How to avoid the ATO’s most common small business audit triggers

I have seen how stressful an audit can be, especially when you are already juggling customers, staff, and cash flow. The good news is that most audits happen because of a few predictable triggers. Once you understand these red flags, you can take practical steps to avoid them and feel more confident that your business records will stand up to scrutiny.

Here are the most common audit triggers and how you can steer clear of them.

Reporting income that doesn’t match ATO records

The ATO uses sophisticated data matching systems that compare what you report to what other businesses and institutions report about you. If you underreport your income or make mistakes when lodging your BAS or tax return, you risk triggering an automated review.

For example, if your business receives income from platforms like Uber, Airbnb or eBay, the ATO will already have data showing what you earned. The same applies if your customers claim tax deductions for invoices you issued.

To avoid this, I recommend reconciling all your income records regularly and using accounting software such as Thriday that automatically tracks transactions from your bank. This reduces the chance of missing sales or duplicating entries.

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Claiming unusually high deductions

Every small business can claim legitimate deductions for expenses related to earning income. However, claiming significantly higher deductions than others in your industry can catch the ATO’s attention.

This doesn’t mean you shouldn’t claim what you are entitled to, but it pays to be careful. Make sure every deduction is backed by clear evidence, such as receipts, invoices, or contracts. If you are unsure whether something counts as a business expense, it is worth getting advice from a registered tax agent.

I have noticed that vehicle expenses, home office claims, and entertainment deductions often cause the most trouble. If you claim a high percentage of your car use as business-related or write off large portions of household bills, be prepared to justify those claims in detail.

Consistently declaring losses

It is normal for a business to make a loss in the early years, especially during start-up. However, if you report losses year after year, the ATO may wonder whether your business is genuinely operating to make a profit or is simply a hobby being used to claim deductions.

If your business does make ongoing losses, it is important to keep thorough records showing you have a clear plan to turn things around. This might include business plans, marketing strategies, or evidence of efforts to grow revenue.

Maintaining accurate financial records not only helps prove your intentions but also makes it easier to identify where your business performance can improve.

Large fluctuations in income or expenses

Sudden spikes or drops in income or expenses can look suspicious to the ATO, especially if there isn’t an obvious explanation. For example, a big fall in income without a corresponding change in expenses could indicate unreported cash sales or bookkeeping errors.

If your business does have a year with unusual activity — such as a large asset sale, a grant payment, or major equipment purchases — include clear notes and supporting documentation with your tax return. This transparency shows you have nothing to hide and reduces the likelihood of further questions.

Poor record-keeping

One of the fastest ways to draw the ATO’s attention is to keep poor records. If your figures don’t reconcile or you can’t produce evidence of your claims, you are far more likely to face an audit.

I recommend using modern accounting tools like Thriday to keep all your records up to date. A platform like Thriday can help you automatically capture receipts, categorise transactions, and match them against your invoices and bank accounts. This not only saves time but also creates a clear audit trail.

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Cash-only operations

Businesses that mainly operate in cash often come under greater scrutiny. The ATO knows that cash income can be easily underreported, so it pays close attention to industries such as hospitality, trades, beauty services, and retail.

If your business relies heavily on cash transactions, be meticulous about recording every sale and reconciling your cash takings to your bank deposits. Using point-of-sale systems that generate electronic records can also help demonstrate that your reporting is accurate.

What to do if you are contacted by the ATO

Even if you follow all the rules, you may still receive an ATO enquiry or review notice at some point. If this happens, don’t panic. The best approach is to respond promptly, provide any information requested, and be open about how you have kept your records.

If you use an accountant or tax agent, let them know straight away so they can help you prepare a clear response.

Final thoughts

Avoiding an audit isn’t about trying to hide anything—it is about demonstrating that you take your tax obligations seriously and that you have reliable systems in place.

I have seen how much stress poor record-keeping can cause small business owners. By keeping your accounts accurate, claiming only legitimate deductions, and using technology to stay organised, you can focus on growing your business without the constant worry of an unexpected ATO audit.

If you want to simplify this process and remove much of the manual work, consider using a platform like Thriday to automate your accounting, tax, and banking in one place. This makes compliance feel effortless and gives you confidence that your business is always ready if the ATO comes knocking.