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Money / Business tax tips

What you need to know about ATO audits

If you’ve been audited, you’ll know that it’s a stressful and time-consuming process. Here’s what you need to know about ATO business audits.

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A tax audit is an examination by the Tax Office to determine if you’ve done what you’re required to do under the tax law. This includes whether you’ve declared all your assessable income, claimed your tax deductions correctly and met all your regulatory obligations.

How the tax office chooses businesses to audit

The tax office uses a broad range of indicators to help select businesses for an audit, including:

  • Comparing a business against other businesses in their industry. This is often referred to as checking small business benchmarks.
  • Allegations of tax evasion from members of the community. The Tax Office has a special number that you can phone anonymously if you think someone is avoiding their tax obligations.
  • Sophisticated data matching technology that matches data reported on your tax return against information supplied from government agencies, banks and trade suppliers.
  • Watching business owners who are reporting net income on their tax return that appears to be too low to support their personal living expenses.
  • Random and unannounced visits to your business premises to check your processes and staff numbers. This happens more than you may realise. You just never know when your next customer could be an undercover Tax Officer.

Once selected for an audit the tax office won’t necessarily launch into a major review of all your business records. To begin with it may only involve a phone call or a letter asking the business owner to provide specific information to verify a claim. If the Tax Office is happy with what they find there will be no further action.

What happens in an audit

If the Tax Office decides to subject you to a thorough investigation of your business records you can expect the following:

"This happens more than you may realise. You just never know when your next customer could be an undercover Tax Officer."

  • You will need to provide tax officers with full and free access to buildings, premises, records and documents.
  • You will be formally interviewed by the Tax Office, sometimes more than once.
  • The audit will last anywhere from six to 12 months, and depending on how messy your records are, it can cause considerable disruption to your business.
  • Expect a large bill from your accountant while they act as the middle man between you and the ATO.
  • You may be required to fill in a comprehensive personal living expenses form. This form will tell the Tax Office whether the income you’re reporting for your business is enough to cover your daily living expenses. You can obtain a copy of this form on the ATO web site.
  • The ATO may perform a personal asset betterment test. This test measures the increase in your net wealth over a year. It will help the ATO determine if you have been paying large amounts of money off your home loan or you have been buying personal assets with cash such as cars and boats.
  • The ATO may contact your suppliers, customers and banks to verify the accuracy of data.
  • If the tax office is satisfied that you have not been reporting all your income they will use your industry benchmarks to amend your tax return and bring your profit back to an acceptable level.

If you do get selected for an audit it is important that you do a complete review of your bookkeeping records before the audit begins. If you find any discrepancies or income that you have failed to disclose you should notify the ATO immediately. Voluntarily disclosing errors before the audit begins may significantly reduce the penalties you may be required to pay.

Want more articles like this? Check out the business tax tips section.

Prevention is better. Audit-proof your business.

At the end of the day, audits place unnecessary stress on a small business so it’s best to avoid them altogether. The best way to audit-proof your business is by doing the right thing. Report all your income and make sure you’re meeting all your obligations as an employer. Ensure your bookkeeping software is balanced and up to date and your benchmarks are being monitored. And if you’re at high risk of an audit, consider taking out audit insurance. This will cover the cost of your accounting fees in the event of an audit.

Have you been audited? Care to share your story? How do you audit-proof your small business? 

Jasmine Kidd

is a FCPA and registered tax agent who specialises in small business, superannuation, property tax and salary tax law. She is also the director of Online Tax Solutions.

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