The scary side of tax time: the audit
Frighteningly we are already approaching tax time again! Taxation is one of the most complex issues that will face a small business. One of the more time consuming and stressful aspects of managing your small business tax is an audit or tax investigation undertaken by the Australian Tax Office.
The ATO regularly review small business returns and activity statements to ensure they are in line with industry benchmarks already determined by the ATO. An audit typically begins with a phone call from a representative of the ATO which may or may not then develop into a full audit of your financial records.
What happens during an Audit?
When a tax audit is undertaken you will be expected to give the ATO full and open access to all your document, records, systems and premises – regardless of whether your accounts are accurate and in order or not, a tax audit can be a disruptive and stressful time. During the audit, the ATO is checking to make sure that the details you have reported in your tax return and activity statements is accurate. Some things they may check include:
If the deductions you claimed are valid and directly related to your business and that the amounts are accurate
If you have declared all sources of income and that the amount of income you have declared is accurate
If you have declared and calculated other tax obligations correctly
During a business audit the ATO will also look at the assets owned and the lifestyle maintained by the business owner. If the expenditure of the business owner far outweighs the income declared for the business, the ATO will investigate further.
How long will it take?
Depending on the size of your business the audit process could take anywhere from a few days to an extended period of many months.
How can I make sure I am prepared if I should be the subject of a tax investigation?
There are a number of ways you can reduce the stress and inconvenience of a tax audit. These include:
Make sure you have full records for any expenses you plan to claim in your tax return (most of these must be kept for a five year period (some may be shorter – the period of time you need to keep your records for will depend on the type of deductions you are making)
Employ a professional tax accountant to help you with completing your tax return and activity statements – the tax laws are complex and your accountant can help ensure you only claim those deductions you are entitled to and that your records are accurate
Ensure your business or office insurance policy is up to date – this can provide you with financial support should you need to settle disputes with the ATO.
CGU offers comprehensive business and office insurance policies which include cover for the costs incurred by your accountant or registered tax agent in conducting an audit or investigation in relation to your liability to pay tax, providing you with the financial security to settle a dispute with the ATO should the need arise.
Click here for more information on the CGU business pack policies.
Always consult your adviser for insurance cover for your specific needs. Visit CGU.com.au to find an adviser.
About the Author
Barry Ferguson is an Underwriter with CGU Direct – Retail Business Insurance. Barry has been in the insurance industry for more than 15 years and delivers training and support to the CGU direct client support team.