On the back of additional funding and ever-increasing updates to their systems to identify high risk taxpayers, there’s an expectation that the ATO’s audit activity is going to increase.
And, for several years now, the ATO has used advanced technology and collaboration between other organisations to target their audits and reviews, and identify incorrect reporting on tax lodgements.
While this sounds like bad news for taxpayers, there’s a silver lining to these new advances and measures. In the same way the ATO identifies high risk taxpayers, it also works to separate those they consider low risk, too.
By doing this, every Australian taxpayer has the ability to manage their tax affairs to the best of their ability, and thereby become part of the low risk group.
In this article we look at five key tips that can help you minimise your audit risk.
Worried about an audit? With the right advice and support, you don’t have to be. Contact Liston Newton Advisory to speak to one of our business advice experts today.
1. Find an accountant that fits your business needs
It sounds obvious, but finding an accountant with the right knowledge and expertise, who understands your business needs, is the first step in being prepared for an ATO audit.
As with any industry, there’s a wide range of accountants available, each with a specific set of skills and experience, and each will operate slightly differently. Being ready for an audit requires extra knowledge, extra skills, and the ability to complete extra processes. So if your business has grown from its humble beginnings, you may have outgrown your original sole trader accountant.
Tax legislation is a large, complicated area of Australian law, and it may be more than what just a one-person show can handle. They need to be across all the information required to assess your financial needs. As such, you need to ensure your accountant has the capacity to take on audit preparation in the first place.
2. Stay up to date with ATO lodgements and payments
There are a number of ways you can find yourself on the ATO’s radar, the most basic of which is being to fall behind on lodgements and payments.
There are many lodgements you need to make to the ATO now, ranging from annual tax returns, to activity statements, and even Single Touch Payroll. By regularly following through on these tax obligations it demonstrates that your business understands the ATO’s expectations. And by showing that you understand your tax requirements, it lowers your risk profile and reduces your chance of audit.
A history of late lodgement, however, or missing payments altogether, clearly shows the ATO that your internal accounting systems and processes aren’t up to scratch. This broadcasts a higher risk of filing incorrect lodgements, or worse, the potential to actively do the wrong thing.
3. Review your key transactions, and get the right advice
There are a number of big financial transactions that can catch the ATO’s attention. While not a red flag, by any means, these are key business transactions that the ATO are likely to audit. So it’s important to have all the right information available to demonstrate what happened, why, and have the financial records to prove it.
These can include events like:
- Starting a new business, or restructuring your existing one
- Consolidating existing businesses
- Buying or selling a business, or property
- Undertaking a new investment
- Made contributions to your SMSF using non-cash assets
- Receiving additional business funding
- Dealing with international entities
- Accessing certain CGT concessions
- Claiming the government’s Research & Development tax incentive
This isn’t an exhaustive list, by any means. But the larger the transaction, the greater your risk of encountering scrutiny from the ATO.
So if you’re considering entering into any major transactions or business restructures, make sure you get the right advice before you undertake them.
4. Ensure your internal processes and systems are up to date
As part of their audit process, the ATO puts an emphasis on investigating a business’ internal controls and processes, so they can see how accurate your financial data is. As with many of their early engagement programs, determining how you enter and record your data is considered just as important as reviewing the numbers themselves.
It’s all about providing a reasonable level of comfort. If you can demonstrate your internal accounting processes are thorough and will provide you with correct figures, then they’re likely to place your business in the low risk category.
5. Work with the ATO on getting a public ruling or Commissioner’s discretion where required
As with any part of law, taxation law isn’t always 100% clear. Sometimes you’ll be presented with a situation where the application of law is down to interpretation.
In a situation like this, such as a large transaction, then it may be in your best interest to take the initiative and go to the ATO for a private ruling. They can then provide a level of certainty around the correct tax application.
This can be a lengthy process, and requires support and advice from both your accountant and a lawyer. However, if you want to be absolutely confident that the ATO agrees with your application of tax law, then a private ruling will be required.
The final word
In all likelihood, if you run a reasonably successful business and are in business for a long period of time, then an audit is inevitable.
But it doesn’t have to be a long, drawn-out, or painful process.
If you follow these five tips, then you’re going a long way towards preventing an audit. By demonstrating best practice in your accounting, your business can ensure that it’s fully prepared should an audit occur.
And to ensure best practice—and make sure you’ve got the best advice possible—we recommend partnering with an experienced accounting team.