What the ATO's Systems Are Actually Looking At

ATO compliance reviews are not random. The ATO uses automated data-matching systems that cross-reference BAS figures against multiple other data sources simultaneously. The most consistent triggers are income reported on the BAS not reconciling to the income tax return for the same period, PAYG withholding on the BAS not matching the wages reported through STP, and bank deposits that do not align with declared sales. Any of these mismatches can generate an automated compliance letter without a human ever reviewing the file.

Industry benchmarks are the second major mechanism. The ATO publishes financial ratios by industry, covering things like cost of goods to turnover, labour costs as a percentage of revenue, and gross profit margins. When a business sits outside those benchmarks without an obvious explanation, it flags for review. This is especially common in cash-heavy industries including construction, hospitality, and the trades. A plumber whose reported income looks unusually low relative to their bank deposits is a pattern the ATO's system is specifically designed to notice.

The accounting method election is a less obvious trigger but a real one. Businesses with GST turnover under $10 million can elect to report on a cash basis. When they do, GST is reported when cash is received or paid, not when invoices are issued. If the software is set to accrual but the client registered as a cash reporter with the ATO, every BAS lodged will report figures on the wrong basis. The ATO can detect this because the timing of reported figures does not match the patterns they expect from a cash reporter. Updating the election and correcting the affected BAS periods is the only proper fix.

The Errors That Appear Most Often

Wrong GST category coding is the most common individual error. The main categories that cause problems are claiming GST credits on wages and superannuation, which carry no GST, coding overseas software subscriptions incorrectly as covered in an earlier post in this series, and applying GST to GST-free supplies or vice versa. Each of these flows directly into the 1A or 1B fields on the BAS and produces a figure the ATO can compare against industry norms and third-party data.

Missed or incorrect PAYG withholding is the second most frequent issue. This happens most often when a client pays contractors without checking whether an ABN was quoted, or when bonus payments or back-pay are processed outside the normal payroll cycle and not captured in either the STP submission or the BAS for that period. The ATO cross-references employer STP data against employee tax return data automatically, so a withholding figure that does not match what employees declare creates a flag at both ends.

Large variances between consecutive BAS periods without a business reason generate their own flags. A business reporting $200,000 in sales one quarter and $80,000 the next will attract attention if there is no corresponding explanation like seasonality, a completed project, or a change in business activity. Firms that note significant period-on-period variances in a client's file before lodgement and can explain them are in a much better position if the ATO asks.

The Takeaway

Finding a BAS error after lodgement does not automatically mean an audit is coming, but it does mean the window for acting cheaply is closing. Voluntary disclosure made before the ATO initiates contact can reduce shortfall penalties to as low as 5%. Errors found during an ATO audit can attract penalties up to 75% of the shortfall for deliberate errors. The practical habit that prevents most of these situations is a pre-lodgement reconciliation: check that BAS income reconciles to the accounting records, that PAYG figures match STP submissions, and that the accounting method in the software matches what the ATO has on file. These three checks take fifteen minutes and catch the errors that generate compliance letters.