An ATO audit can be stressful, particularly if you are asked to explain deductions or provide records from a previous tax return. However, preparing for an ATO audit does not need to begin when the audit letter arrives.

According to John Saade, CEO of Latitude Accountants, one of the most important principles when claiming deductions is being able to prove the claim. Good record-keeping gives you evidence to support your position if the Australian Taxation Office (ATO) asks questions about your tax return.

The best time to prepare for an ATO audit is before one happens. By maintaining organised records, regularly reviewing your deductions, and understanding the evidence supporting your claims, you can be in a much stronger position if the ATO decides to review your tax affairs.

Why Should You Prepare for an ATO Audit?

An ATO review does not necessarily mean you have done anything wrong. The ATO may review a tax return because a particular claim requires clarification, information needs to be verified, or something appears unusual compared with other taxpayers.

This makes preparation important.

If you already have your supporting documents organised, you are less likely to find yourself searching through old emails, bank statements and receipts when the ATO requests information.

Good records can also help you:

• Support your tax deductions
• Explain how an expense relates to earning income
• Demonstrate how you calculated a work-related percentage
• Identify errors before lodging a tax return
• Respond more efficiently to an ATO request
• Give your accountant the information needed to assist you

Australian tax law generally requires taxpayers to retain relevant substantiation records for five years, although some records have different retention periods.

1. Keep Your Tax Records Organised Throughout the Year

One of the biggest mistakes taxpayers can make is waiting until tax time to start looking for receipts.

Instead, develop a record-keeping system that you use throughout the financial year.

Your records can be kept electronically or in paper form. The ATO also recognises clear electronic copies and photographs of written evidence as records.

Consider creating folders for:

• Work-related expenses
• Vehicle expenses
• Travel
• Mobile phone and internet
• Home office expenses
• Equipment and computers
• Professional memberships
• Donations
• Tax agent and tax-related expenses
• Other deductions

If you run a business, your records may also need to cover income, sales, expenses, bank transactions, GST and asset-related expenses.

2. Make Sure Every Deduction Has Supporting Evidence

Before claiming an expense, ask yourself:

“If the ATO asked me to prove this claim tomorrow, could I?”

For many expenses, this means retaining receipts, invoices or other documentation showing what you purchased, when you purchased it and how it relates to your income-earning activities.

Your evidence should make the claim understandable rather than simply showing that money left your bank account.

For example, a bank statement may demonstrate that a transaction occurred, but it may not always explain exactly what was purchased or how it was connected to your work.

This is particularly important for expenses where the work-related portion needs to be calculated.

3. Review Your Work-Related Deductions Regularly

Do not assume that a deduction is valid simply because you claimed something similar in a previous year.

Tax circumstances can change, and each expense should be considered based on the relevant tax rules and your individual circumstances.

Before lodging your return, review your major deductions and ask:

• Did I actually incur this expense?
• Was it related to earning my income?
• Was I reimbursed by my employer?
• Do I have evidence to support it?
• Have I calculated the work-related portion correctly?
• Can I explain how I arrived at the amount?

This type of review can help identify questionable or unsupported claims before they become an issue.

4. Pay Particular Attention to Vehicle Expenses

Car expenses can require more detailed records, particularly when you are using a logbook method.

If you claim vehicle expenses, keep relevant records such as:

• Opening and closing odometer readings
• Logbook records where required
• Work-related journey details
• Total kilometres
• Work-use percentage
• Fuel and other vehicle expense records
• Registration documentation
• Lease or purchase documents where relevant
• Employer confirmation where applicable

The tax law includes specific substantiation and record-retention requirements for car expenses.

Keeping these records as you go is considerably easier than trying to reconstruct your vehicle use months or years later.

5. Keep Evidence for Phone, Internet and Home Office Claims

Work-related phone, internet and home office expenses can also require evidence showing how much of the expense relates to your income-earning activities.

Depending on your circumstances, useful records may include:

• Itemised phone bills
• Internet bills
• Employer confirmation
• Details of reimbursements or allowances
• A reasonable calculation of work-related use
• A representative diary of work and private use where appropriate
• Records supporting home-working patterns

The important point is to be able to explain how you calculated the amount you claimed, rather than simply estimating a percentage.

6. Keep Records for Equipment and Other Significant Expenses

If you purchase a computer, laptop, tools or other equipment for work, retain the original documentation.

Depending on the circumstances, you may need:

• The purchase invoice or receipt
• Date of purchase
• Details of the item
• Evidence of work-related use
• Calculation of the work-related portion
• Depreciation or decline-in-value calculations where applicable

The ATO provides record-keeping guidance covering areas such as mobile phones, internet, tools, computers and other work-related expenses.

7. Be Careful With Unusually Large Deductions

A large deduction is not automatically wrong.

However, unusually high claims can attract questions, particularly where the amount appears inconsistent with the taxpayer’s circumstances or the information available to the ATO.

For this reason, don’t increase a deduction simply because you believe you are entitled to claim something.

Instead, make sure you can explain:

What was the expense? Why was it necessary for earning income? How much was actually work-related? And what evidence supports it?

If you cannot confidently answer those questions, consider obtaining professional advice before lodging the claim.

8. Back Up Your Records

Keeping records is only useful if you can actually access them when required.

If your receipts and documents are stored electronically, maintain regular backups. The ATO recommends backing up electronic records regularly.

You could maintain:

• A cloud-based folder
• A secure computer backup
• Digital copies of receipts
• Organised financial folders
• Accounting or record-keeping software

The goal is simple: if your computer fails or you lose access to an email account, your tax records should not disappear with it.

9. Review Your Tax Return Before Lodging

Before your tax return is submitted, take the opportunity to review the information being reported.

Check that:

• Income has been correctly reported
• Deductions are supported
• Work-related percentages are reasonable
• Reimbursements have been considered
• Major expenses have appropriate documentation
• Calculations are accurate
• You understand the claims being made on your behalf

If you use a registered tax agent, provide them with complete and accurate information rather than assuming they will automatically know about every expense or circumstance.

10. Have a Plan If the ATO Contacts You

Preparation is not only about keeping receipts. It is also about knowing what to do if you receive an ATO review or audit letter.

If that happens:

1. Don’t panic.
2. Read the letter carefully.
3. Confirm exactly what the ATO is reviewing.
4. Check the response deadline.
5. Gather the requested documentation.
6. Review your original tax return.
7. Identify which claims you can substantiate.
8. Get professional advice if you are unsure how to respond.
9. Do not provide information without understanding what you are being asked to establish.
10. Respond within the required timeframe.

If the ATO requires records, taxpayers may be given a specified period to produce them, and failing to provide required substantiation can affect whether an expense remains deductible.

Create Your Own Pre-Audit Checklist

You don’t need to wait for an ATO letter to perform a basic health check of your tax records.

At least once a year, ask:

Records

• Are my receipts and invoices organised?
• Are my electronic records backed up?
• Have I retained the required records?

Deductions

• Can I prove each significant deduction?
• Are my work-related percentages supported?
• Have I included any reimbursed expenses incorrectly?

Vehicle

• Are my odometer and logbook records complete?
• Can I explain my work-related kilometres?

Phone and home office

• Can I demonstrate how I calculated my work-related use?
• Do I have supporting bills and records?

Equipment

• Do I have invoices and evidence of work use?
• Are depreciation calculations supported?

Overall

• Could I explain my major claims if the ATO asked tomorrow?

If the answer is yes, you are already taking an important step towards being audit-ready.

Why Professional Advice Can Help

An accountant can do more than prepare and lodge a tax return. They can also help you understand whether your records adequately support your deductions and identify areas that may require additional documentation.

John Saade and the team at Latitude Accountants regularly deal with tax matters where substantiation and clear evidence are important. Having your records reviewed before a problem arises can give you greater confidence in your tax position.

Good preparation does not guarantee that the ATO will never review you. However, it can make it much easier to explain and substantiate your position if questions arise.

Frequently Asked Questions About Preparing for an ATO Audit

Can the ATO audit my tax return even if I have done nothing wrong?

Yes. An ATO review or audit does not automatically mean that the ATO has determined that you have made an incorrect claim. You may be asked to provide information or evidence supporting particular items in your return.

How long should I keep tax deduction records?

For many work-related expenses, records generally need to be retained for five years, although different rules can apply to particular types of records.

Can I keep my receipts electronically?

Yes. The ATO accepts electronic records, including clear photographs or copies of written evidence, provided they meet the relevant requirements.

What should I do if I realise I made a mistake before an audit?

Don’t ignore it. Speak with your accountant or tax adviser about the circumstances and the appropriate way to address the issue. The correct approach can depend on the nature of the error and your individual circumstances.

Can an accountant help if I receive an ATO audit letter?

Yes. An experienced accountant can help you understand what the ATO is requesting, review your supporting records, and assist you in preparing an appropriate response.

Get Prepared Before the ATO Comes Knocking

The strongest defence during an ATO review is not scrambling to find receipts after receiving an audit letter. It is maintaining accurate records and making sure your deductions can be supported from the beginning.

If you are concerned about your tax deductions, record-keeping or an ATO review, Latitude Accountants can help you understand your position and prepare appropriately.

Latitude Accountants

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Disclaimer

This article provides general information only and does not constitute financial, tax, legal or business advice. Tax rules and requirements can change, and the appropriate treatment depends on your individual circumstances. Speak with a qualified accountant or tax adviser before making decisions about your tax affairs.