Why the ATO Might Come Knocking
Tax time in Australia doesn’t have to be scary — unless you’re on the wrong side of the Australian Taxation Office (ATO). Most people file their returns, cross their fingers, and hope for a decent refund. But then, there are times when the ATO decides to take a closer look. That’s called a tax audit.
No, it’s not something out of a courtroom drama. An audit just means the ATO wants to double-check your numbers. It could be a simple review or a full-blown investigation. Either way, it’s best to avoid the spotlight unless you love paperwork and stress.
The good news? Most audits happen for a reason, and once you know what triggers them, you can steer clear. In this guide, we break down the common ATO tax audit triggers, with some real-world examples and easy tips to stay safe. And don’t worry — we’ll keep it simple, so you know how to prepare for a tax audit by the Australian Tax Office well in advance.
ATO Red Flags — What Makes You a Target
So, what gets the ATO’s attention? It’s usually patterns, numbers, or behaviour that don’t look right. Here are the biggest ATO red flags that can lead to an audit.
- You’re Earning a Lot, But Reporting Very Little
If you run a successful-looking business, drive a shiny car, and holiday in Bali twice a year — but report an income that wouldn’t feed a goldfish — the ATO will raise an eyebrow.
The ATO compares your declared income with others in your industry and location. If your numbers look far too low, they might think you’re hiding income. For example, a café owner reporting $25,000 a year might draw suspicion, especially if they own two homes and no mortgage.
To avoid this trigger:
- Be honest about cash income.
- Keep accurate records.
- Don’t try to “guess” your income — the ATO has data.
- Your Deductions Look Too Good to Be True
Everyone wants a tax refund. But if you claim work expenses that seem over-the-top, you may land yourself in hot water. Say you’re a hairdresser and claim $8,000 in car costs. Or a tradie writing off tools you never bought. These look dodgy on paper.
The ATO has set averages by occupation. If your claims are way above the norm, it sets off alarm bells. Even if your claim is genuine, you need to back it up with receipts and logs.
How to stay safe:
- Only claim what’s work-related.
- Keep proof of everything.
- If unsure, ask a registered tax agent.
- Big Changes From Last Year
The ATO loves patterns. So, if your income or deductions jump or drop dramatically compared to the previous year, expect questions.
Let’s say you claimed no work expenses last year, but this year it’s $6,000. Or your income goes from $110,000 to $40,000 without a clear reason. These kinds of changes raise suspicions.
To prevent issues:
- Explain big changes with notes when filing.
- Don’t make claims just because your mate at the pub did.
- Document new situations (like study, redundancy, or illness).
- Cash Businesses and Side Hustles
Running a business that deals in cash — like trades, cafes, salons, or ride-shares — puts you under the ATO’s microscope. Why? Because cash is easier to hide.
If you’re a part-time DJ or sell stuff online, the ATO still expects you to report that income. Their systems pick up on this more than most think. Platforms like Uber, Airbnb, eBay, and even bank deposits feed information to the ATO now.
Tips to avoid this trap:
- Report all income, even small side gigs.
- Use accounting tools or apps to track it.
- Remember: side hustle ≠ tax-free.
- Business Owners Playing Loose With the Rules
Running your own business comes with perks. But it also puts you squarely on the ATO’s radar. If you don’t keep tight books or mix personal and business spending, expect questions.
The ATO watches for businesses that:
- Lodge taxes late or inconsistently.
- Claim personal expenses (like a family holiday) as business deductions.
- Don’t pay super for employees.
- Fail to report all sales, especially cash jobs.
For example, claiming your jet ski as a “client entertainment cost” might seem funny — until the audit letter arrives.
How to stay safe:
- Use proper accounting software.
- Keep business and personal expenses separate.
- Lodge BAS and tax returns on time.
If you’re unsure, use a registered tax agent — it’s safer than trying to wing it.
- Data Matching – Yes, Big Brother Is Watching
The ATO has some very smart tech. It compares your tax return against a mountain of data — from banks, government departments, employers, even private companies. This is called data matching, and it’s one of their sharpest tools.
They’ll check:
- Your bank interest and dividends.
- Centrelink payments.
- PAYG summaries.
- Health insurance details.
- Uber, Airbnb and other sharing-economy income.
So if you forget to declare $1,200 in interest or a few weekend Airbnb bookings, chances are the ATO already knows.
Tip: Don’t rely on memory — use the ATO’s pre-fill service or a tax agent who can access this info.
- Investment Property Issues
Property investors are another favourite target. Mistakes in rental property deductions are common — often due to poor advice or guesswork.
Things that attract attention:
- Claiming renovation costs as repairs.
- Deducting interest on a loan used for personal reasons.
- Overstating depreciation.
- Claiming full deductions for holiday homes.
The ATO has detailed data from property managers, banks and councils. So fudging numbers rarely works. Always keep:
- Loan statements.
- Lease agreements.
- Receipts and proof of repairs.
Using a tax professional who understands investment property rules is a smart move.
- Cryptocurrency Transactions
Cryptocurrency is a hot topic. And yes, it’s taxable. Many Aussies think they can trade Bitcoin or Ethereum quietly — but the ATO is watching.
The ATO gets data from major crypto exchanges and uses it to match against tax returns. If you’ve made gains and didn’t report them, it could lead to an audit.
Key points:
- Crypto profits are treated like shares — you may pay capital gains tax (CGT).
- Even swapping one crypto for another is a taxable event.
- Holding for over 12 months may reduce your CGT.
To avoid problems:
- Keep records of every transaction.
- Use tracking tools.
- Report gains and losses accurately.
- The Danger of “Lifestyling” Above Your Income
This one’s a classic red flag. If your tax return shows an income of $50,000 but your Instagram screams Bali getaways, luxury handbags, and champagne brunches every weekend, the ATO might start to wonder.
The tax office uses lifestyle audits to compare your reported income with your apparent standard of living. If the maths doesn’t add up, you could find yourself explaining how you managed to buy a jet ski, pay off a new car, and renovate your kitchen — all on a part-time wage.
It’s not just high-flyers under the microscope. Ordinary people flashing cash without a clear source of income can also attract attention. The ATO doesn’t have to look far — bank records, online ads, and even your social media can all paint a picture. It’s not illegal to live well, of course. But if your tax return doesn’t reflect how you live, be prepared for some awkward questions.
- Cash Jobs and “Under the Table” Payments
We’ve all heard the phrase “cash is king,” but try telling that to the ATO. Failing to report cash income is one of the fastest ways to invite a tax audit. Tradies, hairdressers, café workers, and anyone in industries with high cash turnover are especially on the radar.
The tax office knows how much businesses in different industries typically earn and spend. So, if your café reports half the revenue of other cafés in your area, it could raise a red flag. Similarly, if you’re pocketing cash for side jobs but not declaring it, that’s tax evasion — and they take it seriously.
They even run data analysis comparing business benchmarks across similar trades. Being too far below average won’t look good. If you accept cash, declare it. Use a receipt system and bank your income properly. It’s better to pay a little tax than a lot of penalties later.
- GST, BAS, and the Small Business Audit Net
Small businesses can sometimes trip up when it comes to GST and BAS (Business Activity Statement) reporting. The ATO looks closely at businesses that frequently revise their BAS figures, lodge inconsistently, or claim high input tax credits with low sales turnover.
For instance, claiming GST credits on purchases but not charging GST on sales can cause issues. If your business claims thousands in GST refunds each quarter but barely shows any income, it’s likely to draw attention.
Late lodgements, unregistered contractors, or mismatched figures across your BAS and annual return are other common triggers. The best way to stay off the radar? Stay accurate. Double-check your figures. Keep your invoices organised. Better yet, let a bookkeeper or accountant help you with your GST reporting. It’s often more affordable than the trouble of being audited.
- Sudden Spikes or Dips in Income
Fluctuations in income happen — a big job lands, a tough year hits, or you take time off. That’s normal. But sudden and unexplained changes in income without a clear reason can raise questions.
If you usually earn $120,000 and suddenly report $40,000, the ATO might want to understand why. Likewise, if your small business triples in revenue overnight, it’s not necessarily a bad thing — but they may ask how. Their systems are built to detect patterns. If yours shifts dramatically without context, it can look suspicious.
That doesn’t mean you can’t have a good or bad year. Just be ready to support your figures. Did you sell property? Land a big client? Take extended leave? If it’s in the records, and it makes sense, you’re probably in the clear. But trying to fudge the numbers without a story to match? That’s where people get caught out.
So, there you have it — the main things that can raise eyebrows at the ATO. Most of the time, audits don’t happen randomly. They’re triggered by odd patterns, mismatched numbers, or financial habits that don’t line up with what you’re declaring. That doesn’t mean you need to stress every time you lodge a return — if your paperwork’s solid, you’re honest with your income, and you’ve got records to back it all up, you’re already ahead of the game.
Think of the ATO like a maths teacher — they’re just checking your working out. If your numbers make sense and your story checks out, you’ll likely never hear a peep from them. But if something smells off, well… you might end up with some explaining to do.
The best defence? Be honest, keep things tidy, and maybe don’t try to claim your dog as a business expense. Keep your tax clean, and you’ll stay well out of the audit spotlight.
