The ATO definitely plans to be more active in 2021 and increase its audit activity. The number of reviews and audits for the 2019-2020 income year decreased from the 4.3 million conducted in the prior income year to 3.9 million due to COVID. However, in October 2020 the ATO commenced its “Next 5,000” streamlined assurance review program, which specifically targets private groups connected to individuals with wealth of more than A$50 million. We are already seeing significant ATO audit activity because of this program and expect this activity to continue to increase in 2021.
Ultimately the ATO uses a variety of strategies to determine who to review, with what frequency and with what intensity, by assessing the relative likelihood of taxpayers not meeting their tax obligations and the consequences of non-compliance. Two perennial areas of focus in reviews and audits is the systems in place to manage your tax affairs and your approach to tax risk.
Systems Approach - Reduce your risk of being audited.
The ATO has adopted a more ‘systems based’ approach to conducting tax audits. In practical terms, this involves a close examination of the integrity of the systems that a business has in place for meeting tax compliance obligations. For example, the ability of a company’s accounting software to produce sufficiently detailed information to allow it to meet its monthly activity statement reporting obligations.
It follows that businesses with watertight systems and processes are far more likely to be classified as low risk by the ATO and are therefore less likely to be audited, than those that have inadequate systems in place.
Tax Risk Management
Since 2003, the ATO has emphasised ensuring that medium to large businesses understand that tax risk management is an important issue that requires the ongoing input of the Board of Directors along with risk management in the general sense. The ATO are of the firm view that Boards should concern themselves with managing the tax risks associated with major transactions and arrangements.
In most, if not all the current “Next 5,000” streamlined assurance review questions, taxpayers are being questioned on their approach to tax risk management. The ATO attempts to link all entities related to a controlling individual and tries to get a better understanding of the behaviour of the controlling mind behind a private group structure.
The ATO’s view is that with this approach it can effectively risk-assess compliance behaviours at a holistic group level rather than at an entity level.
5 Tips to prepare yourself for an ATO Audit or Review
In light of the current ATO scrutiny that is being directed towards high-net-worth individuals, we would recommend that all wealthy Australians take the following steps to protect themselves from any unexpected tax liabilities.
1. Perform a due diligence review of your business.
Even if you have been diligent in keeping up to date with your obligations, tax laws change, the interpretation of tax legislation changes, either through court cases or simply by there being a new tax administrator, and your business circumstances change. Because you have always done something a certain way, does not mean it is right. There has been a spate of tax law changes in recent months – speak to your tax advisor about the changes and if necessary, have them perform a due diligence of your affairs. There are significant reductions in penalties where you find an error and approach the tax office cap in hand.
Even if you don’t have a formal due diligence, make sure that you regularly meet with your tax advisor to keep up to date with tax developments.
2. Get proper advice upfront before entering significant transactions.
Often taxpayers enter transactions and tell their tax advisors about it when they are engaged to complete the tax return. This may have worked in the past, but if you want to ensure that you don’t run into any issues, it is critical to obtain tax advice upfront for any transactions that out of the ordinary course of your business. The ATO is moving towards real time auditing and as taxpayers we need to ensure that we employ best practice in all our tax affairs if we want to avoid any issues.
3. Get audit insurance.
We all know the saying that taxes and death are certain. If you are a high-net-worth taxpayer, you can add a tax audit to that list. Addressing ATO reviews and audits takes time and money. Even if the ATO does not find any issues when reviewing your tax affairs, you still need to answer their queries as comprehensively as possible. This takes time and money – expect a bill north of $10,000 to address an ATO review where no issues are found.
Having audit insurance to cover ATO reviews will help cover these costs that you will inevitably incur.
4. Stay on top of your compliance obligations.
By simply being a wealthy Australian, you are already on the ATO “watch list”. Keep up to date with your compliance obligations – that includes completing and lodging forms on time, as well as making any payments on time.
The ATO’s view is that ultimate responsibility for the enterprise's tax affairs rests with the business owner. It encourages those responsible for the tax function to ensure sound organisational governance is in place to manage tax risk. This includes understanding your tax obligations, establishing sound risk management processes, getting advice commensurate with the complexity of your business dealings, and ensuring your record keeping obligations are met.
The ATO is becoming more and more interested in understanding taxpayer’s processes, the advice that they have obtained and the underlying systems that helped them keep track of their affairs. Why increase the chances of an ATO audit by not meeting these expectations and raising your risk profile?
5. Maintain good tax records & keep them!
The general rule is that tax records must be maintained for 5 years. However, there are exceptions. For example, where tax losses are utilised, records must be kept for at least 5 years after the taxpayer has utilised the losses. This can mean keeping records for many, many years.
There is nothing more frustrating than knowing that your tax position is correct but not being able to prove it due a lack of evidence. Keeping records can be a problem – and the more complex your affairs, the more difficult it is to maintain your records. However, there are many technologies today that can enable taxpayers to maintain records indefinitely. It will be well worth the effort to explore which one will work for you to enable you to maintain your records.