SMEs Come Under the ATO Microscope

ATO Audits and How to Avoid Them

According to the Assistant Commissioner of Taxation, Tom Wheeler, over 400 small to medium sized enterprises are about to receive a visit from the ATO as part of a crackdown on cash based businesses.

They are targeting cafes, restaurants, salons and construction companies who are said to have “an unfair advantage” over other types of businesses. In fact, the ATO claim that some businesses in these industries frequently report “unrealistic income relative to the assets and lifestyle of the business and owner”.

The program is part of the ATOs initiative to educate and thereby increase compliance by SMEs that have significant cash dealings. These visits are designed to identify business owners who need extra support and small businesses found to be non-compliant will potentially be audited.

Who Can Attract an ATO Audit?

12 million Australians lodge tax returns each year. Of these, the ATO contact about 350,000 regarding discrepancies. Two of the main targets are illegitimate deductions on rental properties and excessive claims on work related expenses. The ATO has warned that taxpayers falsely claiming deductions should expect to be penalised. All tax returns lodged this year will be scrutinised by the ATO’s sophisticated data matching systems and will focus on:

• Private travel expenses
• Work expenses which may have already been reimbursed by employers
• Excessive deductions claimed on holiday homes
• Splitting of rental income between spouses
• Unsupported deductions for jointly owned properties
• Maintenance claims on newly purchased properties

Over 600 million pieces of data are reported to the ATO by third parties every year including banks, employers, insurers and state and federal agencies. The ATO use this data to cross-check income and expense claims that resulted in $950 million in liabilities last year.

Independent Contractors

Independent contractors (particularly in the building and construction industry) suspected of avoiding their tax obligations can also expect to be targeted by the ATO's data-matching program. The ATO’s data matching program electronically matches the payer’s ABNs against the contractor’s, and cross-checks all relevant details. Data may also be collected from other businesses associated with the contractor or payer businesses.

5 WAYS TO ATTRACT THE ATTENTION OF THE ATO

1. Industry Benchmarks – Comparative Financial Performance  

The ATO have accumulated a huge amount of statistical data across a large number of industries and they use this data to compare your business’ financial performance against industry benchmarks. If your business performance sits outside a certain range you might find you come under audit scrutiny. Simple benchmarks like net profit to turnover or wages to turnover can trigger an audit or ‘please explain’ letter. If your business is underperforming compared to the industry average and you operate in a ‘cash industry’, be warned.  

2. Unwanted Media Attention

In business, not all publicity is good publicity. If your business gets media attention for the wrong reason you might find your business under the ATO’s magnifying glass. A guest appearance on a current affair show that highlights some poor customer service or misappropriation of funds can trigger some unwanted attention. A major transaction like the purchase or sale of a high value asset (including the family home) that gets media coverage can attract ATO attention.

3. Under Pay Staff Superannuation

Should an employee notify the ATO that their employer might not have paid the full amount of superannuation on their behalf or they failed to pay by the prescribed deadline (see table below) then this can attract a review or audit from the ATO. Experience tells us that these relatively simple superannuation guarantee reviews can quickly escalate into full blown tax audits.  

Quarterly Superannuation Payment Due Dates

4. Reconciling Tax Returns with BAS’s

Significant variances between the information reported in business activity statements and the tax return can certainly flag a business for an audit. Reconciling the information reported on business activity statements with the annual tax return is critical.

5. Prior Convictions

If you are a serial offender and fail to lodge your tax returns, business activity statements, employee PAYG Payment Summaries or Fringe Benefits Tax Returns on time you are asking for trouble. Regular late payment of tax liabilities can also flag your business for attention.  

Audit Protection

Of course, if you get an ATO audit we are here to help you. You can even insure against the likelihood of an ATO audit or review by a government agency like WorkCover. Audit insurance covers the fees you might pay to your accountant to handle the audit, attend meetings and respond to questionnaires and requests for more information. The cover is typically capped at $10,000 in professional fees and while it covers most of the costs it doesn’t protect a business owner against fraudulent activity.

If you have any concerns about an audit or would like to discuss audit insurance options please don’t hesitate to contact us.