The last financial year has witnessed a record number of tax audits. The Australian Taxation Office (ATO) has increased their scrutiny of all businesses and it would appear that businesses in the $1 – $3 million turnover range have been of particular interest. With the ATO actively stepping up its inspection of business transactions across the board, utmost vigilance must be exercised at all times with the recording of your business transactions.
Access to the latest technological developments are certainly helping the ATO decide which businesses or industries to target for audit. With enhanced data matching software, the ATO can readily cross-reference the declared data against records collected from relevant organisations when processing tax returns. The ATO cross-references with the Department of Transport, Centrelink, Workcover, Superannuation Funds as well as banks and financial institutions.
What’s most concerning is that even if the information declared in your tax return is transparent and thorough, the ATO may still select your business for a tax audit. In our experience, you can expect a “quick” audit to take approximately 28 days. At worst, a complex audit can take 3 – 4 years to fully resolve. The audit process may demand face-to-face meetings with the ATO during which you may be required to present financial records going back five years from the date of the return in question. The personal costs of such a process can be sizable (potentially tens of thousands of dollars), even if your tax lodgments are ultimately deemed valid and correct.
So what exactly triggers an ATO audit? The reasons are many and varied. You may be selected at random, or it could be that your business happens to operate in an industry or sector that the ATO is currently focusing on. It could even be triggered by an anonymous tip-off. But there are definite red flags which can attract the unwanted ATO attention. In order to help you avoid such a stressful, time-consuming and costly tax audit, we’ve put together a list of some triggers you should be aware of.
Typical “Cash” businesses
If you operate a restaurant, takeaway, grocery store, small service provider or similar type business where you’re regularly paid in cash, you’re are more likely to be scrutinised on this area. Should you decide not to declare the cash received products sold or services rendered, your expenses (in terms of percentage of revenue) will register as abnormally high and may trigger a review.
Tip-off from a disgruntled employee or supplier
The ATO takes complaints – be they anonymous or not – from employees regarding the incorrect payment of their superannuation fund very seriously. Such complaints are bound to immediately attract the ATO’s interest. And what may start as a review of your superannuation guarantee obligations can escalate into a full-scale audit, including a review of your income tax, GST and fringe benefits tax (FBT). Be aware that suppliers can also register a complaint should they be dissatisfied.
Performing above or below Industry Benchmarks
Over the years, the ATO has built up a comprehensive database of business activities in Australia. This has allowed it to put benchmarks in place, listing the average income and key expense ratios across many industries and sectors. When your tax return is lodged, it is automatically scanned by the ATO’s cross-referencing software. Should your return register as inconsistent with those of your industry peers, the ATO can view it as an indication of tax compliance issues.
Notable differences in the information provided on your return is one of the most common triggers for a tax audit or review. This includes (but is not limited to) variances in the data on:
- Your businesses’ income tax return and the FBT return detailing employee benefit contributions;
- BAS and Payment Summaries detailing gross wages and PAYG withholding;
- Your businesses’ income tax return and the BAS detailing total sales and expenses.
Data discrepancies can easily be avoided by conducting a thorough reconciliation process for all returns lodged.
Are you always late? Some other Triggers
Other red flags that may raise the ATO’s interest include a history of overdue tax returns and business activity statements; failure to lodge FBT returns if your business lists vehicles among its assets; consistently declaring operating losses; and marked fluctuations in trading performance from one year to the next.
Platinum Accounting & Taxation strongly recommends every business owner to take out Audit Insurance. Consider it equally important as your professional indemnity or public liability insurance, and just as vital. At a nominal annual premium it’s worth the peace-of-mind, knowing your Audit Insurance will cover any professional fees incurred as a result of an audit or review.
Want to get proactive about ensuring your business tax returns and/or practices won’t trigger an unwelcome call from the ATO? Contact Platinum Accounting & Taxation today to make certain your business is fully tax compliant (03) 9746 6479 or join our tribe on Facebook.