Every year, the Australian Taxation Office (ATO) contacts over one million Australian taxpayers to clarify or question information provided in their tax returns. This is usually prompted by what has, or has not been, included (or excluded) in a tax return. This might include unreported income, unusually high deductions claimed, or potentially non-business related expenditure. Whilst the ATO has been relatively “understanding and sympathetic” during the pandemic (yes, many taxpayers have received leniency in mistakes made in reporting to the ATO, as well as concessions on interest and penalties), the ATO is reverting to a more assertive approach to its compliance program.
The ATO has many tools to assist in identifying potential non-compliance which includes data-matching and ATO-prefilling of information. You can read the specifics on these triggers in the ATO tax audit article written by our colleague, and one of the Bishop Collins resident tax experts, Tim Ricardo, here.
Despite accurate and honest declarations, even those completed with the assistance of a qualified accountant, a taxpayer can still be fortunate enough to be selected for a tax audit or review by the ATO. This occurs when the ATO recognises you, or your business, as a compliance risk. Initially, you will get notified of a tax review. The purpose of a tax review is to determine if any compliance issues need to be further examined. A tax review is usually conducted by an ATO delegate over the phone or face-to-face with a view to clarifying elements of your tax return. You’ll get the chance to resolve any issues and avoid escalating the matter to a full tax audit.
If the compliance risk is found to be significant, the outcome of a tax review can lead to a full tax audit where the ATO will further scrutinise your tax affairs. The ATO may request records for up to 5 years from the date of lodgement, as well as conduct intensive analysis on business transactions and interview staff. Unfortunately, getting audited by the ATO isn’t a relaxing affair – it can be a stressful and intimidating process – even more so if you’re not adequately prepared. Frankly, the best way to mitigate this problem is to take appropriate measures to prevent it from happening in the first place.
Top tip: It is also important to note that although some tax audits are random selections, some are triggered by certain factors.
What Factors Could trigger a Tax Audit?
There are numerous factors which might trigger a tax audit. However common factors (in no particular order of preference) include:
- Running a cash business. The ATO targets businesses that make a lot of cash transactions because they are perceived to be at a higher risk of not declaring all of their income.;
- Not paying staff enough superannuation;
- Discrepancies between the tax return and business activity statements (BAS);
- Poor record of lodging tax returns, including several years’ of returns outstanding. You may be perceived as not taking compliance obligations seriously.
- Significant fluctuations in income and expenses between years. Mismatches in income, such as capital gains, dividends, and foreign income can be readily identified by the sophisticated data matching systems used by the ATO. The ATO can also cross check your tax return against information provided by businesses and financial institutions you’ve transacted with. Excessive work-related deductions will raise concerns with the ATO. Note that a deduction can only be claimed in the year it is incurred. Claiming for deductions you are not entitled to, claiming the same deduction twice and poor record keeping are at the forefront of the ATO surveillance regime.;
- Financial performance above or below industry benchmarks – you or your business might be considered an outlier;
- Income inconsistent with assets (not just business, but personal ones as well!). This includes inconsistencies between your lifestyle and your reported income and unexplainable surprise wealth. The ATO can assess your assets and work out how much income you need to maintain your current lifestyle;
- Consistently reporting operating losses;
- International transactions and dealings.
5 Tips to Reduce the Risk
Our top 5 tips to reducing the risk of an ATO audit are:.
1. Recording ALL Taxable Income
Include all taxable income in your tax return from all sources. This includes business income, capital gains (e.g. on assets such as property and investments (i.e. shares)), cash transactions, foreign income from property, shares or employment and bank interest.
2. Only Claim Deductions you are Entitled to
The deduction must be directly related to earning assessable income. Deductions can only be claimed on work-related expenses. Ensure you keep good records to prove your expenses and their relationship to being both work-related and connected to earning income.
3. On-Time Tax Lodgements
Ensure tax lodgments are on time and up-to-date. Build a positive image for you and your business by lodging your tax returns, BAS, and FBT on time. Review your tax returns and reconcile your BAS regularly to ensure there are no variances.
4. Maintain Accurate Records
Maintaining accurate records and keeping invoices and receipts is a must. Keep your personal and business expenditure separate to reduce the likelihood of claiming a personal expense as a business expense. Have minimal variances between tax returns and BAS.
5. Pay Super On-time
Pay the correct amount of superannuation on time for your employees. Note that directors can be held personally liable for unpaid superannuation contributions as well.
BONUS: Insure Yourself!
Take out an audit insurance policy. Having audit insurance in place can take the pressure off by not having to worry about the professional fees which will be incurred in handling an ATO audit.
Handy hint: An audit insurance policy for tax compliance covers only the professional costs in reviewing and responding to the ATO audit program. This insurance does not cover the direct and indirect costs of unpaid tax liabilities, penalties and interest. Again, more incentive to get it right the first time.
If The Inevitable Happens…
It always helps to be honest and upfront with the ATO and own up to your mistakes. Your cooperation with the ATO during a tax audit will be looked upon favourably. In many cases, the ATO has maintained leniency to taxpayers who have cooperated in full and conceded an inadvertent omission or error.
Speak to Bishop Collins about Tax, Audit and Risk Management
The experts are here to help! It’s simple; with Bishop Collins Accountants, there are no surprises. We listen. We educate. We deliver. We provide solutions to protect your assets, and assist you with minimising your tax and moving toward your goals. Speak with one of our team today.
Please reach out to us at Bishop Collins if you would like to seek professional advice on your tax needs.