What Taxpayer Actions Can Trigger ATO Audit

6 min read

As we head into Tax Time, a small but significant proportion of Aussie taxpayers will find themselves subject to some unwelcome scrutiny from the ATO. Tax audits and reviews can be stressful and potentially expensive in terms of extra tax payable, interest and penalties so the key to avoiding that situation is to stay out of trouble in the first place.

Here’s our guide to what the ATO looks for when deciding who to audit.

Failing to declare income:

Not including all of your taxable income on your tax return is a sure fire way to get into trouble with the ATO. Even if you are relying on information pre-filled by the ATO themselves, ultimately the responsibility for ensuring that you’ve included everything you need to rest with you so it pays to take the time to ensure you’ve got it right. Amongst the most common errors – inadvertent or otherwise – are these:

  • Not disclosing capital gains on asset disposals such as shares and property.
  • Undeclared foreign income. Many Australians have links overseas so if you have income producing assets (such as a business or a rental property) outside Australia, you receive investment income from overseas shares or bank accounts, or you have overseas employment income, you must declare all of that in your tax return.
  • Understating or omitting bank interest. Many people receive quite small sums of bank interest, sometimes so small that it’s easy to overlook. Banks report all the interest they pay to the ATO so any discrepancy is easy to pick up.
  • Not declaring business takings. If you run a small business and don’t declare all your sales, the ATO will often identify that your business performs poorly compared to other similar businesses. They do this by establishing “benchmarks” for businesses in certain sectors. If your business is outside the benchmark for your sector, expect additional ATO scrutiny. The ATO is looking particularly closely at cash-only businesses. Their perception is that in this day and age, the only reason for a business to be run on a cash-only basis is to avoid tax (one sale for the till, one sale for the back pocket), so if your business runs only on cash, the ATO will take a close interest.

Claiming deductions you’re not entitled to

The ATO has a collective bee in its bonnet about excessive work related deductions at the moment and is focusing closely on employees who claim more than they are entitled to.

Remember the golden rules of work-related deductions:

  • Only claim for items you actually spent the money on
  • Don’t claim for private or domestic costs, like the daily commute to and from work
  • Keep records to support all your deductions

The ATO appears to be particularly troubled by taxpayers taking advantage of the limited number of concessions available to claim work-related deductions without substantiation, for instance the concession which allows up to $300 of deductions to be claimed without receipts. If you intend to take advantage of that concession, you might not need receipts but you might still find the ATO asking for proof that you actually incurred the expenditure.

Income out of line with lifestyle

If you’re riding around in the latest Rolls Royce and enjoying harbourside living in one of the ritzier Sydney suburbs, but only declaring income of $10,000 on your tax return, the ATO will be looking very closely indeed at you.

The ATO is able to assess the assets you own – cars, properties, boats, etc – and calculate the approximate amount of income you would need to support your lifestyle. If the amount of income you’re actually declaring is significantly less, you’ll trigger alarm bells at the ATO.

As well as traditional sources of third part data like records of property purchases and sales, the ATO even scrutinises social media, so those Instagram pictures of you enjoying the high life in the Caribbean might not sit too comfortably if your declared income is less than the tax-free threshold!

And finally…take advice

The key to getting your tax return right is to get professional help from a tax agent such as H&R Block. Given the complexity of tax law, it’s much easier to make an inadvertent mistake if you use the ATO’s self-lodgement service myTax. Sure it’s free, but the cost of a tax audit can well and truly outweigh that benefit!

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