Senior accountant John Corias explains how taking interest in your financial accounts – and not just how much money is in the bank – can help you keep out of the ATO’s crosshairs.
The surging wave of the information/electronic age that’s sweeping the globe has changed the way we conduct ourselves in so many aspects of our lives and businesses. The fact that most of our transactions and interactions are recorded electronically presents its own set of risks and benefits – for every individual and business.
The Australian Taxation Office has certainly been at the forefront of utilising the electronic age to conduct its affairs, in terms of both compliance with the law and tax revenue collections. The assurance that taxpayers are complying with our nations taxation laws is the paramount concern of the ATO and recent successive governments, both Labor and Liberal, have increased funding to the ATO coffers to ensure that we all pay what we are legally obliged to.
The key aspect of the ATO's compliance focus in recent times is with its data matching projects. Various industry groups have been selected, based on strategic risk assessments, and then targeted for data matching reviews. The ATO has at its disposal all banking and credit card records, property sales and acquisitions and even motor vehicle purchases as recorded by our various state motor registries. So they have a broad database to select from.
On top of this, the ATO has its very own database of lodged income tax returns. Each tax return that is lodged has an industry code that specifies what industry your business operates within. All of the data from each industry is collated by the ATO to then form an industry average. These averages target cost of goods sold, motor vehicle expenses, wages and rent as percentages of turnover. If you then lodged an income tax return that falls outside the normal range of averages, you can expect to be targeted by the ATO.
Of course, if you do fall outside the average range for your industry, as determined by the ATO, it does not necessarily mean you are doing anything illegal, but it may well prompt the ATO to investigate your business further for an explanation.
In a specifically targeted campaign, the ATO will be conducting a data-matching project within the building industry. They are clearly targeting the possible non-declaration of cash income and the fact that the government is then missing out on collecting both GST and income tax on non-reported income. The ATO, using its rather wide ranging powers, has been able to secure the financial data of Wesfarmers Group Limited business Bunnings. Any client of Bunnings that holds a trade account and has made large single transaction purchases of between $10,000 and $3,000,000 will have their account scrutinised and matched up with their income tax returns and state building licenses.
Any building and construction business that has had complaints lodged and recorded against its license number will obviously be a target for the ATO. Any anomalies in the data collected by the ATO are sure to see your business selected for either one of two actions. You will either receive a letter from the ATO asking you to explain any inconsistencies in your accounts with the option of making a voluntary disclosure of any errors or undeclared income. The second action the ATO can take is that they proceed straight to a full blown audit of your financial records.
If you are in business and have never heard of the ATO benchmarking records, you owe it to yourself to get acquainted with them. The ATO website has a full database of benchmarked percentages for most industries nation-wide. Seek out your industry and see how your business compares with the ATO benchmarks. If your financial accounts are within the acceptable ranges then you should have no need for concern.
If your business percentages are not within the ATO acceptable benchmark percentages then action must be taken. A review of your business financial accounts may well find that whilst your business does not fall within the ATO benchmarks, there is nothing illegal or unusual about your business. You may have simply had a poor trading year or perhaps timing issues in your accounting records may throw out percentages from time to time.
There can be many reasons for falling outside the acceptable bands, but the lesson here is that you must be prepared to explain why, to the satisfaction of the ATO. So the message is clear – take interest in your financial accounts and not just how much money is in the bank. Be proactive, speak to your accountant or trusted financial advisor and make sure your financial accounts are bullet-proof, because I can assure you, the ATO has some serious weaponry in its arsenal and it's ready to fire.
John Corias is Senior Partner at m.a.s accountants.
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