ATO Tax Audits
Voluntary compliance of taxpayers is the ATO’s main goal. However, the ATO also undertakes a range of compliance activities to detect, deter and address non-compliance. If the ATO considers that a taxpayer may not be meeting certain tax obligations, or if it does not believe that a review can be sufficient, it may conduct an audit of the taxpayer’s tax affairs.
A tax audit is a formal examination by the ATO of a taxpayer’s tax affairs to see if the taxpayer has complied with the tax laws, including whether all assessable income has been declared and that the deductions and tax offsets claimed in a tax return are legitimate.
Apart from the statutory powers of access and of obtaining information (which are subject to certain limitations, including legal professional privilege and public interest immunity), tax audits are not governed by any specific provisions other than those sections that entrust the Commissioner of Taxation with the general administration of tax legislation. The Commissioner may conduct a tax audit notwithstanding the existence of pending criminal and civil proceedings, provided there is no interference in the administration of justice.
Decisions made in the course of an audit are only reviewable under the Administrative Decisions (Judicial Review) Act 1977 if made under a specific legislative provision.
The ATO frequently uses statistical sampling to help with audits. In Re Carter and FCT [2013] AATA 141, the ATO used cost of goods sold (COGS) industry benchmarks in the course of an audit of a florist’s business, leading to the issue of amended assessments. The AAT ruled that, in the circumstances, it was acceptable to use those benchmarks.
Professional fees incurred by a taxpayer in relation to a tax audit are generally deductible under s 25-5 of the Income Tax Assessment Act 1997.
Conduct of audits
The ATO takes the taxpayer’s circumstances into account when making decisions, and seeks to minimise the cost and inconvenience, caused by audits, to the taxpayer. Taxation officers are required to conduct audits in an impartial, fair, reasonable and professional manner, treating all taxpayers in accordance with the law and the principles outlined in the Taxpayers’ charter. The charter sets out:
- the service and other standards a taxpayer can expect from the ATO,
- a taxpayer’s rights under the law;
- and a taxpayer’s tax obligations.
The charter has no legal effect, but the Commissioner has said that the ATO will always follow the charter.
During the audit, taxation officers are required to:
- explain the purpose of any interview or visit;
- ask clear and unambiguous questions;
- answer any reasonable and relevant questions;
- allow the taxpayer to be represented (except in limited circumstances);
- inform the taxpayer in advance when the taxation officer will have a legal adviser present; and
- give the taxpayer reasonable time to collect records, documents and papers and to gather information (unless the ATO has reason to believe that the existence or integrity of the documents is at risk).
The ATO expects taxpayers to provide complete and accurate responses to requests for information and to be truthful and honest in their dealings with the ATO. Tax shortfall penalties may be increased if the taxpayer obstructs the ATO during an audit.
The taxpayer will be given a signed copy of the taxation officer’s written record of interview (if requested) and a written receipt for any records collected, and will be kept informed of the progress of the audit. The ATO may appoint outside consultants to assist with an audit, without consulting the taxpayer.
A taxpayer can request copies of information in the taxpayer’s audit files under the Freedom of Information Act 1982. However, there are a number of grounds on which the Commissioner may refuse access to certain information.
At the completion of or, in some cases, during an audit, the ATO will:
- explain the basis of any adjustments made as a result of the audit;
- inform the taxpayer of any errors detected (which has resulted in the taxpayer paying too much or too little tax);
- explain the reasons for any penalty or interest;
- give the taxpayer the opportunity to explain any circumstances which could justify a reduction of any penalty or interest; and
- provide the taxpayer with written notification of the outcome of the audit, the taxpayer’s review rights and any remedies that may be available.
If necessary, an amended assessment will be issued, although it should be noted that the taxpayer’s right to object to an amended assessment is restricted.
It is not uncommon for disputed issues which arise during an audit to be settled by negotiation. Settlement discussions (which are on a “without prejudice” basis) may take place at any stage of a tax dispute. The ATO may seek to settle a tax dispute where it is considered to be consistent with good management of the tax system.
There is no benchmark for how long an audit should last, as the complexity varies from case to case. However, the ATO aims to complete large company audits within two years. Where the taxpayer has been cooperative, the ATO has committed to remit any general interest charge (GIC) to the base rate for any period that the audit extends beyond two years. Note: the Commissioner also has the discretion to remit the GIC.
Audit techniques
The methods of auditing individuals and small businesses include the following:
- a “T” account, which is prepared in conventional form, recording all items of cash income and expenditure;
- asset betterment evaluation, which refers to the process of establishing the increase or decrease in the taxpayer’s net assets over a particular period, with adjustments for non-allowable expenditure, non-taxable receipts and items, such as depreciation, that do not involve expenditure. The object is to verify the correctness of any taxable income returned; and
- specific audits of particular business areas that have been found to require regular scrutiny, eg trading stock, repairs, management and service fees, depreciation, bad debts and salaries to associated persons.