As the ATO ramps up warnings about an increased number of audits and threats of big fines for tax returns that ‘don’t add up,’ those who’ve been through the process say it is as daunting as you’d expect it to be.
“is that generally, if you break the law in Australia, then under the judicial system, you’re considered innocent until proven guilty.”
But this is not necessarily the case if you get flagged by the ATO, and this is what makes the idea of a tax audit so daunting for small business owners,” he says. “The onus of proof is on the business.”
“And irrespective of whether or not there is something to prove or disprove at the end of the day, the audit process can be long, drawn out, arduous, stressful.
“But if you are ultimately hit with a debt notice, then things get worse, because your only option is
in-house mediation with the tax department itself. This means appealing your case to the same audit team who issued you the debt in the first place.
“What’s more, explains Michael, “the ATO can start debt-recovery straight away, even while you’re in dispute.”
A taxation audit can take weeks, sometimes even months. It takes all sorts of expertise and resources that SMEs generally don’t have at their fingertips.
There are certain anomalies in a tax return that can ‘trigger’ a tax audit, but each year the ATO chooses a number of specific areas of focus, and will often conduct random audits on tax returns these show up in.
This year, the ATO put work-related claims for dry cleaning and car expenses under scrutiny, along with investment property deductions and earnings from cryptocurrencies and sharing economy platforms, such as Airbnb and Uber.
And obviously, if the ATO does come calling then you want to have all the required paperwork at the ready, and be able to access any information the ATO may request – this will sometimes mean accessing previous transactions and tax returns.
“The issue is – even if the ATO gives you a clean bill of health at the end of the process, it can be a real interruption to ‘business as usual,’ pulling key people away from critical day-to-day tasks, derailing the focus of the core team. It’s time consuming, draining and costly,” says Michael.
If your business is ‘lacking’ good systems and processes, implement, ASAP. Accounting software such as Xero is ideal for small business, and Xero has recently launched a version for micro-businesses too.
Services such as ATB’s Virtual CFO can also be worthwhile for small businesses who can’t afford a specialist in-house resource, because its designed to provide strategic input, as well as advice as and when it’s needed, so that the day-to-day accounting functions run smoothly.
“The Australian tax regime is really complex and so it is worthwhile for every single small business to invest in a good accountant, or at the very least, a tax agent who understands their business.
It is definitely worth the cost. At ATB we offer fixed fees. We specialise in working with small businesses, so we know they need transparency around exactly what service they’ll get for the fees they pay, and that paying on a monthly basis assists with budgeting and cashflow,” he says.
Another option is audit protection insurance.
Audit insurance kicks in if you have been contacted by the ATO and officially been told you’re undergoing an audit. And it will cover accountancy fees incurred in responding to enquiries, questionnaires, audits, reviews and investigations of clients’ lodged returns, including those from previous years. It will also cover specialist fees, including legal fees.
“Basically, it means you can get professionals in to deal with the tax audit and keep on doing what you do best – running your business,” says Michael.
Year on year tax audits are increasing. Currently the ATO is conducting about 2 million audits a year.
“Rather than try to avoid a tax audit,” says Michael, “start running your business like you’re expecting one, and then if you do get the call, you’ll be as ready as you can possibly be. And if we can help, contact us.”