Things to be aware of that can trigger an ATO tax audit in Australia
No one likes to be audited by the ATO.
Being audited by the ATO is stressful, painful and time consuming. Believe me, I know from helping many clients who have come to us for assistance with a tax audit: to start with, they are all very scared.
With our help and guidance through the audit process, we reduced their stress levels and reached a resolution. In the end, they all came out unharmed.
But what if you could avoid being audited in the first place? How amazing would that be!
- So, is there anything you can do to fly under the ATO’s radar and avoid being audited?
- Can you stop that frightening knock on the door from the taxman?
The good news is there are some things you can do to significantly lower your chances of being audited.
What to do to avoid a tax audit
Part of the key to reducing your risk of being audited is knowing whether you are a target or a high risk in the ATO’s eyes. If you are a target, following the strategies outlined below will reduce your chances of being audited.
While there are no guarantees, these approaches and tactics will also help you to fly under the ATO’s audit radar even if you aren’t necessarily a specific target.
Know who the ATO is targeting – each year the ATO publishes a list of the industries or businesses they are specifically targeting. For 2019-20, the following businesses made the target list:
- Beauty salons & personal care businesses
- Restaurants & cafes
- Cash businesses (black economy)
- Vehicle repairers
- Grocery stores, supermarkets, butchers
The ATO plans to visit 10,000 businesses in these categories.
So, if you happen to be one of these businesses, you need to make sure you do everything else set out here to prepare for an ATO visit or risk review and minimise your chances of a full-blown audit.
If you’re not on the list, you can breathe a sigh of relief!
Avoid cash – if it all possible, try to avoid cash transactions. The ATO is particularly focused on cash-based businesses who operate in the “black economy”.
There is also a new cash payments limit which acts as a disincentive to large cash transactions. If you are in a business that takes cash, make sure you follow the rules about keeping cash register records.
- Swim between the ATO’s flags (the small business benchmarks) – the ATO has compiled an extensive list of benchmark financial data (for income tax and BAS data) for more than 100 industries in the following categories:
- Accommodation and food
- Building and construction trade services
- Education, training, recreation and support services
- Health care and personal services
- Automotive electrical services
- Machinery and equipment repair and maintenance
- Architectural services
- Veterinary services
- Retail trade
- Transport, postal and warehousing
Compare your own financial performance against similar businesses in the same industry using the ATO’s key benchmark range. If you’re within the benchmarks, you’re swimming within the ATO’s flags and unlikely to attract attention.
But if you swim outside the ATO’s flags, that is, your financial performance is outside the benchmarks for your industry, you’re highly likely to attract the ATO’s attention, which is not what you want. If this is you, examine where you don’t fall within the benchmark ranges and why and take corrective action to get back within the benchmark range for your business sector.
The small business benchmarks are available on the ATO website.
You can also read more about the benchmarks and how they work HERE.
Keep your private finances and business separate – if you mix your private finances with your business finances, you’re going to have a big headache and are likely to attract the ATO’s attention. Similarly, if you use business assets for private purposes, you will be an easy target for the ATO to hit.
Record keeping – you need to keep up to date, complete and accurate records. Businesses that have poor records are an easy target for the ATO.
Pay and lodge on time – this is one of the ATO’s key metrics to determine whether you will be audited or not. If you don’t pay your tax and GST on time, don’t pay your PAYG withholding on employee wages on time and don’t lodge your tax return and BAS on time, that will increase the risk of you being audited. So pay and lodge on time!
BAS & tax return – the financial data in your BAS and tax return should match or reconcile with each other. If they don’t, this will set off a red flag for the ATO and may cause them to ask questions. There might be valid reasons why there are differences, but you should be able to quickly and simply explain the reasons for those differences. If you can’t, or if your BAS and tax return simply don’t match and you don’t know why you should review everything before lodging your tax return otherwise you might have a problem with an ATO audit.
Pay your employees super – not paying your employees superannuation, or not paying it on time, is a sure fire way to attract the ATO’s attention. With the introduction of compulsory Single Touch Payroll reporting, the ATO now has real time data on who is paying super and who is not. The message is, pay your employees super and pay it on time!
Deliberate omissions & overclaiming – don’t deliberately omit income, overclaim expenses or claim expenses you can’t substantiate with a tax invoice. The ATO has sophisticated data matching so they will know if you’ve left any income out. Likewise, with deductions: if you overclaim, you’re likely to fall outside the ATO’s small business benchmarks and be an easy target for an ATO audit.
Your lifestyle & assets don’t match your income – if your reported income doesn’t support your lifestyle and assets, the ATO will know about it. They use a range of third-party data sources such as boat registrations, real estate holdings and motor vehicle registrations which they match against your tax return information. If your income level is way too low to support your assets, the ATO will know about it and could audit you.
Losses – if you report ongoing losses from your activity (for example 3 out of 5 years are losses), this might be a trigger for an ATO audit.
International transactions – having international transactions can potentially cause the ATO to ask questions about them. While there’s nothing wrong with having international transactions, you should be able to explain them (for example, funds transfers in and out of the country) supported by appropriate records and documentation.
Related party dealings – if you have financial dealings with related parties or associates (including payments to directors), this can be another reason for the ATO to review your affairs and ask questions. Your arrangements with associates and related parties (for example, service entity arrangements) should be well documented and conducted on commercial terms and rates. If they aren’t, you could face unwanted scrutiny from the ATO.
What to do if you are selected for audit
If you’re unlucky enough to be selected for an audit, call us immediately for assistance on 1800 MTL TAX (1800 685 829).
Being audited by the ATO is a scary, daunting and time consuming experience. Good tax legal representation will make the experience less intimidating.
We know how the ATO works and thinks. We can assist you with:
- Managing ATO reviews and audits
- Finalising the audit process efficiently
- Preparing responses to ATO audit position papers
- Representing you in meetings with the ATO
- Representing you in formal interviews
- Limiting the scope of the audit and the issues in dispute
- Making voluntary disclosures
- Making submissions to minimise penalties
- Negotiating an effective and speedy resolution to the audit
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.