The governments of Western countries like Australia don’t have the resources to examine every person’s Tax Return to tell if they are being honest on their taxes, but they do study a sample of the population using sampling and complex Algorithmic patterns. Some people selected for an Income Tax or GST audit are random, but there are factors that increase the odds.
There are ten red flags a person should know if they want to understand how to minimise the chance of a tax audit in Australia.
Work Related Expenses
While the ATO computers analyse all tax returns against varying benchmarks, this year work-related expenses (especially laundry and clothing deductions) as well as investment property income and deductions, will receive closer than normal attention.
With the most powerful computers in the country matching data from just about every facet of your financial life, there really is no escaping a tax auditor’s gaze.
The Australian Taxation Office has the scheme to match consumption data (instead of just income) against tax returns of individuals.
For example, they look at those people who have bought things like boats, racehorses, antiques and luxury cars. They then check the tax returns of those people to see if they can “really” afford those items. It has turned up some amazing results.
The best advice to escape trouble this year is the same as always — don’t push the envelope. In the Cash economy, people who get paid in cash, including those who receive tips, are more likely to be audited. An entire restaurant chain might get audited as there are so many possible Cash situations.
Round Numbers
If you round your earnings, business income, Interest received, etc, rather than provide an exact figure, then the ATO might start to feel suspicious.
Poor Bookkeeping Records
If you are self-employed, then you are responsible for your own bookkeeping. Any tax collector might think about taking a closer look if you do not keep proper Accounting records or books.
Missing Income
Forgetting to report income is very easy to do and, thanks to the ATO’s comprehensive data matching systems, very easily detected.
Think interest income, short term contract or freelance work, government benefits, bonuses, dividends and any other passive income that might have come into your account.
Last year the ATO cross-referenced tax return information against almost a billion transactions provided to them by third parties to track down omitted income and incorrectly claimed offsets.
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That resulted in a huge number of Taxpayers getting a call from the Australian Taxation Office for dicey discrepancies.
Don’t be one of the people caught this year.
Unclear Expense Claims
It is important to ensure all eligible tax deductions are taken advantage of in order to avoid paying a dollar more in tax than necessary. But whatever you do, don’t overstep the line.
There is plenty of information on the ATO website and throughout the MyTax program, so doing it yourself is no excuse for ignorance either.
Be sure to check out any special deductions that are applicable to your circumstances, but don’t go claiming things that push the envelope.
We recently read a suggestion from one “expert” claiming women could buy a $2000 handbag and claim it as work deduction if it carried their laptop.
While claiming a computer bag is deductible, we reckon to claim a designer handbag just pushes it a bit far. A too-smart-by-half move which could get you into trouble.
As already mentioned, it only takes one or two little fudges and suddenly the taxman will be combing your records with a fine-tooth comb. Don’t take the risk.
Overseas Income
The Australian government obtains financial data from at least 40 countries. If you fail to report overseas earnings, then you are very likely to get slammed for the omission. This highlights the importance of having good financial documentation – one of the many benefits of having a financial planner.
Be careful about claiming deductions from that extra property as a business expense.
For example, a seasonal getaway cannot be deducted as a rental property. The ATO knows many of the tricks so make sure you have a full understand of how your property is classed such as whether it is your principal place of residence.
Late Tax Return Lodgement
It’s not just lodging annual income tax returns by the due date, but all compliance obligations (including activity statements, employee related reporting, fringe benefits tax etc.) and the on-time payment of any tax liabilities. A good compliance history can be invaluable due to the way it improves the ATO’s perception of a business.
Be in the Papers
The old adage may be that all publicity is good publicity but when it comes to tax risk, being in the papers for the wrong things can easily bring your client to the attention of the ATO. A major transaction or dispute that is reported in the media will undoubtedly be seen by the ATO. Many business owners are selected for an ATO review after the sale of a high value asset (often the family home) is reported in the paper.
Incorrect Superannuation Payments to Your Employees
If employees complain to the ATO that their employer has not paid them the right amount of superannuation, or not paid it on time, this is a sure fire way to get a review or audit from the ATO.
Often these types of audits can begin as a review of superannuation guarantee obligations, but quickly escalate to include income tax, GST and fringe benefits tax audits if the process isn’t appropriately managed.
Tax laws are complicated because so many rules or aspects of the Law can apply. For fast and friendly help, consider consulting Perth Mobile Tax. These are Income Tax and bookkeeping specialists that can help you in person or over the phone.
