The idea of being singled out for a tax audit or an ATO review is never a pleasant one, but nevertheless it should always be regarded a possibility. Through our Audit Shield service, all our clients have the option to be covered by our tax audit insurance policy, which offers financial protection against the unexpected cost of tax audit.
In this article, we thought it timely to pass on some of the latest facts and figures around tax audit activity, as well as the common pitfalls business owners should be aware of.
Audit activity affects all taxpayers – individuals, business owners and those with a Self Managed Superannuation Fund.
Employer obligations such as PAYG, Superannuation, Fringe Benefits Tax and Business Activity Statements were among the most common audit activity areas reported by Australian accounting firms during the 2021-2022 financial year.¹
As business accountants ourselves, these audit areas have the potential to affect around 80% of our clients.
In FY 2021-22, the six most common areas attracting audit were:
- Employer Obligations (PAYG/SG/FBT) 13.47%
- Income Tax (Full/General/Combined) 13.03%
- ATO (High Wealth) 10.94%
- Payroll Tax (All States) 10.32%
- Business Activity Statements (Pre & Post Assessment) 8.88%
- Income Tax (Rental Property) 7.38% ¹
Common pitfalls for business owners
By now, most small to medium enterprises have registered for Single Touch Payroll (STP), which means the ATO is immediately aware when PAYG or super obligations have or, more to the point, have not been met.
The ease with which revenue authorities are able to cross-check compliance information means audit activity has ramped up significantly. BAS reviews are also attracting increased audit attention.
The ATO has introduced a range of online calculators and tools to help curb errors, which should also hammer home the message that there is less wiggle room for employers to claim ignorance when it comes to accurate reporting and record-keeping.
Data-sharing with other government authorities is another way in which the ATO is tightening up compliance. Red flags raised in tax areas such as Payroll Tax, Land Tax or Stamp Duty can easily trigger audit action.
While accepting payments in cash is legitimate, businesses that conceal cash income are likely to attract audit attention due to the ATO’s benchmarking practices.
Considerations for individuals
For individuals, work-related expenses have been caught in the ATO’s crosshairs of late, particularly with the rise of working from home during the pandemic.
While most individuals do the right thing and have legitimate expenses to claim, those making excessive claims should be prepared to be scrutinised closely and potentially contacted by the ATO.
With revenue authorities increasingly using data matching, artificial intelligence and even social media, they can compare disclosures made in lodged tax returns to those of other taxpayers or against benchmarks.
If a data matching check escalates to an official audit, inquiry, investigation or review, the cost involved in defending a client’s position can accumulate quickly, regardless of whether any adjustments need to be made to their returns.
In our experience, even relatively simple inquiries from the ATO can demand hours of work and, depending on the circumstances, the cost of appropriate representation can be considerable. It’s for this reason we suggest you give consideration to Audit Shield, which covers what can be significant costs, up to predetermined limits.
The cover is comprehensive. It automatically covers previously lodged returns and covers the fees of any other external specialists (e.g. tax lawyers) engaged or instructed by us to assist in a response to audit activity.
Current Core clients will receive correspondence from us with an invitation to participate in this service. However, if you are reading this because you’ve stumbled across our article or you are reviewing our website, please feel free to contact us if you’d like to find out more about audit insurance.
If you need advice about this or any of the other topics we write about, please do not hesitate to call us on (07) 5438 8088 or email mail@corebusiness.com.au.
Core Business Accountants specialise in business advice for growing and mature family-owned and small and medium-sized businesses.
