Ten ways to trigger an ATO audit
As the financial year-end nears, the Australian Taxation Office (ATO) expects to data-match over 640 million transactions to tax returns this year.
With increased ATO scrutiny, private businesses are in danger of triggering an ATO audit, regardless of whether or not they have done anything wrong.
While ATO audits are now a well-recognised part of our tax system, they are still expensive and disruptive, and there are a number of ways in which a private business may trigger one:
1. Financial performance out of kilter with your industry
With the ATO statistically analysing tax returns, if your performance is inconsistent with your industry peers, this can be an indicator of tax issues such as unreported (cash) income, transfer pricing and other issues.
2. Hiccups in paying employee super
Employees who complain to the ATO that their employer has not paid them the correct amount of super, or not paid it on time, certainly trigger ATO’s interest. Often what starts as a review of superannuation guarantee obligations often escalates into an audit of income tax, GST and fringe benefits tax (FBT) if the process isn’t properly managed.
3. Variances between tax returns and business activity statements (BAS)
Reconciling the information reported on BAS to tax returns is a crucial part of tax risk management. Large variances between the information reported in a tax return compared to the activity statements for the corresponding period is another reason likely to trigger an ATO review or audit.
4. Poor lodgement returns record
A good compliance history is invaluable in bettering the ATO’s perception of a business, but lodging annual income tax returns by the due date is not enough! Aim to meet all compliance obligations and the payment due date(s) of any tax liabilities.
5. Consistently showing operating losses
The ATO regards 3/5 loss years as indicative of problems. There may be genuine reasons, but the ATO is likely to want to investigate further.
6. Owning motor vehicles, but not lodging an FBT return
The ATO receives data from the state and territory motor vehicle registries regarding individuals or businesses that have purchased vehicles. They then match these purchases with information reported in tax returns, BAS and FBT returns with an expectation that there will be at least some private use. If a business fails to lodge an FBT return showing private usage, or doesn’t include a ‘fringe benefit employee contribution’ in the income section of the tax return, an ATO review or audit is likely to be on your horizon.
7. Incorrectly stating disclosure items your tax return
Making mistakes in the disclosure items on your tax return can cause you to be flagged for review. There are internal checks in the returns and disclosures which are easily verifiable against publically available or other information collated by the ATO. Get these wrong and the ATO is likely to call.
8. Big fluctuations between years
Big fluctuations in financial position or particular line items in the tax return from year to year can trigger an ATO enquiry as to the cause.
9. International transactions
International transactions are a key area of the ATO’s focus e.g. transactions with international related parties, transactions with tax havens, material funds transfers in and out of Australia all raise red flags. Defensive strategies, such as transfer pricing documentation, can often be the best way to manage this risk.
10. Being newsworthy
A major transaction or dispute reported by the media will undoubtedly be seen by the ATO. Many business owners are selected for an ATO review after the sale of a high value asset is reported in the news.
Many of the triggers outlined can be easily managed with a proactive tax risk management process. And what these triggers show is that tax compliance – in particular annual income tax returns – should be treated as far more than a routine process.
Yet business owners can take a more proactive approach to managing their tax exposures. Those demonstrating best practice will have an active tax risk management process in place involving both management of the business and their key advisors.
Speak with OBT’s friendly Tax and Accounting team in Gatton on 5462 2277 to find out if you’re exposed in any areas or to enquire about audit insurance.
Source Dynamic Business