Nobody wants to attract unnecessary scrutiny from the Australian Taxation Office (ATO). Tax audits can be stressful and often very costly, and are increasingly well targeted now that the ATO’s data matching capabilities are making it easier to identify any discrepancies. The most effective way to avoid an audit is to do the right thing in the first place.
Whether it’s not declaring foreign or business income, claiming too much for work-related deductions or not paying your employees’ the correct superannuation, certain activities are likely to attract the ATO’s interest. There are a number of simple steps you can take to reduce the likelihood of the ATO taking a closer look at your personal or small business return.
Declare all your income
For individuals, it’s important that you include all of your taxable income in your return. The responsibility for including all of your income rests with you so it is important that you report everything as the ATO will use a wide variety of documentation to cross check and approve the information you provide. There are some common mistakes when it comes to individual tax returns which include not providing information in regards to capital gains received when selling shares or property, or forgetting income from overseas sources such as a business, rental property or shares.
When it comes to tax deductions, the ATO is particularly interested in your work related expenses. If your deduction claims are unusually high, in comparison to others in similar industries, the ATO becomes alarmed and will be likely to investigate further. The ATO’s guide to deductions for specific industries is a useful resource to ensure your claimed deductions are appropriate and will not gather further unwanted attention from the ATO.
Take care with property investments
Tax deductions claimed on your rental property are another red flag for the ATO. It is important that you understand the difference between claims for depreciation and capital works, and only claim expenses for periods when the property is rented, or genuinely available to tenants. It is also critical that you do not forget that you can no longer claim travel expenses for inspecting your property or undertaking maintenance.
The ATO is also interested in any non-commercial rental income received from a holiday home, so if you provide your property to relatives or friends at a discounted rate, you need to limit the amount of deductions you claim to avoid unwanted ATO attention. Furthermore, if you have a loan for an investment property and are claiming for the cost of interest on the loan, you must split your deductions into private and business purposes.
Watch your business reporting
When it comes to small businesses, the ATO looks for enterprises that incorrectly or understate their sales, both cash and electronic payments, or fail to register, so it is important that you keep good business records and lodge accurate business activity statements.
Businesses that report outside the normal business benchmarks for their industry are another warning for the ATO that attracts further investigations. These industry benchmarks are helpful for comparing your business’s financial performance against that of similar companies. However, they also provide the ATO with a useful tool for comparing tax payments and deductions claimed by businesses across the industry.
As electronic payment has become the popular form of payment, the ATO is increasingly interested in cash-only businesses, which it views as more likely to be avoiding tax. If your business operates and advertises as being ‘cash-only’, and does not accept electronic payment, you will need to keep detailed records of your takings and payments, due to the ATO being extremely interested in your tax returns.
Pay your staff correctly
In regards to the payment of employees, it is important to ensure you are deducting Pay As You Go (PAYG) tax from their wages and frequently forwarding this information to the ATO. It is also crucial that you are making regular Superannuation Guarantee (SG) contributions to your employees’ super funds in order to avoid unwanted ATO attention.
Not paying the correct amount of Fringe Benefits Tax (FBT), or incorrectly accessing FBT concessions, are also red flags for the ATO. If you are registered for Goods and Services Tax (GST), ensure you are actively carrying on a business or you may attract ATO attention and find yourself speaking to an ATO auditor.
Getting professional help is the key to ensuring your tax return is accurate. To ensure you maximise your tax return, and also know that it is correct and compliant, please give us a call on 03 5443 0344.