How to prepare for an ATO audit without the panic

The words "ATO audit" are enough to make even the most organised business owner sweat. But here’s the truth: being prepared is the best defence. Whether it’s a random review or a deep dive into your financials, the key to surviving an audit is knowing what to expect and having your records in order.

At McMillans, we’ve helped countless clients across Gippsland navigate ATO audits with confidence. Here's what you need to know.

Why might the ATO audit you?

ATO reviews and audits are increasingly data-driven and risk-based. You might be flagged due to:

  • Industry benchmarks being off

  • Discrepancies in reported income vs. lifestyle indicators

  • Claims that don’t match averages (e.g. unusually high deductions)

  • Unusual GST or BAS activity

  • Reporting issues flagged by your employer or financial institution

  • Operating in a “cash-heavy” industry

Sometimes, it’s completely random. Other times, it's part of a sector-wide crackdown. But regardless of why you’re selected, being prepared is crucial.

Types of ATO reviews and audits

The ATO doesn’t always call it an “audit” straight away. There are different levels of engagement:

Data matching reviews

The ATO compares your tax return with external data—banking, employers, super funds, Centrelink, etc.—and flags any discrepancies.

Risk reviews

These are more in-depth checks on particular areas of concern, like rental property income or trust distributions.

Full audits

These are formal investigations. You’ll be required to submit extensive documentation and respond to queries over an extended period.

What the ATO looks for

During an audit, the ATO might examine:

  • Business income and expenses

  • Employee records and payroll

  • Superannuation contributions

  • GST, PAYG and BAS reporting

  • Trusts, dividends and distributions

  • Capital gains and depreciation schedules

  • Personal living expenses vs. declared income

Their aim is to ensure you're accurately reporting income and only claiming deductions you're legally entitled to.

What you can do to be audit-ready

Even if you're not currently under review, these steps can dramatically reduce the stress (and risk) if the ATO ever comes knocking.

1. Keep good records

Maintain clear, dated records of all income, expenses, and deductions. This includes receipts, invoices, bank statements, and logbooks.

2. Use cloud accounting software

Tools like Xero, MYOB and QuickBooks help streamline reporting and ensure your data is accurate and accessible.

3. Understand what you can and can’t claim

Not sure about that home office deduction or car claim? Don’t guess. Ask your accountant for tailored advice.

4. Don’t mix business and personal finances

Maintain separate accounts. Mixing the two makes audits far more complicated and may raise red flags.

5. Engage a trusted accountant

Working with a proactive accountant means issues are spotted early, and you’re supported if an audit occurs.

If you’ve received an audit notice

Don’t panic. Here’s what to do next:

  • Contact your accountant immediately
    We can liaise with the ATO on your behalf.

  • Don’t ignore it or delay
    Missing deadlines will escalate the situation.

  • Start gathering relevant documentation
    We'll guide you on what’s needed based on the audit scope.

  • Stay calm
    Most audits are resolved with good communication and evidence. We’ll be by your side the whole way.

What if issues are found?

Mistakes happen. The ATO recognises that. If discrepancies are found:

  • You may be required to repay tax or amend past returns

  • You might face interest or penalties

  • Voluntary disclosure (with help from your accountant) can often reduce penalties

McMillans will work to negotiate outcomes, manage repayments, and ensure you stay compliant going forward.

Small BusinessCristy Houghton