What are the Red flags that can Trigger a Tax Audit
The past financial year has seen a marked increase in the number of Tax Audits with the Australian Taxation Office’s (ATO) notable inspection of business transactions across the board.
In addition, the ATO is making the most of the latest technological developments as evidenced by the capacity of its enhanced data matching software. This enables the ATO to cross-reference the declared data against records collected from relevant organisations when processing tax returns. These include government departments such as the Department of Transport, Centrelink, Workcover, Superannuation Funds as well as banks and financial institutions.
Even if the information declared in your tax return is transparent and thorough, the ATO may still select you 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 hefty (potentially tens of thousands of dollars), even if your returns are eventually declared valid and correct.
While it may be down to random selection or your business just happens to operate in an industry or sector that the ATO is currently focused on, there are definite red flags which can attract the unwanted attention of the ATO. In order to help you avoid such stressful, time-consuming and costly Tax Audit, we’ve put together a list of some triggers you should be aware of.
- Well know “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.
- Phone calls or letters from Employees
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.
- Comparison to your Peers
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 filed, 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.
- Data Discrepancies
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 be avoided by conducting a thorough reconciliation process for all returns filed.
- Making Headlines – Good or Bad…
If you or your business is making headlines because of a disagreement or newsworthy transaction – for example the selling off of large assets – it’s likely to place your business under the “spotlight”. Even winning an award or garnering too much negative attention on social media platforms can make the ATO sit up and take notice of you or your business. One of our clients with a business now getting National recognition was published in the Australian Financial Review for their innovative product. Less than 7 days later the ATO called wanting to meet.
- Are you always late? Some other Triggers
Other red flags that may raise the ATO’s interest include a history of overdue returns; failure to file FBT returns if your business lists vehicles as among its assets; consistently declaring operating losses; and marked fluctuations in trading performance from one year to the next.
SMART Business Solutions recommends every business owner to take out Audit Insurance. Consider it on a par with 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 SMART Business Solutions today to make certain your business is fully tax compliant.
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