You have a Tax Audit, so what now?
We are noticing that there has been a marked increase in Audit activity by the ATO over recent time. Everyone dreads the thought of an ATO Audit but it doesn’t have to be that stressful, especially if you know how to handle the situation.
Firstly if you do get that dreaded ‘knock on the door’, immediately contact your Accountant and ask for their professional guidance and assistance. This may incur a cost, but for peace of mind it is money well spent. Your accountant will act as your agent and will have direct contact with the ATO. They can understand and speak tax office lingo and know how to answer their questions without raising further questions, plus will hold your hand throughout the process so that you may never have to get involved, other than providing them with any initial and/or ongoing information.
Any ATO audit can typically be broken down into seven basic stages;
- Information gathering
- The issue of a facts/position paper
- The taxpayer’s response
- The issue of assessments
- Objections and
- Settlements and alternative dispute resolution
There are 2 types of ATO investigations;
The ATO use reviews to investigate inconsistencies or risks about some activities, transactions or industries and try to confirm the risks. During a review they look for ways to help you comply with tax obligations. They will give you the opportunity to correct any errors by making a voluntary disclosure. If you do not make a voluntary disclosure, they may decide to escalate the review to an audit.
The ATO use audits to find, measure and correct errors. Some audits follow on from reviews where they confirmed there was a risk. Some audits will commence without first doing a review where, from the available information, they know there is a risk. If an audit commences without a review first happening, generally you will be given an opportunity to make a voluntary disclosure.
The reviews or audits the ATO conduct vary in their complexity. Usually they only involve a phone call or a letter asking you or your accountant to provide further information or verify your claims. In some cases however, a tax officer may visit you (although this is rare), or you may be asked to bring all your records for examination. They sometimes may decide to look more closely at tax returns making similar claims, or from within the same industry.
Property Investors always seem to be a target as there are usually large claims in the individual’s tax returns. The areas that generally let property investors down in an audit are, claiming costs for a capital improvement as a repair and maintenance. For example the cost of replacing an old kitchen with a new kitchen is a capital expense and should be depreciated over time vs written off against the income immediately. Other areas are, incorrect claims of the interest on borrowings, and inaccurate capital gains disclosures on the sale of a property.
When the ATO come knocking this is what they are looking for
1. That you have declared all the income you have received
2. That you have claimed the appropriate deductions against this income
3. That you have claimed the correct credits or offsets
4. That you have correctly withheld and reported PAYG amounts
5. That you have correctly reported any other tax-related obligations
As a safety net, Audit Insurance is something worth considering. For a very small annual premium you can have peace of mind in that if you are selected for a review or audit, and depending on the policy, the majority of your professional fees you pay to the accountant to assist you with the process, will be covered. To see if Audit insurance is right for you, speak to your client manager today.
(Non Executive Chairman and Co Founder of Chan & Naylor)
For more information on how you can cover yourself in the event of an audit please contact Chan & Naylor on 1300 250 122 or request a FREE 10 minute phone call.
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.