Audit Readiness Checklist

The old picture of an ATO audit — an inspector arriving unannounced with a briefcase — is mostly gone. What happens now is quieter and starts much earlier: your lodgements are compared, line by line, against data the ATO already holds from banks, employers, merchant facilities, payroll systems, property registries and online platforms. Most reviews begin not with suspicion but with a mismatch a computer found. Audit readiness, in that world, is less about surviving an interrogation and more about running a business whose numbers agree with each other.

What tends to draw attention

• Sitting well outside the small business benchmarks. The ATO publishes expected ranges for cost and income ratios by industry. A business far outside its range is not automatically wrong — but it is automatically more interesting.
• Cash-heavy industries. Cafés, trades, salons and similar businesses attract more attention simply because unreported cash is easier there.
• BAS that does not reconcile to the tax return. Income reported on activity statements through the year should tell the same story as the annual return. Gaps get noticed.
• Lodgement behaviour. Chronic late lodgement, or years of losses alongside a visibly funded lifestyle, both raise the profile of a file.

The evidence chain to keep — before anyone asks

Records generally need to be kept for 5 years, and the useful test is simple: could you explain any line of your return, and produce the paper behind it, without reconstructing anything? In practice that means bank accounts reconciled through the year rather than at year end, source documents attached to transactions in your software, vehicle logbooks where cars are claimed, stocktake records, contractor invoices with ABNs checked at the time, and signed minutes or resolutions for the decisions that matter — dividends, trust distributions, loans to and from the owners.

What we commonly see go wrong

• Records reconstructed after the review letter arrives — technically possible, rarely convincing, and visibly different from records kept as you went.
• Round-number estimates in returns that cannot be traced to any document when questioned.
• Personal spending mixed through the business accounts, turning every question about one transaction into a question about all of them.
• Owners taking ATO phone calls on the spot and answering from memory — guessing under pressure creates inconsistencies that then have to be unwound.

A worked example

As an illustration: a cleaning business reports income noticeably below the deposits flowing through its merchant facility and bank accounts — data the ATO receives independently. A review letter asks it to explain the difference. Because the bookkeeping was reconciled monthly, the answer takes an afternoon: the gap is customer refunds, a one-off equipment sale and GST collected, all documented. The review closes without adjustment. The same letter landing on a shoebox of receipts would have meant months of reconstruction, and every unexplained deposit treated as income until proven otherwise.

When to get help

If a review or audit letter arrives, the first call should be to your registered agent — before you respond, and ideally before you answer detailed questions by phone. An agent can manage the correspondence, make sure what is provided is accurate and complete, and keep the scope of the review where it belongs. And if you already know your records would not survive the afternoon test, the cheapest time to fix that is now, while nobody is asking.

Does getting a review letter mean the ATO thinks I have done something wrong?

Not necessarily. Many reviews start with an automated mismatch between your lodgements and third-party data, and plenty close without adjustment once the difference is explained. What matters is responding accurately, with documents — which is much easier if the records already exist.

How long do I need to keep business records?

Generally 5 years from when the record was made or the transaction completed, whichever is later, and longer for some records such as those relating to capital assets you still own. Digital copies are acceptable if they are true and complete.

Should I deal with the ATO directly if I am reviewed?

You can, but it is usually wiser to involve your registered agent first. Answering detailed questions from memory over the phone is where avoidable problems start; an agent can handle the correspondence and make sure responses are consistent and supported.