Business Tax Audit

What To Do In The Event Of A Business Tax Audit

If your business is selected for an ATO business tax audit, there’s no reason to panic. There are a few processes you can work through to ensure you get a fair and reasonable outcome. It’s important to remember that you’re not alone in this time, and you can turn to a professional for guidance and advice. TaxResolve’s Ashley King is an expert in tax processes and dispute resolution. He has provided premium-quality business tax audit help to companies of all sizes to work toward a fair resolution. If you’re about to undergo a corporate tax audit, reach out to TaxResolve today.

How The ATO Selects Cases For A Business Tax Audit

It can help to understand how the ATO selects businesses for a company tax audit so you can be better prepared for your audit. The most important thing to keep in mind is that the ATO does not conduct random audits. There will always be a reason they select a case for an audit. Usually, an audit is undertaken because your business falls into one of the ATO’s planned compliance programs, which include;

Large Business Top 100 and Top 1000 Justified Trust Programs (includes Tax Risk Management and Tax Governance Framework)
Privately Owned and Wealthy Groups Top 500 and Next 5000 Programs (includes Tax Risk Management and Tax Governance Framework)
Medium and Emerging Private Groups Program
Lifestyle Assets Data-matching Program
Share trading and ETF Data Matching Program
Cashflow Boost and Jobkeeper eligibility review Program

The ATO also likely conducted a risk assessment, either overtly or covertly, and assessed a reasonable level of risk that there are one or more tax issues to review. Alternatively, the ATO may have obtained or received information from a third party indicating the presence of a tax issue that has yet to be addressed appropriately. This information may come from an anonymous tip-off, a counterparty to a transaction, a government or private organisation that holds information about transactions and events, or from the multitude of data sources the ATO receives each year.

Issues The ATO Looks For In A Business Tax Audit

During a corporate tax audit, the ATO explores two primary categories of issues; the broad level issues and the more granular issues.

Broad level. The ATO will be looking for any structural issues that give rise to ongoing tax risks, including the legal structure of the business, the financial structure, and the pricing of transactions in which the company is involved.
Granular level. The ATO will examine particular events and transactions to determine if the correct tax outcome was declared. This can include gains/losses on disposal of assets, deductibility of certain expenditures, or whether a transaction was on a capital or revenue account. A typical example of a granular issue is where taxpayers use some funds to invest in shares or property. When they sell all or some of those assets, they will typically be on a capital account. This means that any losses can not be offset against ordinary income. Rather, capital losses can only be offset against capital gains.

Valuation disputes are also common in ATO business tax audits. Valuation issues are relevant to many parts of tax law, including;

The setting of cost bases
Capital allowances (depreciation)
Deemed acquisitions or disposals
Trading stock
Calculating capital gains tax
Establishing the price for dealings between related parties
How employees are compensated for services (i.e. fringe benefits tax, employee shares schemes, superannuation entitlements etc.)

What To Do At The Start Of A Business Tax Audit

When you first become aware of the company tax audit, you need to consider whether the position you adopted for those events or transactions is correct or at least reasonably arguable under the law. To justify this, you may need to have someone independent from your team review the position or obtain an option from a qualified tax audit specialist.

If you determine that the issue the ATO is reviewing within the audit is, in fact, incorrect, it’s always best to be upfront about it. If you act quickly, you may qualify for concessional treatment for making a ‘voluntary disclosure’, which can dramatically reduce the significance of the issue.

If the issue is less clear, you can advise the ATO that you are looking into it and will provide all relevant information as soon as you have researched and analysed the outcome. You may need to escalate the issue to your CFO, CEO, or board of directors. A thorough approach to investigations will usually minimise the penalty. In some cases, the ATO will not amend your assessment if they are satisfied that there was a genuine error and that it is unlikely to occur again.

It’s best practice to prepare a chronology of events explaining how the event or transaction occurred. Part of the explanation could involve consideration as to whether there is something your business can do immediately to address the risk, thereby preventing future reoccurrences. You may want to obtain the opinion of a qualified tax audit advisor or implement processes to ensure future errors are avoided entirely.

The Power Of The ATO During A Business Tax Audit

The Commissioner has broad and powerful investigative and enforcement powers under the Taxation Administration Act 1953 (Cth), Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth). Most taxpayers are genuinely surprised to learn that the Commissioner of Tax has greater power than the police to access records and buildings to obtain information. It’s normal to feel as though you are the victim during a business tax audit. Decisions, processes, and events that you or your business have been involved in and responsible for are picked apart and examined with a fine-tooth comb. The ATO will review several materials, including;

Emails
Diary notes
Meeting minutes
Written agreements
Any drafts of materials

They may also ask you to explain particular emails or minutes or attend an interview to answer questions. While it can be a very disconcerting, unsettling process, there is typically nothing to be gained by turning the audit into a battle. ATO auditors have enormous investigative powers to flex when they identify potential issues, and they have a responsibility to ensure the matter is thoroughly investigated. Therefore, it’s not constructive to challenge their authority, motivations, or attitudes that might be brought to the issue. Instead, it is better to prepare for an audit by reviewing your rights and obligations regarding answering questions, information requests/demands, and interviews.

Your Rights During A Business Tax Audit

Unlike some other major developed countries, Australia does not have a legislated bill of taxpayer rights. Instead, taxpayer rights are dispersed throughout various tax and administrative laws and within precedents in cases that have been before the court. However, some ATO auditors may not be aware of the rights scattered throughout various pieces of legislation, practice statements, judgements, and charters.

Further administrative concessions are contained in ATO practice statements and the ATO’s Taxpayers Charter. However, these rights are not enforceable in court, and the ATO reserves the right to put them aside if your case is of particular importance. The most fundamental rights you have throughout a business tax audit is the right to be treated fairly, the right to be treated as being honest, and the right to make claims to keep certain tax advice documents confidential from the ATO by way of legal privilege or accountants concession claims. This confidentiality is also relevant to documents you possess containing legal advice from a qualified tax advisor.

You also reserve the right to have your information treated confidentially, to have your privacy respected, to expect a prompt timeframe for your dealings with the ATO, and to be provided with clear reasons behind certain decisions the ATO makes regarding your case. You can also ask for information and documents the ATO holds about your and your business under the Freedom of Information laws.

Resolving Issues That Arise During A Business Tax Audit

If you are involved in a dispute with the Commissioner, it’s essential to be aware of the ATO’s internal dispute resolution policies and processes. Ideally, you’ll want to try and resolve the dispute before it reaches the AAT or court, as the costs associated with tax appeals and litigation are often significant. The ATO’s internal dispute resolution policies and processes will often resolve;

Administrative and procedural processes
The position to agree/settle on at the end of an audit
The use of experts
The application of penalties
Whether the ATO ought to lift certain concessions
Whether the Commissioner should exercise any of the multitudes of discretions or determinations to which they have power

Alternatively, audits can often be resolved by way of Settlement Deed. This is a legal agreement between the taxpayer and the tax Commissioner that agrees to deal with tax issues in a particular way in exchange for relinquishing the right to object or appeal (amongst many other issues).

For more information, please see TaxResolve’s article on resolving disputes with the ATO.

ATO Audit

Why Choose TaxResolve To Help You Through A Business Tax Audit?

With over 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 a business tax audit, contact Ashley King at TaxResolve today.

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