ATO Audit Activity to Increase

ATO Audit Activity to Increase.

The ATO have identified that Small Business is one of the largest (if not the largest) avoider of tax in a recent study.

The small business tax gap is 12.5 per cent, or $11.1 billion, making it significantly larger than the corporate tax gap at $1.8 billion, or 4.4 per cent, and the individuals not in business tax gap at $8.7 billion, or 6.4 per cent.

Of the $11.1 billion tax gap, 64 per cent (or $7.7 billion), is estimated to be due to the black economy, where businesses deliberately hide or under-report their income, and deliberately over-claim business expenses. So businesses deliberately avoiding tax, rather than those small businesses trying to do the right thing.

Regardless, ATO Audit activity is expected to increase across the board. Accountants Daily, Tax Institute senior tax counsel Professor Robert Deutsch and the CPAs have all indicated we expect stronger audit activity in light of the report. More information can be found here.

Holmans have personally witnessed this also. Holmans recently attended the initial ATO meeting for one of these “random” audits for a client. The ATO will be auditing 2 years’ worth of business figures for this client, and want to see every invoice (sales and purchase, every register tape) for the last quarter. In addition, they have requested we prepare reconciliations on key items like turnover, wages, GST, tax adjustments so-on for the last two years. They have also requested every business bank statement for the last 2 years, personal bank statements (to verify their living expenses) for the last year, and access to their business software records for the last two years to run their auditing software over it. So extensive, invasive, time consuming and expensive.

The ATO have estimated the audit will conclude in the audit middle of next year (9 months later). Why were the client targeted? Maybe we will never know, but it is probably because they are in an industry that has been identified as having a high percentage of players that do the wrong thing (think hospitality, building and construction industry, taxi’s, market operators, café’s). These Audits are easier to deal with if your business records are well organised and you are doing the right thing, as this client has. That won’t help reduce the time, cost or distraction in attending to the audit while the ATO come to the same conclusion.

Here is some useful information about your general record keeping and documentation obligations to ensure you are doing the right thing:

• General Record Keeping
• Deduction rules
• Do you fit the ATO benchmarks for your industry

If you have any questions or concerns about your business and being targeted by the ATO, please contact our office.