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 an audit-free 2020. 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:
- Work-related claims
- Investment property deductions
- Cryptocurrency earnings
- Sharing economy
- Interest expense claims (especially with respect to property)
In unprecedented fashion, the ATO is readying its numerous taskforces to conduct random tax 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 life cycle. As business owners, your client must account for the financials while running the business themselves. Given the spontaneous nature of an ATO tax 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 ATOs 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:
- 1. Failing to mention capital gains for “asset disposals” such as ownership of land or shares.
- 2. Failing to disclose income outside of Australia, also known as “foreign income”. Some business owners pretend not to understand what this means while others genuinely do not know. 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. The same goes for employment income from a foreign company – all of which should be detailed in their tax declaration to minimise the risk of an ATO tax audit.
- 3. Failing to disclose or accurately declare bank interest. We have all been there. The total interest accumulated seems so small and insignificant that we fail to include this in our tax declaration. One thing to note is that banks will always declare to the ATO any interest payments made to their customers. When the ATO data-matching technology goes to work on a declaration, and there is an easy-to-spot discrepancy, a reg flag might prompt a deeper investigation.
- 4. Inaccurately declaring the earnings of a business. Part of the ATO’s function is to collate data across all industries to establish “benchmarks” across all sectors. The ATO does this by analysing the data surrounding a particular business and then determining averages across varying metrics, such as gross revenue and net profit. If there is a large enough discrepancy between the ATO’s benchmarks and your clients’ businesses’ reported earnings, it could dramatically improve the chances of a random ATO tax audit. These benchmarks are expressed as percentages of total business turnover and cover things like employee wages, rent, production, materials, and so on. Be particularly cautious if you except cash regularly, as the ATO is more likely to scrutinise your books if you operate in a cash-only fashion, which nowadays is uncommon.
Making Unentitled Claims
Making unsubstantiated or unfounded work-related deductions is another dubious undertaking that will inevitably leave your clients’ more exposed to an ATO tax audit.
If your clients’ employees are making deductions relating to work, then these guidelines may be helpful:
1. Claim only for products or services that relate to your client’s expenditure;
2. Record any outgoings so your client can substantiate these claims with evidence, whether hard-copy or digital receipts; and
3. Advise against your client making tenuous claims relating to costs incurred in his or her general commute, as this is not covered and could result in an ATO tax audit.
When making a tax declaration on behalf of your clients, certain concessions mean you do not need a receipt. For example, for work-related deductions, up to $300 can be claimed without a receipt as proof of purchase. That said, the ATO might red flag these claims and request other forms of evidence in place of a receipt if the declaration raises alarms.
Is Lifestyle Incongruous With Income?
Imagine owning a Sydney harbour-side property and rolling around in a Bentley after declaring $15k as your total income. This kind of discrepancy has the potential to attract unwanted attention from the ATO and can undoubtedly result in a full-blown ATO tax audit.
In simple terms, the ATO can calculate total assets and deduce what kind of income is required to afford such a living. If your clients have claimed substantially lower than what the ATO determines as a benchmark, in all likelihood the ATO taskforce will come knocking on your clients’ door.
It is certainly not unheard of for the ATO to look into a claimant’s social media when investigating a suspicious declaration.
Is Audit Insurance The Next Step?
As an accountant or a financial adviser, your goal is to protect your client both from legal and financial perspectives. Key to being prepared is having appropriate Audit Insurance in place to curtail the unforeseeable costs of an ATO tax audit.
Audit Cover saves time and money and stress and affords its clients with ultimate peace of mind knowing that the costs and overall impact on their business of an ATO tax audit will be minimised with this added layer of support and protection.