Don’t Be An April Fool + Get Caught Out With An Audit.
It is something that a lot of taxpayers dread. An audit from the ATO. It invokes images of being interrogated in a windowless room. Having to provide receipts for every deduction you’ve claimed in your life. Rummaging through a shoebox to find the receipt for a $5 donation you made 10 years ago. Being hauled off to prison over a few hundred dollars. We have put together this article to be able to arm you with everything you need to know and how not to be an April fool when it comes to an audit from the Australian Taxation Office (ATO), introducing; Don’t Be An April Fool + Get Caught Out With An Audit l Canny Group
The reality is a little different. The ATO does thousands of audits each year – Income Tax Returns, Business Activity Statements, Superannuation, Capital Gains, Fringe Benefits, Individuals, Trusts, Companies, Superannuation Funds, the list goes on.
The ATO also has a time limit to conduct audits. For most taxpayers with simple tax affairs, the ATO usually has two years from the date an assessment is issued. For more complex taxpayers, the time limit increases to four years. However, where the ATO suspect fraud or evasion there is no time limit.
Why does the ATO conduct audits?
The Australian tax system is based on the concept of self-assessment. That is, the information that you submit to the ATO is initially accepted as being correct and the onus is on you to ensure that your tax return complies with the taxation laws.
If the ATO suspects that the information you have provided may not be correct, they may decide to conduct a review or audit to verify its accuracy.
In 2020, it was estimated that ATO audits resulted in additional revenue of $9.5 billion and in the previous 4 years the total additional revenue was over $40 billion.
What are Reviews + Audits?
Depending on your circumstances, the ATO may initially conduct a Review. A Review can be a simple and quick process of the ATO requesting source documents and workpapers. Whereas an audit is a more in-depth examination of the tax issue that has arisen.
The review is generally conducted by an ATO Audit Officer who studies your financial records and tries to match them to the lodged reports. This could include requesting a transaction listing for the period being audited, looking for proof of payments made (e.g. bank statements, payment receipts) and contacting your suppliers to verify the integrity of invoices provided.
The ATO may request payroll reports or contractor payment summaries as well. Once these records are provided and the documents are reviewed by a case officer, they may then decide whether the review was satisfactory.
If the officer believes you have not complied with the obligations or a review is not satisfactory given the complexity of the matter or due to some other reason, they may then refer the matter to the audit department. When this happens, a review gets converted into an Audit.
An ATO Audit is simply a verification of compliance and the accuracy of figures stated on a tax return, activity statement or any other lodged statements. Hence every tiny bit of information could be subject to audit.
A typical audit will involve meeting with the ATO where they will provide information regarding what is being audited, the periods under audit and what information they will require.
While the ATO will usually use a cooperative approach to gathering information from the taxpayer, they do have legal powers that give them full and free access to places, books and documents and can exercise these powers without notice.
When the ATO has completed its audit, it will provide its position to the taxpayer in writing. They will also advise if they intend to amend your assessment. There may be additional tax, penalties and interest charges payable.
If you disagree with the ATO’s decision you can lodge an objection or appeal. This will be then looked at by someone within the ATO, but not the same person that made the initial decision. If you are not satisfied with the outcome, you can pursue the matter through the Administrative Appeals Tribunal or the Federal Court.
How does the ATO know who to audit?
To decide who to audit, the ATO use data matching, benchmarking, tip offs, newspapers, and even social media! There is also the possibility that you can be audited by random selection.
The ATO now has access to a huge amount of data. They receive data from banks and financial institutions, Medicare, Centrelink, Workcover, land titles offices and planning authorities, as well as property title transfers, tenancy agreements, new car purchases, share registers, managed investments funds, building contractors – and many more.
Benchmarking allows the ATO to compare data across various industries to identify any taxpayers that are claiming high deductions or not declaring all income.
There have even been cases where ATO officers have read newspaper articles or viewed something on social media and conducted a review or audit.
And it is not just the ATO. State Revenue Offices also conduct audits in relation to state taxes such as stamp duty, payroll tax and land tax. Declaring rental income on your income tax return may trigger a State Revenue Office to review your land tax registration.
And the state governments talk to each other. A payroll tax audit by one state may lead to a payroll tax audit in another state if a business is operating in multiple states.
Complying with an audit can be a time-consuming exercise. You may be required to provide reports and other source documents dating back many years.
Audit insurance will cover you if you hire a professional lawyer or accountant to complete the tax audit on your behalf. Even if no adjustments are required after the audit, you could be left with considerable professional fees. Audit insurance does not cover you if you are required to pay additional money to the ATO after the completion of the audit process.
Canny Group offers Audit Shield service to our clients. This insurance covers audits, enquiries, investigations and reviews into the following:
- Capital Gains Tax
- Fringe Benefits Tax
- Income Tax
- Land Tax
- Payroll Tax
- Superannuation Guarantee
- SMSFs + many more!
The best way to avoid an audit is to comply with the law. Maintaining accurate records can assist in responding to an audit, as you are able to provide information to the ATO in an efficient manner. If you are in a high-risk category or have complex tax affairs, you should also consider taking out Audit Insurance to avoid being left with a large accounting bill at the end of an audit.
Get in touch with our team today, so that we are able to talk you through the process and ensure that you don’t be an April fool + get caught out with an audit l Canny Group. We are the accountants Geelong locals and surrounding areas trust to ensure their accounting and tax needs are met and are covered should you find yourself in the face of an AUTO audit.
Dale Knight l Accountant