For many business owners, the words ‘tax audit’ can make them tremble with fear. The idea of an audit by the ATO can worry even the most experienced business operator, and the prospect of having government officials inspect your accounting systems can be nerve-wracking.
But it doesn’t have to be… by keeping your business accounting in order, the process of a tax audit can be relatively stress-free.
Here we look at some of the things you can do to help reduce your concerns and make sure you are always prepared for the unexpected.
First of all, it’s important to understand what the ATO is focused on during the current financial year, so you can make sure your relevant accounts are up to date. There are always different aspects of accounting that the ATO can be looking at and for FY20/21 these relate to some of the impacts of COVID-19.
In particular, they will be reviewing superannuation guarantee (SG) payments, as they know that some businesses might have fallen behind due to cash flow pressures caused by the pandemic. They will also be looking at single touch payroll (STP) data as this is becoming more sophisticated and the ATO is receiving more detailed information.
In addition to SG and STP, there will also be a focus on JobKeeper payments to make sure employees were paid the correct amount, and the ATO will continue checking any Cash Flow Boost payments to confirm employers received their correct entitlements. While the Cash Flow Boost program closed on 30 September 2020, it still falls within this financial year so will remain part of their audit focus.
Once you understand the ATO’s focus, you need to make sure you maintain quality accounting records. If you are facing an audit, the last thing you want is the additional pressure of sorting out a disorderly, confusing accounting system.
Utilising a cloud-based system such as Xero can make your life much easier. These types of systems should be up to date with Australian tax regulations to enable smooth transaction management and help with compliance. By keeping on top of reconciliations, payroll, superannuation and other processes you are already in a good position for a smooth audit.
You must also remember to retain your document archives. While most audits are performed against the previous year’s tax return, an auditor can go back to previous years… especially if they think you may have understated your taxable income.
Make sure you keep your documentation from the last five financial years so that you can substantiate your claims. Again, if you are using a cloud-based system you should be able to assign digital copies of your documents, to minimise piles of paper.
Even though you are the business owner, it’s critical that you keep your finances separated into business and personal accounts. If your grocery shopping and supplier invoice payments are appearing on the same bank statement it can muddy the waters during an audit.
You definitely don’t want personal expenses being mistaken for business transactions, so make sure your business account remains solely for business purposes.