Over the next three months, the Australian Tax Office is planning to target up to 90,000 small businesses it says are failing to comply with their tax obligations.
Business owners would do well to take note of the ATO’s interesting and sometimes extensive tactics for gathering information.
One of my favourite audit anecdotes shows the lengths the ATO will go to.
A client was having trouble selling a residential property development so the ATO reviewed whether he was really doing a property development for resale (and entitled to substantial GST claims) or if he had built the properties to rent/live in. The ATO auditor told the client: “I know that there is someone living there because when I drove past last night, I could see an adult female through the window and the place was furnished with different furniture to what was used in the realestate.com advertisement!”
We also know that the ATO is really hot on third party information gathering. It is well within the tax office’s scope, but it can be quite embarrassing for business owners.
For example, a client of ours was under review when the ATO called their office and the receptionist answered. The ATO proceeded to ask her a series of questions about the business activities, explaining they were reviewing the business. Obviously, a business owner does not want the receptionist knowing they are under audit or answering questions about their business affairs.
We have also been contacted directly by the ATO wanting information on transactions of businesses that are not our clients but based on the information our clients had.
I didn’t think we needed to provide this but the tax office pointed us towards the Tax Administration Act, which sets out the Tax Commissioner’s powers.
So the message is simple: the ATO has extensive information gathering powers and if you’re not doing the right thing, you are running a serious risk of being caught. Even if you are doing the right thing, you may be subject to intense scrutiny; you need to be prepared and have a good accountant on your side!
So how can you protect yourself and ensure you’re doing the right thing?
No matter how cautious you are in keeping every receipt, docket and diary record, there is always a risk that your business will receive an inquiry from the ATO.
We know that to have an effective tax system it is necessary that reviews are undertaken, although that doesn’t help take the sting out when it’s you on the receiving end.
It is normal to feel some stress while you are under review and often there can be several rounds of queries from the ATO. It is important to know that a review is not an indication or suggestion that you or your business has done anything wrong. As long as the ATO’s requests are appropriately managed, the matter can often be resolved without amendment.
Reviews can be completely random or you could be selected because you fall outside of a norm across your industry. While there is no real way to know who will be chosen, there are some activities and transactions that will put you at a higher risk.
Businesses operating in industries where cash is a common form of payment such as cafes, hairdressers and tradespeople are subject to high scrutiny. The ATO provides benchmarks on its website for these industries and if the information that you report on your tax return is outside of these ranges, your risk of audit is high. There are many reasons why your business might not meet these benchmarks and if you operate in one of these industries, your accountant should check your figures against these benchmarks and try to identify why, so that you’re prepared if the ATO comes knocking.
Another way to almost guarantee a call or letter from the ATO is to lodge a Business Activity Statement (BAS) with an unusually large refund. This may happen because you purchased a large piece of equipment, for example. In these circumstances, the review generally happens almost immediately after lodging the BAS and, if you are not prepared, it can hold up the refund. Make sure that you have valid tax invoices for all of your purchases before you lodge your BAS and if you are registered for GST on a cash basis, check that payment has been made during the BAS period. Where all records are in order, these reviews are generally resolved very quickly and refunds are released.
Capital gains, particularly where you have been able to take advantage of small business, main residence or other concessions, are a common review area and it is for this reason that tax agents often require extensive information from you when we prepare your returns.
Tax reviews and audits take many forms – phone, in writing or face-to-face. It is generally advantageous to have a tax agent by your side when you’re dealing with the ATO as we understand how to best resolve the query. Where you’ve done the right thing there should not be any tax amendment as a result of the audit but it can sometimes be time consuming to respond to the queries. Tax Audit insurance is a relatively low cost way to protect yourself from the professional fees that you can be up for.
What if you know something is wrong?
If you know that something may not be correct in your disclosures to the taxation office and the ATO finds this out through the course of an audit, it has the power to charge up to 100% of the tax shortfall in penalties.
If you think that you may have done the wrong thing, the earlier that you make a disclosure the better. Making a disclosure before the tax office calls can completely remove the penalty and if a disclosure is made at the start of an audit, the penalties can also be significantly reduced.
Maree Caulfield is director of tax at MGI Adelaide.