Red flags that can trigger an ATO tax audit
The Australian Taxation Office (ATO) has increased their scrutiny of all businesses and therefore we have seen a record number of Tax Audits conducted in the 2014/2015 financial year. The ATO particularly, seems to be focusing on businesses in the $1 – $3 million turnover bracket.
Over the past few years data matching software has been enhanced and extended. When the ATO processes tax returns they cross-reference the information declared in the returns against records collected from other government organisations like Department of Transport, Centrelink, Workcover, Superannuation Funds, Banks and Financial Institutions.
Despite honest and detailed declarations, tax payers can still be selected for a tax audit or review by the ATO. In our experience a “quick” audit takes around 28 days, worst case scenario it can take 3 to 4 years to completely resolve a complex audit. The process can involve face to face meetings with the ATO and requests for financial records for up to five years from the date of lodgement. The costs incurred can be significant (running into tens of thousands of dollars), even if all your lodgements are eventually proved to be correct.
So what triggers an Audit? Some are random selection, some are triggered by anonymous tip offs or your business might be in an industry or sector the ATO has decided to focus on for a particular period. Here’s some other red flags that can trigger a tax audit:
If you receive cash for providing products or services but don’t declare those incomes, your expenses (in terms of percentage of revenues) will look abnormally high. Restaurant, takeaway shops, grocery stores, small services providers are those who have higher exposure to this type of audit.
Performing above (or below) Industry Benchmarks
The ATO has the most comprehensive records of business activities in Australia. They have developed benchmarks for average income and key expense ratios for many industries. With the ATO scanning BAS/tax returns lodged, if your business is inconsistent with peers in your industry, this can be an indicator of tax issues such as unreported income, transfer pricing and other issues.
The anonymous tip off! Employees who complain to the ATO that their employers have not paid their super correctly, will attract the ATO’s interest immediately. Often what starts as a review of superannuation guarantee obligations can escalate into an audit of income tax, GST and fringe benefits tax (FBT) if the process isn’t properly managed. Disgruntled suppliers can also cause trouble.
Discrepancies between information lodged with the ATO
Large variance in the information lodged with the ATO is one of the most common triggers of an ATO review or audit. This includes (but is not limited to) discrepancies between:
- an income tax return and an FBT return on employee benefit contributions;
- BAS and Payment Summaries on gross wages and PAYG withholding;
- Income tax return and BAS on total sales and expenses
In the News
If you or your business is in the news for a disagreement or a newsworthy transaction (e.g. sale of large assets) this can bring your business into the “spotlight”. Winning an award or attracting negative attention on social media platforms can also alert the ATO.
This is becoming a particular area of interest for the ATO. They look at how many times and to which overseas locations you have made transactions. Material fund transfers and business transactions with entities located in tax havens are two reasons the ATO would look closely at your business.
There are other triggers like history of late lodgements, failing to lodge FBT Returns when the business owns motor vehicles, consistently reporting operating losses and unusual fluctuations of trading performance between years.
We recommend every business owner have Audit Insurance in place. It is as important as your professional indemnity or public liability insurance. With a very small annual premium, it covers the professional fees incurred as a result of the tax audit.