It does not need to be about doing anything wrong, it can be simply that the transaction is of interest to the ATO.  Audits are more frequent and they can be disruptive and expensive, so it is best to avoid one where possible.  And remember, the ATO does not have to prove it is right, you have to provide the records to show the ATO is wrong.

These are the most common reasons for an audit:

1. Benchmarks out of line with the industry

The ATO provides some small business benchmarks, but there are other providers too.  The ATO analyses business tax returns against benchmarks, past performance, trends, etc.  Even small variations can be seen as indicators of unreported cash, transfer pricing, overclaimed expenses, etc.

Remedy:   check financials to benchmarks and explain anomalies.

2. Variations between tax returns and BAS

Reconciling the information reported on BAS to the tax return is crucial.  Large variations between the BAS (sales, wages, tax withholding, etc.) and the numbers in the tax return are likely to trigger at least a review, or even an audit.

Remedy:   balance BAS reported and paid to the financials

3. Poor lodgement history

The ATO considers all compliance obligations; BAS, employee reports, FBT, income tax, tax payments.  A good compliance history can be helpful in improving the ATO's perception of a business.

Remedy:   improve reporting to 'on-time'.

4. Consistent operating losses/big fluctuations

The ATO regards three loss years over five years as a concern, as well as big fluctuations in either financial position or certain expenses in the tax return.

Remedy:   analyse losses and material changes, and document reasons.

5. International transactions

A big concern.  The ATO tracks all transfers to and from Australia, whether through declared tax havens or other countries.  Keep all documentation that explains the transaction; perhaps, develop transfer pricing records if overseas transactions occur regularly.

Remedy:   have documents for all transfers to or from Australia; prepare transfer pricing strategies.

6. Ownership of vehicles but don't lodge FBT returns

The ATO has records from all States on purchases and sales of vehicles, and it has an expectation that there will be some private use for cars.  If no FBT return is lodged for that private usage, a review is possible.

Remedy:   keep vehicle log books, conduct an annual (March) FBT review, show a contribution towards private usage in the financials (the 'actual cost' method).

7. Ignore superannuation for employees

If employees complain about non-payment, or the ATO sees payments were not paid on time (which are not tax deductible), or the ATO sees individual 'contractors' and no super, this is sure to result in a super audit, even over some years.  These can start as a super guarantee check, but escalate to GST, FBT and income tax matters depending on systems and findings.

Remedy:   pay super on time, keep super records with wages information.

8. Capital Gains

In order to access the small business CGT concessions there are basic conditions that must be met.  The concessions can reduce, or eliminate, the capital gain made on the sale of business assets or interests in companies and trusts.  There are specific tests required for the asset being sold, meeting conditions for net assets and turnover of the taxpayer and connected entities, and how the interest is held in the business.  The rules are complex and complicated, and the tax can be significant, so the ATO invariably checks to ensure all the conditions have been properly met.

Remedy:   plan well in advance, understand the rules especially when buying assets, expect there may be no simple yes/no quick answer.

9. Be noticed

A major transaction (sale of a property) or a legal dispute (divorce proceedings and financial disclosures) can attract the attention of the ATO.

What these triggers show is that tax compliance, that is preparing annual tax returns, is not just a routine process to fill out forms.  We are looking to get the best tax outcome, and that means these other areas have to be considered at all times and managed with a proactive tax risk management process.