27.5 C
Saturday, May 28, 2022

What Your Business Needs to Know About Tax Audits

Must read

The Australian Taxation Office (ATO) is conducting more business tax audits than ever before, imposing hefty penalties on businesses that are failing to comply with tax regulations. While some business owners are purposefully deceitful when it comes to their tax returns, many Australians make innocent mistakes that can come back and bite them in a major way.

A business tax audit involves the government reviewing everything related to a businesses tax affairs and the information stated on their tax returns. This can include checking whether all of their income was declared, deductions have not been taken advantage of and that all tax-related responsibilities have been handled correctly.

With this in mind, it’s important to make sure that your business is compliant with Australian law so that you can avoid the stressful and lengthy process of an audit. To help you out, here are several red flags that can trigger a tax auditor to visit you and what you can do to avoid these errors.

Being a cash-only business

Cash only businesses are at a higher risk of being audited as it’s easier for them to avoid their tax and superannuation obligations. Many cash-only businesses have been found to pay their staff cash in hand, under-report their income and don’t report that they withhold tax from their wages.

Although completely avoiding an audit may not be possible, you can prepare for the situation accordingly. Using a business accounting software program, holding onto all documents related to your expenses and income and making sure all contracts and agreements you have are in writing can help you in the event of an audit and demonstrate your compliance.

Business performing above or under industry benchmarks

The ATO keeps a close eye on industry trends and is quick to spot any businesses that are performing either well above or below the norm when it comes to their income and expenses. Although there’s not much you can do to avoid an audit if your business has abnormal income or expenses, make sure that you have plenty of evidence to back up your claims.

Luckily, the ATO publishes these benchmarks and makes it possible for you to compare your business to them. This means that you can use this information to assess the likelihood of your business being audited, or perhaps make appropriate adjustments to your business model.

Having undeclared income

Your tax return must include all of your taxable income and it’s your responsibility to make sure of this. It’s not enough to rely on the information pre-filled out by the ATO so make sure you take your time in making sure every cent is accounted for.

Many businesses fail to either declare any foreign income they made or under-report their income due to poor record-keeping. Making sure to keep track of any income you make overseas or within Australia is the key to avoiding having any accidental undeclared income.

Exploiting deductions

While you absolutely should claim every deduction possible that you’re entitled to, don’t get carried away and exploit the system. The ATO keeps track of the standard amount of deductions claimed by your industry in each income bracket, so anything too far outside of the norm will grab their attention.

Also make sure that you have proof of purchase for all of your claimed deductions, so that if you are audited, you can quickly and easily prove their validity.

Income not aligning with lifestyle

The ATO may take a look at your assets, such as cars and homes, and investigate the income you’d need to cover these expenses. If the income that you include on your tax return is much less than this, a further investigation will likely be conducted.

In some cases, they may even look through your social media posts to get a better idea of the kind of lifestyle that you live and again compare this to your declared income. Always make sure you declare all of your income on your tax return and this type of unwanted attention can be avoided.

The best way to avoid an audit is strong record-keeping and good old fashioned honesty. Working with professional accountants and bookkeepers will help your business to stay on top of its tax obligations and keep everything organised, easily accessible and as stress-free as possible.

Also read here to know How Your Business Structure Affects You At Tax Time.

- Advertisement -SEO Services

More articles

Latest article