ATO Compliance Risks & Red Flags Assessment
Overall, while much of the activity appears standard for a retail/service business, there are several significant red flags related to GST treatment, expense classification, contractor payments, and potentially mixed personal/business expenses that increase the risk of an ATO review or audit. Addressing these proactively is recommended.
Key Risk Areas Overview

High Risk
Contractor classification, GST treatment errors
Moderate Risk
Private expenses, account structure, director loans
Low Risk
Income tax expense treatment
This assessment identifies critical compliance issues requiring immediate attention, moderate concerns needing review, and minor issues to address during regular accounting processes.
Contractor Payments & Classification
HIGH RISK
Significant payments to numerous individuals across several 'Contractor' expense accounts (Accounts 26, 28, 29), particularly for workshop labour. Some related Accounts Payable entries even explicitly mention 'Salaries'.
ATO Concern
The ATO heavily scrutinises contractor arrangements to ensure they aren't disguising employee relationships to avoid PAYG withholding and Superannuation Guarantee (SG) obligations. Paying individuals regularly for core business functions (like workshop repairs or sales) often points towards an employment relationship.
Risk
Misclassification can lead to significant penalties, back-payment of PAYG withholding, and Superannuation Guarantee Charge (including interest and administration fees).
Contractor Classification: Required Actions
Urgently review working arrangements
Assess all individuals paid as contractors against the ATO's employee/contractor criteria (e.g., control over work, ability to delegate, provision of tools, risk).
Verify ABN documentation
Ensure valid ABNs are held and quoted on invoices for all contractors.
Check superannuation obligations
Confirm whether superannuation obligations apply under the expanded SGC rules for contractors.
Prepare supporting documentation
Create contracts and agreements justifying contractor status where applicable. Reclassify as employees if necessary and rectify payroll obligations.
GST Treatment Errors
HIGH RISK Observations
  • Rental Bonds (Account 009) appear to be treated as income with GST applied upon receipt.
  • Rental Bond Returns (Account 357) are treated as an expense with GST credits claimed.
  • Several instances where reimbursements or potentially sales income are credited directly against expense accounts (e.g., Account 023 Accessories on 27/08/24, 24/09/24, 28/03/25).
  • Instances where purchases (Payable Invoices) are coded directly to Revenue accounts (e.g., Account 003 Accessories Sales, 016 Sales).
  • Potential incorrect GST claims on entertainment expenses.
ATO Concerns
Incorrect GST treatment (charging GST on non-taxable items like bonds, claiming credits incorrectly on bond refunds or non-creditable acquisitions, netting income against expenses) distorts GST collected and GST credit figures, leading to incorrect BAS reporting.
Risk Impact
ATO reviews or audits often focus on GST errors, leading to adjustments, penalties, and interest. Netting income against expenses understates both figures and associated GST.
GST Treatment: Required Actions
Immediate Correction
Correct the accounting treatment for Rental Bonds (should be a Liability, GST Free on receipt/refund). Amend past BAS if necessary.
Recode Transactions
Correct the coding for income/reimbursements currently offsetting expense accounts (should go to relevant Income accounts).
Fix Purchase Coding
Correct the coding for purchases currently hitting revenue accounts (should go to COGS/Expense/Asset accounts).
GST Review
Review and correct GST coding on all transactions, especially entertainment and any potentially GST-free supplies. Prepare for potential BAS amendments.
Potential Private Expenses
Moderate-High Risk Observations
Numerous transactions on the AMEX card and potentially the main bank account (BBS Cash Flow) for Woolworths, BWS, Dominos, cafes, Kmart, Super Cheap Auto, Mitre 10, travel (Jetstar, Booking.com, Uber, Didi), and potentially some individual payments. Entertainment expenses (Account 419) are explicitly coded.
ATO Concerns & Risks
ATO uses data matching and benchmarks to identify potential private expenses claimed as business deductions. Credit cards are frequently scrutinised. Claiming private expenses inappropriately inflates deductions and GST credits. Entertainment is generally not deductible.
Risks include disallowed deductions, GST credit adjustments, penalties, and interest. FBT implications could arise if benefits are provided to employees/directors.
Private Expenses: Required Actions
Comprehensive Review
Review all credit card and bank statements meticulously. Isolate any private expenditure and remove it from business accounts (code to Drawings/Director Loan).
Maintain Clear Records
Keep receipts, diaries and other documentation substantiating the business purpose for all potentially mixed expenses (e.g., minor staff amenities from Woolies vs personal groceries).
Correct Entertainment Treatment
Correct the treatment of Entertainment expenses (remove deductions, reverse GST credits, consider FBT).
Account Classification & Structure
Redundant Accounts
Multiple accounts serving the same purpose (e.g., Bank Fees/Merchant Fees, Parts/Parts & Components).
Confusing Account Names
'Labour' and 'Others' used for Sales Revenue categories.
Incorrect Classifications
'Owner A Drawings' coded as a Liability instead of Equity.
Moderate Risk Impact
A poorly structured Chart of Accounts increases the risk of errors, makes audits more difficult, and can obscure the true financial picture.
Recommendation: Review and cleanup the Chart of Accounts for clarity and accuracy. Correct the coding for Owner Drawings (should be Equity). Merge redundant expense accounts. Rename sales accounts clearly.
Loans to/from Directors/Associates
1
Observation
Accounts 901, 902, 903 show transactions with individuals names potentially representing loans or advances. Account 903 appears mixed with travel/expense reimbursements.
2
ATO Concern
Loans between a company and its directors/associates fall under Division 7A rules. Non-compliance (lack of proper loan agreements, minimum repayments not met) can result in deemed unfranked dividends, taxed at personal rates. Mixing expenses complicates tracking.
3
Risk Level
Moderate Risk
4
Potential Impact
Deemed dividends leading to significant personal tax liabilities for the individuals.
Director Loans: Required Actions
Clarify Transaction Nature
Clarify the nature of all transactions in accounts 901, 902, and 903.
Implement Loan Agreements
If they are loans, ensure compliant Division 7A loan agreements are in place before the company's tax return lodgement day.
Calculate Minimum Repayments
Ensure minimum yearly repayments (principal and interest) are calculated and made.
Separate Expense Reimbursements
Separate any expense reimbursements from loan accounts going forward.
Large Manual Journals
1
Moderate Risk Observations
Significant manual journal adjustments noted in Sales accounts (003, 016, 017, 019) and Contractor accounts (28, 29) often described as "Correcting Sales" or "BAS Adjustment".
2
ATO Concerns
While journals are necessary, large or frequent unexplained journals can indicate poor bookkeeping, attempts to manipulate figures, or correction of significant errors, potentially triggering further investigation.
If underlying errors being corrected by MJs are substantial or systemic, it points to broader compliance issues.
3
Action Required:
Action Required: Document the reason and supporting calculations for each large manual journal, especially those impacting revenue or key expense categories. Ensure the corrections accurately reflect the underlying transactions and GST impact.
Income Tax Expense Treatment
Low-Moderate Risk Observation
An ATO refund appears coded as a credit (negative expense) to the Income Tax Expense account (505).
ATO Concern
Incorrect accounting treatment, although the net tax effect might be neutral if handled correctly elsewhere.
Risk
Indicates potential misunderstanding of accounting principles.
Action Required
Re-code tax refunds to the relevant ATO liability/asset account (e.g., ATO Integrated Client Account 831 or potentially equity).
Priority Recommendations
1
Contractor Review
Prioritise assessing all contractor arrangements against employee criteria and address any SGC/PAYG risks immediately. This is likely the highest financial risk area.
2
GST Corrections
Correct the treatment of bonds, expense/revenue netting, purchase coding, and entertainment GST. Consider engaging a BAS agent or tax professional to review and amend past BAS statements if required.
3
Chart of Accounts
Restructure the Chart of Accounts for clarity, merge redundant accounts, and rename accounts appropriately (especially Sales/Revenue accounts).
Additional Recommendations
Expense Substantiation
Implement a stricter process for substantiating all business expenses, particularly those on credit cards or from retailers often associated with private spending.
Division 7A Review
Formalise any director/associate loans with compliant agreements and ensure minimum repayments are being made.
Manual Journal Documentation
Document the purpose and calculations for all significant manual journals, especially those adjusting sales or correcting BAS figures.
Preparing documentation and correcting these issues now will significantly reduce the risk profile should the ATO decide to conduct a review or audit.
Thank You
We appreciate the opportunity to assist with your tax compliance review. Our team remains available to help implement the recommended actions.