TAX AUDITS – WHAT
A tax enquiry or audit is an examination of your tax affairs by the
and are entitled to the deductions and tax offsets you have claimed on your tax return. The
as your Australian Business Number or GST registration. If a tax officer visits you, they will let you know the purpose of the visit at the
The enquiries or audits conducted vary in their complexity. Sometimes they only involve a phone call or a letter asking you to provide further information
or verification of your claims. In some cases a tax officer may visit you. In some cases you may be asked to bring all your records for examination.
paperwork you used to complete your tax return.
It is also possible that your tax return has been audited without you knowing about it. The
each account held with them has earned. Using this information, it is a simple check to see whether or not taxpayers have declared that interest
in their return. The
need to do anything. The
If you make an honest mistake, where allowed under the law, they will take this into account when considering any penalties that may be imposed.
In addition to honest mistakes, the law recognises that errors can be caused by a range of factors including carelessness, recklessness or intentional
disregard of the law.
penalties and possible prosecution action.
THE ENQUIRY OR AUDIT PROCESS
An enquiry or audit usually involves examining your tax affairs to make sure that the information is accurate and to confirm your taxation liability
following principles apply:
The tax officer conducting the enquiry or audit will outline the audit process and, where appropriate, will endeavour to guide you through the process
– particularly if you are experiencing an audit for the first time or are not represented by a professional adviser.
Seek to minimise cost and inconvenience to you.
NOTIFICATION OF AN ENQUIRY OR AUDIT
In most circumstances, the
The notification will be in writing, normally be made to your address for service and may be preceded by a phone call.
This notification will tell you the name and telephone number of the tax officer conducting the enquiry or audit and explain the expected nature, scope
and duration of the enquiry or audit and indicate the information and records that will be required.
of enquiry, the adequacy of your records, the availability of information, the complexity of the matter and the level of your co-operation.
your representative, you will be given reasonable time and opportunity to do so. They will also tell you about your rights and obligations
in relation to the enquiry or audit.
There may be situations where the
existence or integrity of documents, information or goods is under threat. Urgent access requires the approval of a senior tax officer. In
these cases the
HOW TO PREPARE FOR AN ENQUIRY OR AUDIT
If you have been notified of an enquiry or audit, you should prepare for it by reviewing your relevant records, tax returns, and activity statements.
Any error should be immediately disclosed. If you do this, the level of penalty that may otherwise have been imposed may be reduced. If you notify
AT THE START OF THE ENQUIRY OR AUDIT
At the initial interview, the tax officer conducting the enquiry or audit will provide Tax Office identification and a telephone contact number when
first meeting with you. If you ask, they will tell you the name and telephone number of his manager, except in very limited circumstances.
You will have the opportunity to volunteer information about any possible irregularity or omission in relation to your tax affairs. If you do this,
the penalty that may otherwise have been imposed may be reduced.
DURING AN AUDIT
the purpose of any interview or visit.
They also undertake to ask clear and unambiguous questions and provide you with all reasonable assistance and explanations to clarify their meaning.
You may choose someone to act on your behalf or to attend interviews with you.The tax officer will inform you in advance when he will have a legal
adviser present to assist him during an interview.
You will be given reasonable time to collect records, documents and papers for examination, and to gather information about any matter that arises,
collected at an interview and the
and if you ask, or where the
of the interview.
You can ask to be provided with a signed copy of the tax officer’s written record of interview. If the tax officer asks you to sign the record of interview,
he will explain the implications of doing this.
between you and your barrister or solicitor. In certain circumstances, they will allow for some advice to remain in confidence between you
and your professional accounting adviser.
allow you the opportunity to give your views on any relevant issue, including any proposed adjustments and keep you informed of the progress
of the enquiry or audit. How often this happens will vary according to the type of enquiry or audit being conducted.
Under the tax laws, the Commissioner can require a person to provide information, to attend and give evidence, or to produce any books, documents or
other papers in the custody of or under the control of that person.
When you are required under the law to attend a formal interview, you are the person who must answer any questions asked in the interview.
You may still choose to have your representative or adviser present. In this situation, you will be given a reasonable opportunity to consult with
your representative or adviser who can only advise you as to the meaning of a question, not what answer you should give.
In very limited circumstances, you will not be allowed to have your representative or advisor present, such as when your representative or adviser
may have had a role in the transaction under review. In this situation, you will be given reasonable time to obtain alternative representation.
Should you be required under the law to attend a formal interview, the tax officer will provide you with an explanation, before the interview, that
the law obliges you to answer questions put to you during the interview.
If you bring an interpreter to a formal interview because you don’t speak English, you are allowed to answer through the interpreter.
has resulted in you paying too much tax or receiving less than your entitlement.
They will clearly explain the reasons for any penalty or interest and how this will be calculated, and give you the opportunity to explain any circumstances
which you believe could justify a reduction of any penalty or interest.
Within seven days of making a decision the
that may be available to you.
Settlement meetings are usually held for more involved or complex audits. If there is a settlement meeting the tax officer conducting the audit will
be accompanied by at least one other officer, except in very straightforward matters.
Settlement agreements should be reached without any inducements or duress and the
In conducting audits and making enquiries, the
Generally, the tax laws provide for penalties to be imposed where the requirements of the law have not been met. In both cases there are different
rates of penalty based on the type of behaviour or the degree of culpability involved.
The law also provides for prosecution action to be undertaken for a range of taxation related offences. These offences include making a false or misleading
statement in a tax return, making a false or misleading statement to a tax officer and keeping incorrect or false records with an intention to
deceive or mislead a tax officer.
As discussed earlier a tax audit is a systematic examination of a taxpayer’s affairs by the
of community awareness and compliance.
Section 262 A of the Tax Act places the onus on the taxpayer to retain certain records to enable the income tax liability to be assessed and then verified
in the event of an audit.
The records must be in English or readily convertible to English. Adequate records can take many varying forms, but retention of records is essential.
As a guide, records must be kept for five years if you are lodging your income tax returns on time. Lack of adequate records makes taxpayers particularly
vulnerable to Asset Betterment Assessments.
RIGHT OF ACCESS
Before dealing with sections 263 and 264 we would stress that when faced with a full audit it is essential to seek professional advice.
Under section 263 an authorised
extracts from or copies of any such books, documents or papers.
The following matters should be considered if you receive a request for access under section 263.
- The access must be “for the purposes of the Act” and the
ATO officer must have proper authority.
- Under section 263 the auditor is not given the right to ask questions or remove records as this section does not contain the word “audit” or “investigation”.
ATO officer will normally provide an identification card and this should be checked to ensure it contains the necessary authorisation under
- You may ask for a clear statement of purpose to establish that the request for access meets the requirement in section 263 that access is for the
purposes of the Act. If this is not provided then correspond with the
ATO, requesting a written statement, promising full co-operation upon receipt of a satisfactory reply.
- Remember that the
ATO has no right to use force, but that you are obliged to provide the auditor with reasonable facilities and assistance. This would include
a desk, a chair and a power point for a scanner. The photocopier may be necessary because the
ATO may not seize documents. The auditor does not have authority to borrow or take away any of your documents or records.
- A taxpayer should take appropriate professional advice as to whether the auditor’s questions should be answered. Perceived exposures should be
balanced with the fact that penalties may be reduced if an early disclosure is made in an audit.
- It should be noted that a taxpayer is not under any obligation to answer questions and that it may be appropriate to request that written questions
- On occasion the auditor suggests that a tape recording of the conversation be kept. Again seek professional advice. You should keep file notes
of all discussions.
POWER TO OBTAIN INFORMATION
Section 264 is the only other section in the Act that authorises the
and certain limitations imposed by the Court.
ASSET BETTERMENT ASSESSMENTS
The Commissioner’s arbitrary power to issue Asset Betterment Assessments demonstrates how important it is for taxpayers to retain adequate accounting
and financial records.
Essentially a default assessment is the Commissioner’s estimate of your taxable income in a given year, taking into account your accumulation of assets
and his estimate of your living expenses.
The default assessments may be issued where you have failed to lodge an income tax return or the Commissioner is not satisfied that the return lodged
is complete or accurate. Once the
Effectively, you may have to satisfy the
in conjunction with your living expenses over the period.
In recent court cases the
records and documentation to support their contentions.
Most taxpayers want to know what issues are of interest to the
Risk assessment work in the property market has identified capital gains as a compliance issue for individual taxpayers. Taxpayers who disclosed rental
income in prior years, but no longer do so are being asked to explain the cessation of rental income, whether they have sold the property and if
so, whether there was a capital gain.
The ATOs focus will be on omitted or incorrectly calculated gains from rental properties, holiday homes and units, vacant land and residential property
purchased off the plan; Australian property owned by non-residents, shares and distributions of capital gains from managed funds.
understand the overall market. They also conduct risk assessments on sales of properties in high capital growth areas and properties sold off
a plan. They can examine the
The ATOs automated system also allows matching of large volumes of internal and external data.
Sources of external date include:
- Interest and dividend income
- Government pensions, payments and allowances
- Health insurance premiums paid
- Salary and wages, allowances etc.
In recent years data matching has been, and will continue to be, performed on millions of taxpayers, resulting in hundreds of thousands being contacted
with “please explain” letters.
The ATO’s data matching capacities keep on improving and around 780 million transactions a year are audited. Below are some recent initiatives.
Online Selling Data Matching Program
The ATO is requesting and collecting the user identification name and number, name, address, telephone numbers, date of birth, email address, registration
date, number of monthly sales, value of monthly sales, the IP address and bank account details of approximately 11,000 sellers who have sales of $20,000
and greater, in the current year through various online selling websites.
Contractor payments 2016-17, 2017-18 and 2018-19 financial years data matching program protocol
The ATO routinely collects data on payments made to contractors by businesses as part of our employer obligations compliance activities.
Contractors can be either individuals, partnerships or other types of entities. Contractors earn income by providing services to other businesses and are
generally paid upon production of an invoice by the contractor.
The data collected from businesses is used to identify contractors that may not be meeting their taxation through:
- not registering correctly with the ATO
- non-lodgement of returns
- failing to report payments received
- not paying amounts of tax due to the ATO.
The data is also analysed to detect trends and compliance issues enabling the ATO to develop and deliver educational products and tailored services. This
is an ongoing data matching program and has been conducted for more than five years.
DATA MATCHING 2017
There is no doubt that these initiatives are becoming more sophisticated and widespread.
The message is simple and clear – disclose all assessable income.
During 2016–17, the ATO cross-referenced information reported in tax returns against over 850 million transactions provided by third parties to identify
omitted income and gains, or incorrectly-claimed offsets or entitlements to exemption from surcharges.
The ATO also contacted nearly 300,000 taxpayers who had apparent discrepancies in the information they reported in their tax returns.
The majority of taxpayers who made errors on their return and had to repay money didn’t wait for all pre-fill information to be available. Nine out of
ten returns were adjusted as a result of our enquiries.
Traditionally the ATO has focused on areas such as omitted interest and employment income. However with better quality data now available from more sources,
they continue to expand data matching capability to encompass a greater range of areas, such as:
- capital gains tax from the disposal of shares and property
- employment related foreign source income
- contractor income from payments made by government agencies.
The ATO has started using auditors from other compliance areas to check on employers providing benefits that may be liable to FBT.
Employers outside the FBT system are being targeted. Where compliance work (an audit) is being undertaken primarily on other taxes, ATO staff have been
told to look at FBT issues where information held by the ATO indicates an FBT risk.
The most common example is the employer that has motor vehicles registered in the business name, but no FBT return has been lodged or any employee contributions
The ATO is providing additional FBT training to compliance staff in these areas. In 2016-17 the ATO has a particular focus on luxury vehicles.
HOW TO BE TAX SMART
When will extra ATO scrutiny occur?
Many taxpayers seem to ignore the obvious fact that the
The sale of family businesses whereby sale prices are understated to cheat on capital gains tax.
Family companies making big loans to shareholders. In these cases dividends are sometimes disguised as loans to avoid tax.
Illegal tax evasion schemes entered into to avoid a large “one-off” profit – an extremely profitable transaction may be scrutinised.
Successful public listings of private companies.
Avoid shady tax schemes
Given the increasing sophistication of the ATOs data matching and detection processes, getting involved in tax evasion schemes is asking for trouble. The
of being caught are now much greater.
Maximise legal tax breaks
Due to tax reform, tax can be minimised in legal and straightforward ways. For example:
Maximise superannuation deductions – note the tax-free payouts after reaching age 60
Negatively gear shares and property
Maximise gains on family homes which are exempt from CGT
Ownership of assets in discretionary trusts means distributions are paid to the lowest taxed beneficiaries.
SPECIFIC TARGETS IN 2017-2018
This is yet to be confirmed but it is unclear as to whether the ATO will continue to publish an annual “Compliance in Focus” document. However, the below
matters indicate where some ATO attention may be in 2017-18.
Occupations Targeted For Special Attention This Year
- Trades persons and labourers in the building and construction industry – for example plumbers, electricians, carpenters, tilers and concreters.
- Construction supervisors
- Construction project managers
- All sales and marketing managers
- Special attention related to the vehicles used by the construction industry – 1 ton utilities and above.
In the past taxpayers claimed 100% of the expenses related to those vehicles, especially if the taxpayer had the use of another vehicle for all the private
travelling done by the taxpayer. The ATO assumed that the private portion relating to the utility would have been minimal and normally allowed the
The ATO is now questioning the reason for the claim and how the percentage of work use was determined.
Log books for cars
Log books will be checked by the ATO to ensure the details have been recorded correctly
Self Education Expenses
Provided the course leads to an increase in the current skills of the taxpayer or to a promotion or to an increase in income and the taxpayer is currently
employed in a position utilising those skills, all the expenses related to that course can be claimed.
Seminars and self-development course
The seminar or course can only be claimed if the seminar/course is directly related to the taxpayer’s current income earning activity. In some instances
only some of the subjects in a course would be related to the current occupation. A percentage of the total course fee can then be claimed.
The main attention in 2018 will be on the loan interest, property repairs and property investment seminars/courses attended and claimed. Since 1 July 2017,
travel to inspect or collect rent on residential in