As a business owner, property investor or trustee of a property investor trust, it’s possible that one day you could be selected for a tax audit. If this happens, it’s important to be aware that you – and not your bookkeeper or accountant – will be held responsible for any errors or omissions in your taxation affairs. This makes it very important to take a keen interest in your financial and tax affairs rather than simply handing them over to your accountant to manage.
As it is, you might have a tax or business accountant in Sydney, Brisbane, Melbourne or Perth that may not have kept you informed of what to expect if you do undergo a tax audit. In light of this, we’ve outlined below what you need to do to minimise your chance of an audit and to help make sure the audit goes well, and also what to expect before and during an audit.
What is a tax audit anyway?
First, we will explain what a tax audit actually is. Essentially it is an audit by the tax office that involves a more in-depth examination of your financial and taxation affairs than would normally be done. It does not automatically mean that you’ve done something wrong – so the first bit of advice your tax accountant may need to give you is: “Don’t panic!”
What you need to do
To stay in the tax office’s good books it’s important to do the following:
- Keep good records of all financial and taxation transactions and activity. It’s also important to keep your documents (both paper and electronic) for 5 years. Maintaining good records should be part of any wealth creation and asset protection strategy.
- Ensure that you are very aware of what is in your tax return before lodgement. If you find errors after lodgement, notify the ATO as soon as possible.
- Make sure to have strong internal controls in all financial transactions – such as dual authorisers of payments, and separation of related duties around cash.
- Consider getting a Comprehensive Audit Insurance Policy, which covers accountancy and legal fees in dealing with the ATO throughout the Audit process. Think of it like Car Insurance where it covers the cost of the panel beater and/or mechanic for repairing damage to your vehicle. Audit Insurance works in a similar way.
What to expect from an audit
According to the ATO, the typical pre-audit process goes something like this:
- Initial contact by phone to arrange a time for a meeting.
- Written confirmation of the meeting time, along with the meeting agenda and an outline of key issues for discussion.
- Holding of the meeting, where the auditors outline the scope of timeframe for the audit, milestones and expectations of the audit, a management plan, and their risk hypothesis regarding your tax affairs as well as where their formal powers might be exercised. The audit process may go as follows:
- The auditors ask questions regarding transactions and request documented evidence about the issues they are examining.
- Use of formal powers if required. While the ATO prefers a cooperative approach, they may need to exercise formal powers in cases where they suspect tax avoidance, or where they need to obtain information about third parties.
- Provision of a position paper, outlining an explanation of the ATO’s position and providing you with an opportunity to comment.
- The final audit report covering the outcome of the audit, and offering a final interview if necessary to discuss tax assessment amendments and penalties.
To sum up, it’s vital that you keep up-to-date with all your record keeping and ATO compliance, and that you regularly communicate with your accountant to keep abreast of your finances and taxation matters.
Keeping all your accounts and your compliance in order should minimise the chance that you will ever need to suffer a tax office audit! Chan & Naylor offers its clients various types of Audit Insurance Policies for different entities, with a comprehensive cover of the widest range of ATO, federal and state investigations under one premium and no excess.
Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.