For business owners, few things are more stressful than a tax audit. While many audits are routine, others are triggered by specific behaviours or inconsistencies that raise red flags with the Australian Taxation Office (ATO). Knowing what’s likely to raise an eyebrow, and how to avoid it, can save you a whole lot of stress, time, and possibly money.

What Is a Tax Audit?

A tax audit is an official review of financial records to ensure correct tax reporting and compliance with relevant laws. It’s essentially the ATO’s way of double-checking your numbers. 

For businesses, the ATO might look at your BAS (Business Activity Statement), tax returns, payroll, GST reporting, fringe benefits, or superannuation payments.

And here’s the truth: while not every audit can be avoided, many happen due to patterns or discrepancies that can be prevented with consistent, accurate reporting and solid documentation. As experienced business tax accountants, we know that staying ahead of the game means staying informed; so here’s what to know as a business owner hoping to avoid scrutiny.

Common Triggers for Business Tax Audits

1. Unusually High Deductions or Ongoing Losses

   If your numbers stand out compared to others in your industry, like unusually big deductions or year-after-year losses, the ATO might want to know why. If your claims are legitimate, that’s great – but make sure they’re clearly documented and business-related. Speak with your tax accountant if your business is operating at a loss over multiple years, as this can raise concerns with the ATO about the long-term viability of your operations. 

2. Discrepancies Between BAS and Tax Returns

   One of the most common audit triggers is when figures reported in your BAS don’t align with your end-of-year tax return. Their systems flag discrepancies automatically. Regular reconciliation between your BAS and annual returns is non-negotiable.

3. Incorrect GST Claims

   Claiming GST where it doesn’t apply or failing to charge it correctly can quickly attract attention. Watch out for purchases from suppliers not registered for GST, or GST-free goods (think fresh produce). Always double-check supplier registration before claiming.

4. Unusual or Inconsistent Payroll Reporting

   Late super payments, incorrect PAYG withholding, or errors in Single Touch Payroll reporting can all trigger scrutiny. Keep payroll on time, in sync, and well-documented. Good payroll software is key here.

5. Cash-Heavy Business Models

   Businesses that rely heavily on cash — such as cafes, trades, or retail — are naturally more prone to audit, especially if reported income seems lower than expected for your sector. Report all income, use POS systems that record every transaction, and avoid off-the-books payments. 

6. Related-Party Transactions and Loans

   If your business moves funds between directors, shareholders, trusts, or related entities, the ATO will want to see that these transactions are structured and reported properly. They aren’t automatically suspicious, but in the case of an audit you’d hope these are done by the book. Document all transactions clearly and ensure they follow Division 7A, which is a set of rules designed to prevent private companies from making tax-free distributions to shareholders or their associates.

7. Large or Frequent Asset Write-Offs

   The instant asset write-off scheme is perfectly legitimate, but if your spending looks excessive or documentation is inadequate, you might get a call. Keep receipts and make sure the assets are genuinely installed for business use.

8. Inconsistencies with Industry Benchmarks

   The ATO publishes performance benchmarks for different industries. If your expenses, income, or profit margins are way outside the averages, be ready to explain why (and with records that back you up). 

Summary: How to Reduce Your Risk of a Tax Audit

• Maintain clear, accurate records.
• Use reliable accounting software.
• Lodge all returns and BAS on time.
• Engage a registered BAS or tax agent to ensure your obligations are met.
• Keep your personal and business finances separated.
• Stay up to date on your industry benchmarks.
• Regularly review your financials to spot errors before the ATO does.

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If you’re selected for a tax audit, don’t panic. Sometimes it’s just a request for clarification. A good business tax accountant can save you a lot of time and stress.

We can help you put together the right documentation and respond to the ATO on your behalf to ensure the process is handled efficiently. We’ll review your records, identify any areas of concern, and guide you through each step from the initial request to final resolution. The key is to be proactive, transparent, and prepared.

Tax audits aren’t always avoidable, but they’re far less likely when your business is well-organised and compliant. Most audit triggers come down to misreporting, inconsistencies, or a lack of documentation — which are all things that can be managed with the right systems and support in place. Our team can help you stay compliant and audit-ready year-round. Talk to us about our tax compliance and advisory services.