How does the ATO view cryptocurrencies?

In essence, a cryptocurrency is viewed as a form of property (like real estate or company shares) and therefore any incomes earned from trading in these digital currencies should be documented and accounted for in your tax declaration and subject to the tax on capital gains.

What cryptocurrency activities does the ATO consider?

If you are the owner of digital currency and you are using this digital currency to trade, then you may need to report these activities to the ATO. These activities include:

• Selling cryptocurrency
• Trading cryptocurrency
• Exchanging cryptocurrency
• Converting cryptocurrency to Australian Dollars
• Converting cryptocurrency to foreign currency
• Using cryptocurrency to purchase goods or services

How can I avoid misreporting cryptocurrency trading?

Best practice of recording transactions and keeping receipts of trading activity should come as no surprise to taxpayers using cryptocurrencies. If you want to ensure accuracy in your declaration, make a record of all transfers and purchases in digital currency. For example, keep records of exchanges, professional costs associated with these exchanges (such as legal or accounting fees), as well as records of your digital wallets. Be specific about the date and dollar value of these transactions and between whom they took place. Procrastinating will not make the ATO disappear – it will only make the job more cumbersome come tax time.

ATO Tax audit – can you afford it?

The ATO has consistently said that it will be utilising more advanced measures to ensure all Australians are meeting their taxation obligations. Last April the ATO released its Data Matching Protocol for cryptocurrency under which it receives detailed transactional data from every digital currency platform spelling out who is transacting and what users transacted on their exchanges.

Government funding aimed at closing the income tax gap has enabled the ATO to set up and deploy taskforces to ensure crypto traders are fully educated on their duties to pay tax. Given the complexity and relatively unique nature of crypto trading, the ATO is attempting to make these traders aware of both their rights and obligations, and will afford them reasonable time to correct any oversight, underreporting, or accounting errors.

Your capital gain could be the ATO’s tax loss

For crypto traders who were active in the 2017/18 financial year, the ATO intends to send notices to review the accuracy of their capital gains reporting detailed in their tax declarations. The ATO has shown some leniency in stating that no penalties will apply to crypto traders who promptly and accurately correct their tax declarations. Otherwise, those who fail to correct their mistakes may face the full force of an ATO tax audit.

For cryptocurrency owners not active in trading, the ATO will send a notice reminding and educating them of their taxpaying obligations with guidelines on best practice in record keeping.

Unfortunately for taxpayers, no guarantee exists to avoid an ATO tax audit. The ATO has more resources than ever before, and extensive investigatory measures like tax-collecting taskforces are now possible.

Honest mistake or deliberate avoidance?

According to the ATO, the issue of cryptocurrency has been on its radar for years with efforts ramping up over the last 12 months. A widespread misunderstanding on the part of Australian taxpayers is the idea that cryptocurrencies operate in the dark, and that the identities of traders and their transactions are somehow inaccessible to the ATO. In reality, while cryptocurrencies are traded virtually in an online environment, the ATO is directly plugged into these exchanges, and regularly receives information regarding users of its platform.

While most traders in company shares are aware of their capital gains tax obligations, some regard cryptocurrency as exempt or somehow different, when in fact they operate in much the same way.

How to respond to ATO cryptocurrency notice

While the ATO sends out thousands of notices to taxpaying Australians that are owners and traders of cryptocurrency, it is also affording a one-month window to ‘self-correct’ any oversights or discrepancies. Recipients should think carefully about whether or not they received any income from cryptocurrencies to ensure they appropriately amend their tax returns.

By ignoring this warning, taxpayers risk additional interest payments, on top of the professional fees incurred in correcting their mistakes.

Unfortunately, the ATO’s strong stance against tax-avoiding behaviour means that even the most diligent and forthcoming taxpayers may be subject to a full-fledged tax audit this year.

Is Audit Insurance the answer?

AuditCover have digitised and streamlined the process of acquiring protection for accountants and their clients through their audit insurance service. Whether you own a business or provide financial advice to business owners, audit insurance is now a cost-saving measure that all Australians should seriously consider in this ever-more vigilant tax environment.

• Work-related claims
• Investment property deductions
• Cryptocurrency earnings
• Sharing economy
• Interest expense claims (especially with respect to property)

In unprecedented fashion, the ATO is readying its numerous taskforces to conduct random tax audits over specific industry sectors determined as high risk. A growing group of industries will be placed under the magnifying glass as the ATO’s enforcement measures heighten to close the gap in Commonwealth income tax revenue. Apart from the potential of paying more in taxes, an ATO tax audit can be an incredibly challenging time in any business life cycle. As business owners, your client must account for the financials while running the business themselves. Given the spontaneous nature of an ATO tax audit, the costs in interest, fees and penalties can damage a business’s bottom line if unprepared.

Here we deep dive into some of the triggering behaviours that can result in an ATO tax audit, and why doing everything right might still result in a full-blown audit of your SME clients’ businesses.

Not Declaring Taxable Income

If your clients are leaving out some of the details of their taxable income, then they are asking for trouble. The primary function of the ATO is to reconcile money earned with taxes paid. A common pitfall of some SMEs is putting too much faith in the ATOs pre-filled data, which only tells a part of the bigger picture when declaring taxable income. The burden of ensuring all information is accurate falls on the declarant and therefore it pays to be careful and considered in approaching this to at least minimise the possibility of an ATO tax audit on your clients.

Whether intentional or not, some of the more common mistakes include the following:

• 1.     Failing to mention capital gains for “asset disposals” such as ownership of land or shares.
• 2.     Failing to disclose income outside of Australia, also known as “foreign income”. Some business owners pretend not to understand what this means while others genuinely do not know. If your clients own or have an interest in overseas assets like property or a foreign business entity, then they have investment income from the interest, rent or otherwise being generated. The same goes for employment income from a foreign company – all of which should be detailed in their tax declaration to minimise the risk of an ATO tax audit.
• 3.     Failing to disclose or accurately declare bank interest. We have all been there. The total interest accumulated seems so small and insignificant that we fail to include this in our tax declaration. One thing to note is that banks will always declare to the ATO any interest payments made to their customers. When the ATO data-matching technology goes to work on a declaration, and there is an easy-to-spot discrepancy, a reg flag might prompt a deeper investigation.
• 4.     Inaccurately declaring the earnings of a business. Part of the ATO’s function is to collate data across all industries to establish “benchmarks” across all sectors. The ATO does this by analysing the data surrounding a particular business and then determining averages across varying metrics, such as gross revenue and net profit. If there is a large enough discrepancy between the ATO’s benchmarks and your clients’ businesses’ reported earnings, it could dramatically improve the chances of a random ATO tax audit. These benchmarks are expressed as percentages of total business turnover and cover things like employee wages, rent, production, materials, and so on. Be particularly cautious if you except cash regularly, as the ATO is more likely to scrutinise your books if you operate in a cash-only fashion, which nowadays is uncommon.

Making Unentitled Claims 

Making unsubstantiated or unfounded work-related deductions is another dubious undertaking that will inevitably leave your clients’ more exposed to an ATO tax audit.

If your clients’ employees are making deductions relating to work, then these guidelines may be helpful:

1.     Claim only for products or services that relate to your client’s expenditure;

2.     Record any outgoings so your client can substantiate these claims with evidence, whether hard-copy or digital receipts; and

3.     Advise against your client making tenuous claims relating to costs incurred in his or her general commute, as this is not covered and could result in an ATO tax audit.

When making a tax declaration on behalf of your clients, certain concessions mean you do not need a receipt. For example, for work-related deductions, up to $300 can be claimed without a receipt as proof of purchase. That said, the ATO might red flag these claims and request other forms of evidence in place of a receipt if the declaration raises alarms.

Is Lifestyle Incongruous With Income?

Imagine owning a Sydney harbour-side property and rolling around in a Bentley after declaring $15k as your total income. This kind of discrepancy has the potential to attract unwanted attention from the ATO and can undoubtedly result in a full-blown ATO tax audit.

In simple terms, the ATO can calculate total assets and deduce what kind of income is required to afford such a living. If your clients have claimed substantially lower than what the ATO determines as a benchmark, in all likelihood the ATO taskforce will come knocking on your clients’ door.

It is certainly not unheard of for the ATO to look into a claimant’s social media when investigating a suspicious declaration.

Is Audit Insurance The Next Step?

As an accountant or a financial adviser, your goal is to protect your client both from legal and financial perspectives. Key to being prepared is having appropriate Audit Insurance in place to curtail the unforeseeable costs of an ATO tax audit. 

Audit Cover saves time and money and stress and affords its clients with ultimate peace of mind knowing that the costs and overall impact on their business of an ATO tax audit will be minimised with this added layer of support and protection.

How ATO Is Tackling The Problem

In the first half of the 2019/20 financial year, the ATO’s hotline for suspicious behaviour, known as the Tax Integrity Centre, received upwards of 25,000 calls. These were from honest taxpayers whose frustrations at those avoiding and evading their taxation obligations reached a breaking point. The most common issues included not declaring income, cash payments to staff or simply a mismatch between a certain lifestyle with a supposed income.

Peter Holt, the ATO’s Assistant Small Business Commissioner says “people are sick and tired” of “dodgy behaviour” that equates to “effectively stealing from the community.”

According to a recent report released by the ATO’s Black Economy Taskforce, the black market size could amount to more than 3% of total GDP, putting a huge strain on everyday business owners who follow the rules.

In addition to tip-offs and communal efforts to encourage an economy of full compliance, legislative support has come in several forms. For example, the Black Economy Procurement Connected Policy mandates tax compliance for any businesses bidding for government-offered tenders. Further to this, as of January 2020, and following the Currency (Restrictions on the Use of Cash) Bill 2019, new limits have been placed on cash payments above $10,000.

With fewer people transacting in cash and ATM average withdrawals dramatically lower now than ten years ago, it is become increasingly difficult to operate this way in our effectively cashless society

Is Audit Insurance Worth The Investment?

Aided with newer and more advanced technologies, the ATO has become more creative in how it goes about enforcing taxpayers’ financial obligations to the community, underscoring the renewed need for tax-payers and their accountants to look more closely at having the appropriate audit insurance in place in preparation for a future crackdown and increasingly inevitable tax audit.

The idea of being audited probably sends chills down the spines of most business owners whose primary focus is growing a profitable business. Nobody wants to get notified by the ATO of an impending audit, especially if the accountant or their clients have no audit insurance protection in place, and it occurs smack bang in the middle of the busiest part of the year. Consider the ramifications of having to cease all business activity to prioritise collating the necessary paperwork, all the while managing business-as-usual activities. It is not difficult to envision a costly and chaotic situation as a result of this oversight.

As automation and the obvious benefits of AI further support the ATO in carrying out its tax-collecting activities, we are witnessing a shift in the importance of being insured against the costly risks of a tax audit. Audit insurancetypically considered an add-on is becoming an essential mix in the various forms of protection leveraged by taxpayers in seeking advice from their advisors.

When Do Businesses Get Audited?

The ATO is becoming much savvier in identifying reporting anomalies and is determined to crack down on deliberate over-claiming. This includes work-related expenses such as clothing and travel, as well as cases of under-reporting weekend trade and the unreconciled use of cash as wage payment.

There are a plethora of triggering events where an audit may be undertaken. For example, audits of Business Activity Statements are most common, however, the ATO has also targeted landlords of rental properties, as well as black market business owners whose intention is to under-report and operate under the radar. Unfortunately for them, the ATO has become increasingly sophisticated in its detection methods, making audit insuranceincreasingly worthwhile for advisors and business alike.

Another focus area of the ATO’s clampdown complies with cryptocurrency laws where the use of these financial instruments like Bitcoin and other characteristically similar digital currencies is becoming increasingly commonplace in business trade.

The ATO has also placed more scrutiny on taxpayers obligations surrounding superannuation with employer obligation audits increasing off the back of the ATO’s introduction of SuperStream whereby missed guarantee payments are immediately brought to light.

What Are The Costs Of Compliance?

It is difficult to accurately estimate the incurred costs on a business being audited by the ATO but we can assume it will cost a considerable amount of employee hours, which can add up quickly and without notice or any forecasting.

Lacking adequate protection through audit insurance means advisors must level with their clients in explaining these unforeseen costs. For some taxpayers that choose to go down the path of self-insurance, it sometimes translates to moderate upfront savings with more substantial (and unexpected) costs down the road.

While some accountants, financial advisors and wealth managers may instruct their clients to self-insure as a method of protection, this can leave them underprepared and exposed to the litany of fees and employee costs that result from a comprehensive tax audit. By self-insuring instead of using an audit insurance solution (like Audit Cover), business owners are limited in how efficiently and effectively they can respond to the ATO’s reporting requirements and discovery of documentation.

The obvious risk for advisors is losing out on their professional fees as a result.

Is Audit Insurance The Best Way To Prepare?

Given the momentum of the ATO’s renewed crackdown, no stone is being left unturned, and no taxpayer is entirely protected from a potential audit. Given the inevitability of more ATO audits aimed at closing the income tax gap, more tax advisors, accountants and practitioners in the space are seeking external support in the form of audit insurance providers. This assurance and added layer of protection afford peace of mind for both the firm itself and its clients.

This trend of more frequent and effective ATO auditing is a direct result of more intuitive and automated data analysis systems. As technology gets better at detecting misbehaviour (intentional or otherwise) via systems likeSingle Touch Payroll, audit insurance will become more of a necessity than a luxury in an ever more vigilant environment.

Food For Thought

In summary, the ATO’s has adopted various new initiatives aimed at better compliance and more accurate reporting from Australian taxpayers. As a result, those relying on unsubstantiated claims or failing to keep up with tax obligations like rent or GST are being targeted. While education and engagement are pillars of the ATO’s approach in addressing the issue, the buck stops with enforcement.

Tax advisers, now more than ever, must keep up with the shifting legislative and technological tax landscape to make sure their clients are receiving the greatest possible protection.

With lodgement methods changing and new online services such as myGovID, it is more important than ever that tax advisers are across these changes, adept at spotting vulnerabilities and seriously considering the advantages of audit insurance for their clients.

The Future of Tax Accounting

It is abundantly clear that the ATO is better than ever at enforcing taxpayer obligations. If your clients are falling foul of their duties to the ATO and the broader community, the message must be drilled home.

The ATO is shining a light on tax agents whose claims are consistently high. This kind of attention can have an impact on brand protection and reputation. As more taxpayers rely on pre-filled returns in their tax lodgement, practitioners are being forced to shift their business models and come up with new value-add offerings while providing access to the broad range of deductions or concessions to which they are legally entitled.

Audit Insurance offers a comprehensive way of ensuring no stone is left unturned in reviewing a client’s tax compliance if (or when) it gets that ominous letter in the mail or phone call from the ATO audit taskforce.