Understanding how the audit process works and the rights of the ATO and taxpayers can help smooth the way, as explained in this month’s Mid Market Focus.
The ATO undertakes a wide variety of compliance activity, ranging from a very simple check of information in a tax return or BAS, up to a comprehensive audit of the tax affairs of a large corporate group or family. It is safest to assume that any request from the ATO is similar to an audit, regardless of the terminology used by the ATO.
The ATO audit program is guided by the compliance model and taxpayers’ charter. In broad terms, the compliance model outlines the factors which affect taxpayer compliance, as well as the perceived level of intervention required by the ATO in order to collect revenue from different types of taxpayers. Complementing this, the taxpayers’ charter sets out the rights and obligations of taxpayers when dealing with the ATO.
The ATO adopts a risk differentiation framework under which the approach used for different types of taxpayers varies based upon their perceived level of tax risk. This is a combination of the likelihood of non-compliance and the consequences of any non-compliance, such as the amount of any tax shortfall. This allows the ATO to take a targeted approach to tax compliance, focus on higher risk compliance areas and reduce compliance costs by not targeting low risk and compliant taxpayers.
The High Court decision in Kennon v Spry [2008] HCA 56 is one of the very few decisions of the High Court on appeal from the Full Court of the Family Court in Australia in the past 20 years where there has been no constitutional law element.
The High Court held Dr Ian Spry QC, a noted trust law expert, was unable to prevent the Court ordering the payment of discretionary trust funds to satisfy an outstanding order.
In the circumstances, care should be taken in the creation of new trust deeds or amendments to existing trust deeds to minimise the risk of potential claims under the Family Law Act.
Tax Agents’ Role
While tax agents are not obliged to audit their clients’ information, they can play a crucial role in influencing the tax compliance of their clients. They must also comply with the Code of Professional Conduct under the Tax Agent Services Act 2009 (Cth). This includes a requirement to advise clients of their rights and obligations under tax laws that are materially related to the services provided by the tax agent, as well as complying with the professional and ethical rules set out by relevant professional bodies (including The Tax Institute) of which they are a member. In addition, tax agents should be aware of any deficiencies in the business records maintained by clients. They should make their clients aware of their obligations under the record-keeping rules and the potential pitfalls they may face under an audit or review if they do not maintain and keep the required records.
Identification for Review or Audit
Taxpayers are classified into one of four risk categories, based on their relative size, wealth or turnover, nature of transactions they undertake, their effective tax rate and compliance history. These categories are as follows:
- higher risk — can expect close ATO scrutiny;
- medium risk can expect periodic reviews;
- key taxpayer — can expect consistent ATO monitoring; and
- lower risk — can expect periodic monitoring from the ATO. This category generally includes small and medium- sized enterprises (those with a turnover between $2m and $250m and individuals with a net wealth over $5m).
The ATO has stated that the risk categorisation influences the likelihood of a review, its formality and intensity; however, it does not impact the outcome. A range of sources are used to identify potential non-compliance, based on qualitative and quantitative measures, including risk assessment, data matching, information sharing with other government agencies and referral from community members.
Information Gathering
While the ATO has wide-ranging formal information-gathering powers under the Income Tax Assessment Act 1936 (Cth), many reviews and audits will start out as informal requests for information. Generally speaking, a formal approach will only be taken where the informal approach has not worked, or the taxpayer’s circumstances, behaviour or history warrant a more formal information-gathering approach. This is why it is a good idea to adopt a cooperative approach when dealing with the ATO.
Investigation and Action
Once the ATO has identified higher risk taxpayers, it will generally begin its investigation via basic integrity checks and additional information-gathering via phone, questionnaires etc. Taxpayers may then be subject to a further risk review or audit, or both. Given the informal nature of many reviews and audits, as well as the breadth of terminology used by the ATO, it can be unclear what constitutes an audit. It is therefore generally a safer approach to assume any review or similar is an audit, regardless of the terminology used by the ATO.
Risk reviews are used by the ATO to determine whether a more in-depth investigation is required. If significant risks are identified, the ATO may proceed with an audit. Although similar to an audit, a risk review will generally be a less intensive investigation. Further, any voluntary disclosures made as part of a review will generally result in more generous penalty remissions compared to voluntary disclosures made during an audit.
An audit contains higher levels of information collection and analysis compared to a risk review and, for more complex audits, can last up to 540 days. Generally, taxpayers will be given an audit management plan by the ATO at the outset. They may also receive a paper clarifying the ATO position during the audit, which gives taxpayers an opportunity to respond to any matters before the audit is completed
Cooperation with the ATO
The relationship between the ATO and taxpayers is primarily governed by the taxpayers’ charter (see wwwatogov.au/ About-ATO/About-us/In-detail/Taxpayers–charter/Taxpayers–charter-what-you-need-to-know/), which details the expectations of both the taxpayer and ATO in their dealings. The charter seeks to create an open, cooperative and positive relationship between taxpayers and the ATO
Under the heading “Tax compliance for small-to-medium enterprises and wealthy individuals”, the ATO website sets out the following list of mutual expectations during compliance activities:
- have ongoing, open and frank discussions and a plan for completing the compliance activity;
- participate in meetings to identify any issues with the process that could delay or disrupt progress and to agree on contingencies;
- agree on realistic time frames;
- provide facts and evidence in a timely manner;
- clarify issues as they arise so that they can be resolved efficiently;
- seek to minimise costs;
- provide prompt and ongoing access to key personnel and escalation points;
- agree in advance on how to handle relevant documents covered by legal professional privilege or the accountants concession; and
- provide access to senior people within their organisations where appropriate.
Voluntary Disclosures
According to the miscellaneous tax ruling MT 2012/3, taxpayers are automatically entitled to an 80—100% reduction in penalty if the voluntary disclosure is made before the taxpayer is informed that the ATO is conducting an examination of the taxpayer’s affairs. The term “examination” does not necessarily mean an audit or review, and can sometimes include verification checks, record-keeping reviews and other ATO requests. Accordingly, while voluntary disclosures to the ATO will generally result in a favourable outcome for the taxpayer, the timing of the disclosure can also be important. The voluntary disclosure must also be made in the “approved form”.
Accountants’ Concession
The ATO provides an administrative concession for advice between taxpayers and their professional external accounting advisers. This allows certain types of advice to remain confidential where it has been prepared for the sole purpose of advising clients on taxation. However, the concession is an administrative one and therefore is not legally binding. Further, under the ATO administrative guidelines, the concession may be ignored in “exceptional circumstances”.
Record-keeping Requirements
Businesses are required to record and explain all transactions and other acts which are relevant for tax purposes. While these rules can appear simple enough, there are a couple of issues worth noting.
Business Records for Small Business
The ATO’s “Record keeping for small business” provides an extensive list of records which a small business must keep. It is extremely important that small businesses keep all these records: first, so that the business can substantiate its business dealings in the case of an audit or review; and second, to avoid any administrative penalties for failing to keep or retain records.
Pavuk Legal can assist you on many legal aspects in relation to your estate planning and asset protection requirements including review and amendment of your existing trust deed, update to your will and preparation of testamentary trusts.
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