Taxing times

It’s something we all believe won’t ever happen to us. We tell ourselves tax audits happens only to the risk takers. We mistakenly find solace in the seeming randomness of those who do happen to capture the attention of the Australian Tax Office’s auditors, but the reality is that it’s rarely that haphazard. 

Unexplained wealth

Sophisticated computers are detecting more suspect claims than ever through data matching. The tax office now collects extensive information from banks, other government agencies and industry suppliers, and obtains the purchase reports on major transactions such as cars and property. This data is then reconciled against the income and expenditure that’s already been reported, triggering red flags when things don’t quite add up.

Fertile fodder for the country’s auditors includes the under-reporting real income, cash-only transactions and suggesting a business has been shuttered when it’s still operating. This year, the ATO has already warned it will be cracking down on additional income earned through the sharing economy too, which means the Mornington Peninsula beach house could be a source of contention rather than relaxation if the Airbnb takings have not been properly reported. 

And finally, if you’re still under the illusion the ATO isn’t strategic in its auditing, look at their publicly announced target lists which spells out the who’s who of job titles the ATO believes are particularly loose when claiming their work-related deductions.

High stakes

While it would be comforting to think the scrutiny is shared equally, if you’re a high-worth individual or privately-owned group that control assets of more than $30 million, you can expect the tax office to come knocking every four to six  years. 

This is because the ATO realises that within that cycle, there’s usually at least one significant event which will create complex tax implications and a shifting of wealth. Such events could include divorce, the sale of a business or the dissolution of a shareholder’s agreement and it’s this type of financial turmoil that the country’s tax officials are proactive in following up.

A history of aggressive tax planning, accessing business assets for tax-free private use and a lifestyle inconsistent with the after-tax income is also of note for the ATO among privately owned and wealthy groups. Not to mention, social media accounts filled with luxury cars, designer clothes and extravagant holidays all the while paying less than $15,000 in tax a year.

Be prepared

The Scout’s motto may be a cliché but being prepared continues to be practical and effective advice. If you’re under audit, you can expect the level of information that the ATO requests will be incredibly detailed. Nothing will be overlooked, including the minutiae of specific transactions. The subject of an audit has just 28 days to gather the necessary documentation once it begins, which can leave some scrambling to meet such a tight deadline.

Precise record-keeping dating back a minimum of five years, and a skilled financial adviser will help to alleviate the stress of an audit which can be all consuming. Getting the ATO case manager up to speed on how a family trust works can be a process, and that’s before the issue of the contention is even addressed. That’s why it’s crucial at the start of any audit proceedings to make sure your accountant is adequately resourced to deal with the time it demands or to refer you to a professional that does.

Adding it up

If your financial adviser does manage to secure a positive outcome, it won’t be without considerable manpower. During an audit investigation, accounting fees can escalate to as much as $50,000 quickly. It’s also impossible to predict how long it will take to wrap up an audit because it only concludes when the ATO is satisfied.

Protection is possible through audit insurance. While it does not cover any fines or shortfall in taxes should any discrepancies be found, it does cover the accounting fees accumulated throughout an audit. It’s important to note, that any penalties for serious offences uncovered in an audit are not tax deductible the following year.

Honesty pays off

There are ways to ensure an audit is a minor rather than major blip, and that starts with having a good relationship with the case officer assigned to your file. Providing all the information promptly and being available to answer questions readily will help all involved.

And, if you do discover something wrong, we at Moore Stephens recommend that voluntary disclosure is the best way forward. Most ATO case managers appreciate when the information is willingly disclosed, and while they can’t be forgiving of any oversight, they are more likely to be cooperative when finalising payment terms.