How to Minimise the Risk of an Audit: A Guide for Small Businesses

1. Correctly Declare All Taxable Income

One of the most common triggers for an audit is the underreporting or omission of taxable income. The ATO’s data-matching technology cross-references your reported income with information from various sources. This includes banks and credit card providers. To avoid raising red flags:

• Report all interest and dividends accurately.
• Include capital gains from property sales or other investments.
• Account for all online and retail sales, especially those processed through credit cards.
• Ensure your lifestyle (e.g., property ownership, luxury vehicles, holidays) is consistent with your reported income.
• Declare any income earned abroad, as the ATO closely monitors foreign income sources.

2. Align Your Business Performance with Industry Benchmarks

The ATO compares your business’s financial performance against industry benchmarks. Significant deviations from these benchmarks can suggest that income is being underreported. For example, if your profit margins are considerably lower than others in your industry, the ATO may investigate whether you are accurately reporting your earnings. To stay on the safe side:

• Regularly review your financial performance and compare it with industry standards.
• Seek professional advice if your business’s performance is significantly different from the norm and ensure you have a clear, documented reason for any discrepancies.

3. Ensure BAS and Tax Returns Reconcile

A key area where many businesses falter is in ensuring that their Business Activity Statements (BAS) reconcile with their annual tax returns. Discrepancies between these documents can raise suspicion and trigger an audit. To prevent this:

• Meticulously review all figures before submission, ensuring consistency across all reports.
• Use accounting software to track income and expenses throughout the year, reducing the chance of errors.
• Consult your accountant to verify that all figures align before lodging your BAS and tax returns.

Consistency in your financial reporting demonstrates to the ATO that your business is well-managed and transparent, reducing the likelihood of further scrutiny.

4. Stay Current with Superannuation and Other Obligations

Late or unpaid superannuation contributions often trigger ATO audits. This is especially true now that Single Touch Payroll (STP) gives the ATO real-time access to your payroll data. To avoid issues:

• Pay superannuation on time and keep clear records of all payments.
• Ensure all employee entitlements are correctly calculated and paid.
• Stay on top of other obligations, like GST, PAYG withholding, and other tax liabilities.

If you encounter cash flow issues that prevent you from making payments on time, it’s better to lodge on time and negotiate a payment plan with the ATO rather than delay the lodgement. A history of late payments can signal to the ATO that your business is struggling financially—which may trigger an audit.

5. Maintain a Strong Lodgement and Payment History

Consistently late lodgements or payments are a surefire way to attract the ATO’s attention. A history of poor compliance can suggest that your business is either poorly managed or attempting to evade tax responsibilities. To avoid this:

• Set reminders for all tax lodgements and payments to ensure they’re made on time.
• Regularly review your financial calendar to keep track of upcoming deadlines.
• Address any errors in past lodgements promptly and transparently.

If you discover any mistakes in previous filings, correcting them as soon as possible is crucial. The ATO is likely more lenient if you address issues proactively rather than waiting for them to discover discrepancies during an audit.

Additional Tips for Minimising Audit Risk

In addition to these core strategies, consider the following to keep your small business under the radar:

• Hire a knowledgeable accountant who understands the complexities of tax legislation and can help you navigate potential pitfalls.
• Take out audit insurance to cover the costs of professional assistance if you do get audited.
• Keep meticulous records of all financial transactions, contracts, and other business activities, ensuring you have documentation to back up every entry in your tax return.

While you can’t entirely avoid the possibility of an audit, establishing robust tax practices will significantly reduce your risk. If you’re in doubt, do not hesitate to seek professional guidance to ensure your tax affairs are in order. Call Retinue on 1800 861 566 for assistance.