As a Tax Agent that is usually the first thing a client says to me when I tell them I have received a letter that they are to be audited. Sometimes the words are more explicit. The response I get has hardly changed in the 19 years I have been involved in tax.
Over the last couple of years the ATO has decided that they will investigate businesses which it considers high risk. They have published over 100 industry benchmarks. These benchmarks are by industry and show what the ATO 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 Tax 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.
They are also concentrating more on lifestyle. If declared income is low, but one has a large home, expensive cars and children in private school the ATO may start asking how this lifestyle has been maintained. 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 ATO is severely underfunded. You have to be quite unlikely to get picked. But it does happen. Last year 118,000 cash business were investigated and this number will get bigger. It is still a small number considering the total number of businesses in Australia.
So, how do you avoid getting picked in the first place?
First, check to see if your industry is one of the benchmarks published by the ATO. 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.
Second, ensure you have maintained your books and records properly. The ATO have 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 returns (Tax, BAS, FBT etc) on time. If you are late or cannot make payment get in touch with the ATO and explain what is happening. They will be more responsive and less likely to investigate.
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 ATO what kind of lifestyle you have. There is also less chance of personal items accidently 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.
If you are unlucky to be audited, what should you do?
Well, get a Tax Agent to do the work and communicate with the ATO. 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.
The ATO can ask for a meeting. Try and avoid this but you may not have an option. The ATO 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 an hour and a quarter because after this time you are likely to let your guard down.
The ATO 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.
Finally, remember the ATO probably have a lot more information about you than you think. We live in a digital age of Google Maps and data matching. The ATO 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.