SMEs should prepare for increased ATO audit activity

SMEs should prepare for increased ATO audit activity

12 February 2018

Recently there has been a lot of commentary about increasing audit activity from the ATO. While a lot of the mainstream media coverage has been about large multinational corporations, smaller businesses are also a potential target.

We know that the ATO is focused on minimising the ‘tax gap’ (how much the ATO actually collects vs. what it should collect if all taxes are paid in compliance with the law) and it will need to target all sectors of the business community to achieve this.

Last year we saw Taxation Commissioner Chris Jordan state that more needs to be done regarding the policing of smaller companies, as random audits and risk based audits were regularly revealing errors.1 The ATO’s 2016-17 annual report revealed that for dispute resolution, micro, small and medium businesses accounted for nearly two-thirds of all settlements in the financial year, being hit with over $1bn in tax bills after settlement. High wealth individuals accounted for another 12%, having to fork out a total of $95.5 million.2

ATO audits, enquiries, investigations and reviews can cover all areas of tax compliance, including employer obligations, payroll tax, superannuation guarantee, income tax, SMSFs and more.

The simplest example of where this might affect a small or medium sized business is end of year tax work. SMEs typically partner with their accountants to complete end of year compliance work based on all the information available, but there is always a chance something can get overlooked.

For example, you may have a bank account earning a small amount of interest that you never really use and so you never thought to mention. But in the world of big data, it is easy for the ATO to identify interest you’ve paid and compare this to interest declared, to pick up discrepancies.

For an SME, being subject to an audit can be an absolute headache. Even the small ones can be time consuming and distract you from the business activities you would rather focus on.

If you are subject to a review or audit, you will most likely need the help of your accountant to compile all the required information. This can mean unexpected professional fees that blow out your annual budget and affect your bottom line.

One way to avoid this is through audit insurance, which covers the professional costs associated with audit activity. It is available for businesses, individuals and SMSFs. While it may not be for everyone, we view it just like any other type of insurance – you hope you’ll never need to use it, but when you do you’ll be thankful you had it. Plus, the cost is generally tax deductible.

As with every business decision, it’s important to review whether it’s a worthwhile investment, and most of the time it will come down to your risk appetite as a business owner. But it’s something worth thinking about given the current political environment and apparent sense of determination at the ATO. If you want to find out if audit insurance is relevant for you or your business, please get in touch.


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