ATO Audits – What You Need to Know
Australia’s taxation and regulatory framework requires businesses, organisations, and individual taxpayers to comply with various laws and regulatory requirements. Broadly, these requirements relate to the reporting of correct financial information to the Australian Taxation Office in a timely manner, and compliance with requests from the ATO or other regulators for specific information or evidence to substantiate your reporting.
In proceeding with this article, we disclaim our writings and published content as making any legal claims with regard to the views, opinions, and information contained therein. This information is of a general nature, and the topics discussed are subject to variation in given circumstances or situations. Due care has been taken to only include information which is informative and that may serve to assist taxpayers in gaining awareness of their obligations and the regulatory requirements that may affect them.
The ATO may conduct an audit with relation to a number of tax issues, such as income tax, employment tax and employee obligations, Goods and Services Tax (GST), tax deductions, discounts, and concessions, and the production of statements and statutory documents just to name a few. Issues which may trigger an ATO audit or review could include the overstatement of deductions or the under-reporting of income, which both indicate a failure to comply with tax obligations.
For businesses and other organizations in particular, it is important to ensure compliance and minimize the risk of being audited, as facing an audit is seen as often seen as a sign of misconduct or negligence which has implications for the organization’s reputation. For any taxpayer, failing to comply may result in an enormous and unexpected tax bill which can have dire financial consequences, let alone the impact on professional status and credit viability.
As a business owner or the manager of an organization, or even as an individual taxpayer, maintaining an awareness of the record keeping and reporting requirements set out by the ATO and other regulators can ensure your compliance and reduce the risk of dispute or other action.
What Is an ATO Audit?
An audit is a detailed and comprehensive verification process, designed to assure the tax office that the audited party has complied with their tax obligations. The ATO has a number of methods which is may use to determine when an audit is to be performed on a party’s financial records. Detection systems, including data matching systems and systems that compare data from different public sources, such as government departments, with information obtained through the party’s tax returns or Business Activity Statements (BAS).
These methods may be used to conduct what is known as a risk review, which is basically a comparison of a given party’s financial reports and the standard industry figures or benchmarks. Such risk review processes may identify a discrepancy between the information reported by the party of interest and the data which represents the industry or sector benchmarks. If such discrepancies are identified, the ATO may conduct a review of the party’s financial statements or an audit, which is a more detailed investigation of the party’s financial position.
An ATO review may be the first step in this verification process, and involves an ATO-appointed reviewer checking relevant reports for misstatements or mistakes which may account for the discrepancy. This is why it is vital that all taxpayers keep records relevant to their tax liability, and that these records can be produced for the ATO in the event that a review is ordered.
If the ATO has grounds to believe that a standard review or follow-up would be unable to explain the discrepancies they have identified, or that the relevant party has not acted in compliance with their taxation obligations, they may then trigger an audit in to the party’s financial position.
How are ATO Audits Performed?
The tax office employs officers who specialize in the audit and review of financial information, known as ATO Audit Officers. If you are subject to a review or audit, an ATO Audit Officer may be assigned to examine your financial records and match this against the information that you have reported to the ATO. During this process, the auditor or reviewer may request information such as transaction lists, bank statements, receipts, or other proof of payments. The details may vary depending on the nature of the circumstances and the entity being reviewed or audited, as well as the nature of the discrepancy being investigated.
Following the initial review of this financial information, the appointed reviewer may be satisfied that the discrepancy can be explained by a mistake, or that the discrepancy does not reflect an attempt to avoid tax obligations. In this case, the review may be concluded and the reviewed entity or individual may receive important feedback on how they can minimize the risk of such action occurring again.
Should the reviewer conclude that the discrepancy cannot be explained through a review of financial information, or that the discrepancy indicates a deliberate attempt to avoid tax obligations, the matter may be referred to a department which initiates audits. If this happens, then the review will change into an audit, which is a much more thorough investigation.
What Is Targeted During an ATO Audit?
If the ATO decides that an audit is required to explain discrepancies in the information available to them, they may begin the audit process. This process involves the comprehensive analysis and verification of the audited party’s financial statements and other information. Generally, the focus of the audit will be on the source of the discrepancy which triggered the audit, but an audit should be considered as a thorough and complete examination of your financial position.
The Timeline of an ATO Audit
1. Once an audit has been decided upon as the appropriate method to determine the cause and nature of a discrepancy in financial reporting, you will receive written notification that an audit is underway. This notification may identify an Audit Officer who will conduct an interview with you face to face. You will be advised as to what to expect during this interview, and what information or documentation you may need to give to the interviewer.
2. At the interview, the Audit Officer may identify themselves and state their right to conduct the appropriate investigation, and may inform you about the reason for their investigation. The Audit Officer may provide you with their contact information, and ask that you forward them any questions or queries you have in relation to the audit. The Audit Officer may then spend time forming an understanding of the business, organization, or individual in question, and how it operates with regard to tax compliance and record keeping. This information may provide a blueprint from which the rest of the audit procedure may be derived.
3. Once the audit is underway, the ATO will make requests for any information or assistance they require from you to carry out their investigation. This will continue until they have obtained an appropriate amount of evidence to come to a conclusion on the matter and make a decision. Once the decision has been made, you will be informed of your rights, such as the right to bring a legal representative to the concluding interviews.
4. The final stage involves detailed questions and the answering of these questions, and will allow you to put your own questions to the auditors. Audit Officers may also make visits to business premises, these visits may or may not be announced. When the decision is formalized and the audit concluded, you will receive a written notice informing you of any adjustments made or penalties imposed, as well as the means by which you may object to or challenge the outcome of the audit.
The Importance of Tax Compliance
For businesses, individuals, and organisations alike, the task of tax compliance need not be a difficult one. Depending on the nature of your circumstances, you may need the assistance of a financial advisor or accountant to ensure that you are compliant with your tax obligations. Your accountant can advise you of these requirements and assist you in making the required reports and lodging documents with the ATO.
The best way to ensure compliance is to keep detailed records of your transactions and expenses, particularly if you wish to claim deductions on them. Record keeping can ensure that the required information is on hand should the ATO conduct a follow-up with you.
Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about auditing and accounting in Melbourne, or email us at firstname.lastname@example.org.