As we are moving through the tax season now, some factors may trigger a tax audit. The ATO has four key areas they are focusing on this financial year which are:
- record-keeping
- work-related expenses
- rental property income and deductions, and
- capital gains from crypto assets, property, and shares.
To avoid triggering a tax audit you should pay attention to the following factors.
Fraudulent claims
The ATO can access a wide range of data-matching points to verify the fidelity of the information you report. These include bank transactions, government agencies and electronic payments. This then allows the ATO to view transactions as small as the interest income paid into your account or as large as a mortgage settlement. Therefore, you must have receipts for all expenses and deductions claimed. It might be tempting to submit the same level of expenses as for the last financial year but the ATO requires you to be able to match claims with valid documentation.
Over-claiming tax deductions
Has your business been in a loss position? Bad business decisions alone do not deter the ATO from undertaking a formal audit. Business owners sometimes claim a high cost of goods sold which results in a loss. While you might make a bad business decision on a purchase, you can’t continue to claim on this ongoing.
The ATO has introduced industry benchmarks to set the benchmark of maximum expenses that a normal business incurs. The ATO releases updated benchmark ratios each year. The most recent data is from the 2019–20 financial year. As an example, a hairdresser should not attribute more than 19% of its annual turnover. However, an electrical service can have 35% of the annual turnover in the cost of goods sold. If a business’s annual turnover is more than $500,000, the benchmark will rise to 42%.
Over-claiming of deductions may also occur if your expense was used for both work-related and private use. You can only claim the work-related portion of the expense.
Late lodgement and ignoring ATO notices
Other factors that may trigger a tax audit include late lodgement and ignoring a notice from the ATO. Have you received a Letter of Reminder from the ATO? You need to sort this out promptly. A late lodgement can attract interest fees and penalties and ATO attention. The longer you ignore an ATO notice, the more likely the ATO will flag you for attention. Better to address any issue early. If you require assistance regarding your tax contact our team of experts.
Important Reminder for Company Directors: New Director ID
If you are a company director you are required to apply and meet the new directors’ ID requirements by 30th November. Check our previous article for more detail by clicking here. We can’t apply for a director ID on your behalf, but we can help you decide if you need to apply.