Signs that your business is up for an audit

The Australian Tax Office (ATO) has announced its intention to step up activity in a bid to recover significant amounts of unpaid or underpaid taxes.

It’s important to look out for signs that your business is at risk. That way you can put together a plan to ensure you are in compliance and reduce the risk of being investigated.

Here are some sectors that could potentially be at risk of receiving an audit, as well as some warning signs that the ATO are looking for.

Overseas operation

Businesses with overseas operations have been named as an audit target.

Specifically, the ATO is looking to ensure that the way in which such business groups are set up are consistent with the legal structures that have been established.

They are also scrutinising so-called offshore marketing hubs to make certain that profits are not being manoeuvred out of Australia and are keen to close loopholes in anti-avoidance rules that currently enable some such schemes to escape their clutches.

Property investment

The ATO has announced its intention to arm itself with more information on property investment, using data matching from banks, share registries and Government departments.

Individuals with property portfolios should be aware of this focus and ensure all transactions are recorded and reported accurately.

Industry comparison

Industry benchmarking continues to be a focus for the ATO, and this year, they have implied that agriculture and farming could fall under their gaze.

Tradies

Tradies will continue to be under the microscope with a specific focus on high work-related deductions claimed by building and construction labourers.

This has been triggered by a significant increase in deductions claimed in recent years and fuelled by the ATO finding a high level of incorrect deductions in the investigations it carried out last year.

For example, travel between home and work can rarely be claimed, yet many tradies have been doing so.

Wealthy individuals

The ATO has also put what it refers to as ‘highly wealthy individuals’ on notice. These are people controlling over $30M net wealth.  Given the ATO raised over $1 billion from 291 such reviews last year, it is no surprise that this continues to be a focus.

Audit warning signs to look out for:

  • You are in non-compliance with your reporting requirements. It is important to file your BAS returns by the due date.
  • You are not completing your BAS returns properly. If you keep receiving notices from the ATO informing you that your BAS return was incorrectly completed, these could be followed up with a notice of audit. You can avoid this by having your accountant or tax agent complete the forms on your behalf.
  • The ATO’s ears will often prick up if you are claiming large GST refunds that appear out of the ordinary.
  • The ATO has published (and regularly adds to) headline benchmarking data on a variety of industries. You’ll find these on their website here. It provides a range of ratios that it monitors on both income tax and BAS returns.

Specifically, the tax office is looking to see whether your cost of sales and expenses and a percentage of your turnover fall within the ‘normal’ range for your industry, based on the size of your business.

Similarly, it monitors the percentage of non-capital purchases and a proportion of sales on your BAS return, as well as the proportion of GST-free sales that you are reporting.

If you’re outside of the standard range, your chances of receiving an audit are increased.

Receiving a tax order probably isn’t atop your Christmas list.

Regardless, as long as you have nothing to hide, you are properly recording and reporting all transactions within the required timeframes and you are not trying to reduce your tax liability by engaging in questionable schemes, then there really is nothing to worry about.

If you take the attitude that you might be asked to open your books to an ATO inspector at any time, you’ll make the right decisions in respect of your bookkeeping and accounting procedures.

In the event that you are selected for an audit, there is no reason that you would find yourself exposed.

Of course, if you are like many business owners and accounting is not your forte, you would be well served engaging an accountant to give your accounting records a thorough once-over and have them deal with the ATO on your behalf.

That way, you can sleep easier at night in the knowledge that you have an expert helping you keep in compliance.

The information provided here is of a general nature for Australia and should not be your only source of information. Please consult an experienced tax agent as each business’s circumstance will vary.