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Tips for managing a tax audit

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16 Dec 2016

At some stage, most businesses will be subjected to some form of tax audit by the Australian Taxation Office (ATO).  While these audits can be distracting from business, time consuming and frustrating (and sometimes all three), there are ways to minimise the inconvenience and bring the audit to a just and fair conclusion.

1.  Know your exposures

The first step is to make sure that your house is in order, as best it can be.  Make sure that you are aware of any potentially significant tax exposures in your business and prepare Reasonably Arguable Position Papers to support the treatment that you have adopted.  Have the positions that you have adopted on significant tax issues reviewed by an adviser that does not normally act for you so that they can approach the issues independently and with a fresh set of eyes.

This is particularly important for “systemic” issues within your business where a particular tax treatment may have been adopted years ago and that treatment is carried forward year after year without much thought as to whether the treatment is still appropriate.

Errors in issues like:

  • the timing of revenue recognition;

  • whether certain transactions are capital or revenue;

  • transfer pricing;

  • the GST treatment of everyday transactions; and

  • whether a certain class of worker is or is not an employee for tax and then separately for superannuation guarantee purposes,

can have a devastating effect in an audit because the errors usually recur over a number of years magnifying the tax, interest and penalty cost if an amended assessment is issued.

2.  Voluntary disclosure

At the start of an audit you will be given the chance to make a voluntary disclosure of errors of which you are aware in the tax returns that are subject to audit.  This opportunity should be taken seriously because by making a voluntary disclosure at that stage you can reduce the culpability penalties involved by 80%.

3.  Understand then narrow the issues

The ATO will give you an audit plan of the issues that they will be auditing.  Understand as quickly as possible their concerns and try to eliminate those issues that really should be of no concern to them so that you can focus your defences on genuinely contentious issues.

4.  Use FOI, if necessary

During an audit the ATO will ask you lots of questions and request many documents. You can do the same to them.  You can request copies of their audit working papers and the documents that record their decision making process.  This can be done under Freedom of Information where the ATO will not otherwise hand them over.

5.  Be truthful, be credible

It is of utmost importance that anything that is said or given to the ATO during an audit is correct.  The key is that you do not want to undermine your credibility by having to change something you have said regarding the facts at a later point.  If you are unsure of the answer to something that is asked, go away and find out the correct answer rather than giving a guessed answer or a vague answer that needs to be amended later.

6.  Have an eye to the litigation that might follow an audit

Ultimately, if the ATO issues an amended assessment against you, you may object to the new assessment.  Objection is essentially an internal review of the issues in dispute by ATO officers separate from the audit team.   If the objection is not resolved in your favour then you will need to take the matter to the AAT or the Federal Court. 

This happens quite quickly following the objection process.  It is far too late to start gathering your evidence for the Tribunal or Court proceeding if you wait for your objection to be rejected before you start.

Ideally, supportive evidence should have been compiled when the transactions in question were undertaken but if not, then that evidence needs to be assembled during the audit phase if it looks like the ATO is going to take an adverse position.

Along the same lines, it is important to have an experienced tax lawyer briefed during the audit phase.  Whilst your accountant may have primary conduct of the audit with the ATO, the lawyer will be a valuable resource in providing advice as to the strategy for conducting the audit, assessment of the technical issues and the drafting of any objection.

Philip Diviny 15 December 2016