At a glance
- ATO audits and reviews should be considered as a matter of ‘when’ not ‘if’.Â
- Instead of reducing the risk of being audited, it’s about making sure your client is organised.Â
- Encourage clients to write down their process, store financial documents in one place, and pen a diagram describing their business interests.Â
- The ATO is reasonable if you don’t ignore them.Â
For many business owners, the mere mention of an ATO audit or review is enough to send shivers down their spine. The thought of detailed examinations and potential penalties can be overwhelming.
Tax agents can alleviate these worries by empowering clients to minimise audit risks and be consistently prepared. Jane Harris, a senior tax expert at Brown Wright Stein Lawyers, says the ATO may request documentation, clarifications and records without conducting a full-blown audit.
“A review checks if businesses are organised, have good procedures and manage tax risk. An audit specifically checks if the correct amount of tax has been assessed.
“If underpayment is found, you must pay the extra tax, interest and possible penalties.”
A tax agent’s job is transforming fear into preparedness and precision, she says.
Which clients are most likely to be audited?Â
From sole traders to large corporations, the ATO scrutinises everyone, and is finding increasingly intelligent ways to do so.
As well as analysing data from banks, financial institutions, share registries and employers, it also accesses data from many different sources. For example, it requires motor vehicle registries to report car sales, rental software to track rent and expenses, and insurance providers to report lifestyle assets.
“This means expensive cars, boats and jet skis,” says Harris. “The ATO knows your salary and will consider whether you can likely afford it and if there’s other income you may not have disclosed.”
Other triggers for reviews and audits are larger-than-usual deduction claims compared to other businesses in the industry, and repeated errors or adjustments in tax returns.
“If you’re frequently amending your return after lodging it, the ATO will question your procedures. We’ve also seen clients using self-assessment software to adjust deductions up and down so the desired tax outcome pops out. Those keystrokes are all logged by the ATO.”
Help clients prepare and preventÂ
Instead of focusing on avoiding an audit, make sure your client is well organised and can easily respond if the ATO has questions, says Harris.
Here are four things tax agents should encourage clients to do:
1. Write down their processesÂ
“When the ATO enquires about procedures, like who prepares the tax return and BAS, and who checks them, many small taxpayers look stumped,” says Harris.
“Documenting these processes and knowing when to escalate issues to an accountant, seek a ruling from the tax office or get specialised advice, is crucial.”
2. Store financial documents in one placeÂ
Records should be kept for five years from the date of lodging a tax return, but for assets like property or shares subject to capital gains tax, records should be retained until the asset is sold.
“Whenever the ATO is reviewing, they’re looking for source documents,” says Harris. “Often, some are with the lawyer and others with the accountant or buried in outdated software systems. I’ve had clients searching their garage on the farm.
“My biggest tip is to suggest your client has a single repository for all tax-related documents, including meeting minutes on financial decisions, whether it’s in a digital folder or a registered office.”
Encouraging clients to upload receipts and invoices regularly speeds up the process and prevents a year-end backlog, she adds.
3. Pen a group diagramÂ
“This is literally a one-page picture that shows each of your business entities and who owns them,” says Harris.
For a sole trader, this is simple. But if the client has multiple entities, this diagram is extremely valuable – for both the ATO and tax agents, she adds.
“Whenever the tax office calls about that client, grab the diagram for context.
“It also allows you to discuss and update the diagram with your clients annually. This opens the door to discovering any transactions or changes in ownership, which can then be included in the tax return.”
4. Get audit insuranceÂ
If your client is a large business or in a higher-risk industry, recommend that they obtain audit insurance, suggests Harris. Â
“This enables them to claim tax advisor fees if the ATO conducts a review or an audit, which can get very expensive.”
Seek out a specialist Â
Tax is complicated and even accountants and advisors can’t know everything, says Harris.
“If a client is being audited and there’s a specific issue or a large volume of questions, consider enlisting the help of a tax lawyer.
“We help manage the audit process, streamline ATO correspondence and make it less stressful. We also provide proactive advice, so if a client is planning to sell their business, we’ll advise on the tax implications and what to include in their return, so they don’t get into trouble in the first place.”
And lastly … don’t ignore the ATO Â
“Proactive engagement with the ATO is crucial. If you or your client receives a letter, don’t ignore it or put it in the ‘too hard’ basket, thinking it will go away because it won’t,” says Harris.
“In fact, ignoring correspondence or missing deadlines can make matters much worse.”
She suggests confronting issues head-on to avoid escalating problems.
“If you can’t respond immediately, contact the ATO and request more time. As long as you show you’re addressing the issue, they’re generally willing to be reasonable and grant extensions.”Â
More information on IPA’s CPD Online here. Â
