What Factors Trigger an ATO Tax Investigation into Your Business?


Tax Time is just around the corner and that means the Australian Taxation Office is entering its hyperactive phase, ramping up its Tax Audits on tens of thousands of businesses around the country. Over the past few years, the ATO has been increasing its scrutiny on businesses in order to stamp out tax rorting.

In spite of the tough penalties and the hawkish eyes of the taxman, there are still businesses that dodge tax or cleverly manipulate their books in order to minimize their tax burdens. While wealthy people and corporations can use legal tax avoidance routes such as income smoothing via discretionary trusts or family trusts and foreign subsidiaries, most people use barely legal or illegal techniques such as inflating deductions, understating the holding stock at the EOFY, bogus GSTs, fraudulent tax file numbers etc.

The ATO has been devising new techniques to snare these businesses including developing industry benchmarks that they can use to estimate the revenues of a particular business in a locality.

The taxman has even extended the reach and functionality of its data matching software. Whenever you submit your tax returns, they will cross-reference it against your financial records collected by other government agencies and institutions such as the super funds, the Department of Transportation, financial institutions, banks, Work Cover and Centrelink.

Sometimes, the tax scrutiny may take an unconventional route. There are cases where the taxman is even using social media accounts to determine if your income declaration matches your lifestyle as portrayed in your online persona.

Genuine Taxpayers in the Crossfire

While these techniques are aimed at ensnaring those who rort tax, there are cases where genuine taxpayers who file honest and detailed tax declarations may find themselves in the crossfire and be subjected to more intense tax scrutiny. They are generally not a nice experience and could result in you incurring significant costs even if your lodgments are accurate.

But what triggers the ATO to give your business a second look and a more thorough audit? Sometimes, it is just a matter of chance. ATO may randomly select businesses that will undergo an intense tax audit. Some are a result of anonymous tip-offs or the nature of your business: cash-only businesses attract more scrutiny.

Here is an overview of some of the most common red flags that are likely to get the taxman knocking on your doors even if you are a genuine and faithful taxpayer:-

Your Lifestyle Does Not Reflect Your Declared Income

If you are driving the latest Mercedes Benz, making frequent trips to Singapore and Hong Kong and living in Toorak while declaring an income of only $40,000 in your lodgment, the ATO will be very interested in knowing more about your lifestyle and how you are able to fund it.

The Australian Taxation Office is able to assess the assets that you own and your lifestyle and roughly estimate the amount of money that you will need to fund that lifestyle. If you are declaring an income that is way below their benchmarks for your lifestyle, their antennas will go up instantly.

It doesn’t help your case if you also happen to be a really flashy person with lots of glamorous Instagram photos. Not only does the ATO rely on the traditional instruments of tracking your assets such as records of sales and purchases but they also prowl on your social media accounts to see the kind of lifestyle you are living. Well, one of those eager eyeballs on your Instagram posts might just be an ATO taxman eager to get in on the action!

You are running a cash-only or cash-heavy business

From late 2017 to early 2018, the ATO has been on a scrutiny blitz that is targeting mainly cash-only small and medium-sized business. The raids have been so effective that they have netted the taxman more than $197 million in taxes and penalties.

If you are running a cash only business, it may be time to experiment with electronic payment options. Cash-only businesses can also take additional steps to minimize the risk of penalties and additional taxes by keeping proper records of their transactions, meeting their employer obligations such as paying pay-as-you-go (PAYG) and superannuation for employees and using the most current GST and ABN registrations.

Your Business is Performing Above or Below the Industry Benchmarks

As the taxman, the ATO has a very comprehensive data on small business activities in Australia. It applies this data in small business benchmarking in order to determine if your business is performing as expected. The benchmark is basically a financial profile of a typical business in a particular niche and geographical area based on the data that ATO collects every year. The financial profile covers data such as the costs, margins and the profitability of the business. So if your business figures are falling outside the margins that ATO has in its benchmarks, they may be interested in investigating why that is the case.

Discrepancies in Your Lodgment with the ATO

You might have lodged your returns on time but if there are large variances between the information that you have provided in your tax returns, they might trigger an ATO review or tax audit.

The following discrepancies are likely to raise the red flags:

  • A huge discrepancy between your income tax return and the business activity statements (BAS) on your total business sales and expenses.
  • A discrepancy between your business activity statements (BAS) and Payment Summaries on the business pay-as-you-go (PAYG) withholding and gross wages.
  • There is a discrepancy between the income tax returns and the FBT returns for your employee benefit contributions.

Before you lodge your tax returns, it is advisable to have an accountant Melbourne professional review and reconcile all your financial details to avoid raising suspicion.

You Fail to Declare Your Income

It is your responsibility as a business owner and a taxpayer to ensure that you declare all your income. Take your time with your tax lodgment in order to ensure that you avoid making errors, whether inadvertently or not, in your tax returns filings.

The most common income declaration mistakes you are likely to make include the following:-

  • Failing to disclose the capital gains tax on your asset disposals such as properties and shares.
  • You fail to declare your foreign income: Australians have vast global links and businesses in Asia, Europe and North America. If you have an income producing asset in a foreign country such as property or a business, you receive income from shares traded in a foreign country or you are employed in a foreign country, you have to declare that income in your tax returns.
  • Failing to declare or understating your bank interest
  • Failing to declare your business takings: If you are managing a small business and are understating your sales, the ATO will have a way of establishing that your figures are out of tune with the industry benchmarks.

Making Dubious Claims on Deductions

The Australian Taxation Office is deeply interested, in fact obsessed, with taxpayers taking advantage of its concessions to make dubious claims on deductions to minimize their tax burdens. If you are planning to make any work-related tax deduction claims, especially those under the “other” category, make sure you adhere to the following in order to avoid extra scrutiny from the ATO:-

  • Make honest claims. Do not make claims on things that you have not spent money on and which you can’t back up.
  • Avoid making claims for private expenses
  • Maintain good records that support all your claims.

Take Professional Advice

The key to avoiding tax-related problems in your business is to take professional advice from an accounting firm Melbourne practice. Tax laws and tax-related procedures are highly complex and tedious so if you are not familiar with the terrain, you are likely to make inadvertent mistakes that can be quite costly.

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