The ATO make it clear in their compliance program for 2013-14 that they will be active in their review and audit practices.  They have set their benchmark  to data match over 640 million transactions to tax returns this year.

What triggers an ATO audit is shown by your tax compliance – in particular your annual income tax return.

Businesses demonstrating best practice will have an active tax risk management process in place involving both senior management of the business and their key external advisors.  As an accountant we suggest that you are proactive in looking for  likely audit triggers before they become an issue.

1. Have financial performance that is out of the ordinary with your industry

As a matter of course the ATO will statistically analyse your tax returns.  For business clients one of the aspects analysed is their performance compared to industry peers- also known as bench marking If you are inconsistent with the industry, this can be an indicator of tax issues such as unreported (cash) income, transfer pricing and other issues.

2. Don’t pay the right amount of superannuation to your employees

If employees complain to the ATO that their employer has not paid them the right amount of superannuation, or not paid it on time, this is a sure fire way to get a review or audit from the ATO.  Often these types of audits can begin as a review of superannuation guarantee obligations, but quickly escalate to include income tax, GST and fringe benefits tax audits if the process isn’t appropriately managed.

3. Variances between tax returns and business activity statements

Reconciling the information reported on your business activity statements and your tax returns is a crucial part of tax risk management.  Large variances between the information reported in a tax return compared to the activity statements for the corresponding period is likely to trigger an ATO review or audit.

4. Have a poor record of lodging returns on time

It’s not just lodging annual income tax returns by the due date, but all compliance obligations (including activity statements, employee related reporting, fringe benefits tax etc.) and the on-time payment of any tax liabilities.  A good compliance history can be invaluable due to the way it improves the ATO’s perception of a business and individual.

5. Consistently show operating losses

The ATO regards 3 loss years out of 5 as indicative of problems.  There may be genuine reasons, but the ATO is more than likely to want to investigate these.

6. Own motor vehicles, but don’t lodge an FBT return

The ATO receive data from the state and territory motor vehicle registries (in NSW this is the Roads and Maritime Services) regarding individuals or businesses that have purchased vehicles (generally those with a value of $10,000 or more).  For businesses, the ATO then match these purchases with information reported in tax returns, activity statements and fringe benefits tax returns, with an expectation that there will be at least some private use.  If the company or trust fails to lodge an FBT return showing private usage, or doesn’t include a ‘fringe benefit employee contribution’ in the income section of the tax return, an ATO review or audit is likely to be just around the corner.

If an audit is triggered because of the business owning a motor vehicle, the audit will generally cover income tax, GST and fringe benefits tax.

7. Get the disclosure items wrong in your tax return

The tax return is the main way that ATO gathers information on your situation.  Making mistakes in the disclosure items can inadvertently cause the return to be flagged for a review.  There are internal checks in the returns (superannuation, cost of goods and withholding tax are examples) and disclosures which are easily verifiable against publically available or other information collated by the ATO (such as the existence of international transactions).  Get these disclosures wrong and the ATO is likely to call.

8. Show big fluctuations between years

The ATO will compare your client’s tax returns year on year.  Big fluctuations in financial position or particular line items in the tax return can trigger an inquiry from the ATO.

9. Have international transactions

International transactions are a key area of focus for the ATO.  Transactions with international related parties, transactions with tax havens, material funds transfers in and out of Australia are all examples of things that can raise a red flag at the ATO.  Defensive strategies, such as transfer pricing documentation, can often be the best way to manage this risk.

It is not just large businesses which are the focus in this area.  Small and medium sized businesses with any international transactions should seek appropriate advice given the recent legislative changes which increase the personal risk Directors bear when their company conducts international transactions. The ATO are now reviewing sites such as Ebay also for personals that are failing to disclose their activity .

If you feel you could be a target, give us a call and we can review your situation.