S**T…. I have an ATO Audit? Crap!

As a Tax Agent, this is usually the first thing a medical professional says to me when I tell them I have received a letter from the ATO notifying that they are to be audited. Sometimes the words are more explicit, but the response I get has hardly changed in the 24 years I have been involved in tax.

What is the ATO audit process?

Historically, medical professionals do not get audited much. But this has changed. There are a number of reasons for this:

• The ATO has more resources – so their reach is longer
• The ATO has realised that many medical professionals do not follow the PSI properly especially which it comes to splitting income or especially when using bucket companies
• The tax that can be collected if tax returns are completed incorrectly is significant because well the tax paid by medical professionals is significant. In addition if the tax office thinks you have not followed the rules correctly they can go back 20 years. That’s a lot of tax and interest to pay.

In the last year or so, I had had a few clients come to us after they have received audits. We found that because they had not followed the PSI rules properly or they were using bucket companies that were not correctly structured, they will get large tax bills. In one case the bill will be about $350,000 after interest and penalties. In the other a whopping $1.5M.

Here the worrying part. Both these professionals had been trading less than 5 years so you can see how quickly the tax bill can rack up.

When you have these kinds of tax bills that you are not expecting it puts everything on hold. You cannot plan financially for the future and it is like a massive weight around you that you can do nothing about.

When prospective clients come to us the first thing we ask is if they understand their structure. Its tedious I know but unless you understand it, you do not know if the tax paid is right.

Many see us only to find that if they were to do it properly it would mean paying more tax and so do not change thinking they will deal with when it the problem arises. This rarely works because I know what extended tax audits can do. Generally the ATO will be sympathetic but if they think you or your agents have tried to avoid the rules they can be ruthless.

I know a few who have been convicted and done jail time too though none are medical professionals. In my books its not worth it so if in doubt always get a second opinion.

The Process 

The ATO audit process commences with them first deciding that they will investigate businesses which it considers high risk or where they feel the figures declared do not add up.

Generally, medical professionals are not high risk so if you are picked the chances are it is because the ATO is not comfortable with your numbers. They also have a lot of external information which they use to create a picture.

The Australian tax office is also concentrating more on lifestyle. If declared income is low but one has a large home, expensive cars and children in private school, the Australian tax office may start asking how this lifestyle has been maintained.

 This is how the ATO is picking up the illegal use of bucket companies where you have PSI income.

With Cash Boost and JobKeeper we have seen audits increase. I expect that trend to continue. With audits becoming more regular.

How can I avoid an ATO audit?

So, how do you avoid an ATO audit in the first place? Here are a few pointers:

1. Understand Your Structure & PSI

Most accountants don’t know the PSI rules or decide to ignore them.

PSI basically means you cannot split income to other family members or a bucket company but I see many that ignore this rule. You might think it actually works well – until it doesn’t.

Remember ignoring PSI is illegal so the ATO will not give you the benefit of the doubt. It really is not worth the risk.

2. Benchmarking

The ATO hold a lot of data. They know what an average GP or specialist earns. So if your income shows much lower income than average but still own an expensive house and cars they will start getting interested, especially if your spouse is earning income connected to you.

3. Implement good business record keeping

1.   Ensure you have maintained your books and records properly. The Australian tax office has really emphasised this. Most medical professionals are quite good at this.

1. Make sure your records are up to date and that you have expenses documented included receipts and invoices. They are not just interested in your income but your expenses as well. Remember if you do not have receipts you cannot claim the expense or the GST.

If they think there has been a manipulation of income they are not going to go easy on you if you have claimed more than they think you should.

1.  Third, make sure you file and pay all your Tax returns (BAS, FBT etc) on time. If you are late or cannot make payment, get in touch with the Australian tax office and explain what is happening. They will be more responsive and less likely to investigate.
2.  Be reasonable when it comes to making deductions or business claims. One of my doctor clients decided he was going to employ one of his children as a receptionist who would also being doing admin work. Reasonable you may say except she was getting paid $20 and hour and is 13 years old. The rates are way above any award rate but the question is what work will they be doing? And if they were not your child what would you really pay them?

If you believe you have a child who is capable of acting as a adult and should be paid as such the ATO would be within their right to ask questions directly to the child on the basis that they are capable to answer as an adult. I don’t know many adults that can deal with this never mind a 13 year old child.

 Here is how to think about it. If the ATO is sitting in front of you and asks questions can you:

• Explain it without it sounding a bit silly
• Can do it with a straight face.
•  If you are using a bucket company make sure you are operating within the rules. Most contractor medical professionals cannot use bucket companies due to the PSI rules.

4. Separate your finances

Lastly, keep your private financial affairs separate from your business affairs. Only use a business bank account and business credit cards for business expenses. If you do use a personal credit card, use it solely for business purposes and not personal.

This is because you do not want to give any indication to the Australian tax office what kind of lifestyle you have. There is also less chance of personal items accidentally being claimed as business expenses especially if you have a bookkeeper or Tax Agent preparing your books.

Remember a small mistake found by a tax inspector can lead to more questions.

What should you do if you are chosen for an ATO tax audit?

If you are client, I know almost everyone one of you will be on the phone to me. There are several things that you can do to assist you if you have to do an ATO tax audit.

1. Ensure you have tax audit insurance

Always get a Tax Agent to do the work and communicate with the Australian tax office. It will be expensive but they are experts and should know what to do. You won’t. It is usually a good idea to take out tax audit insurance so that your Agent’s fees are covered.

2. Understand how ATO meetings work

The ATO can ask for a meeting. Try and avoid this if possible (although you may not have an option). The Australian tax office may ask for this meeting to be at your home. Ensure this never happens as they want to see what is in your home.

Always arrange a meeting at your Tax Agent’s office as a meeting at an ATO office is likely to intimidate you and you may say things you would not normally. During the meeting, if you feel uncomfortable at any stage, end the meeting.

Try to ensure the meeting does not go beyond forty-five minutes to an hour because after this you are likely to let your guard down.

The Australian tax office will send you notes or minutes of meetings asking it to be signed and returned. You are not legally required to sign and our policy is to never sign them.

3. Avoid vague answers 

Finally, remember that an ATO audit is not the end of the world. Keep in mind that they have a lot more information about you than you think.

We live in a digital age of Google Maps and data matching. The Australian tax office can see what a taxpayer’s home looks like by pressing a few buttons on a computer at their desk.

Try to avoid giving vague answers. Tell the truth, stick to the point and only answer the questions asked and nothing more.

If you would like to know more or would like more information on Audit Insurance please get in touch by calling 1300 440 316 or email [email protected]