S**T…. I have an ATO Audit? Crap!

As a Tax Agent, this is usually the first thing a client says to me when I tell them I have received a letter from the ATO notifying that they are to be audited. Sometimes the words are more explicit, but the response I get has hardly changed in the 24 years I have been involved in tax.

What is the ATO audit process?

The ATO audit process commences with them first deciding that they will investigate businesses which it considers high risk or where they feel the figures declared do not add up.

The Australian tax office has published well over 100 industry benchmarks. These benchmarks are by industry and show what the Australian tax office 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 taxation 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.

The Australian tax office is also concentrating more on lifestyle. If declared income is low but one has a large home, expensive cars and children in private school, the Australian tax office may start asking how this lifestyle has been maintained.

Part of the ATO processes is that 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 Australian tax office is severely underfunded. You have to be quite unlikely to get picked for an ATO audit. But over the last 10 years the Federal Government has allocated more funding to audits.

With Cash Boost and JobKeeper we have seen audits increase. I expect that trend to continue..

How can I avoid an ATO audit?

So, how do you avoid an ATO audit in the first place? Here are a few pointers:

1. Understand industry targets

Each year the Australian tax office targets a different range of industries to focus their attention on. Try and find out what these are although this year due to Covid19 and the fact that the ATO is acting like our best mates they have not released much data.

2. Benchmarking

Before making decisions check to see if your industry is one of the benchmarks published by the Australian tax office. 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.

If we your financials we do this automatically for you and let you know if there are any concerns.

3. Implement good business record keeping

1. Ensure you have maintained your books and records properly. The Australian tax office has really emphasised this.

2. 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.

3. Third, make sure you file and pay all your Tax returns (BAS, FBT etc) on time. If you are late or cannot make payment, get in touch with the Australian tax office and explain what is happening. They will be more responsive and less likely to investigate.

4. Be reasonable when it comes to making deductions or business claims.One of my doctor clients decided he was going to employ one of his children as a receptionist who would also being doing admin work. Reasonable you may say except she was getting paid $20 and is 13 years old. The rates are way above any award rate but the question is what work will they be doing? And if they were not your child what would you really pay them?

If you believe you have a child who is capable of acting as a adult and should be paid as such the ATO would be within their right to ask questions directly to the child on the basis that they are capable to answer as an adult. I don’t know many adults that can deal with this never mind a 13 year old child. Is it worth the risk?

Here is how to think about it. If the ATO is sitting in front of you and asks questions can you:

Here is how to think about it. If the ATO is sitting in front of you and asks questions can you:

• Explain it without it sounding a bit silly

• Can do it with a straight face.

4. Separate your finances

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 Australian tax office what kind of lifestyle you have.

There is also less chance of personal items accidentally 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.

What should you do if you are chosen for an ATO tax audit?

If you are client, I know almost everyone one of you will be on the phone to me. There are several things that you can do to assist you if you have to do an ATO tax audit.

1. Ensure you have tax audit insurance

Always get a Tax Agent to do the work and communicate with the Australian tax office. 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.

2. Understand how ATO meetings work

The ATO can ask for a meeting. Try and avoid this if possible (although you may not have an option). The Australian tax office 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 forty-five minutes to an hour and a quarter because after this time limits you are likely to let your guard down.

The Australian tax office will send you notes or minutes of meetings asking it to be signed and returned. You are not legally required to sign and our policy is to never sign them.

3. Avoid vague answers

Finally, remember that an ATO audit is not the end of the world. Keep in mind that they have a lot more information about you than you think.

We live in a digital age of Google Maps and data matching. The Australian tax office 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.

If you would like to know more or would like more information on Audit Insurance please get in touch by calling 1300 440 316 or email hitesh@hiteshmohanlal.com.au.