The implementation of the system of self-assessment heralded the commencement of a widespread and intensive tax audit program.
The Tax Office has extended and promoted its audit program for individual taxpayers and businesses, promising that most individuals and business operations will be scrutinised sooner or later.
Taxpayers have a duty to themselves to ensure that they reduce the likelihood of any amendments to their returns, and to be aware of their rights and obligations should they be the subject of a tax audit.
Types of Tax Audit
There are three major types of income tax audits:
- Complex audit – relates to large scale corporate taxpayers who are involved in extensive business activities:
- Business audit – focuses on professional persons, incorporated or unincorporated entities and self-employed taxpayers. A business audit may incorporate an FBT audit, a Training Guarantee Levy audit and a Superannuation Guarantee Charge audit. Alternatively, an audit may be conducted in only one of the areas mentioned; and
- Desk audit – primarily deals with salary and wage earners and investors.
The ATO has recently launched the Record Keeping Audit (RKA) program. Under this program, tax auditors have been visiting businesses Australia-wide, reviewing their records and making recommendations on how to improve them.
Records must be kept in such a way as to enable the person’s tax liability to be ‘readily ascertained’. They are normally required to be retained for a period of 5 years from the date on which the record was prepared or obtained, or from the time the relevant transaction was completed, whichever is the later.
If selected for an RKA, the ATO auditors will provide a list of records wanted for inspection, and arrange a convenient date and time for the audit to take place. Records usually requested include:
- Bank books and statements;
- Cash books and cash register tapes;
- Cheque butts;
- Creditors and debtors listings;
- General journals, other journals and ledgers;
- Job sheets;
- Loan/lease agreements;
- Directors’ minutes books;
- Motor vehicle log books;
- Quote books; Receipts and sales invoices;
- Stock sheets;
- Suppliers’ invoices; and
- Wages books.
The RKA program is designed to show business owners they should have an accounting system that enables them not only to prove income and support deductions but also explains any calculations of taxable income and tax payable.
Right of Access
Section 263(1) entitles the Commissioner or his representative to full and free access to all buildings, places, books, documents and other papers for any purpose of the Act, and to make copies or extracts from those books, papers or documents.
Section 263(2) requires that the officer be properly authorised in order to obtain access to the building. If the officer fails to produce his/her authorisation on request then the officer is not entitled to remain on the premises.
Section 263(3) places an obligation on the taxpayer to provide the officer with reasonable facilities and assistance which extends to the use of photocopiers, telephones, light and power facilities, as well as advising of the location of relevant documents.
It should be noted that Section 263 does not entitle the officer to seize the documents in question. Under no circumstances should you allow the officer to remove your documents from your premises.
Commissioner’s Right to Obtain Information
Section 264 enables the Commissioner to request any person to furnish him with such information as he may seek, to attend before him or a duly appointed officer (possibly under oath) and to furnish any books, documents etc, that may be required. For this to apply, the Commissioner is required to request such matters in writing.
Particular Points Commonly Examined:
- Asset backing;
- Cash income;
- Understatement of income;
- Tax schemes;
- Purpose of expenditure;
- Fringe benefits;
- All business and personal records;
- Examination of bank credit; and
- Loan accounts of taxpayer and family.
Private Companies and Cash Businesses
- Stock taking procedures provisions
- Obsolete stock and scrap
- Usage and rate of depreciation
- Investment allowance
- Use of cars, sale of vehicles and Section 26AAB
Profit and loss
- Receipt and treatment of income
- Bad debts
- Treatment of cash receipts and accruals
- Superannuation deductions
- Overseas travel
- Expenses to executives
- Payments to subcontractors
- Management fees and royalties
- Exchange gains/losses
- Basis of loss and carry forward claims
Prescribed Payments System
- Sighting of exemption and deduction certificates;
- The currency of certificates; and
- Whether payments have been made by the due date and whether the forms have been completed correctly.
Fringe Benefits Tax
- Examination of employment contracts;
- The provision of fringe benefits to shareholders, beneficiaries or contractors;
- Examination of records kept and the calculation of the taxable values of the benefits;
- Number of motor vehicles, log books and odometer readings;
- Existence of loans to employees, directors and associates;
- Reimbursement of employee expenses; and
- The provision of accommodation.
The Do’s and Don’ts of a Tax Audit
- consult us immediately;
- agree on a mutually acceptable time with the officers for the audit to be conducted;
- arrange a preliminary meeting with the officers;
- ensure that all your records are in proper order prior to the audit;
- ensure that we are present at the preliminary and closing meetings;
- be aware that the audit will usually involve three financial years and may be a prolonged affair;
- consider asking for all important questions to be put in writing;
- watch for the same questions being asked in a different format;
- be mindful of the ‘blackmail technique’ in respect of the imposition of penalties;
- record all discussions, questions and answers; and
- carefully check the authorisation of the officer, in particular his/her authority to carry out his/her right of access.
- draw conclusions, make concessions or comment in relation to adjustments suggested by the Tax Office before the final meeting;
- answer any question unless you clearly understand the implications;
- volunteer information that has not been specifically asked for by the officer or is additional to what has been requested by the officer;
- give the officers free access to your staff;
- sign anything without discussions with your advisers;
- let your records be taken away; and
- concede adjustments until the final settlement is reached.
Important: This is not advice. Clients should not act solely on the basis of the material contained in this bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.