The ATO is on the prowl this year with a focus on small and medium sized businesses. Tax expert Jolyon Dare dissects the danger.
In recent months, the Australian Tax Office (ATO) has indicated that it will be undertaking an increased number of audits of small and medium sized businesses over the coming year.
These audits are intended to identify situations where businesses aren’t “playing by the rules”, for example by using the cash economy.
Following are some of the most common questions asked about ATO audits.
Am I at risk of an ATO audit?
One of the main ways that the ATO identifies potential problems is by using industry benchmarks. This means that all businesses within a certain industry are compared to each other in areas such as profit or turnover, to see if there are any exceptions that may signal the need for an audit.
For example, in the takeaway food industry, the key area is cost of sales to turnover. This means that a takeaway food business that is consistently reporting a ratio of greater than 49 percent on its tax returns is outside the benchmark, and it’s likely that it will get a visit from the ATO.
What happens in an audit?
When the ATO undertakes an audit, the onus is on the business owner to explain why it is outside the benchmark, and to convince the ATO that there are valid reasons for this. It can be a very stressful experience for business owners.
How can I avoid being audited?
Prevention is always is better than cure, and business owners may find it well worth their while to take steps to keep them out of the ATO’s spotlight.
For example:
Businesses are identified for benchmarking purposes according to the ANZSIC industry code on their tax return. Make sure the code provided by the business is the right one.
Review which industries the ATO has benchmarked on its website at http://www.ato.gov.au/businesses/pathway.aspx?pc=001/003/102&alias=businessbenchmarks
Note which benchmarks the ATO thinks are most important for each industry. For example, in the clothing retail industry, this is cost of sales to turnover
If a number of different descriptions could apply to a business, consider choosing one that isn’t benchmarked.
What should I do if I am audited?
The best results are achieved by giving the ATO good quality information quickly. To help with this, businesses should make sure that they maintain good records of:
- Sales, income and expenses
- Labour costs, including superannuation payments
- Non-capital purchases
- Equipment costs, including motor vehicle expenses
Ensuring such information is up-to-date, accurate and easily accessible can make a big difference for a quick and simple audit, not one that drags on and becomes increasingly costly to the business.
What is the ATO looking for?
Generally speaking, the ATO is looking to ‘walk through’ a typical receipt to amounts reconciled and banked and subsequently reported on tax returns or activity statements.
If businesses can quickly and easily show that their processes would detect a cash sale that did not get banked and reported, they are in a much better position to show that cash takings are correctly stated.
Jolyon Dare is a tax partner with accountants and business and financial advisers HLB Mann Judd Sydney. www.hlb.com.au.