- The Australian Taxation Office (ATO) and the ATO audit are usually two of the most dreaded phrases for Australian SMEs.
- However, there are a few tips and tricks and some insightful, accurate and consistent advice we want to share with you to make any interaction with the ATO less stressful for you.
- Intrigued? Check out this article to understand the ATO audit process and how to best prepare for the ATO audit.
As a Tax Agent, this is usually the first thing a client says to me when I tell them I have received a letter from the ATO notifying that they are to be audited. Sometimes the words are more explicit, but the response I get has hardly changed in the 19 years I have been involved in tax.
What is the ATO audit process?
The ATO audit process commences with them first deciding that they will investigate businesses which it considers high risk.
The Australian tax office has published over 100 industry benchmarks. These benchmarks are by industry and show what the Australian tax office expects.
For example, the ATO will expect a profit of 11% ($55,000) for a discount store with turnover (sales) of $500,000. Anything less may have the ATO knocking on doors.
Tax inspectors have also told taxation agents that they intend to concentrate on cash businesses. Inspectors have been known to eat at restaurants, pay in cash and then, at a later date, return to check that their sale has been included in the books.
They will visit a retail store and buy items over a few weeks and pay at different tills and then return to check their sale has been recorded.
The Australian tax office is also concentrating more on lifestyle. If declared income is low but one has a large home, expensive cars and children in private school, the Australian tax office may start asking how this lifestyle has been maintained.
Part of the ATO audit procedures is that they can ask for passports so that they can check holidays and ask how those holidays were paid for.
However, it is not all bad news. Unfortunately or fortunately, depending on which side of the fence you are on, the Australian tax office is severely underfunded. You have to be quite unlikely to get picked for an ATO audit.
But it does happen.
Last year during the ATO audit period, 118,000 cash businesses were investigated and this number will get bigger. It is still a small number considering the total number of businesses in Australia.
How can I avoid an ATO audit?
So, how do you avoid an ATO audit in the first place? Here are
1. Understand industry targets
Each year the Australian tax office targets a different range of industries to focus their attention on. It has been announced that the ATO audit targets for 2014 are small tradesmen (electricians, builders, carpenters, etc) and multinational corporations who attempt to move company profits to offshore tax haven countries.
Before making decisions check to see if your industry is one of the benchmarks published by the Australian tax office. Make sure you are within the ranges expected by the ATO. If you are outside the ranges you may need to come up with a good reason why.
3. Implement good business record keeping
- Ensure you have maintained your books and records properly. The Australian tax office has really emphasised this.
- Make sure your records are up to date and that you have all till receipts (not just ‘Z’ readings), sales invoices, supplier invoices and how and when payments and receipts occurred.
- Third, make sure you file and pay all your Tax returns (BAS, FBT etc) on time. If you are late or cannot make payment, get in touch with the Australian tax office and explain what is happening. They will be more responsive and less likely to investigate.
4. Separate your finances
Lastly, keep your private financial affairs separate from your business affairs. Only use a business bank account and business credit cards for business expenses. If you do use a personal credit card, use it solely for business purposes and not personal.
This is because you do not want to give any indication to the Australian tax office what kind of lifestyle you have. There is also less chance of personal items accidentally being claimed as business expenses especially if you have a bookkeeper or Tax Agent preparing your books.
Remember a small mistake found by a tax inspector can lead to more questions.
What should you do if you are chosen for an ATO tax audit?
There are several things that you can do to assist you if you have to do an ATO tax audit.
1. Get tax audit insurance
Well, get a Tax Agent to do the work and communicate with the Australian tax office. It will be expensive but they are experts and should know what to do. You won’t. It is usually a good idea to take out tax audit insurance so that your Agent’s fees are covered. Seek professional advice from your Tax Agent who should be able to help you.
2. Understand how ATO meetings work
The ATO can ask for a meeting. Try and avoid this if possible (although you may not have an option). The Australian tax office may ask for this meeting to be at your home. Ensure this never happens as they want to see what is in your home.
Always arrange a meeting at your Tax Agent’s office as a meeting at an ATO office is likely to intimidate you and you may say things you would not normally. During the meeting, if you feel uncomfortable at any stage, end the meeting.
Try to ensure the meeting does not go beyond forty-five minutes to an hour and a quarter because after this time limits you are likely to let your guard down.
The Australian tax office will send you notes or minutes of meetings asking it be signed and returned. You are not legally required to sign and our policy is to never sign them.
3. Avoid vague answers
Finally, remember that an ATO audit is not the end of the world. Keep in mind that they have a lot more information about you than you think.
We live in a digital age of Google Maps and data matching. The Australian tax office can see what a taxpayer’s home looks like by pressing a few buttons on a computer at their desk.
Try to avoid giving vague answers. Tell the truth, stick to the point and only answer the questions asked and nothing more.
Do you dread the Australian tax office or the audits? Then we hope this article helps you.
Editor's Update 07/07/20:
Nobody wants to be audited by the ATO. Fortunately, there are some simple steps you can take to mitigate the risk of being pulled up for an audit.
How can I avoid an audit on my small business tax return?
Here are some top tips to avoid an audit on your tax return:
1. Complete all sections of the tax return
2. File the tax return on time
3. Don't exploit small business tax reductions
4. Provide exact figures and avoid providing only rounded figures
5. Your business should have similar margins to other businesses
6. Provide supporting documents to evidence significant changes in income
7. Your personal lifestyle should align with the income reported
How far back can the ATO tax audit go in Australia?
The ATO can conduct an audit of your business within the past five years. It's important to keep records and documents to demonstrate your tax figures for five years from the date you lodge a tax return.
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