Tax audits are like that childhood scarey, hidden monster you used to think would come out at night as soon as the lights went off. Not only does it cause a disruption to normal business proceedings; audits also tend to add significant stress to business owners and employees alike.
However, with as many as 1000 businesses audited every financial year, there is a very real reality that your business could be targeted next.
So, what can you do, as a business owner to ensure that your relationship with the taxman remains a positive one?
The audit sweepstake
Getting selected for an audit can sometimes feel a bit like the lottery – you’re just waiting for your numbers to be picked. Unfortunately this is not the exciting kind where you win a lot of money, but in the sense that anything can happen.
The most important way to appease the ATO is by maintaining tidy and compliant books and records.
This of course, is easier said than done. And it really is a process that needs to be implemented in the business from day one; or as soon as possible if this process has been lacking in an established business.
There are so many different tools and software programs available these days to help business owners create efficiencies that enable business owners to comply with the ATO’s GST and tax requirements, as well as any bookkeeping requirements specific to an individual business’ needs. The chart of accounts and tax codes in the software are also set up to ensure accurate reporting.
Don’t be late
Another way to stay in the ATO’s good graces is by lodging all of your Business Activity Statements, Instalment Activity Statements and tax returns on time, every single time.
Quite frankly, late returns and unpaid balances are essentially a major red flag and that will more than likely result in unwanted attention from the ATO, which in turn may potentially trigger a request to audit.
However, as mentioned, the accounting software you’re using should have the tools to easily prepare your BAS and IAS and track the amount owed to the ATO. Cloud based bookkeeping programs like Xero, which is what we use at Lockwood & Ward contains many advanced features like bank fees which update instantly, so you are ready to submit your year-end results well before the due date.
In addition to avoiding late lodgement, businesses that update their records regularly are able to monitor business performance and identify issues before things spiral out of control. By monitoring cash flow on a regular basis, managing debtors, creditors, stock control, etc businesses are more likely able to avoid cash shortages that make it a challenge to pay their ATO debts.
Another way to avoid the ATO’s watchful eye is to make sure that your business falls within the benchmarks for your industry.
Every year the ATO releases small business benchmarks to compare like-type business performances against their ratios. This information is published on the ATO website and it derives benchmarking information from business activity statements and tax returns lodged by businesses.
It could be worth noting that if your income or expenses fall significantly outside of the parameters of these benchmarks, you can pretty much bet that the ATO will take special interest in your business activity. Be prepared to give them a status check if you’re in this situation!
So, what can cause you to fall outside the benchmarks?
Claiming personal expenses as part of your business, inflating deductions or underreporting incomes will distort your results compared to other businesses in your industry. Here are some examples of common mistakes that can distort business results:
- Topping up the fuel of family member’s cars and claiming it as business car usage.
- Claiming mobile phones that are private.
- Claiming personal trips as business related.
- Expensing capital items purchased.
- Over-claiming on GST – by claiming on items that are exempt of GST like donations, bank fees, drawings etc.
- Not reporting cash income
While your business doesn’t have to roll out the red carpet for the ATO, businesses that keep their books tidy, up to date and stay compliant should be able to sleep well at night knowing that in the event that their numbers are up, they will be well and ready for the taxman.
For more business tips and advice, email us via firstname.lastname@example.org or call us on 02 9299 7044