Surviving a tax audit

"Hello, this is the Australian Tax Office …" Those seven words on the other end of the phone are enough to fill a small business owner with dread. But why are we so scared of the ATO?

The main cause for concern, says Garry Addison, senior tax counsel with CPA Australia, is that a call from the ATO may result in ATO officers conducting an audit, "which can be time-consuming and costly for a small business owner," he says.

"Even if the call does not lead to an audit, the owner may still incur additional costs if they have to seek assistance from their accountant or tax agent to respond to the ATO queries."

How it works

The first thing to know is that ATO audits or tax enquiries happen every day, and they're rarely sprung on you.

"The Australian Tax Office is active in reviewing small business tax returns and business activity statements particularly in seeing the business meets the ATO's benchmark for that industry," says Frank Brass, regional director of tax accountants H&R Block.

Initially, you're sent a letter letting you know that the ATO has picked up that something is missing from your tax return.

If you agree the amount should be on your return you don't need to do anything; "we will issue you with a 'notice of amended assessment' telling you how much you need to pay," the ATO says. This can involve interest and penalties. If you disagree with the ATO, the letter will tell you what to do next. You might, for example, be asked to allow ATO officers to do a review of your books.

"If we find evidence during a review that you have not met your tax obligations, we may decide to conduct an audit," cautions the ATO.

When this happens, the ATO expects you to give tax officers "full and free access to buildings, premises, records and documents. Records and documents that are in confidence between you and your barrister, solicitor, or professional accounting adviser are excluded".

However, Brass says the ATO is more intent on catching businesses with a reckless disregard for the tax rules than chasing you for something you've missed from your books.

"The ATO states that if you make an honest attempt to comply with the complex tax laws, they will not penalise you for an honest error," he says, although you may have to pay any general interest charges on the tax not paid.

What you can do

Addison says that if you are going to be audited, it's always wise to seek professional advice from your tax agent. "They will ensure that you are aware of your rights and that the audit is properly conducted in accordance with the relevant tax law and the ATO's administrative practices in this area," he says.

Instead of stressing about being audited, Brass advises individuals and businesses to concentrate on getting their records in good shape as a matter of course.

"For individuals, keep track of the receipts or records of purchase for everything you intend to claim. File this 'proof' in one central place so that it's easily accessible if you need it," he says.

"For businesses, balance each period of your BAS to your books to make sure your tax returns agree with your BAS total for the year."

It also helps to know the norms regarding tax requirements when it comes to your industry sector.

"If your business is outside the business norms, they may be targeted for an audit or a review," he adds. "So make sure your business is within the norms."

• Find a personal loan
• Find a credit card
• Find a home loan
• Find a savings account