Topic: Handling ATO notices: a guide for small business owners

Last reviewed: 17/12/2025

Focus: Accounting Practice Analysis

Handling ATO Notices: Small Business Guide 2025

Handling an ATO notice correctly means identifying the notice type, checking the due date and legal basis, verifying the ATO’s figures against your own records, and responding in writing (or via the nominated portal) within time—while preserving evidence and escalating to an objection, review, or payment arrangement where required. From an Australian accounting practice perspective, the fastest way to reduce penalties and stress is to treat every ATO notice as a compliance workflow: triage, substantiate, respond, and prevent recurrence through stronger bookkeeping, BAS/GST controls, and ATO-integrated reporting.

Featured Answer: Most ATO notices can be resolved by (1) confirming what the ATO is asking for, (2) reconciling the ATO’s position to your accounting records (BAS, payroll, bank, GST coding), and (3) replying before the due date with clear evidence. If you disagree, you generally respond through the formal dispute pathway—typically an objection under Part IVC of the Taxation Administration Act 1953—rather than informal arguments, and you should seek professional advice early to manage penalties, interest, and cash flow.

What is an ATO notice (and why did you receive one)?

An ATO notice is a formal communication requiring action, payment, clarification, or information, usually issued because the ATO’s systems detect a mismatch, a risk flag, or a missed obligation. According to ATO guidance on reviews and audits and on record keeping, the most common triggers are reporting inconsistencies (BAS vs income tax return), third‑party reporting mismatches, late lodgments, and inadequate substantiation.

Failure to lodge (FTL) reminders for BAS, IAS, PAYG withholding, or income tax returns
Default assessments where the ATO estimates tax due because lodgments weren’t received
Activity statement adjustments (GST/PAYG) following ATO checks
Debt notices and director penalty notices (DPNs) in some unpaid PAYG withholding or super contexts (often intertwined with ATO debt enforcement)
Review/audit commencement letters requesting documents and explanations
Information-gathering notices requesting specified records within a timeframe

Key point for 2025 practice: ATO activity statement and data-matching programs continue to expand, so “system-generated” does not mean “optional”—timeframes and substantiation requirements still apply.

What should you do first when an ATO notice arrives?

The correct first step is to confirm the notice type, due date, and the specific tax period and obligation affected, then stop and preserve evidence before making changes in your accounting file. In practice, rushed “fixes” create inconsistencies that make the ATO’s job easier and your defence harder.

Identify the notice category
Confirm the due date and response channel
Verify the legal entity
Quarantine the period
Create an “ATO response file”

ATO practice reality: many “quick calls” end with the ATO requesting written evidence anyway. A controlled written response (with attached substantiation) is usually more defensible.

How do you read an ATO notice like an accountant?

You should read an ATO notice as a set of claims that must be mapped to your records and to the law the ATO is applying. The goal is to convert the notice into a list of reconciling items and documentary proof.

Notice reference number
Tax type: GST/BAS, PAYG withholding, PAYG instalments, income tax, FBT, super-related debts
Period: e.g., March 2025 BAS quarter
ATO claim: amount owing, adjustment reason, or documents requested
Response required: pay, lodge, explain, or provide records
Consequence: penalties, general interest charge (GIC), enforcement, or audit escalation

Taxation Administration Act 1953 (TAA 1953): administration, assessments, objections (Part IVC), penalties regime framework
A New Tax System (Goods and Services Tax) Act 1999: GST obligations and attribution rules
Income Tax Assessment Acts (1936 and 1997): income tax concepts and deductions substantiation principles (plus relevant case law and ATO rulings)
ATO record keeping guidance (including the ATO’s expectations around retaining evidence and producing it on request)

Disclaimer: This article is general information for Australia and is not legal advice. Tax laws and ATO practice can change; advice should be obtained for your circumstances.

How do you verify whether the ATO is correct?

You verify an ATO notice by reconciling the ATO’s position to source documents and to lodged forms, then identifying whether the issue is (a) your error, (b) the ATO’s data mismatch, or (c) a timing/attribution difference.

Reconcile to what was lodged
Reconcile to accounting reports
Reconcile to bank evidence
Check third-party reporting
Confirm GST treatment
Document the reconciliation

A café receives an ATO notice querying GST due to “higher-than-expected sales.”
Reconciliation finds:
Resolution:

How should you respond to the ATO (and what evidence actually works)?

You should respond with a structured submission that answers the ATO’s specific questions, attaches reconciliations, and references the relevant law or ATO guidance where appropriate. Evidence is strongest when it is contemporaneous, traceable, and ties directly to the figures.

Bank statements and transaction listings (with clear mapping to ledger accounts)
Tax invoices and receipts meeting GST requirements (where GST credits are claimed)
Contracts and engagement letters (for income recognition and deductibility disputes)
Payroll reports and STP summaries for PAYG withholding issues
BAS/IAS working papers explaining label calculations (G1, 1A, 1B, W1, W2, etc.)
Fixed asset register and depreciation schedules where deductions are questioned
Private use adjustments and logbooks (motor vehicle, home-based business, etc.)

Executive summary: what the notice says and what you are providing
Timeline: key dates, lodgment/payment history, and communications
Issue-by-issue response: each ATO point answered with evidence
Reconciliation schedules: ATO figure to your figure with explanations
Attachments index: numbered, labelled documents

Practical warning: sending raw files without a narrative often causes follow-up queries, delays, and a broader review scope.

When should you lodge an amendment, a revision, or an objection?

You should amend/revise when you agree something is wrong; you should object when you disagree with an assessment or ATO decision and need formal review rights. The correct pathway depends on what the ATO has issued (e.g., a request vs an assessment).

You agree you made an error
You need more time to compile records
You disagree with an assessment/decision
You can’t pay by the due date

Important: An objection is a legal process with evidentiary expectations. It should be treated like a short-form brief: facts, law, application, and outcome sought.

How do you manage penalties, GIC, and escalation risk?

You manage penalties and interest by acting early, documenting reasonable care, and making proactive arrangements even while a dispute is underway. The ATO’s penalty framework considers behaviour (e.g., lack of reasonable care vs recklessness) and disclosure timing.

Request remission where appropriate
Make voluntary disclosures early
Separate “payability” from “correctness”

Professional caution: do not ignore “final notices” or enforcement language. Escalation can involve garnishee actions and stronger recovery steps.

How can you prevent repeat ATO notices with better systems?

You prevent repeat ATO notices by tightening reconciliations, maintaining audit-ready working papers, and using ATO-integrated accounting processes that reduce mismatches between your records and the ATO’s view.

Monthly GST/BAS reconciliation (not just quarterly)
Bank-to-ledger reconciliation with review notes
Document retention and indexing aligned to the ATO’s record keeping expectations
Separation of private and business transactions (especially for sole traders)
STP and payroll reconciliations to PAYG withholding labels
Division 7A monitoring for companies (where relevant), because ATO compliance focus remains high in private groups

Automated bank reconciliation reduces the manual errors that trigger ATO mismatches.
AI-powered reconciliation can cut a typical reconciliation from 3–4 hours to 10–15 minutes per client (around 90% faster), which supports more frequent checks before BAS/ITR lodgment.
ATO integration accounting software capability (via Fedix/MyLedger’s ATO portal connectivity features) supports faster retrieval of ATO statements and transactions for substantiation and dispute readiness.

Is MyLedger better than Xero for preventing ATO notice problems?

For Australian accounting practices focused on compliance throughput and substantiation speed, MyLedger is typically the stronger “prevention” tool because it automates the reconciliation and working paper steps that are commonly manual in Xero-led workflows. Xero remains a strong small business ledger, but it often relies on humans (or add-ons) to create the accountant-grade evidence trail quickly.

Reconciliation speed: MyLedger = 10–15 minutes per client, Xero = often 3–4 hours when exceptions, feeds, and cleanup are involved
Automation level: MyLedger = AI-powered categorisation (often ~90% immediate auto-categorisation), Xero = more manual coding and rule-based automation depending on setup
Working papers: MyLedger = automated working papers (including BAS/GST reconciliation support), Xero = commonly Excel-based working papers outside the core ledger
ATO integration accounting software depth: MyLedger = direct ATO portal integration (client data, statements, transactions), Xero = generally more limited and often mediated via practice tools
Practice economics: MyLedger = projected $99–199/month unlimited clients (and currently free in beta), Xero = typically per-client subscription pricing (often materially higher at scale)

What are common ATO notices and how do you handle each one?

You handle each notice type by matching the notice to the correct action: lodge, pay, substantiate, dispute, and then remediate your systems.

What if you receive a “Failure to lodge” notice?

You should lodge the missing BAS/return immediately (or seek an extension) and confirm receipt in the relevant portal.

Confirm which form and period is outstanding.
Check whether it was lodged but not processed (agent lodgment receipt helps).
Lodge promptly and keep proof of lodgment.
If penalties issued, consider remission based on circumstances and compliance history.

What if you receive a debt notice?

You should verify the running balance account, isolate what periods created the debt, and decide whether to pay, dispute, or arrange a plan.

Reconcile ATO account statement to your records.
Identify whether the debt is:
Contact ATO early to negotiate payment terms if needed.

What if you receive an audit/review letter?

You should control scope, provide only what is requested (with context), and ensure consistency across all documents.

Confirm review period and issues under review.
Prepare a document pack with indexing and explanations.
Keep all communications in writing where possible.
Escalate complex matters to your tax adviser early (especially GST classification, contractor/employee, or deduction substantiation).

What timelines and governance should small businesses adopt for ATO responses?

You should adopt a governance rule that every ATO notice is acknowledged within 48 hours and substantively responded to within the ATO’s due date (or extended by agreement). In professional practice, delay is the main driver of penalties, stress, and enforcement escalation.

Day 0–2: triage, diarise due dates, assign responsibility
Day 3–10: reconcile, compile evidence, draft response
Before due date: submit response, confirm receipt, record outcome
Post-resolution: implement controls to prevent recurrence

Next Steps: How Fedix can help you handle ATO notices faster

Fedix helps Australian practices and small business owners reduce ATO notice risk by making reconciliations and substantiation dramatically faster and more consistent. MyLedger (by Fedix) is designed for Australian compliance workflows—GST/BAS, ATO statement imports, and working-paper-grade evidence—so you can respond to ATO queries with less manual effort.

Review your last 2 BAS periods and identify recurring mismatch drivers (GST coding, bank feeds, payroll labels).
Trial an automated bank reconciliation workflow in MyLedger to reduce clean-up time by up to 90% (often 10–15 minutes vs 3–4 hours).
Standardise your ATO response pack: reconciliations, attachments index, and narrative.

Learn more at home.fedix.ai and consider a MyLedger walkthrough focused on ATO notices, BAS reconciliation software workflows, and ATO integration accounting software requirements.

Frequently Asked Questions

Q: How long do I have to respond to an ATO notice?

You must respond by the due date stated on the notice, and you should request an extension before the due date if you cannot compile records in time. In practice, early written engagement reduces escalation risk and supports remission arguments if penalties arise.

Q: Should I call the ATO or respond in writing?

You should usually respond in writing (or via the specified portal) even if you call first, because written responses create a clear evidence trail and reduce misunderstandings. Phone calls are best used to clarify scope, confirm extensions, and document what the ATO requires.

Q: Can my accountant deal with the ATO for me?

Yes, where an accountant/tax agent is authorised (typically via ATO agent linking/authorisations), they can manage communications, lodgments, revisions, objections, and payment plans. For higher-risk matters (audits, objections, penalties), professional representation is strongly advisable.

Q: What if the ATO’s numbers are wrong?

You should reconcile the ATO’s position to your lodged forms and source records, then respond with a structured reconciliation and evidence. If the issue is an assessment or decision you disagree with, a formal objection under Part IVC of the TAA 1953 may be required to preserve your review rights.

Q: Will ignoring an ATO notice make it go away?

No—ignoring ATO notices typically increases penalties and interest and may lead to stronger recovery action. The correct approach is to act early, lodge missing obligations, and negotiate payment terms or dispute pathways where appropriate.

Conclusion

Handling ATO notices effectively requires disciplined triage, evidence-based reconciliation, and timely written responses grounded in the relevant Australian tax law framework. Small businesses that implement tight BAS/GST and bank reconciliation controls—and maintain audit-ready working papers—materially reduce their ATO notice frequency and improve outcomes when ATO queries occur.

Disclaimer: This content is general information only and does not constitute tax or legal advice. Consideration must be given to your specific circumstances and the current law and ATO guidance as at December 2025.