Receiving a letter from the Australian Taxation Office (ATO) asking you to explain your tax return can be stressful. Your first reaction may be to wonder what you have done wrong or whether you are about to receive a large tax bill.

However, an ATO audit letter does not automatically mean you have done anything wrong. It means the ATO wants to take a closer look at particular information reported in your tax return.

In a recent discussion, John Saade, CEO of Latitude Accountants, walked through a real redacted ATO audit letter issued to an individual taxpayer and explained what the ATO was looking for, why certain deductions attracted attention, and what taxpayers should do when they receive an audit letter.

The key lesson is simple: if you claim a tax deduction, you need to be able to prove that you are entitled to it.

What Is an ATO Audit Letter?

An ATO audit letter is correspondence notifying you that the ATO is reviewing specific information in your tax return.

The ATO may ask you to provide supporting documents, explanations, and other evidence relating to particular income or deduction claims.

An audit does not necessarily mean the ATO has decided your tax return is incorrect. It allows you to provide evidence supporting the information you reported.

The most important thing is not to ignore the letter.

You should carefully check:

• The income year being reviewed
• The tax return information the ATO is questioning
• The deductions or expenses being reviewed
• The documents the ATO has requested
• The deadline for responding
• The method the ATO has provided for submitting information

If you receive unexpected correspondence, make sure it is genuinely from the ATO before providing sensitive information.

Why Might the ATO Select Your Tax Return for an Audit?

One important point highlighted by John Saade is that unusually high deductions can attract attention.

The ATO uses data and information to identify tax returns that may warrant further review. If your deductions appear significantly higher than what would typically be expected for people in similar circumstances, this may prompt additional scrutiny.

For example, imagine a management consultant claiming tens of thousands of dollars in work-related expenses while the typical claim for that occupation is considerably lower.

A large deduction does not automatically make the claim incorrect. There may be legitimate reasons for the amount.

However, the higher the claim, the more important it becomes to have strong evidence supporting:

• What you purchased
• How much you paid
• Why you purchased it
• How it relates to earning your income
• What portion was work-related
• Whether you were reimbursed
• How you calculated the deduction

This is why good record-keeping should start before an audit ever happens.

What Does the ATO Want You to Prove?

When reviewing work-related expenses, the ATO generally expects taxpayers to be able to demonstrate that their claims satisfy the relevant deduction requirements.

The ATO’s three basic rules for work-related expenses are that:

1. You spent the money yourself and were not reimbursed.
2. The expense is directly related to earning your income.
3. You have a record to prove the expense.

If an expense has both a work and private component, you generally need to claim only the work-related portion.

This means simply telling the ATO that an expense was for work may not be enough. You need evidence supporting your claim and, where necessary, an explanation of how you calculated the work-related portion.

Why Substantiation Is So Important During an ATO Audit

Substantiation is one of the biggest themes in an ATO audit.

Your records should allow you, your accountant, and the ATO to understand how you arrived at the deduction claimed.

Depending on the expense, supporting evidence may include:

• Receipts and tax invoices
• Employer letters or confirmations
• Bank and financial records
• Travel records
• Vehicle logbooks
• Odometer readings
• Mobile phone records
• Work diaries
• Depreciation schedules
• Calculations showing the work-related percentage
• Evidence showing the expense was not reimbursed

The ATO states that written evidence for expenses generally needs to show information such as the supplier, amount, nature of the goods or services and relevant dates. Records generally need to be kept for five years from the date you lodge your tax return.

A bank statement can demonstrate that money left your account, but it may not always contain enough information by itself to establish what the payment was actually for. The supporting documentation needs to substantiate the deduction.

Common Expenses the ATO May Question

An audit can cover different categories of deductions depending on the circumstances.

Car and Motor Vehicle Expenses

If you claim vehicle expenses, you may need evidence showing:

• You own or use the vehicle
• The vehicle was used for work
• The work-related percentage
• Relevant odometer readings
• Vehicle expenses and receipts
• Your method of calculating the deduction
• A valid logbook where required

A logbook method requires careful record-keeping. Your records should support the work-related use percentage you have claimed.

Work-Related Travel

Travel deductions may require receipts and other evidence demonstrating that the travel was connected with your work.

Depending on the circumstances, this can include:

• Accommodation records
• Transport receipts
• Parking receipts
• Toll records
• Taxi or rideshare records
• Details explaining the work purpose of the travel

The ATO confirms that work-related travel expenses must be incurred while performing work duties and that only the work-related portion can generally be claimed.

Work Clothing and Laundry

Not every item of clothing you wear to work is automatically deductible.

There is an important distinction between ordinary clothing and eligible work-related clothing.

Depending on the circumstances, deductions may apply to occupation-specific clothing or certain protective clothing and uniforms. However, taxpayers need to satisfy the relevant requirements and maintain appropriate records.

Mobile Phone and Home Office Expenses

Mobile phones and working-from-home expenses are common areas where taxpayers need to calculate their work-related use carefully.

If your phone is used for both work and private purposes, you generally cannot simply claim the entire bill. You need to determine the work-related portion and keep records supporting how you calculated it.

Similarly, working-from-home claims require appropriate records and calculations depending on the method used.

What Should You Do When You Receive an ATO Audit Letter?

If you receive an audit letter, John Saade recommends taking the situation seriously without panicking.

1. Read the Letter Carefully

Identify exactly what the ATO is reviewing and what information it wants.

Do not assume the entire tax return is being questioned if the letter addresses only specific deductions or transactions.

2. Check the Deadline

ATO correspondence will generally specify when you need to respond.

Do not put the letter aside and hope the issue disappears. Missing the deadline can make the situation more difficult.

3. Gather Your Evidence

Review your tax return against your records.

Work through each deduction and ask:

• Do I have the receipt?
• Can I prove I paid it?
• Was I reimbursed?
• Was it directly related to earning my income?
• Can I explain how I calculated the work-related portion?
• Would my employer be able to confirm the work requirement if necessary?

4. Understand Your Position Before Responding

Do not send information to the ATO without first understanding what you have claimed and whether you can substantiate it.

If you discover that something may have been claimed incorrectly, seek professional advice before deciding how to proceed.

What Happens If You Cannot Substantiate Your Deductions?

If you cannot provide adequate evidence supporting a deduction, the ATO may determine that the claim should be reduced or disallowed.

Depending on the circumstances, this can result in an amended assessment and additional tax becoming payable. Penalties and interest may also apply.

This is why maintaining records throughout the year is much easier than trying to reconstruct years of expenses after receiving an audit letter.

The ATO provides tools such as myDeductions to help taxpayers keep records of expenses and receipts.

How an Accountant Can Help With an ATO Audit

An experienced accountant can help you understand what the ATO is asking for, review your supporting documentation, and prepare an appropriate response.

More importantly, good tax advice should begin before an audit.

When deductions are reviewed during tax preparation, an accountant can help identify whether an expense is genuinely deductible, whether the work-related portion has been calculated correctly, and whether sufficient records have been retained.

At Latitude Accountants, our approach is proactive rather than simply appearing at tax time. The goal is to help clients understand their numbers, maintain appropriate records and make informed decisions about their tax affairs.

Frequently Asked Questions About ATO Audit Letters

Does receiving an ATO audit letter mean I have done something wrong?

No. An audit means the ATO wants to examine particular information in your tax return. You may be able to resolve the matter by providing appropriate evidence supporting your claims.

What should I do first when I receive an ATO audit letter?

Read the letter carefully, identify what the ATO is reviewing, note the response deadline, and gather the requested records. Consider speaking with an accountant before responding.

How long should I keep tax deduction records?

The ATO states that records for work-related expenses generally need to be kept for five years from the date you lodge your tax return.

Can the ATO reject a tax deduction if I don’t have a receipt?

Depending on the expense and applicable substantiation rules, you may need written evidence or other records demonstrating that you incurred the expense and are entitled to the deduction. The requirements can vary depending on the type of expense.

Can an accountant help me respond to an ATO audit?

Yes. An accountant can help you understand the audit request, review your records, assess your deductions, and assist with preparing an appropriate response to the ATO.

Should I ignore an ATO audit letter if I believe my tax return is correct?

No. Even if you believe every deduction is legitimate, you should respond within the required timeframe and provide the evidence requested by the ATO.

Need Help With an ATO Audit or Your Tax Return?

Received an ATO audit letter or unsure whether your tax deductions are properly supported? Latitude Accountants can help you understand what the ATO is asking for, review your records, and guide you through the process.

Our experienced team provides practical accounting and taxation advice to help you stay compliant, prepare the right documentation, and respond to the ATO with confidence. Whether you need help with an audit, a tax return, or ongoing tax advice, we can provide clear guidance tailored to your individual circumstances.

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

Disclaimer

This article is intended for general information purposes only and does not constitute financial, legal, tax or business advice. Tax laws and ATO requirements can change, and the appropriate treatment of an expense depends on individual circumstances. You should speak with a qualified accountant or tax adviser about your specific situation before making decisions or responding to an ATO audit.