In brief
ATO review activity is usually about reconciling information, understanding unusual results and checking evidence. For sole traders, the strongest response is complete income reporting, disciplined separation of private and business costs, and records that connect bank activity, platforms, BAS and the tax return.
How questions commonly arise
The ATO receives information from banks, digital platforms, payment processors, government bodies and other third parties. Data matching can identify differences between amounts reported by a payer or platform and amounts included in activity statements or an income tax return. A difference is not automatically wrongdoing: timing, refunds, transfers and reporting classifications can all require explanation.
Review risk can also increase when returns and BAS do not reconcile, lodgments are repeatedly late, margins change sharply without context, or business and private transactions are mixed. Avoid describing a single item as an automatic “audit trigger”. The ATO considers information in context and may begin with a request for clarification or documents.
Income completeness and bank differences
Include cash, card, online platform, marketplace, foreign and barter income where applicable. Reconcile sales systems and merchant settlements to bank deposits, allowing for processor fees, refunds, chargebacks and settlement timing. Transfers between your own accounts and loans should be identified so they are not mistaken for sales.
Where gross platform receipts differ from net bank deposits, retain statements showing the deductions. A year-end reconciliation should explain the path from sales records to GST labels and assessable income. Unexplained bank deposits are much easier to address when source documents and notes exist at the time.
Deductions and substantiation
A cost is not deductible merely because it was paid from a business account. Private groceries, ordinary clothing, family travel, fines and private portions of phone, internet, home or vehicle costs need appropriate treatment. Mixed-purpose expenses require a reasonable apportionment supported by evidence.
Motor vehicle claims deserve particular care because the available methods and records depend on the taxpayer and vehicle circumstances. Contractor payments, wages and super should also be checked against the actual relationship. Calling a worker a contractor in an invoice or agreement does not settle employee, super or PAYG obligations.
Losses, GST and PAYG consistency
A tax loss from business activity may be subject to the non-commercial loss rules before it can reduce other income. Keep evidence of the activity, tests, exceptions and any deferred loss calculation. Do not simply net a loss against salary because the bookkeeping report shows a negative result.
Compare BAS sales and purchases with the annual accounts, GST reports and tax return. Differences can be valid because GST and income-tax rules are not identical, but they should be documented. Review PAYG instalments, payroll reports and contractor reporting where relevant, and correct classification errors rather than carrying them forward.
Correcting problems early
If an omission or overclaim is found, quantify it across affected periods and discuss voluntary correction. An amendment or BAS revision may be appropriate. Early, complete correction is generally more manageable than waiting for an information request and then reconstructing several years under time pressure.
Keep the explanation factual. Record what happened, the periods affected, how the corrected amount was calculated and what process changed. Tax advice can address reporting and substantiation; employment status and contractual disputes may also require legal advice.
A practical review sequence
Begin with source documents rather than a desired answer. Put the relevant agreements, statements, invoices, bank transactions and operational reports in date order. Reconcile totals before analysing tax treatment. This separates a missing-record problem from a technical tax question and makes timing differences easier to explain.
Next, write down the actual facts in plain language: who performed the work, who paid, what was supplied, when an amount was earned or spent, and whether any private purpose was involved. Compare those facts with the official guidance linked below. Where an assumption is uncertain, label it and obtain the missing evidence instead of allowing it to become an undocumented conclusion.
Finally, record the treatment adopted, the reason, any calculation and who reviewed it. Add the issue to the regular bookkeeping or year-end checklist if it can recur. Consistent monthly controls usually provide stronger evidence and better decisions than a large reconstruction after the end of the year.
Keep the scope of advice clear
Accounting records often sit beside contracts, employment arrangements, lending decisions, licences and personal financial choices. A tax outcome does not by itself establish that an arrangement is legally effective, commercially suitable or compliant with another regulatory regime. Raise connected issues early so the right adviser can be involved.
For sole traders matters, Demeter can help organise the tax facts, reconcile the records, identify the applicable reporting questions and explain the information needed for advice. Legal rights and contract interpretation belong with a lawyer. Credit assistance and financial product recommendations require appropriately licensed advice. The aim is a coordinated decision, not one professional answer stretched beyond its proper scope.
Review the position again when the parties, systems, contracts, ownership, work pattern or relevant law changes. A conclusion supported for one income year should not be carried forward automatically when the underlying facts are different. Keep the final workpaper with the return or activity statement records, including copies of the guidance relied on and any professional advice. When a later transaction differs, return to the source facts instead of forcing it into the earlier treatment. That small discipline makes future reviews faster and helps everyone understand where judgement was used.
Practical checklist
Put the records and decisions in order.
- Reconcile all sales channels to bank and merchant statements
- Separate transfers, loans and owner contributions from income
- Review private or mixed-purpose expenses
- Check GST labels against the annual accounts
- Document motor vehicle and home-office methods
- Review worker classification, PAYG and super
- Assess non-commercial loss treatment
- Correct identified errors promptly
Discuss with an adviser
Questions worth resolving.
- Can every significant deposit be explained?
- Why do BAS sales differ from tax-return income?
- Are mixed expenses apportioned on a supportable basis?
- Do contractor arrangements match actual working practices?
- Should any prior period be revised or amended?
Official sources