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The Increase of Random Audits to Hit SME’s Hard

December 17th, 2015

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Unfortunately, when the Australian Taxation Office comes calling it is rarely a pleasant call. And in 2016 small-medium enterprise owners are set to be put under the pump by the ATO with random audits set to hit a range of businesses hard. But why is the tax office doing this and, perhaps more importantly, what can you do to protect your business from these audits?

We’ve taken a broad look at the implications of the ATO’s increase in random audits, and what it could mean for your business.

What is happening?

The ATO is set to commence a series of random audits of a broad sample of many SME’s. As the Australian Government states in its document outlining its approach to business audit timeframes,

“Audits are part of its broader strategy to deter, detect and address non-compliance (‘active compliance strategies’). However, active compliance activities are not the only type of activity the Tax Office undertakes to influence taxpayer behaviour and ensure compliance. ‘Compliance assistance strategies’ aim to assist taxpayers to understand their obligations and voluntarily comply without the intrusive means of audits.”

Essentially what this means is that the ATO’s audits are going to target individuals and SME’s as a means of gauging the amount of revenue that is not collected because of tax evasion.

Why is the ATO doing this?

Well, the main reason for the ATO to make this move to audit SME’s and individuals is because the tax office reported a broad estimate of the tax gap (how much revenue is missing from the government due to tax evasion and misreporting), and it’s a big figure. The ATO currently estimates the tax gap to sit at a whopping $3 billion in missing revenue.

The ATO determines the tax gap based on a range of estimates including incorrect reporting, fraud, non-payment of liability, non-registration, non-lodgement, and overt tax evasion. Interestingly enough though, while acknowledging a huge revenue stream exists the ATO does not include “tax minimisation” strategies by individuals and companies, which may be allowable under the law but often leads to huge multinational companies managing to avoid paying a huge proportion of their tax, especially when you acknowledge their big revenues.

Should I be concerned?

Well, not if you’ve been doing the right thing tax-wise. Random audits are undoubtedly annoying, but ultimately they exist as a means of catching people who haven’t being paying their tax – so if you have been paying your tax on time it stands to reason that you shouldn’t have anything too strenuous to worry about if the tax man comes knocking.

That being said, the Australian Government does make the point to acknowledge the fact that by their very nature there are adverse impacts that arise from audits including, “business administrative costs”, exposure to “adverse market reactions”, and the potential that “audits may also raise the general anxiety level of the business”. This can leave SME’s feeling disempowered with a perceived lack of control or understanding in the process.

So while people who have been operating their business ethically and paying all their tax, the act of undertaking an audit can have some very real financial and stressful costs.

What can I do to protect myself and my investments?

While it would be a bit of a stretch to pre-empt the occurrence of an audit, it is your responsibility as a SME operator to ensure you’ve been taking the necessary measures and paying all the required tax. And it’s interesting to note that not everybody in the industry is for these audits occurring.

Tax Commissioner Chris Jordan told Parliament’s Standing Committee on Tax and Revenue that the audits had the potential to upset taxpayers doing the right thing, which could negate the high costs required for these audits to process. CPA Australia chief executive Alex Malley went as far as telling Fairfax Media he was not supportive of random audits, “One of the concerns with random audits is that their purpose may be more about the integrity of a process than revenue collection.”

Ultimately, it’s likely that the ATO go through with their plans to target individuals or SME operators as a means of closing the revenue gap. Whether or not the ATO’s time would be better spent focussing on a different matter (such as tax minimisation strategies of global giants) is another matter entirely.

As an SME operator you have to be prepared. By ensuring you books are in order, you can got along ways to minimising the pain when the tax man eventually comes knocking.

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David Hill
David has over 15 years in the insolvency industry – advising clients through restructuring of their business. His clear, “straight up” style provides clients with a strong direction of what they need to do, and how the process will work. As importantly, he brings empathy to the process – which is essential at a “high-stress” time for clients.

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