Darshak Shah
Darshak is Evource Co-Founder and an Australian CPA, who has experience of working in over 8 different industries including with employers like NAB & Cancer Council. He has a great eye for process streamlining, improvement, change management, and transitions.
An audit is not a pleasant thing to go through for any business. If your books are in order and you are careful with your claims, then an audit isn’t anything to worry about. It’s just a pain to go through. While an ATO audit can come to anyone, there are certain red flags that pique the ATO’s interest and increase the likelihood that you will become the subject of an audit.
1. Your ratios are significantly different from other businesses in your industry
The ATO utilised their statistics on business expenses to create a gauge on what is ‘normal’ for specific businesses at specific income levels. This means that if your profit margin is significantly lower than expected or your costs of goods comprises a much higher percentage than most other business, then you are likely to be targeted for an ATO audit.
2. Dramatic changes from year to year
Changes to your financial situation are expected from year to year. However, if you were making $500,000 in profits for the last three years then you suddenly lodge a return with a $500,000 loss, the ATO is more likely to investigate the reason for the dramatic change. Sudden leaps in normal costs that don’t align with an increase in income may be particularly concerning.
3. Your business operates in the cash economy
Some industries are notorious for operating in a cash economy. This means they have more opportunity to slip income into their pockets instead of running it through their till. On the expense side, it can also mean they’re more likely to pay staff cash in hand instead of running them through the books and paying the correct amounts of superannuation, workers compensation, or other costs.
The ATO uses data to help them detect when a cash economy business might be failing to properly report their business dealings.
4. Your information contradicts ATO data matching
The ATO is increasingly implementing systems with enhanced data matching capabilities. If your business owned land and sold it through the year, the ATO will now have records of that sale and expect to see the income being declared. Some sole traders, particularly with larger clients, may find that their client is reporting their income to the ATO. If you are declaring less income than they know about this is a major indicator that you are not tracking or reporting your taxable income correctly. Be prepared for an ATO audit.
While it hasn’t been done in the past, the ATO is able to data match your BAS lodgements with your tax return. Significant discrepancies between the two will understandably raise a red flag. FBT reports, PAYGW Summaries, and other lodgements should also align with what is declared in your tax return.
5. Your figures are all very round
If the income and expense claims on your tax return are all suspiciously round, make sure your books are in order. Rounded figures present as estimates rather than actual numbers. Estimates are less likely to be based on actual evidence.
6. You have existing debt, late lodgements or a history of issues with the ATO
If you haven’t been able to stay under the ATO’s radar by keeping on top of your compliance requirements then are far more likely to be selected for ongoing audits. Perhaps businesses who fail to properly prepare for their obligations are also less likely to have kept proper records. Whatever their reasoning, if you have a history of non-compliance they will be continuing to monitor your activities to ensure you don’t slip up again.
7. Someone has complained about you
Suppliers, employees, and clients can all submit complaints to the ATO if they believe there is something going on that is not above board. While employees are likely to complain about wages or superannuation, suppliers or clients may report attempts to keep transactions off the books or transactions they find suspicious. The ATO is more likely to audit a business they have received a complaint about, even if the complaint is anonymous.
8. You are consistently declaring losses
If your business is never making a profit, why are you still running it? That is the fundamental question for anyone who is declaring tax losses year after year after year. Looking at this situation objectively and you can understand why this scenario raises a red flag for an ATO audit.