Audit

It is well recognised that businesses are doing it tough as a result of the economic downturn. Despite this, the ATO believe that now is the time to be seen as fair and equitable (i.e., creating a fair playing ground) in their support of honest businesses by taking firm action against those seeking an unfair advantage.
 

To this end the ATO plan to use industry benchmarking as well as the development of a new personal living expenses guide.

In recent years, the cash economy has become one of the ATO's largest compliance areas and generally involves businesses either under-reporting or not reporting cash income, or not reporting cash transactions that are subject to GST.

In the 2010-2011 Compliance Program, the Commissioner has clearly indicated that the cash economy will rank highly on the ATO's list of audit priorities for the 2011 income year. The ATO have released 100 benchmarks to date for industries including Construction, Retail Trade, and Accommodation and Food Services.
 

ATO Benchmarks enable tax payers to compare their performance to the rest of the industry, and will be used by the ATO as follows:

(a)  Enable auditors to compare particular cases with industry benchmarks.

(b)  Benchmarks are generally not used to trigger an audit, however they will be used as part of an audit (i.e. in working out any omitted income).

(c) Allow for a better overall understanding of industries.

The ATO acknowledges that there may be valid reasons for a business performing outside the industry benchmarks; however, the ATO has indicated that consistent, long-term performance outside a benchmark may be a sign of non-compliance and therefore will warrant further action.

 

For more information regarding benchmarking click here.

Sam is a concreter and was selected for audit by the ATO because of the very low levels of income he has been reporting over a number of years. The concreting industry benchmarks were used by the ATO to assess Sam's business relative to the industry.

During the audit, Sam said his business was based on smaller suburban work, for  which he received very little cash. He said he always issued tax invoices to his customers.

 

Sam had declared a taxable income of $18,000 for the income year in review. He recorded only four concrete purchases during one of the quarters. However, third party data acquired from one of Sam's suppliers indicated that in fact Sam had made 18 purchases for that quarter, some of which he paid for in cash. Further examination showed many of Sam's jobs were for cash and were not recorded in his records and that his customers did not receive tax invoices.

 

Based on the information gathered from all sources, the auditors formed the view that there was significant unreported cash income and expenses. As Sam's records were inadequate, they estimated Sam's incomes by applying his normal sale price per square metre to his actual purchases of concrete. The audit revealed Sam had omitted $142,000 from his return and this resulted in tax liabilities of about $67,000 and additional penalties of nearly $50,000.

The personal living expenses guide is quite extensive and is indicative of the importance the ATO place on examining taxpayers' household expenditure when seeking to identify omitted cash income in the course of reviews or audits. However, even prior to the commencement of a review or an audit, the personal living expenses guide is a useful tool. For example, it allows taxpayers to gain an insight into the type of information the ATO require when looking at household expenditure and whether there is the potential for an audit.

 

For a concise personal living expenses guide click here.