EOFY Lessons: What the ATO Audit Trends Can Teach Your Business

The end of the financial year (EOFY) is more than just a time to lodge your tax return and reconcile your accounts. It’s a valuable opportunity to reflect on your financial practices and learn from the Australian Taxation Office’s recent audit trends.

Each year, the ATO identifies key focus areas for audits and reviews, offering insights into where businesses are most likely to make mistakes. By understanding these trends, small business owners can improve compliance, reduce risks, and build more sustainable operations.

What Is an ATO Audit?

An ATO audit is a detailed review of your financial and tax affairs to ensure your business is complying with Australian tax laws. While some audits are randomly selected, many are triggered by inconsistencies or high-risk behaviour in your tax returns or business activity statements (BAS).

Common types of audits include:

• Income tax audits: Review your reported income and deductions to confirm accuracy.
• GST audits: Ensure GST is correctly reported and paid.
• Superannuation audits: Check that super contributions are paid accurately and on time.
• PAYG withholding reviews: Verify that PAYG withholding obligations for employees are met.
• Fringe benefits tax (FBT) audits: Focus on non-cash benefits provided to staff (e.g., cars, entertainment).

An audit might take the form of a desk review (conducted remotely) or a field audit (where the ATO visits your premises). The goal is to ensure your business is paying the right amount of tax and complying with legal obligations.

Audits can be stressful, but they’re also avoidable if you understand what the ATO is looking for and take proactive steps to stay compliant.

Key ATO Audit Trends from the Past Financial Year

Each year, the ATO releases insights into areas they will monitor closely based on risk, compliance data, and industry behaviour. Here are the key focus areas from recent audit activity:

1. Over-Claiming Business Deductions
• Many businesses over-claim deductions for expenses such as vehicles, travel, and home office usage.
• The ATO pays close attention to whether expenses are wholly or partially for business use.
• A common mistake is failing to keep adequate records or logs to justify these claims.
2. Underreporting Income
• Cash-heavy industries like hospitality, beauty services, and tradies are under the spotlight.
• The ATO uses data-matching technology to cross-check income with bank records, sales data, and even third-party payment platforms such as Stripe and PayPal.
• Businesses that fail to report all income or delay invoicing to manipulate income periods may face scrutiny.
3. Incorrect GST Reporting
• Errors in calculating GST on sales or incorrectly claiming GST on non-deductible items are a common trigger for audits.
• This includes claiming GST on purchases that are private in nature or using incorrect GST codes in accounting software.
4. Super Guarantee Non-Compliance
• Employers must pay super contributions to employees nominated super funds on time, at least quarterly.
• The ATO continues to use its data-sharing capabilities with super funds to identify late or missing payments.
• Failing to pay super correctly can result in the Superannuation Guarantee Charge (SGC), which includes interest and administrative penalties.
5. Contractor vs Employee Classification
• Misclassifying workers as contractors when they should be employees is a growing area of focus.
• If someone works regular hours, is under your direction, and can't subcontract their work, they may legally be considered an employee.
• The ATO provides a worker classification tool to help businesses make the right call.

Lessons You Can Apply to Your Business

Audit trends aren’t just warnings, they’re learning tools. Here are the key lessons small businesses can apply immediately:

a) Improve Recordkeeping

• Keep all receipts, invoices, and statements organised and digitally stored.
• Use cloud-based accounting software (e.g., Xero, MYOB, QuickBooks) to automate reporting, track income and expenses, and reconcile accounts.
• Store digital backups of physical records in secure cloud storage.
• Maintain a proper paper trail, including signed contracts, tax invoices, and employee timesheets.

b) Understand Deductions

• Only claim expenses that are directly related to your business.
• Shared costs (e.g., internet, rent, electricity) must be portioned fairly. Use square metre calculations for home offices and logbooks for car expenses.
• Business travel must be substantiated with itineraries, receipts, and notes explaining the business purpose.
• Avoid claiming private expenses through the business to reduce audit risk.

c) Review GST & BAS Reporting

• Reconcile all income and expenses before lodging BAS.
• Double-check that GST is only being claimed on eligible business purchases.
• If you are using accrual accounting, ensure income and expenses are recorded when invoiced, not when paid.
• Keep your GST codes accurate in your accounting software.
• Correctly account for non-taxable sales (e.g., export sales, input-taxed supplies).

d) PAYG & Super Compliance

• Ensure PAYG withholding is calculated correctly and reported in each BAS.
• Pay super via the ATO-recognised clearing house to ensure accurate and timely contributions.
• Provide payment summaries or income statements through Single Touch Payroll (STP).
• Stay up to date with super rate increases (e.g., 11% in FY2025–26).

e) Treat Contractors Correctly

• Assess whether your contractors meet the criteria for independent contracting. Misclassification can lead to back payments and penalties.
• If you're in the building, cleaning, courier, or IT industries, you may need to lodge a Taxable Payments Annual Report (TPAR).
• Always keep a written agreement outlining the terms of the working relationship.
• Request contractor ABNs and tax invoices for all work performed.

Red Flags That May Trigger an Audit

While some audits are random, others are prompted by behaviours that raise suspicion. Common red flags include:

• Significant year-on-year fluctuations in income or expenses
• Inconsistent figures between BAS and annual tax returns
• Claiming large deductions that aren’t industry standard
• Frequent late lodgement of tax and superannuation obligations
• Operating in a cash-intensive industry without clear records
• Anonymous tip-offs from disgruntled staff or customers
• Unusual accounting practices that draw attention (e.g., excessive director loans or private expenses listed as deductions)

How to Respond If You're Audited

Getting audited doesn’t always mean you've done something wrong. If you receive a notice from the ATO:

• Don’t panic: An audit is a chance to explain or correct your position.
• Get organised: Compile documentation such as receipts, payroll records, bank statements, tax invoices, and contracts.
• Consult your accountant or BAS agent: They can help you prepare and communicate effectively with the ATO.
• Respond promptly: Meeting deadlines for document submission shows professionalism and cooperation.
• Rectify errors: If the audit highlights issues, work with your accountant to fix them. This can include amending returns or updating your processes.

Some audits result in no changes; others may lead to reassessments, fines, or payment plans. Transparency and preparation are your best defences.

The ATO’s audit trends serve as an annual reminder of the importance of good financial clean out. By learning from these insights, your small business can build stronger systems, avoid costly mistakes, and operate with confidence throughout the new financial year.

Don’t wait for an audit notice to review your practices. Take the lessons onboard now, and consider working with a registered accountant or BAS agent for a mid-year check-in. It could save you thousands in the long run and a lot of stress too.

- Jaz Anna