Does the thought of a tax audit make you break out in a cold sweat?
Being served notice of impending audit activity from the Australian Taxation Office “ATO” or the NSW Office of State Revenue “OSR” is generally the last thing any business owner wants. On the one hand, it can be like the doctor’s needle: it looks painful but when it comes to the crunch, it’s just a mild sting and it’s over before you know it. On the other hand, an audit can be a complete nightmare for a business owner, which could end in fines, penalties, additional tax and, at worst, criminal charges.
Below is the Nexia Court & Co tax audit survival guide:
Establish what type of audit it is and who is conducting it
First and foremost, the relevant office – the ATO or the OSR – will formally notify you of the purpose of the impending audit, the period of the audit, and when they would like to hear back from you. Notice periods can be 14 days to 28 days, but an application for extension may be granted.
It is important to clearly identify the type of audit that the relevant authority is to conduct, as well as the scope. This enables your adviser to quickly identify any area of weakness and be prepared to present either a voluntary disclosure position in the event of past mistakes (which reduces any possible penalties) and/or prepare arguments to support your position. Again, it is important to be fully prepared to counter any proposed reassessments before such action is taken. This is called the “negotiation stage”.
Likely areas which would be subject to scrutiny by the ATO would include: Income Tax (Income and Deductions), Fringe Benefits Tax (FBT), Goods and Services Tax (GST), Capital Gains Tax (CGT) and Superannuation Guarantee Contributions (SGC).
Whilst the auditors may stick to their mandate of auditing for a particular purpose, they may discover errors that lead to queries for other taxes under their relevant jurisdictions. If they suspect fraud, they may widen their investigation to prior periods or financial years beyond the usual two or three years.
Compile your Records
The notice period will give you adequate time to compile all your necessary records. You may require the assistance of your bookkeeper, administrative staff or need to engage the services of a specialist accountant, such as Nexia Court & Co. Good recordkeeping and filing help make this process a lot easier.
Audits may be completed at the taxpayer’s premises, or arranged to be undertaken at your accountant’s office. Sometimes, it is most convenient to do the audit at your premises, such as the case of a GST audit whereby the auditors may wish to see a paper trail and assess the controls such as POS systems and Z readings, etc. Some other audits may be best handled at your accountant’s office, where other records are more readily accessible.
Voluntary disclosure may reduce penalties
The ATO and OSR work on a self-assessment policy and devote only targeted resources for audit activity.
There are instances whereby, if you discover an honest mistake, where you can voluntarily disclose such an error to the relevant office and receive a reduced penalty. This may also be the case with interest, as often the earlier the error is detected, the less interest may be incurred.
Conclusion of the Audit
‘Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.’ -F J Raymond
At the conclusion of the audit, the ATO or OSR will explain the basis for any decisions and any adjustments made to your taxation affairs. They will allow you to explain circumstances which you believe could justify a reduction of any penalty or interest. This is where the services of an experienced adviser come to the fore.
In the event that you are served with a reassessment, you do have grounds of appeal by way of objection if you consider that the result of the audit is not satisfactory.
Remember: If you have been notified of any audit, prepare for it carefully and retrieve and review all of your records.
Sean Urquart is with Nexia Court and Co, for information on the services Nexia Court and Co can provide, please visit their website.