Ways to reduce the risk of a Tax Audit

|by Michael Courtin|Taxation and Compliance

Every year the Australian Taxation Office (ATO) contacts about 2 million Australian taxpayers to clarify or question information provided in their tax returns.

Most of the questions relate to unreported income and claimed deductions that appear too high or not linked to their business or work. The ATO have increased data-matching capabilities and can cross-reference the information declared in the tax returns against records collected from other government organisations.

Despite accurate and honest declarations, a taxpayer can still be selected for a tax audit or review by the ATO. This may involve a face to face meeting with the ATO, and requests for financial records for up to 5 years from the date of lodgement. Although some tax audits are random selections, some are triggered by certain factors.

Factors that could get trigger a tax audit

  • Financial performance above or below industry benchmarks
  • Running a cash business
  • Not paying staff enough superannuation
  • Income inconsistent with assets
  • International transactions
  • Discrepancies between the tax return and business activity statements (BAS)
  • Poor record of lodging tax returns
  • Owning a motor vehicle but not lodging a fringe benefits tax return
  • Big fluctuations in income and expenses between years
  • Consistently reporting operating losses

How to reduce the risk

  • Include the entire taxable income in your tax return from all sources, such as business income, capital gains on assets such as property and shares, foreign income from property, shares or employment and bank interest.
  • Only claim deductions that you are entitled to. The deduction must be directly related to earning assessable income. A deduction can only be claimed in the year it is incurred.
  • Ensure you tax lodgements are up to date which will also help avoid penalties and interest charges.
  • Maintain accurate records and keep relevant invoices and receipts.
  • Pay the correct amount of superannuation on time for your employees.
  • Check that your business’ financial performance is in line with industry standards.
  • Have minimal variances between tax returns and BAS.
  • Take out an audit insurance policy. Having audit insurance in place can take the pressure off by not having to worry about the professional fees which will be incurred in handling an ATO audit.

If you have questions on any of the above, or other matters relating to your tax or financial affairs, please do not hesitate to contact our office on (07) 5504 5700 to speak to one of our trusted advisors.

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