The Australian Taxation Office (ATO) makes it clear in its annual compliance program that it will be active in its review and audit practices. For example, it expects to data-match over 640m transactions to tax returns this year. Damian Sutherland of William Buck outlines eight common ways that private businesses risk triggering an ATO audit.
What these triggers show is that your business’ tax compliance – in particular the annual income tax return – is more than a routine process. The ATO uses this as a key method to assess audit activity and select businesses for review. Businesses demonstrating best practice will have an active tax risk management process in place, involving senior management and key external advisors.
- Have financial performance that is out of kilter with your industry
As a matter of course the ATO will statistically analyse your business’ tax returns. For manufacturing businesses one aspect is performance compared to industry peers. If your data is inconsistent with the industry, this can be an indicator of tax issues. The ATO releases industry benchmarks, though they are limited for the manufacturing industry due to the diverse range of businesses in the sector and the inconsistency of the data. More information can be obtained from the ATO website.
- Don’t pay the correct superannuation to employees
If employees complain to the ATO that their employer has not paid the right amount of superannuation, or not paid it on time, this is a surefire way to get a review or audit. These audits can begin as a review of superannuation guarantee obligations, but quickly escalate to include income tax, general sales tax (GST) and fringe benefits tax (FBT) if the process isn’t appropriately managed.
- Variances between tax returns and business activity statements
Reconciling information reported on business activity statements and tax returns is a crucial part of tax risk management. Large variances between a tax return and activity statements for the corresponding period are likely to trigger an audit. In a recent case, a business was selected for an ATO audit primarily because disclosures of capital and non-capital items on the activity statement differed from expenses and depreciable assets reported in the income tax return for that year (even though the correct GST and income tax had been paid to the ATO).
- Have a poor record of lodging returns on time
It’s not just lodging annual income tax returns by the due date, but all compliance obligations (including activity statements, employee-related reporting, FBT, etc) and on-time payment of liabilities. A good compliance history can be invaluable in improving the ATO’s perception of a business.
- Own motor vehicles, but don’t lodge an FBT return
The ATO receives data from state and territory motor vehicle registries regarding individuals or businesses that have purchased vehicles (generally with a value of $10,000 or more). For businesses, the ATO matches these purchases with information in tax returns and activity statements, with an expectation that there will be at least some private use. If the company or trust 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 audit is likely to be just around the corner. If an audit is triggered by the business owning a vehicle, the audit will generally cover income tax, GST and FBT.
- Unusual or incorrect items in annual tax returns
The tax return is the main way the ATO gathers information on your business. Making mistakes in disclosure items can inadvertently cause that business to be flagged for review. There are internal checks in the returns (such as superannuation, cost of goods and withholding tax) and disclosures that are easily verifiable against publically available information or other information collated by the ATO (such as the existence of international transactions). Get these disclosures wrong and the ATO is likely to call.
The ATO will compare tax returns year on year. Big fluctuations in financial position or particular line items can trigger an inquiry. The ATO regards three loss years out of five as indicative of problems. There may be genuine reasons, but the ATO is likely to investigate.
- Have international transactions
International transactions are a key focus area for the ATO. Transactions with international related parties or tax havens, and material funds transfers in and out of Australia are examples that can raise a red flag. Defensive strategies, such as transfer pricing documentation, can often be the best way to manage this risk.
It is not just large businesses that are the focus in this area. SMEs with any international transactions should seek appropriate advice given recent legislative changes that increase the personal risk directors bear when their company conducts international transactions.
- Be in the papers
The old adage may be that all publicity is good publicity, but when it comes to tax risk, being in the papers can easily attract the attention of the ATO. A major transaction or dispute reported in the media will undoubtedly be seen by the ATO. Many business owners are selected for a review after the sale of a high-value asset (often the family home) is reported.
ATO audits can be quite involved and costly. It is worthwhile that businesses are aware of how they record and report information, and work in conjunction with external an accountant to ensure their statutory obligations are on time, accurate and cross-referenced.
Damian Sutherland is a director of William Buck (Vic) Pty Ltd Chartered Accountants. AMTIL has a service partnership with William Buck as an exclusive benefit to our members. For more information, contact AMTIL’s Corporate Services Manager Greg chalker at gchalker@amtil.com.au. Damian Sutherland can be contacted on 03 9824 8555.