Are you at risk of being audited this year? Tax expert Jolyon Dare dissects the danger.
Am I at risk of an ATO audit?
One of the main ways that the ATO identifies potential problems is by using industry benchmarks.
This means that all businesses within a certain industry are compared to each other in areas such as profit or turnover, to see if there are any exceptions that may signal the need for an audit.
For example, in the takeaway food industry, the key area is cost of sales to turnover.
This means that a takeaway food business that is consistently reporting a ratio of greater than 49 percent on its tax returns is outside the benchmark, and it’s likely that it will get a visit from the ATO.
What happens in an audit?
When the ATO undertakes an audit, the onus is on the business owner to explain why it is outside the benchmark, and to convince the ATO that there are valid reasons for this.
It can be a very stressful experience for business owners.
How can I avoid being audited?
Prevention is always is better than cure, and business owners may find it well worth their while to take steps to keep them out of the ATO’s spotlight.
For example: Businesses are identified for benchmarking purposes according to the ANZSIC industry code on their tax return.
Make sure the code provided by the business is the right one.
Note which benchmarks the ATO thinks are most important for each industry.
For example, in the clothing retail industry, this is cost of sales to turnover If a number of different descriptions could apply to a business, consider choosing one that isn’t benchmarked.
What should I do if I am audited?
The best results are achieved by giving the ATO good quality information quickly.
To help with this, businesses should make sure that they maintain good records of:
• Sales, income and expenses
• Labour costs, including superannuation payments
• Non-capital purchases
• Equipment costs, including motor vehicle expenses
Ensuring such information is up-to-date, accurate and easily accessible can make a big difference for a quick and simple audit, not one that drags on and becomes increasingly costly to the business.
What is the ATO looking for?
Generally speaking, the ATO is looking to ‘walk through’ a typical receipt to amounts reconciled and banked and subsequently reported on tax returns or activity statements.
If businesses can quickly and easily show that their processes would detect a cash sale that did not get banked and reported, they are in a much better position to show that cash takings are correctly stated.