March 2014 Newsletter - How to survive a tax audit
How to survive a tax audit

How to survive a tax audit

Good advice can minimise inconvenience

With the Federal and State Governments facing debt and budgetary challenges, it is no surprise that both the Australian Taxation Office (ATO) and NSW Office of State Revenue (OSR) are planning to increase their tax compliance review and audit activities.

In the 2013-14 year, the ATO plans to undertake more than 1,000 audits and reviews of small and medium sized businesses, and will be contacting more than 2,500 to verify information. In addition, the ATO will continue to act on discrepancies in the reporting of employee payments like superannuation and PAYG withholding.

At the same time we are witnessing more activity from the OSR in reviewing payroll tax and land tax than ever before.

So, what should you do when you are faced with an audit or review of your tax affairs?

While the details below deal with the details of an ATO tax audit, many of the principles are the same when the OSR takes a look at land tax or payroll tax.

There are a number of things to understand when faced with an audit or review:


1. You should contact your professional advisor as soon as possible
It is important to obtain professional help and advice as early as possible in the process, to ensure you approach an audit or review correctly from the beginning.

This ensures that only accurate and relevant information is provided to the ATO, that a response is provided in a timely manner, and that a professional relationship is quickly established with the revenue officer involved. It also means that any potential problems or issues can be quickly identified and managed to reduce penalties or the likelihood of further action.

Both the ATO and OSR have strict standards and guidelines imposed on their officers in conducting a review or audit, and an understanding of these can help smooth the process and increase the likelihood of a quick and favourable outcome.

2. It might take some time - and money - to resolve
An audit is a reasonably thorough process and it can take some time, and a certain amount of toing and froing, before it is finalised. While the ATO officially has a policy of minimising the time, expense and inconvenience of an audit, the truth is that an audit can be a long and expensive process.

You should discuss the likely timing and cost of the audit up front with your advisor.
 
3. There may be penalties for non-compliance but these can be minimised
While an audit can lead to an increase in a taxpayer's tax liability, there is often also a penalty component added to the amount payable.

Generally, a taxpayer is liable for an administrative penalty where:


  • They make a statement to the ATO; and
  • The statement is false or misleading in a material particular, whether because of things included or omitted from it.


The amount of the penalty depends on the level of culpability displayed by the taxpayer (or their tax agent), and is charged on the amount of the tax "shortfall". Penalties are charged as follows:


  • Lack of reasonable care      25%
  • Recklessness                      50%
  • Intentional Disregard           75%


These penalties can also be increased by 20% where a taxpayer:


  • Took steps to prevent or obstruct the ATO from finding out about the shortfall or the false and misleading statement;
  • Found out about these shortfall or false and misleading statement after the statement was made and the ATO was not advised about it within a reasonable time; or
  • A shortfall penalty has previously been applied to the taxpayer.


These penalties can, however, be reduced in certain circumstances, such as:


  • Where the taxpayer makes a voluntary disclosure to the ATO, and the disclosure is judged to have saved the ATO a significant amount of time or resources;
  • Where the taxpayer (or their tax agent) treated a law as applying in such a way as agreed with advice given by the ATO, or published by the ATO; or
  • Where the taxpayer took reasonable care, or has a reasonably arguable position.


 4. You can object against the result of an audit
Under the terms of the ITAA, taxpayers who are dissatisfied with their income tax assessment can object against it. This process usually involves the lodgement of a written objection with the ATO, together with subsequent discussions and negotiations, and the provision of further information. These processes require experienced management, and should be managed by your tax advisor.

Where the objection process is not successful, a taxpayer can then choose to pursue their claim with the Administrative Appeals Tribunal (AAT) or Federal Court.

Generally speaking, audit and review activity is a fact of life, and should be nothing to worry about.

Good advice, both before and during the audit process, will usually minimise the inconvenience of an audit, and the prospect of penalties.

Accordingly, if you have been contacted about an audit, or are concerned about possible activity, you should contact your Goodwin Chivas & Co advisor on 02 9899 3044.

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