Surviving an ATO Audit

This piece is aimed at self-employed clients, so if you’re a salary earner or a retiree you can safely move on to the next item. For others, it goes without saying that at tax time you should disclose all your assessable income and only claim legitimate business deductions. Failure to do so exposes you to the risk of penalties and interest on top of the underpaid tax. And the chances of popping up on the ATO’s radar are not negligible. It runs an active small business compliance program that uses industry benchmarks and other information, including “dob ins” received from community members.

Cash Jobs

Offering a discount for cash for a lower price might seem tempting, but it suggests an intention of under reporting income. Tradies and the like occasionally fall out with their clients, some of whom might then report them to the ATO and those “dob ins” can lead to audits being conducted. The practice remains widespread, but you should avoid doing cash jobs – there’s a good chance they will come back to bite you.

Benchmarks

The ATO keeps extensive data of industry benchmarks for many industries, tracking gross income, expenses and profits margins. Its website suggests this data enables you to see how you compare with your peers and perhaps identifies areas for improvement. But it also gives the ATO a way of identifying potential audit cases.

If your trading results are well below the industry average, you might want to think about what some of the reasons for that might be. These could include:

• Ill health suffered by yourself or a close family member

• A long holiday

• Your café or retail business is not in the best location

• Competition from similar businesses operating nearby

• You’re inexperienced or just not a great business person.

Averages are just that, and some businesses will be under while others are over. Having an idea of where you sit on the spectrum and why may help you engage with the ATO if and when the time comes.

Lifestyle Factors

Another way of identifying cases suitable for audit is for the ATO to assess whether your apparent lifestyle matches the net income disclosed in your tax returns. If you drive a flash car, take expensive holidays, have your children in private schools, have had major home renovations done or get around wearing a Rolex while your disclosed income doesn’t support such a level of spending, you might have some explaining to do.

The Audit

If, for whatever reason, the ATO isn’t satisfied that the taxable incomes you have disclosed are correct, they can make their own estimate using whatever information is available. Any amended default assessments will generally be based on a bank account analysis, as well as estimates of private spending. They can’t just pluck a figure out of the air, but they don’t have to prove where the discrepancy came from either. Those without complete and accurate records of both their business and private finances are vulnerable to adjustments that involve double counting, especially from a bank analysis that assumes that every unexplained deposit represents undisclosed income and every unexplained withdrawal was used to fund private expenditure. As often as not the two are offsetting but the taxpayer can’t prove it. To challenge a default assessment a taxpayer has to show not only that the ATO’s estimate is wrong in some respect - they also have to show what their correct taxable income is. The courts and tribunals are littered with default assessment cases where the taxpayer has failed in this regard, leaving them with a very large tax bill.

Protective Measures:

Here are some of the practices that might assist you in an ATO audit. Most of them would need to be in place before an audit even starts:

• Keep your private and business accounts separate

• Avoid using cash for business transactions

• Never run private expenditure through your company account

• Keep documentary evidence of gifts, loans and other non-taxable receipts that flow through your bank accounts. Create a written record of such transactions as they occur

• Be prepared to explain any apparent discrepancies between your lifestyle and the income disclosed in your tax returns

• If you have made a mistake or two, consider making a voluntary disclosure when you are notified of the audit but before it starts. This could help reduce penalties

• Ensure you have books of account and bank records that verify the taxable income disclosed in your tax returns.

Come and see us to help get you ready for an ATO audit (or avoid one altogether).

Need support or advice?

The team at POINTAX are here to help you. Our expert professionals are available and are keeping up to date with the latest announcements. Contact us by calling us at 03 8386 7410 or visiting our website contact page www.pointax.com.au/contact.

Disclaimer

While every care has been taken to ensure the accuracy of the material above, POINTAX, its employees, or any of its representatives will not bear any responsibility or liability for action taken by any person based on the information contained in this blog. The content is for information purposes only. It is recommended that no person make an investment decision until their needs, desires and risk profile have been assessed by a qualified professional.