Countdown to tax time: Avoid an audit

Countdown-to-tax-time-Avoid-an-audit-blog

For a lot of business owners out there, the word “audit” coming from their accountant is enough to induce heart palpitations.

Even if you know you are thorough with your record-keeping, there’s always a tendency to second guess yourself.

Having an audit doesn’t necessarily mean you have done something wrong; sometimes it’s just the luck of the draw.

To reduce the risk of raising a red flag, here are some tips that you should be aware of to help to avoid that dreaded phone call.

1. Personal transactions

I always recommend to my clients that they keep all personal transactions completely separate from their business transactions.

Even if you are a sole trader, have a separate bank account for personal use and keep your business bank accounts strictly for business. Online accounting software like MYOB Essentials includes time-saving features to help take care of the day-to-day bookwork.

2. Know the benchmarking standards for your industry

Benchmarking is how the ATO keeps tabs on businesses.

Most industries have a set of benchmarks that the ATO matches to businesses. For example, if you are in the restaurant industry, the ATO will know what your Cost of Goods for food or beverage should be sitting at.

It’s all about margins, so if you are in business, it’s a really good idea to have a chat to your accountant and find out what the benchmarking standards are for your industry to make sure you’re in line with what would be expected. Not only does this help avoid an audit, but it makes good business sense to know these things.

3. Report your income and expenses accurately

Report all income!

If you have a lot of cash transactions make sure that you have tight systems in place to ensure cash is reconciled daily.

Don’t be tempted to exclude cash from your reporting. For my clients who have cash businesses, I ask them to bank every cent. It makes it much easier to reconcile in your accounts.

You should also only claim legitimate business expenses. If you are unsure if a purchase is tax deductable, ask your accountant.

A few areas that are closely looked at are Travel, Entertainment and personal use of Motor Vehicles. If you do a lot of travel for business it’s a good idea to keep a travel diary, make sure you are across what can and cannot be claimed for entertainment and don’t forget to keep your log book in order for your motor vehicle usage.

4. Include everything

The ATO data matches with other agencies. If you have excluded things like interest, shares, dividends and capital gains, this could be picked up triggering an audit.

5. Lodge on time

Being a regular late lodger can definitely put you on the ATO’s radar. Staying on top of your bookkeeping on a regular basis makes it easy to lodge your BAS, IAS and tax returns on time.

Make sure that when you do lodge, you are lodging with the correct data to avoid having to make revisions down the track.

In the event that you are to receive an audit, the best thing that you can do is to be organised. When the audit takes place, apart from having accurately reported transactions, the Auditor will want see that you have good record-keeping systems in place, you have been able to provide all the required information and are co-operative with their requests.

 

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  • Evwill

    Is it true that the ato expects the audit to be funded by the the one being audited?
    And it can cost thousands of dollars?
    That’s why my accountant sells audit insurance

    • Stefanie Di Trocchio

      Hi Evert,
      Here’s some more information from the ATO: http://bit.ly/28Uvpju.
      Thanks,
      Editor, The Pulse

  • http://businessadviceandtax.com.au Duncan Smith

    Martine
    Good Article,
    Often I role play with my clients as to how they would handle questions from the ATO
    What record keeping and decision making was made.
    A large majority of my clients sign Tax Returns face to face – it is important that a business owner understands what they are signing. Often I look at Tax Returns that have not be signed by the Tax Agent or the Business Owner as email from the Tax Software was used by the Agent. The Tax Agent required a signed Electronic Lodgement Declaration but not a signed Tax Return.
    Understanding of a business by a proprietor and Agent are paramount in avoiding an Audit.

    From my experience, audits are reasonably rare.
    I understand the ATO would wish to converse with business owners before conducting an audit.
    A ATO Review may well proceed an Audit.
    Review Procedures may include a Letter.
    Letters include Benchmark Letter.
    As you mentioned, every Business Owner should hold a copy of their ATO Benchmark and have discussed the results of their business compared with the ATO Benchmark with their BAS/Tax Agent.
    My view is that this role would not be giving Tax Advice and could be conducted by a BAS Agent.
    The BAS Agent may want to work closely with the Tax Agent on areas where the ATO Benchmark is not met.
    It is important to respond to a ATO Benchmark Letter as a Audit may well result if a response is not received.
    One client received a Benchmark Letter – we replied that the business owner had started a family and would likely work part-time in the business for at least ten years. Nothing further was received from the ATO
    One client lost the Benchmark Letter and a ATO audit resulted.
    The procedure of the ATO was very interesting from a former Banker’s perspective.
    The ATO requested a Personal Budget to determine the lifestyle of the Taxpayer.
    The ATO wrote telling the Taxpayer what information to bring to the Audit (Bank Statements are not sufficient).
    My client and I worked closely on the ATO requirements and attended the interview.
    One question that the ATO asked was how many of the ATO requirements did I undertake before attending the audit. I said some/most – the Auditor replied that the main role of the ATO is often training/information.
    The ATO told me of an audit where the Tax Agent and the client had not worked closely together and had not provided the required ATO information. The Tax Agent was asked how he calculated Income – he replied he added up the deposits on the Bank Statement – Wrong Answer
    Always be prepared for a review or audit.

    Other Letters used by the ATO include Rental Property Letters and Cash Businesses Letter.
    An interesting initiative from the ATO is Certainty Letters. The ATO will confirm that the return has meet their criteria is considered low risk and no further action is likely.
    I believe that lodging early and have a good payment record with the ATO will help in being considered low risk.

    How to avoid a ATO Review or Audit?
    My advice would be to have proper record keeping and for a business owner to understand the expectations of the ATO. The ATO has a wide variety of information for small business owners.
    The Engagement Letter is a good way to start as it will state the responsibilities of the business owner (declare all income and holding of tax invoices, paying super etc) and the responsibilities of the BAS/Tax Agent.
    The Tax Agent Services Act 2009 requires an Agent to act within the Code of Professional Conduct and offers business owners Safe Harbour.
    Be Organised and do the bookkeeping/accounting regularly.
    The Business Owner should take a keen interest in the financial aspects of their business.
    Invite your Tax Accountant into your MYOB file and have the Tax Accountant review the MYOB file quarterly.
    Conduct Tax Planning (eg Salaries FY17) and Profit Planning on a regular basis.
    Duncan Smith
    Business Advice + Tax
    Saturday 05 November 2016

    • Stefanie Di Trocchio

      Thanks for your comments, Duncan. We agree – working through these issues with your accountant, bookkeeper or business advisor is the way to go.