ATO Audit FAQs

Before we dive in, it’s important to know that being selected for an ATO audit or review is not always a sign you’ve broken Australian tax laws. The ATO conducts tax audits as part of regular compliance activities to ensure fairness and integrity in the tax system. If you or your company is the subject of an ATO audit, check out our article on managing an ATO audit or review . We can help you make the process less time consuming, stressful and disruptive.

So here we go. Our most frequently asked ATO audit questions are…

What Triggers an ATO Audit?

It’s the digital age and the ATO has access to more data than ever, making their audit process far more precise and successful. The ATO can access information from banks, employers and other government agencies to identify discrepancies between your reported income and expenditure. Common triggers for an ATO audit are:

Declaring higher-than-usual deductions or claiming deductions you’re not entitled to

This could include things like claiming travel expenses that were actually private in nature, or claiming for entertainment expenses that were not actually incurred in the course of earning your income.

Providing financial benefits to their shareholders (or associates) tax-free

Shareholders of private companies need to be careful that they don’t fall foul of Division 7A , the tax law designed to stop shareholders from getting an unfair tax advantage on what would otherwise be taxed to the shareholder as a dividend.

Claiming losses where there is no evidence of business activity

Losses claimed where the activity is no more than a hobby is a surefire way to get caught in the ATO's firing line. For individuals and partnerships, there are additional rules that must be satisfied before losses can be offset against other income (e.g. salary and wages). As with all business activities, it pays to keep evidence of everything that indicates that you’re actually carrying on a business, such as invoices for goods and services sold, receipts for business expenses and a business plan that shows you had reasonable expectations of turning a profit.

Incorrectly reporting capital gains

The ATO takes capital gains very seriously, and they have a number of tools at their disposal to identify and investigate potential errors. If you’re selling an investment property, shares or other assets that are subject to CGT, ensure you’re reporting the gains accurately.

Submitting inconsistent records

Good record keeping practices will help you pay your taxes accurately and on time, avoiding nasty letters from the ATO. (There’s a whole bunch of other reasons why record keeping is important in running a successful too!)

What Happens When the ATO Audits You?

If you’re going to be audited, the process usually starts with a letter from the ATO outlining the scope of the tax audit or review. At this point, the worst thing you can do is stick your head in the sand and ignore it. If the ATO correspondence relates to a company tax debt and only announces a review, you may be able to avoid a full audit by engaging early and honestly, repaying the debt in full, or going on a payment plan. The ATO reviewer or auditor may also seek to meet with you to ask questions about your tax affairs and review your records.

ATO audits vary widely in scope, with some taking several months to complete. Regardless of whether your company or personal tax affairs are the subject of an ATO audit, the following may take place following initial notification:

1. Information gathering

You’ll be asked to provide a lot of information such as records, receipts, documents and also explain any dubious claims in your tax return. Your company may need to supply invoices, employment contracts and anything else the ATO wants to see.

2. Interviews and discussions

Meetings may take place as the ATO seeks clarification on specific and detailed matters related to your company or personal tax affairs.

3. Review and analysis

The ATO audit process can be extensive as they review every financial aspect of your business and life to ensure you’re in compliance with Australian tax laws . They’ll also analyse various third-party data such as information from your bank, employer, investments, trusts and more.

4. Adjustments and penalties

If the ATO audit uncovers any errors or potential non-compliance they may propose adjustments to your tax liabilities. This could mean paying additional tax, paying interest on your tax debt, and even penalties depending on the nature of non-compliance.

5. Disputing ATO findings

It’s unlikely, but there’s a chance that the ATO might have things wrong. You can dispute ATO findings, but this is an expensive option as you’ll have to pay an accountant for a full audit of your tax affairs and potentially incur interest charges, as well as losing any favourable treatment from the ATO if you’d simply made an honest mistake.

How Far Back Can the ATO Audit?

Our answer: How long is a piece of string?

While the ATO does have time limits to audit or review your tax affairs (called the ‘statute of limitations’ or ‘period of review’) time frames vary based on the tax type in question. They can also be extended if there’s evidence of false or misleading statements, or a failure to lodge a return.

• For income tax, they can generally review your returns for up to 2 years (from the notice of assessment) for most individuals and SMEs or 4 years for other taxpayers
• For GST, they have up to 4 years (from notice of assessment) to review your activity statements and related records
• For Fringe Benefits Tax they can review your returns for up to 3 years from the date the FBT return was lodged, but could be longer if tax has been avoided (6 years)
• Superannuation guarantee compliance can be reviewed for up to 4 years
• If fraud or evasion is suspected, there is generally no time limit for a review or amendment

Practically speaking though, it's a good idea to hold onto your tax records and supporting documents for at least five years. This gives you a reasonable timeframe if the ATO decides to audit or review your taxes. There are some situations where records need to be kept longer than 5 years. For example, where you hold a CGT asset, you generally need to keep records for as long as you hold the asset, and then 5 years after you sell or dispose of the asset. By keeping accurate records, you can back up your claims and stay compliant with tax laws.

Speak to a Tax Consultant When Dealing with an ATO Audit

If you find yourself facing a tax audit, don’t panic. Remember to be proactive, provide information in a transparent manner and seek advice from an experienced tax consultant or tax lawyer.