Common ATO Audit Red Flags: How to Ensure Your Business Stays Off Their Radar in 2025

One of the last things you want to deal with is an Australian Taxation Office (ATO) audit. However, ATO audits are a reality for businesses of all sizes, and the best way to avoid one is by maintaining accurate records, staying compliant with tax obligations, and following best practices for BAS lodgement. In this blog, we’ll explore the common red flags that can trigger an ATO audit and provide tips on how your business can stay off the ATO’s radar in 2025.

1. Inaccurate or Incomplete Record-Keeping

One of the main reasons businesses find themselves under the ATO’s microscope is poor record-keeping. The ATO expects businesses to keep accurate and up-to-date records of their financial transactions, including income, expenses, and GST. Failing to do so can result in discrepancies that could raise suspicion.

To ensure your business avoids this red flag, make sure you:

• Keep detailed records: Store all invoices, receipts, bank statements, and other financial documents in an organised and accessible manner. Use accounting software like Xero or QuickBooks to help track and categorise transactions.
• Regularly reconcile accounts: Reconcile your bank and credit card statements to ensure they match your accounting records. This helps spot errors early and keeps your financial records accurate.
• Store records for the required period: The ATO requires businesses to keep records for at least five years. Ensure you’re compliant with this timeframe to avoid penalties.

2. Consistent Losses or Unusually Low Profits

While it’s normal for businesses to experience fluctuations in profits, consistently reporting losses or unusually low profits can raise a red flag for the ATO. The ATO may be concerned that you are underreporting income or inflating expenses to reduce your taxable income.

To avoid this issue:

• Track your financial performance: Regularly review your financial statements to ensure your business is operating profitably. If you are consistently reporting losses, it may be worth reviewing your expenses and income streams to identify any potential issues.
• Justify losses: If your business is making a loss, ensure that you can explain why in detail. If necessary, keep records of any business plans or projections that demonstrate your strategy for profitability.

3. Failure to Lodge BAS on Time

The Business Activity Statement (BAS) is an essential part of your tax compliance, and late or missing BAS lodgements are a common trigger for ATO audits. The ATO monitors businesses closely to ensure they meet BAS lodgement deadlines and make the correct GST and PAYG instalments.

To stay on top of your BAS obligations:

• Keep track of lodgement dates: Ensure that you are aware of the due dates for BAS lodgement, and set reminders so you don’t miss them.
• Lodge on time: If you are unable to lodge your BAS on time, contact the ATO and request an extension. Don’t let late lodgement become a habit.
• Consider using a bookkeeper: A professional bookkeeper can help you stay on track with your BAS obligations, ensuring that all your financial records are in order and that your BAS is lodged on time.

4. Incorrect or Overstated Claims for Deductions

Another common red flag for the ATO is the overstatement of deductions. Some businesses may attempt to claim deductions for personal expenses or claim more than they’re entitled to. This can lead to the ATO investigating your tax affairs.

To avoid this issue:

• Be careful with deductions: Only claim deductions that are directly related to your business activities. Ensure that all expenses are legitimate and well-documented.
• Seek professional advice: If you’re unsure about a particular deduction, it’s always a good idea to consult with a qualified bookkeeper or tax advisor. They can help you navigate the complex world of tax deductions and ensure you’re complying with the law.

5. Misclassifying Employees as Contractors

The ATO is vigilant when it comes to the classification of workers. Misclassifying employees as contractors can be a major red flag, especially if you’re not withholding the correct PAYG tax or making the appropriate superannuation contributions.

To avoid this issue:

• Understand the difference: Make sure you understand the difference between employees and contractors. Employees are entitled to superannuation contributions, leave entitlements, and other benefits, while contractors typically aren’t.
• Review your contracts: Ensure that all employment contracts are properly drafted, and that you’re meeting all obligations related to employee pay, superannuation, and tax withholding.

6. Not Paying or Underreporting Superannuation

Superannuation is a serious matter for the ATO, and failing to pay the correct superannuation contributions for your employees can result in significant penalties. If your business is not paying or underreporting superannuation, the ATO may take action.

To stay compliant:

• Pay superannuation on time: Ensure that you are making superannuation contributions for all eligible employees and paying them on time.
• Track employee superannuation: Keep accurate records of superannuation contributions and ensure they are calculated correctly based on the employee’s wages.

Conclusion

By maintaining accurate records, staying compliant with your tax obligations, and following best practices for BAS lodgement, your business can avoid common ATO audit red flags and ensure smooth, stress-free operations in 2025.

If you’re unsure about your record-keeping, BAS lodgement, or other bookkeeping obligations, it’s always a good idea to work with a professional. Katia Chehade, Master Bookkeeper and Registered BAS Agent, is here to help ensure your business stays on track with all its bookkeeping needs. Contact Katia today to ensure your business is audit-ready and compliant with the latest tax regulations.

Don’t let ATO audits disrupt your business. Stay proactive and organised to set your business up for success in 2025 and beyond.