Preparing for an ATO Audit in Sydney

An ATO letter can make even a well-run business owner feel uneasy.

The first reaction is usually to search old emails, open the accounting file, check the bank account and try to remember why a figure was lodged the way it was. That is understandable, but it is not the best way to prepare.

An ATO audit, review or request for information should be handled with evidence, not panic.

For Sydney businesses, the issue may involve BAS, GST, PAYG, payroll, deductions, income, contractor payments, business records, company money, trust distributions, foreign income or a return that no longer looks as simple as it did when it was lodged.

This guide explains how to prepare calmly, which records usually matter, and why the response should be built on documents rather than memory.

First, Work Out What The ATO Is Actually Asking

Not every ATO contact is the same.

The ATO may be asking for a document, checking one item, reviewing a lodgement, following up overdue obligations or conducting a broader audit. The response should match the request.

Before doing anything else, read the letter carefully and identify:

• the tax period involved
• the entity involved
• the tax type, such as income tax, GST, BAS, PAYG or super
• the specific issue being questioned
• the due date for responding
• whether documents are requested
• whether the ATO is asking for an explanation, correction or further information
• whether the issue relates to one transaction or several years

Do not assume the ATO is asking about the whole business if the letter is about one issue. Do not assume it is minor if the request points to several periods, repeated patterns or large amounts.

The first step is to define the scope.

That is what keeps the response focused.

A Review Is Not Always The Same As An Audit

Business owners often use the term “audit” to refer to any ATO contact.

The distinction still matters.

A review may be a narrower check or information-gathering process. An audit is usually more detailed and may involve a deeper examination of records, transactions, positions taken and supporting evidence.

The ATO’s guidance on  risk review and audit processes explains that a review of an identified compliance risk may result in an audit.

For a Sydney business, the practical point is this: respond carefully from the beginning.

A short request can become more serious if the answer is incomplete, unsupported or inconsistent with the records. A calm, organised first response is usually better than a rushed explanation that creates more questions.

Build The Evidence File Before Writing The Explanation

An explanation without records is weak.

Before responding, gather the documents that show what happened. The ATO’s  record-keeping rules for business explain that businesses must keep records of transactions relating to tax, superannuation and registrations.

For an ATO audit or review, useful records may include:

• lodged tax returns
• BAS lodgements
• GST reports
• payroll reports
• bank statements
• accounting software access
• sales invoices
• supplier tax invoices
• receipts
• contracts
• quotes
• payment records
• loan documents
• asset purchase invoices
• vehicle records
• logbooks
• stock records
• superannuation records
• director loan details
• trust distribution records
• emails explaining unusual transactions
• prior advice received
• ATO correspondence

The goal is to create a clear trail from the lodged figure back to the source document.

If the records do not support the lodged figure, that needs to be understood before a response is sent.

Do Not Reconstruct The Story From Memory

Memory can be useful, but it should not lead the response.

A business owner may remember that an expense was for a client job, a vehicle was mainly used for work, a customer deposit was refunded, a supplier bill was paid, or a director paid for a business cost personally. But the ATO usually needs records, not just recollection.

That is especially important when the issue is old.

People forget details. Staff change. Software changes. Bank accounts close. Supplier portals expire. Emails get archived. What felt obvious during the year may become difficult to prove later.

A better approach is:

• find the source document
• match it to the bank transaction
• check the accounting treatment
• compare it to the lodged return or BAS
• identify any inconsistency
• prepare a clear explanation only after the records are reviewed

If the explanation and the documents do not agree, the documents need to be dealt with first.

BAS And GST Questions Need Transaction-Level Review

Many ATO questions start with BAS or GST.

The issue may be GST on sales, GST credits, PAYG withholding, unusual refunds, missing invoices, a large purchase, a revised activity statement or figures that do not match the business pattern.

The ATO’s  Business Activity Statements guide explains that BAS is used to report and pay obligations such as GST and PAYG.

For audit preparation, BAS records should be reviewed at the transaction level.

That may involve checking:

• whether GST was charged correctly on sales
• whether GST credits were supported by tax invoices
• whether supplier bills were entered in the right period
• whether private-use expenses were adjusted
• whether loan payments were coded correctly
• whether transfers were wrongly treated as income
• whether payroll PAYG withholding matched the BAS
• whether large asset purchases were treated properly
• whether BAS corrections or revisions were handled correctly

The ATO also provides guidance on  correcting an activity statement and  revising an earlier one, which may be relevant if an error is found.

If the ATO issue relates to BAS, my page on  BAS accountant in Sydney explains how I review the figures behind the activity statement.

Income Checks Should Start With The Source Of Sales

If the ATO is asking about income, do not rely only on the bank account.

A bank deposit may be a sale, but it may also be a transfer, loan, owner contribution, refund, reimbursement, or movement between accounts. On the other hand, income can be understated if sales were recorded net of merchant fees, platform fees or refunds.

A Sydney business may receive income through:

• invoices
• cash sales
• point-of-sale systems
• merchant facilities
• Stripe, PayPal or Square
• Shopify or online marketplaces
• delivery platforms
• booking systems
• subscriptions
• deposits
• progress payments
• related-party transactions
• overseas customers

The ATO question may be about whether all income was included.

To prepare, compare the source sales records with bank deposits, accounting reports, BAS figures and tax return income. If there is a difference, work out why before trying to explain it.

A vague answer like “that was probably a transfer” is not enough. The transfer should be supported by records.

Deduction Questions Need More Than A Receipt

A receipt helps, but it does not always prove the deduction.

The business still needs to show that the expense related to earning business income was treated correctly. Private use, capital treatment, depreciation, GST, timing and structure can all affect the answer.

The ATO’s  business deductions guide is a useful reference because it explains the general requirement that expenses must be connected to the business.

Deduction areas that often need evidence include:

• motor vehicle expenses
• tools and equipment
• home office expenses
• phone and internet
• travel
• staff costs
• subcontractors
• repairs and maintenance
• professional fees
• software
• insurance
• interest and finance costs
• asset purchases
• training
• marketing
• mixed business and private costs

For each item, ask:

• What was purchased?
• Who paid for it?
• Was the invoice kept?
• Was it for the business?
• Was there private use?
• Was GST treated correctly?
• Was it an expense or an asset?
• Was the claim made in the correct year?

If the answer cannot be shown, the deduction may need closer review.

Payroll, PAYG And Super Records Must Line Up

Payroll can become a major audit issue because it touches several obligations at once.

A business may need to show wages paid, PAYG withholding, superannuation, employee records, Single Touch Payroll reports, leave records, reimbursements, allowances, and how payroll was recorded in the accounting file.

If payroll reports do not match bank payments, BAS figures or financial statements, the business should identify the reason before responding.

Useful payroll records include:

• pay slips
• pay run reports
• employee details
• PAYG withholding records
• superannuation payment records
• payroll summaries
• leave balances
• employment start and end dates
• reimbursement records
• allowance records
• STP finalisation records
• bank payment records

If contractors are involved, the business may also need invoices, ABN records, contracts, payment records and evidence of the arrangement.

A payroll or contractor issue should not be answered casually. The difference between wages, contractor payments, reimbursements and owner drawings can affect several parts of the tax record.

If payroll records are part of the problem, my page on  payroll services in Sydney explains how I integrate payroll with bookkeeping, BAS, and tax.

Company Money And Director Money Need A Clear Trail

ATO questions can become more complicated when company money and director money are mixed.

A company is separate from the director. If money has moved between the company and the director, the records need to show what the payment was.

It may be:

• wages
• a dividend
• a director loan
• a reimbursement
• repayment of money lent to the company
• a private expense paid by the company
• a business expense paid personally by the director
• a transfer between related accounts

These categories are not interchangeable.

If the ATO is asking about a company return, deductions, loans, private expenses or director payments, the director account and balance sheet should be reviewed carefully.

A company bank account used like a personal account can make an audit harder. The response should not pretend that the issue is only an expense question if the real issue is the movement of money between the company and the director.

If this is the weak point, my page on  corporate tax accountant in Sydney explains how I review company tax and director transactions.

Trust And Partnership Records Need The Agreement Behind The Numbers

Trusts and partnerships need more than ordinary income and expense records.

A trust may need records for distributions, beneficiaries, unpaid entitlements, trustee decisions, trust deed issues, related companies or family arrangements.

A partnership may need records for profit allocation, partner drawings, partner contributions, reimbursements and each partner’s share of income or loss.

If the ATO question relates to a trust or partnership return, the response should not only point to the final tax figure. It should show how the figure was reached and how it connects to the structure.

That may require:

• trust distribution records
• beneficiary details
• trustee minutes or resolutions
• trust deed information where relevant
• partner capital accounts
• partner drawings
• partnership agreement details
• prior-year balances
• loan and unpaid entitlement records
• related-party transaction records

If a legal interpretation of a deed, agreement, or dispute is involved, a solicitor may be needed. The accounting response should respect the legal documents, not work around them.

If There Is A Mistake, Identify It Properly

Sometimes the review shows that a mistake was made.

That does not mean the response should be rushed.

First, identify the mistake clearly:

• Which period is affected?
• Which entity is affected?
• Which tax type is involved?
• What was lodged?
• What should have been lodged?
• What records support the correction?
• Was the issue isolated or repeated?
• Does a BAS revision, tax return amendment or other correction need consideration?
• Has the ATO already raised the issue?

The ATO’s  fix a mistake or amend a return guidance explains that if a mistake was made or something was left out of a business or super tax return, activity statement or statement, it may be possible to fix or amend it.

The important point is to deal with the correction carefully. An ill-explained correction can raise more questions.

The ATO Response Should Be Clear, Complete And Controlled

A good response is not necessarily long.

It should answer the question asked, provide the requested documents, and explain the position in a way that aligns with the records.

Avoid:

• sending unrelated documents without explanation
• guessing from memory
• changing the story after the records are found
• ignoring deadlines
• over-answering questions that were not asked
• blaming software without checking the file
• assuming the ATO has made a mistake without evidence
• responding emotionally
• hiding weak records until they are requested

A better response should:

• identify the issue
• provide the relevant documents
• explain how the figures were prepared
• note any corrections being considered
• keep copies of everything sent
• track dates and conversations
• ask for clarification where the request is unclear
• involve the accountant before the response is submitted

The goal is to make the tax position understandable.

Keep A Timeline Of The Audit Or Review

During an ATO review or audit, keep a simple timeline.

This helps prevent confusion, especially if the process takes time or involves several people.

Track:

• date the ATO letter arrived
• response deadline
• phone calls
• documents requested
• documents provided
• explanations submitted
• ATO follow-up questions
• extension requests
• amended or corrected lodgements
• decisions received
• payment or objection deadlines

A timeline is not just admin. It helps make sure the business does not miss a deadline or lose track of what has already been explained.

If You Disagree With The ATO Position

Sometimes, the ATO may reach a position that the business disagrees with.

That disagreement should be handled through the correct process, with records and reasoning.

The ATO has information on  objecting to a decision and a  small business independent review process in certain circumstances.

Do not wait until a deadline is close before asking what options exist.

If an objection, independent review or legal issue is involved, the response may need a more formal process. The accounting records still matter, but the next step should be chosen carefully.

Do Not Wait For An Audit To Clean Up The File

The best audit preparation happens before the ATO writes.

A Sydney business can reduce stress by keeping its accounting file in an understandable state.

That means:

• reconcile bank accounts regularly
• keep invoices and receipts
• review BAS before lodgement
• check GST coding
• keep payroll records current
• separate business and private spending
• label director or owner payments clearly
• keep asset purchase documents
• document unusual transactions
• review supplier and customer balances
• keep records for the required period
• ask about uncertain items before lodging

This is not about being afraid of the ATO.

It is about running a business with records that clearly tell the truth.

If the file is already behind, my page on  small business bookkeeping in Sydney explains how I review the working records before they become tax problems.

Where Rafal Fits Into The Process

I’m Rafal Slowinski, Director of Tax Accounting Group Pty Ltd. My background in accounting and tax law helps me review ATO matters from both sides: what the law or lodgement requires and what the records can actually support.

For an ATO audit or review, I can help you work through:

• what the ATO is asking
• which records matter
• whether the lodged position is supported
• whether a mistake needs correction
• whether BAS, GST, payroll or income records need review
• whether company, trust or partnership records are involved
• what explanation should be prepared
• what should be avoided in the response
• whether another adviser, such as a solicitor, may need to be involved

The aim is not to create panic or argue for the sake of arguing.

The aim is to move from uncertainty to evidence.