🚨Top ATO Red Flags and How to Avoid Them This EOFY
- CoActise
- Jun 28
- 3 min read
The Australian Taxation Office (ATO) has ramped up its compliance activitiew and further tightening scrutiny from 1st July 2025, targeting common small business lodgement and record-keeping errors. As EOFY approaches, understanding these red flags can help you avoid unnecessary audits, penalties, or interest charges that directly reduce your profits.
💡 Worried about ATO audits this EOFY? Book a quick bookkeeping review call today to stay compliant.
📌 Why Does the ATO Flag Businesses?
The ATO uses data-matching technology to compare your BAS, income tax returns, payroll, and superannuation reporting against industry benchmarks, bank data, and supplier records. Discrepancies or unusual patterns often trigger automatic reviews or audits.
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1. Unusually High Work-Related Deductions
Claiming deductions significantly higher than others in your industry or income bracket raises immediate flags. The ATO now focuses on:
✔️ Vehicle expenses without valid logbooks
✔️ Home office deductions exceeding standard usage
✔️ Tool or equipment claims without clear business use evidence
2. Missing or Underreported Income
With ATO’s expanded data-matching agreements, all payments from:
✔️ Banks (merchant settlements)
✔️ Platforms (Uber, Airbnb, Upwork)
✔️ Industry suppliers
… are visible to the ATO. Failing to declare this income is a direct audit trigger.
3. Cash Businesses with Low Reported Income
Trades, hospitality, and retail businesses reporting unusually low cash sales compared to electronic sales or industry benchmarks attract scrutiny. The ATO continues its Cash Economy Program targeting underreported takings.
4. Incorrect GST Reporting
Key GST reporting errors include:
✔️ Claiming GST credits for purchases without valid tax invoices
✔️ Claiming GST on private or non-business expenses
✔️ Misclassifying GST-free or input-taxed items
The ATO has intensified reviews of BAS reporting accuracy, with penalties for overclaimed credits plus high GIC interest (currently 11.34%, non-deductible) on unpaid liabilities.
5. Employee vs Contractor Classification
If you engage contractors but treat them like employees (control hours, provide equipment, pay regular amounts), the ATO may reclassify them as employees, leading to superannuation, PAYG, and payroll tax liabilities plus penalties.
6. Late or Missing Superannuation Payments
Super Guarantee (SG) payments must be made by due dates to claim tax deductions. Late payments are non-deductible and incur Super Guarantee Charge liabilities plus penalties and interest.
7. Large or Unexplained Variations Between Years
If your income, GST credits, or deductions vary significantly year-to-year without clear business reasons (e.g. asset purchases, job changes), the ATO may initiate a review to confirm legitimacy.
8. Personal Expenses Claimed as Business
Using your business account for personal expenses (e.g. groceries, personal travel, family items) and accidentally coding them as business deductions can result in penalties if audited.
✅ How to Avoid ATO Red Flags
Need help avoiding these common BAS and bookkeeping mistakes? Download our EOFY checklist today.
✔️ Keep accurate, up-to-date records for income, expenses, GST, payroll, and superannuation.Need help avoiding these common BAS and bookkeeping mistakes? Download our EOFY compliance checklist today.
✔️ Separate personal and business transactions with dedicated accounts.
✔️ Use cloud accounting software like Xero or MYOB to reconcile regularly.
✔️ Retain valid tax invoices for all GST claims.
✔️ Consult your registered tax agent or BAS agent for advice tailored to your situation.
✔️ Review your deductions to ensure they are reasonable, documented, and business-related.
🔎 Key ATO Enforcement Changes in 2025
✔️ No Deduction for ATO Interest Charges:
From 1 July 2025, interest charges like GIC and SIC are no longer tax deductible, increasing the cost of unpaid tax debts.
✔️ Superannuation Guarantee Increase:
SG rate rises to 12% on 1 July 2025. Employers must apply this to all payments made on or after this date.
✔️ Expanded ATO Audit Funding:
Nearly $1 billion allocated to strengthen ATO audit and compliance activities, with over 1,000 new staff targeting businesses and high-net-worth individuals.
✔️ Stronger Tax Practitioners Board Powers:
From 1 July 2025, the TPB can impose decade-long bans, issue infringement notices, and seek court penalties against non-compliant tax practitioners.
💡 Final Note
The ATO’s compliance focus continues to tighten, making EOFY preparation critical for avoiding audits and penalties. Staying organised, reporting accurately, and working with your professional advisors ensures your business remains compliant and audit-ready.
📞 Ready to get your books audit-proof and stress-free?
📝 Disclaimer
This blog provides general information only and does not constitute financial or tax advice. For guidance specific to your business situation, please consult your registered tax agent or BAS agent.
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