Seven red flags that could land you with a tax audit
As the tax office moves swiftly to crack down on the cash economy and "high-risk" business sectors, tax specialist Murray Howlett reveals the red flags that can trigger an audit
According to February's senate estimates hearing, there are more than 280 tax audits of private groups and high-wealth individuals under way.
Work in this area has raised $545 million in liabilities, with $250 million in cash collections so far this year.
"We are starting to see the impact of the federal government's tax-avoidance taskforce and a significant increase in tax audit activity," says Murray Howlett, a tax partner with Pilot Partners.
"We are anticipating more funding for the taskforce to be announced in this month's federal budget and are urging business not to unnecessarily attract unwanted attention from the ATO.
"Make sure your tax file records reconcile and know where the risks are for your business - that way you will be better placed to respond to ATO queries. Be able to quantify any exposure to risk and know who may be liable.
"When it comes to audits, the tax office has little sympathy for mistakes, so pleading ignorance or carelessness is no defence."
So what are your odds of being audited? According to Howlett, seven of the more common reasons are:
- Luxury cars in company names
This is an easy one for the ATO as it has high visibility of car ownership (and leasing) through the state departments of transport. If cars are owned in a business there is a risk of fringe benefits tax. The ATO's own statistics indicate only 30% of people actually keep legitimate log books.
- Inconsistent records
There are multiple ways a business can lodge the same information, either through its income tax return, business activity statements, payroll tax or individual employee records. If the information doesn't reconcile and the data doesn't match, then the ATO is likely to issue a "please explain" letter.
- "Hobbies" and loss-making businesses
In the digital economy many people are regularly buying and selling items over eBay without thinking about the tax implications. The minute a "hobby" starts to make money then the ATO will ask whether tax must be paid. On the flipside, loss-making businesses may cease to be a "business" if they happen year in and year out.
- Living beyond your means or income
Make no mistake about it. The ATO is actively monitoring social media accounts. It has publicly stated it is investing in data collection analysis to find cases of people's declared income not matching their lifestyles.
- Cross-border cash movements
The bigger the dollars and the shadier the transaction's destination, the more likely it will be to raise the interest of the tax office. Vanuatu, the Jersey Islands, Lichtenstein, Hong Kong, Singapore and the Cayman Islands are just some of the destinations on the its watchlist.
- A significant number of contractor payments
The emergence of the "gig economy" is presenting new challenges for business. With more and more employees working independently, contractors are kryptonite for employers. The ATO rules around superannuation payments have tightened substantially in recent years, and any company director in any sector who deals with sub-contractors could be exposed.
- Outstanding tax lodgements
This sends a clear message to the tax office that your business systems and controls are not good. Late payments and lodgements may be the only prompt for it to come looking.