ATO Tax audits

ATO Audit

The moment when the Australian Tax Office undertakes an audit is a moment of reckoning for many small to medium-sized businesses. It is also a time when many clients approach our business for guidance on how to handle the situation (or fix the process).

If the ATO has commenced an audit, it is too late to start preparing documents that should have been done a long time ago. Modern tax law requires that current ongoing documentation be kept as transactions occur, and tax advice is no longer a “one-year hindsight affair”. Further, a tax audit (compared to a tax review) is a significant event with a much higher penalty regime.

So, for many SMEs, a tax audit is just part of the ATO tax compliance regime. It is normal for the ATO to ask direct questions to a taxpayer, and if these are responded to quickly correctly with the correct level of tax focus at the time, then the matter is completed. A common example is the main residence exemption where your address is located elsewhere – an excellent and legitimate position with a perfectly understandable question for the ATO.

Many high net wealth families are currently engaging with the ATO on their Next 5,000 program – which is effectively a review of how focused families are on managing their personal tax affairs and the quality of the tax advisor helping the client. And these programs will now likely be an ongoing, regular part of the ATO audit process for those families.

However, the ATO review has a few clear takeaways for a tax advisor.

Be upfront about your mistakes. The ATO review will typically have a point where you can show your mistakes and your riskier positions.

Consider this moment in time well. It can result in a significant reduction in penalties.

Meet your deadlines. Tell the ATO straight away if the ATO gives you a timeframe that you cannot meet (you have a wedding coming up or something). Do not wait for the deadline to sail past and then start to ask for an extension.
Answer the questions. If you are requested for something, provide it and do so clearly – do not rant about something not related to or beyond the scope of the audit.

Importantly you should keep a copy of all your written tax advice in one secure location. At Westcourt, we file all of our written correspondence on our client portal – so even if you have lost it, you know you can get it quickly.

And if a topic is not documented in writing, you don’t have advice on it. Internal file meeting notes, abstract emails and the returns typically mean that final advice was not provided.

At Westcourt, we perform well with ATO audits because:

Every tax return is attached with an advice letter that discusses the tax position taken in depth.
If you have asked us not to consider a tax position, we will document that – we don’t let you know that our scope was narrow after the event.
Our position of tax leadership within the profession and within the Tax Institute provides that we are at the leading edge of understanding the ATO administrative approach and attitude on positions of tax law.
Our gold partner status with CCH IKnow means that our tax library is one of the most extensive and well researched.
Our partnering with Business Fitness means that our well documented internal work papers will fully consider a tax position for a complex matter.
Our representative status as the Western Australian branch of the GGI Global Alliance Network gives us access to a massive range of tax practitioners for international transactions that cover multiple countries.

Frequently Asked Questions

What will trigger an ATO Audit Review?

The Australian Taxation Office (ATO) may conduct an audit of a taxpayer’s affairs if it suspects that the taxpayer is not complying with their tax obligations or if the taxpayer has a history of non-compliance. Some of the most common triggers for an ATO audit review include:

Large or unusual transactions: The ATO may be alerted to large or unusual transactions that may indicate tax evasion or avoidance.
High-risk industries: The ATO may focus its audit efforts on certain high-risk industries, such as the building and construction industry, where non-compliance with tax obligations is more common.
Data-matching: The ATO uses data-matching technology to identify taxpayers who may not be reporting all of their income or who may be claiming excessive deductions.
Tip-offs: The ATO may receive tip-offs from the public, other government agencies, or tax professionals about taxpayers who may not be complying with their tax obligations.
Previous non-compliance: The ATO may focus its audit efforts on taxpayers who have a history of non-compliance with their tax obligations.

It’s important to understand that the ATO has broad powers to audit taxpayers, and it’s a good idea to seek advice from a tax professional like Westcourt if you are concerned about an ATO audit. A tax professional can help you understand your rights and obligations during an ATO audit and represent you during the audit process.

What happens if the ATO audit you?

If the Australian Taxation Office (ATO) decides to audit you, it will send you a letter advising you of the audit and requesting information and documentation to support your tax returns. The purpose of the audit is to determine if you have accurately reported your income, claimed the correct deductions, and paid the correct amount of tax.

During the audit, the ATO may ask you to provide a variety of information and documentation, including bank statements, receipts, invoices, and other records. The ATO may also visit your place of business or request that you attend a meeting to discuss the audit.

If the ATO finds that you have underpaid your tax, you will be required to pay the additional tax, interest, and any applicable penalties. If the ATO finds that you have overpaid your tax, you may be entitled to a tax refund.

It’s important to understand that the ATO has broad powers to audit taxpayers, and it’s a good idea to seek advice from a tax professional if you are concerned about an ATO audit. The best time to manage a tax audit is before the tax audit starts. A tax professional like Westcourt can help you understand your rights and obligations during an ATO audit and represent you during the audit process. They can also help you negotiate a resolution with the ATO if necessary.

How can I avoid being audited by the ATO?

There is no guaranteed way to avoid an Australian Taxation Office (ATO) audit, as the ATO may choose to audit a taxpayer for a variety of reasons. However, you can reduce your risk of being audited by the ATO by following these tips:

Accurately report your income: Ensure that you accurately report all of your income on your tax returns, including all sources of income, such as employment income, rental income, and investment income.
Claim legitimate deductions: Only claim deductions that are allowed under the tax laws and that you are entitled to claim. Keep accurate records and receipts to support your deductions.
Report all foreign income: If you have foreign income, ensure that you report it on your tax return and that you are aware of your obligations under the foreign income tax laws.
Stay up-to-date with tax laws: Ensure that you stay up-to-date with the latest tax laws and regulations, and seek advice from a tax professional if you are unsure about your tax obligations.
Keep accurate records: Keep accurate and up-to-date records of all of your income and expenses, and keep them for at least five years in case of an audit.

By following these tips, you can reduce your risk of being audited by the ATO and ensure that you are in compliance with the tax laws. However, it’s important to understand that the ATO has broad powers to audit taxpayers, and it’s a good idea to seek advice from a tax professional if you are concerned about an ATO audit. A tax professional like Westcourt can help you understand your rights and obligations during an ATO audit and represent you during the audit process.