While there is nothing pleasant about being audited by the Australian Tax Office (ATO). Even in a best-case scenario, it creates stress and chews up time and energy. At worst, if the ATO decides you’ve failed to disclose important information or misrepresented your financial situation, the financial penalties can be significant.i
While there is no way to guarantee you won’t be audited, there are things you can do to lessen the likelihood of it happening.
Be extra conscientious if you take cash
Accurately or otherwise, the ATO believes those who operate in the cash economy – restaurant owners, shopkeepers, tradesmen and taxi drivers among others – are disproportionately likely to fail to declare all their income.
This doesn’t mean you need to change careers if you sometimes get paid in cash. It does mean, however, that you can expect to be audited at any time. So be extra careful about having all your paperwork in order and following some of the simple precautions outlined below.
Try to avoid big income fluctuations
What’s most likely to get the red lights flashing at the ATO is either earning less than you have in previous financial years or less than others in a similar situation. The ATO has benchmarks for what it expects people in different industries to earn, which can be found on the ATO website.
Double-check your arithmetic
One of the most common triggers for an ATO audit is things failing to add up. This is a particularly tricky area for business owners. They can find themselves flagged for all sorts of discrepancies, such as inconsistencies between their income tax return and BAS on total sales and expenses.
Business owners should also be mindful that failing to pay employees the correct superannuation could result in a review of superannuation guarantee obligations. This can quickly snowball into audits of income tax, GST and fringe benefits tax.
Lodging your income tax returns along with all necessary supporting documentation on time, year in, year out, results in a good compliance history. That indicates to the ATO you’re serious about meeting your obligations and less likely to be engaging in creative accounting.
Make sure any international transactions are above board
There’s a growing political backlash against businesses and wealthy individuals lessening their tax obligations by transferring money overseas. The ATO is now closely scrutinising the international transactions of individuals and businesses. You may have good reasons to be sending money offshore but you should be prepared to prove that to the ATO.
Keep records of work expenses
Each year the ATO focuses on a particular area of non-compliance. For the 2015-16 financial year that area is excessive work-related expenses.ii
As a general rule, taxpayers are allowed to claim expenses related to earning an income, assuming they weren’t otherwise reimbursed for these expenses and they have the necessary records. Be aware though that the ATO is cracking down on those who push the envelope.
For example, if you’re claiming costs related to outgoings such as your mobile phone and internet you can only claim that proportion of costs related to work usage. Likewise, you can only claim work travel expenses in strictly circumscribed circumstances, such as when you have to transport bulky equipment to different locations. If you’ve done a training course, you can only claim it against your tax if it was relevant to your current job.
What are the odds of an audit?*
• On average, the ATO contacts over 350,000 taxpayers each year to alert them to errors in their tax return
• In the 2014–15 financial year, the ATO used over 650 million transactions reported by third parties to cross-check individual income tax returns and other income statements.
• In 2014-15, the ATO conducted around 450,000 reviews and audits of the 12.8 million tax returns filed by individuals. This resulted in revenue adjustments of over $1.1 billion. Cases involved omitted income or over-claimed entitlements such as deductions or offsets, including those significantly different to claims made by taxpayers in similar circumstances.
*Information supplied directly by an ATO spokesperson in July 2016.
Another area to watch is the $20,000 instant asset write-off. Business owners run the risk of getting audited if they attempt to take advantage of it for items that are going to be used or enjoyed privately, such as works of art. Attempting to claim the deduction for items that actually cost more than $20,000 is also likely to end in tears.
Share your proceeds of the sharing economy
The ATO has also announced it is paying close attention to income generated by the likes of Uber and Airbnb. If you’re earning money by providing services in the so-called sharing economy, make sure you’re following the guidelines. In some instances, this may involve getting an ABN or paying GST. The guidelines can be found on the ATO website.
Expect the Tax Office to use data matching
These days, new technology makes it much easier for the ATO to keep track your finances. Thanks to increasingly sophisticated data analytics and risk modelling, it is able to identify and review income tax returns that omit information or contain incorrect statements.
On the plus side, technology makes it easier to keep track of your financial situation and avoid an unwelcome audit.
Even so, making sure you pay your fair share of tax but not more can be a complicated business. So, please feel free to contact our office on (03) 9999 7200 or contact us here to discuss your end of financial year obligations.