Tax time is quickly approaching and as the largest contributor to Australia’s whopping $8.7B tax revenue deficit, “the ATO compliance focus is likely to be on the small business sector” with high-wealth contributing “substantially lower” than some expected. With plans to send hundreds of thousands of “please explain” notices to ordinary Australians, it is worthwhile having the conversation with your clients about the unpredictability of an ATO tax audit, and that even doing the right thing does not guarantee being audit-free.
Given how much more resourced the ATO will be off the back of federal government funding to close the income tax gap, we can expect the ATO to target the following tax areas as part of their ATO auditing programs:
- Work-related claims
- Investment property deductions
- Cryptocurrency earnings
- Sharing economy (Amazon ABN holders take note!)
- Interest expense claims (especially with respect to property)
In unprecedented fashion, the ATO is readying its numerous taskforces to conduct random ATO audits over specific industry sectors determined as high risk. A growing group of industries will be placed under the magnifying glass as the ATO’s enforcement measures heighten to close the gap in Commonwealth income tax revenue.
Apart from the potential of paying more in taxes, an ATO tax audit can be an incredibly challenging time in any business’s life cycle. As business owners, your clients must account for the financials while running the business themselves. Given the spontaneous nature of an ATO audit, the costs in interest, fees, and penalties can damage a business’s bottom line if unprepared.Here we deep dive into some of the triggering behaviours that can result in an ATO tax audit, and why doing everything right might still result in a full-blown audit of your SME clients’ businesses.
Not Declaring Taxable Income
If your clients are leaving out some of the details of their taxable income, then they are asking for trouble. The primary function of the ATO is to reconcile money earned with taxes paid. A common pitfall of some SMEs is putting too much faith in the ATO’s pre-filled data, which only tells a part of the bigger picture when declaring taxable income. The burden of ensuring all information is accurate falls on the declarant and therefore it pays to be careful and considered in approaching this to at least minimise the possibility of an ATO tax audit on your clients.
Whether intentional or not, some of the more common mistakes include the following:
- Failing to mention capital gains for “asset disposals” such as ownership of land or shares.
- Failing to disclose income outside of Australia, also known as “foreign income”. If your clients own or have an interest in overseas assets like property or a foreign business entity, then they have investment income from the interest, rent, or otherwise being generated.
- Failing to disclose or accurately declare bank interest. Banks will always declare interest payments to the ATO, and data-matching technology can easily spot discrepancies, potentially triggering a tax audit.
Inaccurately declaring the earnings of a business. The ATO uses benchmarks across all sectors, and a discrepancy between industry averages and your clients’ reported earnings could increase the likelihood of an ATO audit. Businesses that primarily operate in cash are at higher risk of ATO auditing attention.
Making Unentitled Claims
Making unsubstantiated or unfounded work-related deductions is another behaviour that will inevitably leave your clients more exposed to an ATO tax audit.
If your clients’ employees are making deductions relating to work, these guidelines may be helpful:
- Claim only for products or services that relate to your client’s expenditure.
- Record any outgoings so your client can substantiate these claims with evidence.
- Advise against making tenuous claims, such as general commute costs, as these are not deductible and can trigger ATO auditing scrutiny.
Certain concessions allow for claims up to $300 without a receipt, but the ATO may still request other forms of evidence. Red flags can trigger tax audit defense measures if the claims seem excessive or unsupported.
Is Lifestyle Incongruous With Income?
Imagine owning a Sydney harbour-side property and driving a luxury vehicle after declaring $15k as total income. This type of discrepancy can attract the attention of ATO auditors and likely result in a full ATO audit. The ATO can compare lifestyle and declared income to deduce whether under-reporting is likely. If your clients’ declared income appears inconsistent with their assets or lifestyle, an ATO taskforce might investigate further. It’s not uncommon for ATO auditing to include reviewing social media activity.
Is Audit Insurance The Next Step?
As an accountant or financial adviser, your goal is to protect your client both from legal and financial risks. Key to being prepared is having appropriate audit insurance in place to curtail the unforeseeable costs of an ATO audit.
AuditCover provides affordable tax audit protection, covering professional fees incurred during an ATO tax audit. Whether your clients need small business audit insurance or protection for larger enterprises, audit coverage through audit insurance policies is an important offering for peace of mind. AuditCover saves time, money, and stress. It affords its clients ultimate peace of mind, knowing that the costs and overall impact of an ATO audit will be minimised with this added layer of audit protection and support.
See How AuditCover Works
Request a demo with AuditCover today to see how our digital Audit Insurance solutions can protect your clients from the financial impact of an ATO audit while simplifying your practice’s workflow.