ATO Audits
The ATO is putting a lot of focus on taxpayers who operate in 'the cash economy', and whether they comply with tax and superannuation obligations.
The ATO uses a range of measures to check compliance, including reviews or audits to determine if taxpayers' have declared all of their assessable income, can justify deductions and offsets, and have met their regulatory obligations. No arguments here, proper planning is the best defence.
We experienced an aggressive and supercilious attitude on a recent audit. The approach was 'full guns blazing, we've got the power, we know what you're doing, we know everything'. Actually, they weren't right and got nowhere, but their approach was planned and strategic and could have been a problem for a client without the right records.
So, where did this come from?
Two cases in 2013:
- In Carter, the use of ATO small business performance benchmarks as a risk assessment tool was confirmed. Unless you have the records (till readings, bank statements, invoices, etc) and these enable tax liability to be readily ascertained, the ATO is authorised to amend the return (meaning, increase the income) based on its benchmarks.
- In Gashi, the taxpayers' lifestyle was far better than the tax returns showed so the ATO assessed on an estimate, calculated under the asset betterment test. The taxpayer lost in four Courts under the principle that 'the onus of proving an assessment is excessive rests solely with the taxpayer'.
The penalties in each case were 100% of the tax (Gashi was $2m tax +$2m penalty).
The lesson is clear; without all of the records, especially proof of income, the ATO is going to win and it is likely to be costly.
What can be done?
- Keep good records that explain all transactions but especially prove sales;
- Compare performance with benchmarks before lodging (we do this for every business);
- Consider the audit insurance offer which will be offered to you this month, a few hundred dollars covers many thousands of cost.