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Each year, the Australian Taxation Office (ATO) reviews thousands of tax returns, scanning for warning signs like under-reported income, unusually high deductions, or inconsistent financial records. These reviews aim to identify discrepancies that could indicate non-compliance, and when something stands out, it may trigger a formal audit.
If you're unlucky enough to be selected, the experience can be stressful, time-consuming, and potentially costly. But understanding what triggers an ATO tax audit gives you the power to act early. It allows you to review your reporting habits, identify high-risk areas, and make corrections before problems arise.
An audit is a detailed examination of your tax affairs, conducted by trained ATO officers to verify the accuracy of your reporting. While some audits are selected at random, most are based on specific risk indicators. Depending on the situation, the process may be handled through correspondence, over the phone, or via a face-to-face meeting.
If your claimed deductions are significantly higher than others in your industry or income bracket, it may raise red flags. For example, claiming $30,000 in travel expenses as a sole trader in a low-mobility industry could prompt closer scrutiny.
Discrepancies between your Business Activity Statements (BAS), PAYG summaries, and income reported in your tax return can trigger an audit. The ATO cross-matches data from multiple sources.
If you report a low income but appear to live a high-end lifestyle (owning luxury vehicles or property, for example), the ATO may investigate how you are funding it.
Businesses that operate largely in cash—such as cafes, tradies, and hairdressers—are at higher risk. Undeclared cash income is a major audit trigger.
Large or frequent international transfers, especially without clear business justification, can raise questions. The ATO works with global tax authorities to track offshore accounts.
Certain industries such as construction, hospitality, and cleaning are considered higher risk due to the prevalence of cash transactions and complex subcontracting arrangements.
Frequent late lodgements or inconsistencies in your annual reporting can make the ATO suspect carelessness or evasion.
Sharp increases or decreases in income, expenses, or deductions without a reasonable explanation can appear suspicious.
Maintain organised records of all your income and expenses. Keep receipts, invoices, and bank statements for at least five years.
Timely lodgement of your tax returns and BAS shows the ATO that you are proactive and responsible with your tax obligations.
Working with a registered tax agent ensures your returns are prepared accurately and in line with current tax laws. They can also advise you on what is and isn’t deductible.
Try to maintain consistent reporting patterns. If there are legitimate changes (e.g., a sudden spike in revenue), include notes or explanations where possible.
Include all sources of income—even one-off payments. The ATO uses data-matching technology to verify what you report.
Only claim deductions you can prove. Inflated or false deductions are one of the fastest ways to attract audit attention.
Digital tools make it easier to stay organised and lodge accurate returns. Choose platforms that integrate well with ATO systems.
First, don’t panic. Gather all relevant records and review your return for accuracy. Cooperate with the ATO and respond promptly to any requests. If needed, consult a registered tax agent or legal professional to represent you. Transparency and cooperation go a long way toward resolving issues quickly.
Small and medium-sized businesses face unique challenges when it comes to staying compliant with the ATO but building a few habits can make all the difference. First, separate your business and personal finances. Use a dedicated business bank account and avoid mixing personal expenses with company funds, even for small purchases.
Second, keep digital copies of receipts and invoices. The ATO accepts electronic records, and using software like Xero or MYOB can help automate the process and reduce the risk of lost paperwork. Be sure to regularly reconcile your bank statements and double-check that your reported income matches what you’ve submitted through BAS.
Third, set aside tax from every payment you receive—don’t wait until the end of the quarter or year to deal with it. A good rule of thumb is to transfer a percentage into a separate tax account so you’re not caught short when your bill is due. For GST-registered businesses, always check that GST is being collected and reported accurately.
Finally, don’t leave it all to the last minute. Engage a registered tax agent or bookkeeper who understands your industry and can spot issues early.
High deductions, mismatched income, irregular reporting, and cash-heavy businesses are common triggers.
Keep good records, lodge on time, use a registered agent, and avoid inflating deductions.
Small businesses, sole traders, and individuals with complex finances or large deductions are most at risk. The ATO also pays closer attention to industries known for cash transactions or inconsistent reporting, such as construction, hospitality, hair and beauty, automotive repair, and retail.
The ATO may audit randomly, but most are based on risk factors, unusual activity, or inconsistent reporting.
If you want peace of mind this tax season, consult with a registered tax professional or book a tax health check today. Reach out to us Darcy Bookkeeping and Business Services or call us on 1300 728 875 and book a consultation.
