ATO Audits: Can They Be Avoided?
A commonly-held view is that the self-employed (in particular sole traders and family partnerships) are more likely to be chosen to be audited by the Australian Tax Office (ATO), as such businesses typically do their own accounting and reporting, instead of going through an accountant. Additionally, the self-employed are more likely to blend their personal and professional assets and obligations (often out of necessity).
However, this is not the case. The ATO applies the same standards to the self-employed as they do to medium-sized businesses (‘SMBs’) and large businesses. The ATO has a sophisticated set of benchmarks, algorithms, and data-matching technology (comparing figures against those obtained from Centrelink) that flags ‘unusual’ events or activity.
What Triggers an ATO Audit?
The ATO selects audit targets based on detected anomalies and patterns that do not align with expectations. In the interest of transparency, it has published a list of potential audit triggers on its website.
These triggers include illegal activity or tax outcomes that appear inconsistent with the intent of the tax law. However, more common and seemingly harmless events may also trigger attention. Examples include large one-off transactions, aggressive tax planning, and business performance that does not align with industry benchmarks.
A business that suddenly alters its tax planning, makes a significant purchase, or simply has a profitable year may trigger a review under the ATO’s benchmarks and data-matching systems. In some cases, inaction can also prompt attention. Ignoring ATO information requests or failing to comply with tax obligations can lead to scrutiny. There may be breaches of tax or corporate law that the business is unaware of.
Can You Avoid an ATO Audit?
Short answer? Not really.
Once the ATO has selected a business or individual for audit, the best course of action is to ensure your records are in order. This includes receipts, documentation, and other supporting materials. It is essential to respond to ATO enquiries promptly and honestly.
The ATO has extensive legislative powers to investigate if it reasonably suspects tax obligations are not being met. If you believe you may have difficulty complying with your obligations, or if you are concerned about the audit process or your legal position, seek professional advice without delay.
How Far Back Can the ATO Audit?
As of June 2025, the ATO generally has the power to audit and amend tax returns for a period of:
- Two years for individuals and small businesses (including sole traders and partnerships with turnover under $10 million);
- Four years for medium and large businesses;
- Unlimited time if there is a suspicion of fraud or evasion.
The audit period starts from the date the ATO issues a notice of assessment, not the lodgement date. In cases involving fraud or evasion, there is no restriction on how far back the ATO may look.
ATO Audit Time Limits
The ATO’s power to amend an assessment is governed by what’s called a ‘period of review’.
A two-year period applies to individuals and small businesses. It gives the ATO two years from the date of assessment to review and amend the return.
A four-year period applies to companies, trusts, and other entities with more complex tax arrangements or higher turnover. The ATO has four years from the date of assessment to amend returns for these entities.
In cases of fraud or evasion, there is no limitation period. This allows the ATO to amend assessments from any year, regardless of how much time has passed.
Taxpayers can object to amended assessments, but must do so within the relevant time limits for lodging objections.
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Related Blog – Tax Avoidance vs Tax Evasion: Key Differences & Consequences