

Disclaimer: This information is general in nature and is not financial or legal advice. Tax laws and ATO guidance are complex and subject to change. Consideration should be given to your client’s circumstances and professional advice should be obtained before acting on any matter described above.