Being audited by the ATO can strike fear into the hearts of many business owners. But there are some key steps you can take both to reduce your risk of being audited and during an audit.
Whilst high net worth taxpayers (controlling wealth of more than $50 million) can expect some form of interaction with the ATO every few years, most business owners will generally only have an interaction with the ATO as a result of mismatches in data that the ATO expects to see reported by a taxpayer based on the ATO’s internal data-matching systems, and data that is actually reported to the ATO by a taxpayer via lodgement of business activity statements and tax returns.
Being audited doesn’t mean the ATO considers you are ‘guilty’ – they accept that mistakes can be made. In fact on the ATO website it says “We presume you are trying to meet your obligations unless your actions give us reason to believe otherwise. We provide help through our advice, publications and visits.”
Also, they don’t jump straight to an audit, they will often do a review first, which is an information gathering exercise aimed at assessing if there is a risk that you are not complying with your obligations. Reviews are an opportunity for the ATO to collect information about particular industries and activities. If they believe there may be errors or significant issues requiring further exploration, they may then proceed to an audit.
ATO Audit Triggers
There is a long list of ATO audit triggers but one of the key ones is data matching.
Over the past few years, the ATO has invested heavily in improving its ability to collect and process information on a real-time basis. Organisations such as banks, public companies, Land Titles Offices, Insurers and Motor Vehicle Registries now provide continuous data feeds directly to the ATO. The ATO then uses this information, along with data that it collects from tax return disclosures, to build a risk profile for each taxpayer. The size of divergence between the position that the ATO expects to see for the tax payer based on the information it has collected, and the information submitted within the tax return as lodged by the taxpayer directly impacts on the risk that the ATO associates with that taxpayer.
Data matching can track things like:
- Single Touch Payroll
- Buying and selling Cryptocurrency
- Property income
- Novated leases
Other triggers for an ATO audit include:
- Having a lifestyle that doesn’t match your declared income eg. frequently taking expensive overseas holidays or buying luxury cars or yachts. ATO auditors have been known to trawl social media accounts of people they suspect of leading lifestyles that don’t match their declared income
- Being in an industry the ATO is targeting eg. where cash payments are more common and the potential for tax avoidance is higher
- Being late with your tax returns or tax payments
What to do if you are contacted by the ATO
During the audit and review process, the ATO have a cooperative approach – they try to maintain an open dialogue. Therefore, it is encouraged that you:
- Provide complete, accurate and timely responses to requests for information
- Are truthful and honest in your dealings
- Communicate openly and advise of any delay ahead of time
Above all, you need to treat all ATO contact seriously. The ATO reads a lot into a taxpayers attitude to tax compliance from their actions during the audit. A flippant attitude to an ATO information request will likely raise more suspicion and prolong the length of the audit. Conversely, a well-considered and comprehensive response to the ATO, which avoids the risk of leaving the ATO to “fill in the blanks” can put the taxpayer in a stronger position, and will more often than not result in the ATO discontinuing its action.
If you are contacted by the ATO, we strongly recommend that you get in touch with your tax adviser, and quickly, so you can plan your response to the ATO. This will be significantly more cost effective in the long run and will typically result in a far better outcome. Speak to an Accru advisor if you ever find yourself in this situation.