No one wants to get that dreaded letter from the ATO. An audit can quickly turn into a stressful (and expensive) exercise if you’re not prepared. While most business owners aren’t deliberately trying to dodge tax, simple mistakes, poor record-keeping, and aggressive deductions can land you in hot water. And when the ATO finds an issue, they don’t just ask you to pay back what’s owed—they add penalties on top.
So, how do you stay off the ATO’s radar, avoid hefty fines, and handle an audit if it comes your way? Let’s break it down.
The ATO doesn’t randomly pick businesses to audit. They rely on data-matching technology, industry benchmarks, and red flags to decide who gets a closer look. Here are some common triggers:
🔎 1. Big Deductions That Don’t Match Your Income
If you’re reporting a low taxable income but claiming large deductions, the ATO will want to know how you’re paying your bills. They compare your claims to industry averages, so if you’re claiming way more than similar businesses, expect some scrutiny.
🔎 2. Unusual Activity or Large Fluctuations
Sudden drops in income, massive expense increases, or big swings in profit can trigger an audit—especially if you can’t explain why. The ATO looks for consistency, so if your figures jump around without a clear reason, they may investigate.
🔎 3. Not Paying the Right Amount of Super or PAYG
Superannuation Guarantee (SG) and Pay-As-You-Go (PAYG) withholding are hot topics for the ATO. If you’re underpaying employees, missing SG contributions, or reporting incorrect PAYG, they’ll take an interest.
🔎 4. Late or Missed Tax Returns & BAS Lodgements
Consistently lodging late is a major red flag. The ATO assumes that businesses who fall behind on lodgements are likely to have other compliance issues too.
🔎 5. Cash Transactions & Underreporting Income
The ATO has cracked down on businesses that deal heavily in cash, especially those in hospitality, construction, and retail. If your declared income is lower than what the ATO expects for your industry, they might suspect undeclared cash sales.
If the ATO finds errors, they don’t just ask for the missing tax—they hit you with penalties too. The amount depends on how serious they think the mistake was.
Here’s the breakdown:
💰 Lack of Reasonable Care (25% penalty) – You made a mistake because you didn’t take enough care with your records or tax return. You weren’t being reckless, but you should have known better.
💰 Recklessness (50% penalty) – You ignored clear risks and took a ‘she’ll be right’ approach. This applies if you guessed figures, ignored obvious discrepancies, or failed to seek professional advice when needed.
💰 Intentional Disregard (75% penalty) – The ATO believes you knew the rules and deliberately broke them. This is the worst-case scenario, where they think you intentionally underreported income, exaggerated deductions, or manipulated records.
💰 Additional Interest & Administrative Penalties – On top of the penalty, you’ll also be charged interest on the shortfall amount until it’s paid.
💰 Criminal Charges (in extreme cases) – While rare, the ATO can take legal action against businesses or directors for serious tax evasion or fraud.
Want to stay off the ATO’s radar? Here’s what you should be doing:
✅ Keep Detailed & Accurate Records – Make sure you have proper invoices, receipts, and supporting documents for every claim. If the ATO audits you, guesswork won’t cut it.
✅ Lodge On Time & Pay What You Owe – The ATO watches for businesses that fall behind on lodgements or payments. Even if you can’t pay everything on time, lodging on time shows good faith and can reduce penalties.
✅ Keep Payroll & Super Up to Date – Late super payments aren’t just a compliance issue—they affect your employees. The ATO takes this seriously, and unpaid super is one of the fastest ways to trigger an audit.
✅ Check Your Figures Before You Lodge – If your income, expenses, or profit margins look drastically different from previous years (without a clear reason), the ATO will notice.
✅ Get Professional Help – Having an accountant isn’t just about compliance—it’s about risk management. If you’re unsure about tax rules, get expert advice before the ATO does it for you.
So, what happens if you do get audited? First, don’t panic—but don’t ignore it either.
🚨 Step 1: Read the Audit Notice Carefully – The ATO will tell you which areas they’re reviewing. It could be income reporting, deductions, payroll, or a combination.
🚨 Step 2: Gather Your Records – Pull together all relevant documents, including invoices, receipts, and bank statements. The more prepared you are, the smoother the process.
🚨 Step 3: Be Transparent & Cooperative – If you’ve made an honest mistake, own up to it early. The ATO is more lenient when businesses admit errors rather than trying to cover them up.
🚨 Step 4: Challenge Unfair Assessments – The ATO isn’t always right. If you believe their audit findings are incorrect, you can dispute the assessment—but you’ll need solid evidence.
🚨 Step 5: Get Professional Representation – Dealing with an audit alone can be overwhelming. Having an accountant or tax advisor involved can help reduce penalties, negotiate payment arrangements, and ensure the best outcome.
No one wants to deal with an ATO audit, but if you keep your records clean, and lodge on time your chances of being targeted drop significantly.
If you’re not sure whether your tax affairs are in order—or if you’re already under ATO review—don’t wait until it’s too late. Reach out, and we’ll help you navigate the audit process, minimise penalties, and keep your business on track.