Nobody wants to learn that the Australian Taxation Office is auditing them. Even if the family in business is doing everything right, and their Perth tax accountant has been on the ball – the fear that something has been missed, or the cost and effort to respond to the audit, is never seen as a good news event.
How an ATO tax audit starts
The ATO will ordinarily call your Perth tax accountant and tell them the review will start. At this time, the general scope of the review is given, the period during which the review is discussed, including when the ATO will forward their questions for review, and the intended completion date for the audit is presented.
This point in time will often include a general discussion of the client’s activities and the type of activity being undertaken. It is ordinarily a very high-level discussion only.
In rare events, the ATO officer will contact the client directly. This is rare and typically happens when the underway and the ATO officer is gathering additional evidence.
Suppose the ATO contacted you directly for a review or audit, and you are unaware that the review or audit has started. In that case, you should ask if the Perth tax accountant was previously informed of the review, the date they were notified and the scope of the audit including timing and the expected completion date.
In particular, the ATO officer will always give you their telephone extension number. This will allow you to call the ATO officer back through the general ATO reception line to ensure you are talking to an ATO person. The caller could well be a scammer.
If the ATO officer insists on a payment today, you are likely talking to a scammer.
Understanding the scope of the ATO audit
Most families in business will consider any ATO discussion with you an audit. But that is not the case; most ATO enquiries are taken in the form of a review. Understanding the difference between a review and an audit is essential, especially regarding penalties.
As a guide, an ATO audit is more comprehensive (and costly) than a risk review. It is usually associated with more significant amounts of unpaid tax.
Reducing penalties for voluntary disclosure
Ordinarily, you will be given a date on which you can voluntarily disclose to the ATO that you made a mistake or underpaid your taxes. The date is normally early in the ATO examination process and can lead to a reduction in penalties and interest by 80%.
At Westcourt, we always document the high-risk areas for our clients and normally support the high-risk areas of taxation with a considered and thoughtful tax opinion.
Discussing disclosing these positions upfront with your Perth tax accountant is worthwhile as it shows that you are honestly managing your tax affairs and are not trying to hide your tax concerns.
Responding to an ATO audit
Your Perth tax accountant is the best person to respond to an ATO audit. While your records can look clear and easily understood by you, it is possible that they are not clear to another person. So, ensuring that your responses are clear and easily understood is critical to stopping the review quickly.
If the initial response is confusing, unclear or conflicted, then the ATO review can turn into an audit and become costly to stop.
When responding to an ATO audit you should do the following:
Look at your global tax affairs to see if there is a risk of mischief.
Sometimes, we are so concerned with micro matters that the larger issues at play are not clear. So, having a larger strategic discussion might shed light on an area that has inadvertently walked into an aggressive tax area.
Review your tax workpapers
The tax work papers prepared by your Perth tax accountant during the tax return preparation process are your first line of defence. The quality of the tax work papers will highlight the governance and care you put into your tax affairs and will showcase to the ATO that you legitimately care about the tax returns lodged and your ATO communication.
The Perth tax accountants’ work papers might be lacking. And that can sometimes require an honest and challenging conversation. Practically, the only time that the work papers are needed is when you are reviewed – and if the work papers are lacking, then the question should focus on what the advisor has been engaged to do along the way?
Respond to the questions
The ATO responses must be clear, and they must be clear without ambiguity or confusion. Sadly, many people lie to the ATO. So, giving the ATO a response that leaves no room for deception, confusion, or lying by omission is critical to stopping further questions and review.
The ATO response should follow the exact logic and reasoning of the initial ATO enquiry. Don’t jump around from topic to topic. Answer the exact questions so that no person can be confused or needs to consider.
Stick to the time frame
If the ATO asks a question, especially from the Next 5,000 review, the chances are that they know the answer. However, the ATO is often interested in how you answer.
So, if you make a promise to the ATO, you should stick to it.
Only answer the questions
Your opinion matters, but not when an ATO review is taking place. Only respond to the direct ATO question, and do not diverge into an area unrelated to the questions, no matter how tempting.
If you disclose a matter to the ATO, do it after discussing it with your Perth tax accountant. Sometimes, the disclosure is essential when you have made a mistake. The ATO review will likely identify the error, and you already have correction action before the review that has corrected the error.
Be professional
The ATO cannot be intimated, charmed, swayed or distracted from their job. While you might successfully persuade others in business through a side channel, it doesn’t work with the ATO.
Your best tax strategy is getting the ATO questions answered quickly, clearly, and on time.
The closure of a tax audit
When a tax audit or review successfully ceases, the outcome is quite an anticlimax. Normally, you are notified by letter that the audit/review has stopped, and the ATO reserves the right to look at your affairs later if needed.
If the audit responds with the ATO saying you owe more than you think, you can either pay the tax or object to it. At this stage, you will generally know why the ATO thinks you owe more and will have an opinion as to whether they are right or not. The notification is normally done through an ATO audit position paper.
At this stage you can either
- Pay the tax, and the penalty,
- Request an in-house facilitation, or
- You can object.
If the objection fails, you can then take the matter to the Administrative Appeals Tribunal.
Conclusion
The best time to prepare for a tax audit is when you engage with your accountant. Your accountant’s tax advice and tax returns are your first-line defence strategy for an ATO audit or review.
At Westcourt, we know that tax is a primary factor for a family’s financial success and wealth and the businesses they own. Getting your taxes and tax strategy set well early in advance is the best way to manage a tax audit. And being smart about the review is critical in getting rid of it. This is where Westcourt is a clear choice – tax is our main advisory area, and we are independent, award-winning, and global with a team of over 31,000 advisors internationally – so why not call us?
