ATO Audit

Important Things You Need To Know About An ATO Tax Audit: The ATO Power To Conduct Audits

Australia’s tax system is underpinned by self-assessment, which means taxpayers are responsible for lodging an accurate tax return that complies with tax laws each year. The information provided to the Australian Taxation Office (ATO) in that tax return is initially accepted as being true and correct, and a tax assessment is issued on that basis. The ATO is not responsible for ensuring the accuracy or completeness of the original tax return, but it has the power to check, review, and audit a tax return if it chooses. If the ATO decides to conduct an audit, you may want to know the reason that you were selected for the audit, what information the ATO holds about you and what you should do about it. At TaxResolve, we help clients understand their rights and obligations in an audit situation, which is why we’ve come up with a few things below that we believe are important to know about an ATO audit. 

What Is A Tax Audit? 

After a tax return is lodged and the taxpayer receives their assessment, the ATO will typically undertake data analysis to check all information declared by taxpayers in their returns against the enormous amount of data the ATO obtains or sources from third parties each year. This data includes details from; 

  • Banks, Financial institutions and Credit card companies
  • Stock exchanges, share registries and trust unit holdings
  • Federal and State government departments (including for grants, allowances, incentives, payroll data)
  • Online, gig economy and e-commerce businesses 
  • Ridesharing and transport businesses 
  • Digital and cryptocurrencies
  • Land titles and real estate authorities
  • Motor vehicle, boating, aircraft and other licencing registries and authorities
  • Insurance companies (aimed at high-wealth taxpayers)
  • Foreign tax offices and organisations including tax and financial information exchanges
  • Suspicious and reportable AUSTRAC transactions 
  • Gold, metals, water and other commodity traders

The data will be acquired and matched to improve audit risk profiling of taxpayers and provide a holistic view of their assets and accumulated wealth. The lifestyle assets data-matching program allows the ATO to identify and address a number of taxation risks including Capital Gains Tax, Income TAx Avoidance, GST avoidance, FBT avoidance and whether self-managed super funds are investing within permitted rules.

Based on this analysis, and from other information the ATO receives such as dob-ins and tip-offs from the public or tax profession, the ATO may conduct a review or audit of a taxpayer’s tax returns. The ATO will do this where it suspects or detects that there is a risk the taxpayer’s return is not correct. 

There are many intricacies involved with ATO audits. The ATO has dozens of Practice Statements and Rulings that contain the rules and processes for audits. Taxpayers rights are also contained in the Taxpayer’s Charter, which you can access here. 

What to do when the ATO commences an Audit

When compiling a tax return, the onus is entirely on the taxpayer to ensure their return complies with taxation laws. Taxpayers must show all their assessable income and only claim deductions and offsets to which they are entitled. If unsure about entitlements or inclusions, it’s the taxpayers responsibility to check by conducting research, asking the ATO or obtaining advice from a registered tax agent or lawyer. 

If subjected to an audit, a taxpayer needs to make sure that they understand their rights and responsibilities so they can sensibly reply to ATO requests for information without falling into traps. Taxpayers have the right to use tax agents, accountants, and tax lawyers to gain tax audit advice as well as guidance for the subsequent objection and appeal process. 

What Is The Process Of A Tax Audit In Australia? 

If the ATO decides to conduct an audit, taxpayers can expect a structured process as follows: 

  • The ATO contacts the taxpayer and asks for information relating to their sources income, deductions and any other areas the ATO considers relevant. These questions usually cover the most recent one or two years’ tax returns, but the ATO has almost unlimited power to ask questions going back further in time. Sometimes, the ATO will not know the exact information it does not possess, so it will ask broad-ranging questions. All of these questions are usually permitted under the tax law. 
  • The reply. Taxpayers are usually given about 28 days to reply. More time can be requested and negotiated with the ATO if 28 days isn’t long enough. It’s usually wise to reply to the ATO with the sought-after information and an explanation about areas of contention, as a failure to reply may result in penalties and the ATO issuing an increased tax assessment without further communication. 
  • If a taxpayer does not respond… If ATO auditors do not receive a reply or are unsatisfied with responses, they have the power to seek that information under formal powers using a Demand Notice. The Demand Notice may ask other parties for information about a particular taxpayers’ affairs, which is legal under tax law. 
  • Speak to a tax audit specialist. If you’re feeling uncertain, make sure you speak to an ATO tax audit specialist like Ashley King at TaxResolve. They’ll help you provide the correct information and advice. Additionally, they’ll be able to advise you of your right to withhold some information from the ATO if it’s legally privileged or falls within the ATO’s accountant’s concession, or to obtain information from the ATO if it’s relevant to the audit. 
  • When does the audit finish? If the ATO audits are satisfied with the taxpayer’s explanation and information, they will most likely close the audit. 
  • What if the tax return is considered to be  incorrect? If the ATO gathers information that indicates a taxpayers’ tax return is incorrect, they will usually advise the taxpayer via a written information paper called a Position Paper. Taxpayers are able to respond to that paper in writing and may also request a meeting to explain the situation. Alternatively, the ATO may proceed with an amendment to the assessment to increase the tax that is due, which will usually be accompanied with penalties and interest in addition to the unpaid tax. 
  • Taxpayer rights of review . If a taxpayer is not satisfied with the outcome of an ATO audit, they can ask for an independent review of the case. In addition, taxpayers have the statutory right to object to an amended assessment and to appeal the objection decision to the AAT or the Federal Court. Taxpayers also have the right to obtain reasons for decisions made by the ATO and  information the ATO holds, using a Freedom of Information request. 

If You Need Help With An ATO Audit, Contact TaxResolve

With more than 20 years of experience working for the ATO and a further 13 specialising in tax dispute processes and resolution, TaxResolve’s Ashley King has assisted hundreds of clients with their tax issues. Throughout his career, Ashley has responded to information demands, prepared chronologies, responded to position papers, prepared technical and evidentiary submissions, obtained information under FOI laws, negotiated settlements, obtained remission of penalties, and successfully objected to assessments. He has also advised boards, directors, business owners, and public officers on their tax responsibilities and obligations. Ashley is renowned in the industry for his expertise, professionalism, and efficiency. If you need assistance with an ATO audit, contact Ashley King at TaxResolve today. 

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October 2013 – (Regional Head of Tax, Large Global Bank)

Ashley’s approach to Tax Controversy is different to the other Big 4 accounting firms, who would have just made things worse. Compared to the competitors in relation to Tax Controversy work, it is hard to find any, you rank number 1.