Business tax audits are at a record high as the Australian Tax Office (ATO) cracks down on those who aren’t paying their fair share. As any business that’s undergone an ATO tax audit would tell you, it’s a stressful and time-consuming process that’s best avoided.
In this article, we’ll take you through the red flags that can trigger an audit before covering the steps you can take to audit-proof your business. By the end, you should be well-versed in all the latest information on audits in Australia and prepared to protect your business.
What is a tax audit?
A tax audit involves the ATO reviewing someone’s tax affairs to verify the information they provided on their tax return is correct. The tax office audits both individuals and businesses, and they generally check whether all income was declared, deductions were accurate, and tax-related obligations were calculated and reported correctly.
How does the ATO choose who to audit?
Several factors may trigger a tax audit, including general categories the ATO elects to focus on each financial year. For example, the ATO honed in on record-keeping and work-related expenses in 2022. In 2021, they zeroed in on capital gains from cryptocurrency.
While you can’t control what the ATO decides to focus on in a given financial year, there are factors within your control that can contribute to you being selected for an audit. Below, you will find the most common red flags that can earn you unwanted attention from the tax office:
Financial performance above or below industry benchmarks
The ATO creates benchmarks for businesses by industry. If your business income and expenses fall outside the benchmark, the ATO will likely want to take a closer look.
Running a cash business
If you run a cash business such as a restaurant or takeaway store, you’re a prime target for an audit, especially if your expenses are disproportionately high compared to your declared income.
Not paying your staff enough superannuation
If a staff member complains to the ATO that you haven’t paid them the right amount of superannuation or you haven’t paid it on time, this is a surefire way to trigger a tax audit or review.
Income inconsistent with assets
The ATO can look at your assets, such as cars and properties, and then work out the estimated income you’d need to be able to reasonably afford them. If the income on your tax return is significantly less than this, the ATO will likely investigate further.
International transactions have become a key area of interest. Transactions with tax havens will certainly draw the attention of the ATO. However, this is far from the only category the tax office is interested in examining. If you fail to report any international transaction or report them incorrectly, you are at a far greater risk of triggering an audit.
Discrepancies between your tax return and business activity statements
If there are large variances between the information you report on your tax return and the business activity statements (BAS) you lodge to the ATO for the corresponding year, you’re at risk of a tax audit. For this reason, it’s crucial to fix any mistakes made in your BAS.
Pro tax tip: If a reported purchase or sale was correct at the time it was recorded on your BAS, but circumstances later changed, the ATO does not consider this an error. Instead, it is a revision, and you can make an adjustment via the ATO’s online services for business. Alternatively, you can have your bookkeeper handle any corrections or adjustments for you.
Other red flags
- A poor record of lodging your tax return;
- Owning a motor vehicle but not lodging a fringe benefits tax return;
- Large fluctuations in income and expenses between years;
- Consistently reporting operating losses.
How can you audit-proof your business?
The best way to audit-proof your business is to do the right thing each and every financial year. The desire to save money on your taxes may be strong, but if you end up facing an audit, you’ll look back and wonder why you put yourself at risk.
Here are the simple steps you can take to avoid being audited by the ATO:
- Include your entire taxable income on your tax return. This includes declaring:
- All your business earnings;
- Capital gains on assets such as property and shares;
- Any foreign income from property, shares, or employment;
- Any bank interest you earned.
- Only claim valid deductions, and ensure you can prove that:
- The expense relates directly to earning your assessable business income;
- You have a receipt or other documentation to verify that you paid for it;
- You paid for it in the year for which you’re claiming the deduction.
Need more expert tax advice for your business?
If you’re looking for professional accounting services or tax advice for your business, ITP has the friendly, qualified tax agents you need. We can take the stress of bookkeeping off your shoulders while helping you audit-proof your business and maximise your tax return. Sign up today to receive 20% off as a new business client.