With increased ATO scrutiny, private businesses could be in danger of triggering audits, regardless of whether they have done anything wrong.
While audits are a necessary part of an effective tax system, they can be expensive and disruptive for your business.
Here are the 10 most common ways in which a private business may trigger an ATO audit:
1. Have financial performance that is out of kilter with your industry
As a matter of course, the ATO will statistically analyse your tax returns. If your performance is inconsistent with your industry peers, this can be an indicator of tax issues such as unreported (cash) income, transfer pricing and other issues.
2. Don’t pay the right amount of superannuation to your employees
If employees complain to the ATO that their employer has not paid them the right amount of superannuation, or not paid it on time, this is a sure-fire way to get the business reviewed or audited by the ATO. Often these types of audits can begin as a review of superannuation guarantee obligations, but quickly escalate to include income tax, GST and fringe benefits tax audits if the process isn’t appropriately managed.
3. Variances between tax returns and business activity statements
Reconciling the information reported on business activity statements (BAS) to your tax returns is a crucial part of tax risk management. Large variances between the information reported in a tax return and the BAS for the corresponding period is likely to trigger an ATO review or audit.
4. Have a poor record of lodging returns on time
Lodging annual income tax returns by the due date is not enough. You should aim to meet all compliance obligations (including BAS, employee-related reporting, fringe benefits tax etc.) and the timely payment of any tax liabilities. A good compliance history can be invaluable in improving the ATO’s perception of a business.
5. Consistently show operating losses
The ATO regards three loss years out of five as indicative of a problem. There may be genuine reasons, but the ATO is likely to want to investigate these.
6. Own motor vehicles, but don’t lodge fringe benefits tax return
The ATO receives data from the state and territory motor vehicle registries regarding individuals or businesses that have purchased vehicles (generally those with a value of $10,000 or more).
The ATO then matches these purchases with information reported in tax returns, activity statements and fringe benefits tax (FBT) returns, with an expectation that there will be at least some private use. If a business fails to lodge an FBT return showing private usage, or doesn’t include a ‘fringe benefit employee contribution’ in the income section of the tax return, an ATO review or audit is likely to be just around the corner.
7. Get the disclosure items wrong in your tax return
Making mistakes in the disclosure items on your tax return can cause you to inadvertently be flagged for a review. There are internal checks in the returns and disclosures that are easily verifiable against publicly available or other information collated by the ATO. Get these disclosures wrong and the ATO could come calling.
8. Show big fluctuations between years
Big fluctuations in financial position or particular line items in your tax return can trigger an inquiry from the ATO.
9. Have international transactions
International transactions are a key area of focus for the ATO. Transactions with international related parties, transactions with tax havens, and material funds transfers in and out of Australia are all items that can raise red flags at the ATO. Defensive strategies, such as transfer pricing documentation, can often be the best way to manage this risk.
10. Be in the papers
A major transaction or dispute that is reported in the media will undoubtedly be seen by the ATO. Many business owners are selected for an ATO review after the sale of a high-value asset (often the family home) is reported in the paper.
What these triggers show is that tax compliance – in particular annual income tax returns – should be treated as far more than a routine process. Many of the issues outlined above can be easily managed with a proactive tax risk management process.
Greg Travers is the tax director of William Buck, a chartered accountant and advisory firm.