Everything you need to know, but were afraid to ask
Over the last couple of years, we as accountants, as well as the accounting industry as a whole, have noticed the ATO has been ramping up their tax audits, including those of small businesses. In part it’s because the ATO’s revenue dropped significantly during Covid and the government is somewhat reliant on tax measures to fund government spending – think healthcare, education, defence, etc.
So we thought it might be time to shed a bit more light onto the whys and wherefores of tax audits with a quick FAQ, particularly as they’re not spoken of terribly often, for fear you’ll somehow trigger one.
How many tax audits do the ATO do a year?
The ATO is said to conduct around 2 million audits a year. That covers both businesses and personal audits. Even so, that’s a lot of audits.
What triggers tax audits?
The ATO has significant oversight capacity and very sophisticated data matching capabilities and if you, or your business, are declaring less income than the ATO can see has been earned, you’re likely to trigger a red flag for an audit. Another trigger for a red flag is if your spending or loan repayments don’t match your income (say for example if you’ve just bought a multimillion dollar luxury yacht/plane or car and you’re earning $60K a year – yes, the ATO can track that too).
Each year the ATO releases a series of specific areas it’s looking at for tax audits. Last year (and likely again this year) claims relating to working from home expenses (along with other work expenses), motor vehicle expenses (especially during Covid, when no-one was actually leaving their home/offices for meetings) and cryptocurrency earnings are likely to be targeted. If your records reflect significantly more expenses or deductions than your industry sector or job role, it might also pop up a red flag. And in the past, investment properties and shares have also been an audit red-flag, especially if capital gains tax wasn’t declared on sale of said assets.
One of the more common reasons for a tax audit is doing your own return and accidentally getting your numbers out of whack – it might be as simple as putting things in the wrong place or missing a decimal point, which leads to reporting a significantly greater return than you’re entitled to. Even if you realise your mistake once you’ve submitted and rectify it, paying any monies owing, you might already have been flagged.
Another flag raiser is not having paid tax for a couple of, or more, years. Be assured the ATO is watching and they always get paid.
Aside from that, each year the ATO selects a number of tax returns that meet their selected criteria that can be audited at random.
Types of tax audits
- GST Audits – this is a relatively simple exercise, more of a review than audit per se, where the ATO can ask a taxpayer (usually the business or a GST paying sole trader) to provide a tax invoice (or series of) to support a GST credit claim on their BAS.
- Individual tax audits – this is a review of how much tax you paid personally against how much income you’ve received and the deductions you’ve claimed.
- Business tax audits – this is a review of how much the business has earned – both from selling its products and services as well as trading its assets or receiving income from investments, the expenses it’s claimed and the tax its paid along the way. If your business is audited, chances are there will be a careful look to ensure that you’ve not missed paying fringe benefits tax where company assets are used for personal reasons.
How far back can the ATO go on an audit?
For income earners and small businesses, the ATO can audit your records going back two years.
Larger businesses can be audited going back four years.
However, that’s from the time your tax return is submitted. So if you’re putting in 10 years of returns this year, the ATO audit folks have access to all of those records for another couple of years.
Plus, if serious fraud or evasion is found they can look further back, in fact, there is no time limit under these circumstances. – up to five years. (Kerry, can you confirm this true???)
What happens if I’m audited?
Not every audit is harrowing. Tax audits can range from a quick and dirty check of a single document to make sure what you’ve claimed is fair to a far more significant and complex review of all your transactions and deductions over a particular period.
If you are selected for a tax audit, your auditor will call either you or your accountant to set up a time to visit. In addition they will provide written confirmation of the meeting and the issues they’re likely to cover. You and your accountant will then likely begin collating information and documentation relevant to those issues (this is where it pays to be organised with your both your financial records and receipt management).
More fulsome tax audits will require significant time from both you and your accountant and can run to many thousands of dollars. Having good systems and processes, such as a Xero cloud accounting system in place, can make a vast difference in terms of your paper trail. You can also put audit insurance in place (in advance) to cover accountancy fees for enquiries, reviews, meetings with the ATO and legal fees. It doesn’t cover any payments you might need to make to the ATO for unpaid debts.
What happens if I’m found to owe money on a tax audit?
You’ll be required to pay what’s owing to the ATO (ie: what you should have paid), plus any interest or penalties applied. If you’re found to have shown intentional disregard in your returns/responses individual tax payers can be fined a further $4-13K and businesses can be fined significantly more. And if you’re found to have been involved in a criminal scheme to defraud the ATO, that’s a whole different ballgame with custodial penalties added to the mix.
The key takeaways here are;
- declare all your income – PAYG, rental/investment income or profit, sharing economy income such as Uber, AirBnB, etc; cryptocurrency exchanges, business income (including any cash payments you might take) and bank interest. If you made money, the ATO need to know
- claim your expenses appropriately (within what’s allowable).
If you do that, you’re likely to be okay. If you’re not sure when it comes to your tax returns or your business’ ATO submissions like BAS, check with your accountant before making said claim. If you do make a genuine mistake, your accountant can go back and update your records and as long as you pay anything outstanding, again, you’re likely fine.
Of course, if we can help you ensure your financial records are in great shape should the ATO come to call, by transitioning your existing business in the direction of digital transformation via cloud accounting with Xero (especially whilst there are still tax incentives) or being your personal tax accountant of record, we’d love to help. You can call us on 6023 1700 or connect with us via Facebook or LinkedIn.
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