The Australian Tax Office (ATO) conducts audits of businesses and high net wealth individuals to ensure compliance with Australian tax laws. The aim of these audits is to ensure that the right amount of tax is being paid. There are heavy penalties for tax avoidance in Australia.
It is important to understand what triggers an ATO audit. Below are five common triggers.
1. Being in an ATO target industry
Each year the ATO publishes a list of industries that it is targeting for audits. Some industries are more common targets than others. For example, industries where cash payments are more common and the potential for tax avoidance is higher.
2. Your business income being low compared to industry benchmarks
The ATO compiles income statistics from the tax returns and business activity statements (BAS) of more than 1.5 million Australian businesses across more than 100 industries. Data matching is easy in the digital age we live in. It allows the ATO to establish income benchmark ranges for businesses in different industries.
If your business income is lower than the benchmark range for your industry, you will have more chance of being targeted for an ATO audit. However, if it is lower and you have valid reasons why, then there should be nothing for you to worry about. You might need to focus on improving your business performance instead.
3. Not declaring all your individual income (including overseas income)
Just like you need to declare all your income if you run a business, it is important to declare all individual income you receive. This includes additional passive income such as interest, share dividends, Airbnb rentals and government benefits, as well as any income you may have earned through short-term contract or freelance work as an individual (for example, driving for Uber).
The ATO has a sophisticated data matching system to detect undeclared income. If you are identified via their detection methods, this can trigger an ATO audit.
Declaring all of your income includes both domestic and overseas sources. The ATO has data sharing arrangements with more than 40 countries as part of their effects to ensure that all Australians pay the right amount of tax on their income.
4. Having a lifestyle that does not match your declared income
If you lead an extravagant lifestyle that does not match your declared income, this can trigger an ATO audit. For example, if you are frequently taking expensive overseas holidays or buying luxury cars or yachts, this can lead to ATO suspicion that you are not declaring all of your income which can then lead to ATO audits. They will wonder how you can afford your lifestyle and why you have seemingly unexplained wealth.
ATO auditors have been known to trawl the social media accounts of people they suspect of leading lifestyles that do not match their declared income. They look for evidence of extravagant spending and they have access to both bank and flight records.
5. You submit your tax returns and/or pay your tax obligations late
This can include all your individual or business ATO obligations, including GST (Goods and Services Tax), FBT (Fringe Benefits Tax) and Pay as You Go (PAYG) withholdings on behalf of your employees. Make sure you submit your returns and pay the appropriate tax amounts on time to avoid triggering ATO scrutiny and a potential audit.
If there is a valid reason why you cannot submit any ATO paperwork or payments on time, make sure you (or your accountant) get in touch with them to explain before you miss any deadlines.
6. Anonymous allegations of tax evasion being made against you
The ATO has a special number that any member of the community can call to report a case of potential tax evasion. If you lead an extravagant lifestyle, you may become an auditing target as the result of an ATO tip-off.
7.Not paying the compulsory superannuation guarantee to your employees
If you run a business and you employ staff, you have a legal obligation to pay 9.5% of each employee’s salary/wages into superannuation. If you do not do this (or you do not pay on time), this can trigger ATO audits on your business.
The instigation of an audit is normally instigated as a result of employees not receiving their super obligations and reporting it to the ATO.
8. Buying business-related vehicles, but not lodging an FBT return
The ATO receives information about new motor vehicle purchases from State and Territory registration departments across Australia. Business-related vehicles provided to employees are expected to have at least some private use and the ATO expects businesses to pay FBT on them accordingly. If an FBT return is not submitted for such vehicles, this can trigger an ATO audit. This audit may not only investigate FBT, but also business income and GST as well.
How we can help
Wilson Pateras can help to ensure your full compliance with ATO legislation. We can also help you to prepare for an ATO audit meeting if you are targeted, as well as liaise with the ATO on your behalf and attend the meeting with you.
Our team provides a full range of services for individuals and businesses.
Contact us today to discuss how we can help you and/or your business.