5 Red Flags That Could Trigger a Tax Audit for Your Business

Marketing Manager
5 days ago
3 min read

Updated: 5 days ago

Yellow caution tape with bold black text "CAUTION" stretches across a blurred background, creating a serious, alert mood.

Avoid costly mistakes and learn how to keep your books clean and your business “audit-resistant”

Running a business in Australia comes with many responsibilities and staying compliant with the Australian Taxation Office (ATO) is at the top of that list. While most audits are triggered automatically by data matching or anomalies, some red flags can increase your chances of getting that dreaded call or letter.

Here are the five biggest audit triggers and how to steer clear of them.

🚩 1. Claiming Deductions That Don’t Match Your Industry Norms

When your expenses raise eyebrows, so will the ATO.

If you’re a freelance graphic designer and you claim thousands for tools typically used by tradies, that’s a problem. The ATO uses industry benchmarks to compare your business to similar ones. When your deductions look unusually high for your type of work or turnover, that can spark a review.

What to Watch For:

Excessive motor vehicle claims for a mostly home-based job
Large travel or meal deductions not aligned with business activity
Claiming home office expenses that don’t match your hours or setup

💡 Tip: Only claim what you can prove. Keep receipts, logs, and clear records.

🚩 2. Big Fluctuations in Income or Expenses

If your numbers swing too wildly, it might signal issues—or creative accounting.

Yes, business can be unpredictable. But large and unexplained changes in revenue or expenses (especially if you’re normally stable) can prompt questions from the ATO.

Risky Patterns:

Sudden drop in income with no explanation
Huge jump in expenses during a low-revenue period
Constant losses over several years

💡 Tip: Provide notes or explanations in your return if something genuinely unusual occurred—like an equipment purchase, restructure, or one-off project.

🚩 3. Not Paying Super on Time

The ATO takes superannuation compliance seriously—because it’s your team’s future at stake.

From 1 July 2026, super must be paid at the same time as wages (“payday super”), and even now, missing quarterly deadlines is risky.

Late or unpaid super is one of the fastest ways to trigger a payroll audit, and it can lead to penalties, loss of deductions, and legal action.

How to Stay Compliant:

Use automated payroll software (like Xero, MYOB, or QuickBooks)
Set super reminders ahead of the due date (currently quarterly)
Ensure your payments reach the super fund by the cutoff—not just when it’s processed

💡 Tip: Super paid after the deadline isn’t deductible, even if you eventually pay it. That’s money left on the table.

🚩 4. Mixing Personal and Business Expenses

The ATO can spot fuzzy lines—and they’ll expect you to justify every cent.

Blurring the line between personal and business expenses is a red flag. Think buying a new phone and claiming 100% for business use—even though you scroll Instagram on it every night.

Common Problem Areas:

Vehicles used for both personal and work purposes
Phones and laptops claimed at 100% business use
Travel where business and leisure overlap

💡 Tip: Use a logbook for car claims and keep detailed usage records for tech. Be honest—partial business use is still deductible, just not the whole amount.

🚩 5. Not Reporting All Income (Especially Online or Cash)

The ATO has eyes everywhere—and digital platforms are making it harder to hide.

With data-matching technology, the ATO now cross-checks data from banks, sharing economy platforms (like Uber and Airbnb), e-commerce sales, crypto exchanges, and more. If you earn income—even if it's cash or online—and don’t report it, expect consequences.

High-Risk Scenarios:

Not reporting income from Etsy, eBay, AirTasker, or Upwork
Cash-only services without proper invoicing
Missing BAS declarations for GST-registered businesses

💡 Tip: Assume everything is traceable—and treat all business income like it will be audited.

✅ How to Stay Audit-Safe (and Sleep Better at Night)

Here’s how you can lower your risk and stay compliant:

1. Use Smart Accounting Tools

Switch to cloud accounting software that automates reporting, super payments, and expense tracking. Tools like Xero or QuickBooks also integrate with your bank feeds—minimising manual errors.

2. Keep Everything Documented

If the ATO ever asks, you’ll need to back up every claim:

Receipts and invoices
Work-related usage logs (like for cars or phones)
Contracts and records of income

You’re required to keep tax records for at least five years.

3. Work with Accounting Professionals

The best move? Get a professional involved. Accounting professionals (often referred to as a registered tax agent, invest their days every week in contact with the ATO, attending their information sessions and dealing with tax specific issues. They can spot potential red flags before you lodge, help you claim correctly, and offer tailored strategies to reduce your audit risk.