The possibility of being selected for a taxation audit is increasing each year as the Australian Taxation Office (ATO) widens the scope of its audit activity. However, the likelihood of being targeted for a tax audit is highest among those whose tax returns reveal that:
They have made apparently large or unusual claims, particularly in respect to work-related expenses or rental properties.
Their declared income is below the average for their industry or occupation.
Their deductions, or their ratio of deductions, are above the average for their industry or occupation.
There is a discrepancy between the dividend and interest payments declared in their tax returns and those provided by financial institutions.
The ATO may also obtain information from other sources (including from questionnaires sent to tax payers on specific topics) that raises suspicion of some form of non-compliance warranting audit action.
Businesses which attract the attention of the audit teams are those that appear to have:
Used a separate entity to split personal services income, or retained such income in a company.
Made excessive claims for depreciation.
Used business capital for non-business purposes.
Not recorded all sales.
Made excessive claims for motor vehicle expenses or understated Fringe Benefit Tax (FBT) liabilities.
Facing an audit
Audits are conducted in a variety of ways: some entirely by mail and phone and others by face-to-face meetings with the audit officers. If you are selected for an audit, you will receive written notification and you may also receive verbal notification as well.
Whether by mail or by interview, you will be asked to explain your reasons for any omitted income or excessive deductions. You may be asked to produce receipts or other documentation to support your claims.
You may be required to provide access to your business premises and residence at mutually agreed times and provide reasonable facilities, such as cleared space in which the audit officers may work.
How audits vary
There are several kinds of audits. They include:
Audit officers interview taxpayers at their business premises to ask questions about their record-keeping procedures and may also examine their records. When irregularities are found, further audits may follow.
Wage, salary and contractor payments audits
Audit officers visit employer premises to examine PAYG records.
Small business owners and salary earners are asked to substantiate expenses claimed in their tax returns within 28 days. If the claims for the most recent return are found to be incorrect, substantiation for earlier years may also be sought.
The books of small companies, trusts and partnerships are inspected to establish the nature of all transactions. The audit officers will require substantiation of income and expenditure.
The records of the business are examined to verify the accuracy of GST payments and claims for input tax credits.
The records of businesses are inspected to check that all fringe benefits are disclosed and correctly calculated.
There are other audits, called complex audits and tax strategy review audits, which are carried out on large companies in particular industries and on companies with international affiliations. These may extend over a period of years.
What to expect
The ATO instructs its audit officers to adhere to a set of principles in carrying out audits. These principles entitle audit subjects to expect that audit officers will:
Produce identification at the first meeting and explain the purpose of any interview or visit.
Act in a professional and courteous manner and show fairness and impartially in the conduct of the audit
Give taxpayers reasonable time to collect records, documents and papers required for an audit and to gather information on any other matter that might arise during an audit.
Arrange interviews with tax payers at mutually convenient times, usually during normal business hours.
Your auditing checklist
To get yourself into the best possible shape for a tax audit:
Verify the cost of all assets so that depreciation claims may be confirmed.
Check all records of capital expenditure to ensure that none have been used for non-business purposes.
Ensure that all sales have been properly recorded.
Check that you have substantiation for all motor vehicle expenses.
Check the accuracy of all FBT declarations
Check that you have substantiation for all travel expenses.
Check that you have full details of any payment to subcontractors, including names and addresses and amount paid
Check that any declarations of interest or dividends match the amounts credited in your bank or dividend statements.
You do not have to face an audit alone. You may choose to have your accountant present at any meeting or interview. As your professional advisor, we will be able to answer all technical questions.
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