ATO audit activity is on the increase especially for businesses. The tax gap (what the ATO collect compared to what the ATO would collect if everyone was tax compliant) is on the rise with the latest figures showing a gap of $37.5 billion. The ATO are determined to try and reduce that gap. One tool they have are audits. While some ATO audit activity may be random, the ATO are more likely to target businesses who they think may not be doing the right thing. What are the red flags that the ATO are looking for?
Discrepancies in Reported Income
One of the most common triggers for an ATO audit is when your reported business income doesn’t match the data the ATO already have. A lot of information is reported directly to the ATO and the ATO have enhanced data matching software. The ATO have access to information from online selling platforms (e.g. eBay), sharing economy facilitators e.g. Uber), merchant facilitators (banks) and payment systems (e.g. PayPal). This enables the ATO to cross-reference the declared income against records collected from relevant organisations when processing tax returns. If there are discrepancies, it can raise a red flag.
Known Cash Industries
If you operate a business in an industry that is regularly paid in cash, you are more likely to be scrutinised. Some of these industries include hospitality, retail, and construction.
Cash transactions are more difficult to track and easier to misreport, so the ATO closely monitors these industries.
Business Benchmarks
The ATO collect a significant amount of data. They use this data to establish business benchmarks. These industry benchmarks are financial and activity ratios calculated from tax returns and activity statements.
When your tax return is lodged, it is automatically scanned by the ATO’s cross-referencing software. Being outside of the business benchmarks will not automatically result in an audit but it may put the business on the radar of the ATO.
Overseas Income or Assets
In recent years, the ATO has increased its focus on international tax compliance, particularly with the rise of globalisation and offshore investments. Failing to declare foreign income or assets, whether it’s rental income from overseas properties or offshore bank accounts, will be a red flag for the ATO. Australia has tax treaties and data-sharing agreements with numerous countries, so the ATO has access to much of this information.
Other Triggers
Some other red flags for the ATO include
– history of overdue returns
– consistently declaring business operating losses
– significant fluctuations in trading performance from one year to the next
– making headlines that are newsworthy
– complaints to the ATO from employees
While no one wants to face an ATO audit, understanding the red flags that can trigger one is the first step toward avoiding it. By keeping accurate records, ensuring compliance with tax laws, and seeking professional advice when needed, you can greatly reduce your chances of being audited.
Contact your local Accru advisor to ensure your business activities won’t trigger unwanted ATO attention.
