10 Tax Audit Red Flags to Watch Out For
(A Practical Guide for Business Owners)
No one enjoys a call from the ATO. While most audits are routine, certain patterns in your tax records can trigger closer attention.
Here are ten of the most common red flags the ATO looks for—and what you can do to avoid them.
- Large Fluctuations in Income or Expenses
Sudden changes from one year to the next can look suspicious.
If you’ve had a genuine reason—new contract, major write-off, or unusual event—keep solid documentation to support it.
- Consistent Losses Year After Year
A business that keeps declaring losses raises questions about whether it’s operating for profit.
If you’re claiming deductions while showing ongoing losses, expect scrutiny under the non-commercial loss rules.
- High or Unusual Deductions
Claiming expenses that seem out of line with your industry averages (e.g., travel, car use, home office, entertainment) can attract attention.
Keep clear receipts, logbooks, and business justifications.
- Excessive Director or Owner Drawings
Large personal drawings, dividends, or loans from the company or trust can be a signal for the ATO to check Division 7A compliance and unpaid present entitlements to corporate beneficiaries.
- Discrepancies Between BAS and Income Tax Returns
If your reported income or GST doesn’t match across BAS, payroll, and income tax returns, the ATO’s data-matching system will flag it automatically.
Ensure your bookkeeping system reconciles consistently.
- Cash-Based or High-Risk Industries
Trades, cafés, hospitality, construction, and beauty services are all cash-intensive sectors.
The ATO’s “small business benchmarks” make it easy to compare your declared results against industry norms.
- Large or Unusual GST Refunds
Frequent or significant GST refund claims can trigger verification, especially if you’ve changed accounting methods, bought major assets, or amended prior returns.
Maintain clear tax invoices and evidence of business use.
- Payroll and Superannuation Irregularities
Missed super payments, late STP reporting, or unexplained wage spikes will catch the ATO’s eye.
Superannuation guarantee compliance and timely STP lodgement are top audit priorities.
- Related-Party Transactions and Loans
Transactions between entities (trusts, companies, SMSFs, or family members) must be at arm’s length and properly documented.
Interest-free loans, unpaid distributions, or non-commercial leases are frequent triggers.
- Lifestyle Not Matching Declared Income
If an owner’s visible lifestyle—cars, property, travel—doesn’t align with reported earnings, the ATO may perform an asset betterment review to test for undeclared income.
How to Stay Off the ATO’s Radar
- Keep accurate, real-time records in Xero or your accounting system.
- Regularly reconcile your BAS, payroll, and financial statements.
- Document unusual events or one-off transactions before year-end.
- Seek professional guidance before making structural or inter-entity changes.
Bottom line: The ATO doesn’t expect perfection—it expects transparency.
If your records are clean, your claims are justifiable, and your story matches your numbers, you’ll sail through any audit confidently.
If you would like us to review your accounts or run through an internal audit of sorts, we’d be happy to do so. Feel free to get in touch with us any time.
