This review drills down to the very understanding of claims-made & occurrence-based insurance policies.

The following insurance classes are often claims-made, as opposed to occurrence-based insurance policies.

• Tax Audit Insurance
• Professional Indemnity
• Directors & Officers Liability
• Employment Practices Liability
• Management Liability

^*The crucial impact & indeed importance of the variance in the cover provided (under claims-made vs occurrence-based) will be seen below.

CLAIMS-MADE LIABILITY

The above classes of insurance are most often written on a claims-made basis. This means the insured is covered for claims made against them during the current period of insurance, irrespective of the date when the incident happened; (subject to the retroactive date – if not unlimited).

E.g. ABC Plumbing Pty Ltd receives a tax audit claim from the ATO on 1 July 2021. The matter relates to a payroll tax event from early 2017. It is the policy that is in place when the claim is made that will respond i.e. 1 July 2021, as opposed to the policy that was in place at the time of the occurrence (early 2017).

There are two important criteria to observe with this:

1. By reason of the nature of claims-made policies, the insured is required to report or notify the insurer of any claim or known circumstance which may lead to a claim, within the current period of insurance;
2. It is the current insurer that will respond to a claim made against the insured, & not the insurer on risk at time of original incident.

OCCURRENCE-BASED LIABILITY

Householders Insurance is generally always written on an occurrence basis. This means the insured is covered for damage caused by an occurrence happening during the current period of insurance.

(Occurrence means an event or series of events, including continuous or repeated exposure to substantially the same general conditions, which results in personal injury or property damage neither expected nor intended by the insured).

With occurrence-based policies, it is the original insurer on risk at the time when the incident happened, that will ultimately respond to a claim; irrespective of when the claim is actually lodged; which may be many years of elapsed time since the date of the original incident.

If a claim under an occurrence-based policy is lodged today, the current insurer will refer the insured back to their original insurer (who was on risk when the incident occurred).

If you would like more information please contact Adi Snir adi.snir@auditcover.com

As JobKeeper and JobSeeker wind up at the end of March, we will see a renewed sense of purpose and dogged determination from the ATO and other State Revenue Offices. As anticipated, these agencies are keen to claw back lost designated tax revenue. As such, it will be essential for taxpayers, accountants, and business owners to get a sense of the recent ATO target areas. As our economy recovers, we could see new strategies rolled out to restore Australia’s economy to its once enviable pre-pandemic position.

ATO Inactivity in 2020: Looking back

Reflecting on the year gone by, the ATO made a big difference to Australians’ lives. It did this by pumping the breaks on many of its critical functions around debt collection and revenue recovery. The ATO stopped carrying out many of its typical tasks, pausing to allow the federal government a more direct and effective pathway to economic recovery through its COVID-19 stimulus measures.

It is no secret that there is now a deep-seated financial shortfall incurred by the ATO, which included:

• A roughly 10% loss in its $15B anticipated compliance revenue; and
• A burgeoning debt portfolio that in 12 months ballooned by $8B to $53B

What to expect as a result

Once the harshest impacts of the pandemic ease and the economic dust settles, we can expect markets to bounce back, which seems to be already occurring in many states. At this point, the federal government will establish a plan with the ATO to return the national economy to its previous strong position.

How will this take place? The ATO will likely receive substantial financial support to manage some critical tasks such as historic tax liability collection, as well as a reinforcement of its existing tax-recovery and tax-crime investigation entities.

ATO Snapshot from 2019

The ATO relies on three prongs to achieve its outcomes, including prevention, education, and better detection and enforcement systems. Also, it functions as the leading agency for the various taskforces established to address different aspects of tax crime in Australia.

These task forces investigated, reviewed, and audited taxpayers during the previous financial year, focusing on work-related expenses, black economy participants, and fraudulent GST claims. Their success is, in part, drawn from the newly established Tax Integrity Centre, which encourages community members to report anything that seems unusual or suspicious.

The Commissioner of Taxation annual report 2019-20, which investigates the ATO methods and results in addressing tax crime, gives a good sense of how successful the ATO has been in terms of its enforcement.

The most noteworthy results of the many taskforces included:

• The Tax Avoidance Taskforce
  • Tax liabilities: $2.7B
  • Cash collections: $1.6B
• The Serious Financial Crime Taskforce 
  • Liabilities: $131M
  • Cash collections: $59M
• The Black Economy Taskforce 
  • Liabilities: $787M
  • Cash collections: $696M
• The Phoenix Taskforce 
  • Liabilities: $112M
  • Cash collections: $47M
• The Superannuation Guarantee Taskforce 
  • Liabilities: $111M
• The Illicit Tobacco Taskforce
  • Tobacco valued at $171 million.

Potential ATO focus areas for 2021

Multinationals vs. SMEs

The ATO has hinted that it will continue looking into large multinationals because of the substantial debt recovered in this area. However, the primary focus will likely remain small and medium businesses, as well as high net-worth individuals. These two groups alone comprise roughly half of the total debt revenue gap, and despitea slow start, all signs point to a ramping up of debt recovery efforts over the year.

Directors (Penalty Regime)

As we know, 2020 represented an anomaly year packed full of stimulus packages and paused tax obligations. As we roll into the new year, the ATO will be more equipped than ever to target directors using director penalty notices. The scope of liability is already broad. Changes to corporate PAYG laws, superannuation, and GST will give the ATO new weapons in its already large arsenal to bring directors’ personal assets into the equation.

Equally, employers need to understand that in order to meet the eligibility criteria for superannuation guarantee amnesty, all outstanding debts must be either paid in full or paid through regular payment plan installments.

Stimulus Recipients

The recovery of wrongly distributed COVID-19 stimulus funds is another prominent focus area. Job Keeper payments made to ineligible recipients, such as prisoners and the dead, has already come under fire. When you consider the sheer volume of applications and the program’s cost is around $130B, it is no surprise there is such a level of scrutiny. It is unlikely that the ATO will absorb any wrongly received payments, even if it means that the entities will have to liquidate and people with lose their jobs.

Work-related expenses

As expected, the ATO will again be looking closely at work-related expenses. With most people working from home last year (and many still), the ATO will place particular focus on the following:

Laundry, clothing, and dry-cleaning “If I rotate dress shirts for my Zoom meetings but continue to wear track pants, claiming dry cleaning for my suits should be fine, right?”

Home expenses like rent when you do not run a business from home “If I work from home, and I am paying rent to live here, therefore I am paying rent to work, right?”

Food relating to working overtime “If I’m checking my email around 10 pm but finished at 5 pm, and then order UberEats, that meal should be covered…no?”

Mobile phone and internet “If my personal phone is also my work phone, and I use my home internet to complete work tasks, then most of that should be tax-deductible, surely…”

Motor-vehicle costs “If I use my car to drive to and from work, and the ATO will pay 68c per kilometer under 5000km, then I probably drove about that distance.”

Claims when no receipt is needed “If the ATO doesn’t need receipts when the claim is under $300, I’ll claim a few extra things while I’m at it…”

Property Investment Claims

If you are fortunate enough to fall into this category, then take heed the ATO is watching. According to the ATO commissioner, Chris Jordan, 90% of returns had errors. Lost rent due to COVID-19 explains part of the reason there are so many false or misleading claims in this area: The areas of concern cover:

• Interest expense claims, such as the costs of borrowing on both your family home and your rental property
• Wrongly apportioning rental expenses and income between joint owners
• Rental properties where the property was not rented or listed, but instead being lived in by the owner
• Make an immediate and lump sum claim for the renovations and repair work on a newly purchased rental property instead of claiming these deductions over several years.

Takeaway, please!

The primary takeaway here: if you cannot prove it with records, receipts, or other evidence, then do not claim it. The ATO cannot look through every single tax return manually but will continue employing newer, smarter automation technology to help in its mammoth effort of recovering lost revenue and closing the tax revenue gap.

While we all appreciate the vital role the ATO plays in keeping our tax system and taxpayers in check, an ATO audit is an unpleasant experience. Even the most law-abiding citizen can fall into the clutches of the taxman. Ultimately, ATO audits are not reserved for wrongdoers. It can happen to any tax-payer, regardless of industry, business structure, record-keeping practices, or otherwise – we’re all potential targets.

Bottom line: ATO audits are painful. They require time and money to resolve, irrespective of your level of wrongdoing. So even without penalty or debt, the costs of professional fees can add up. Unfortunately, clients do not always see things this way and may erroneously conclude that their accountant is to blame. In reality, the ATO audits far more problem-free tax returns than those that end in fraud or evasion.

What do ATO audits, reviews, or investigations look at?

• Cashflow boost
• Income declarations
• Expenses relating to self-education
• Business Activity Statements
• Claims surrounding GST
• Deductions relating to work
• Superannuation
• Employer obligations
• Deduction relating to motor vehicles

What does an ATO audit warning letter mean?

Unlike a review, investigation, or audit, a warning letter is more like a notice of further potential action. It indicates to the taxpayer or accountant that there is a red flag or discrepancy in the tax return, and encourages an internal review to rectify any mistakes in the accounting or claims. If nothing sticks out upon review (note: the ATO does not always spell out exactly what triggered the notice) consider a professional opinion.

If nothing needs amending, then move on. When you miss something that the ATO pulls you upon, you’ll need to amend the return with the ATO. Tax returns that are two years or older require special permission to revise and open. Accountants, however, have special access to make changes to tax returns made earlier.

What triggers ATO audits?

Every year, the ATO leverages data to cross-check your tax declaration against other returns with comparable metrics across similar industries. In the first instance, the ATO rarely invests personnel to investigate a particular return, relying heavily on automation of algorithms to trawl through the millions of assessments. Will this system be right 100% of the time? Not a chance. Is it improving in accuracy and detection every year? You can bet on it.

As we know, the ATO indicates its areas of interest for a particular tax year. Given the pandemic and various stimulus packages, the ATO will be shining light on businesses and individuals that benefited from one or more of these initiatives.

In recent years gone by, the ATO has focused on undeclared taxable income (including overseas earnings) and work-related expense claims. The emergence of cryptocurrencies, for example, and any resulting capital gains generated, also drew specific ATO attention in its pursuit to claw back tax unsubstantiated tax revenue.

Other ways the ATO detects anomalies is through industry benchmarks. For instance, if you are well below the averages for income in your industry, the ATO may choose to look further into your declaration. Some industries have rested on their laurels in identifying themselves as cash-only. This is seldom adopted nowadays and more often the reverse is true, i.e. “cash not accepted”. In the eyes of the ATO, there is no reason for a business to be cash-only in its trading.

Data-matching technology

The ATO’s data-matching technology will not (yet) distinguish between innocent and intentional mistakes. If you inadvertently do the wrong thing, the ATO takes an understanding approach. Generally, the ATO accepts that tax-payers plug the wrong numbers in by accident. In these circumstances, discretion has proven the best approach to encouraging future and ongoing compliance with the Australian tax system. Some accountants, knowing that the ATO audits are not entirely avoidable, work with tax audit insurance providers to provide clients with an added layer of risk management.

The takeaway here: the ATO will approach every situation differently. Having an accountant assist you in lodging your returns is immeasurably valuable for a business. An ATO audit can be complex. An accountant’s attention to detail means no further discrepancies or anomalies emerge during the process.

What does the ATO audit process involve?

You have just received an ATO audit letter notifying you of an impending ATO audit.

What happens next? The ATO will organize a meeting and confirm the meeting agenda in writing. This is known as the audit management plan.

During your meeting, the ATO will establish the audit scope, which defines the timeline of activity to be audited. The audit officer will provide a risk hypothesis, which is the area of concern about which the ATO wants more information. In your meeting, you will agree on timelines and the preferred communication method.

How important is having an accountant during an ATO audit?

Not having an accountant during an audit is like not having legal counsel during a criminal investigation. Apart from the reality that this area is specialized, the process is protracted at the best of times. An accountant will be much more efficient and accurate in their management of the ATO audit, having navigated the process many times before. While the professional fees of your accountant (or tax lawyer for that matter) may be covered by a robust audit insurance policy, dealing with this yourself will not.

From a legal perspective, if you’re initially managing this yourself, ask as many questions as possible on your call with the ATO. Enquire about the scope of the ATO audit. Best to avoid making statements outside answering the ATO officer’s direct questions. Remember, anything you say could be used against you. Try not to provide additional information until you have first spoken to a professional.

The ATO has the legal legs to summon information under the Taxation Administration Act, 1953, however still needs to have a reason to request any information. Ask that the ATO gives you the audit scope and any specific requests in writing. It will be easier to hold them accountable. Understand that ATO auditors are not looking to bust you. Instead, they want you to understand your obligations and rectify any errors made while navigating the complex terrain of Australian tax law.

Rules and stages of the ATO audit

ATO audits can carry on for months. You and your accountant can contact your case officer, the details for whom will be provided by the ATO when they put together your audit management plan. Remember, the initial scope of the audit can change. The risk hypothesis can expand. Your accountant or legal counsel will be indispensable in these moments of deciding how (or whether) to respond to further requests for information.

Time limits to ATO audits?

It is common practice to keep hard or soft copy records of your tax returns for five years. No excuses.

The end of the ATO audit process?

You or your accountant will eventually get the ATO’s final decision, which will cover:

• The facts
• The “risk hypothesis”
• Your case or challenge to the facts and hypothesis
• Any relevant laws being applied under the ATO audit process
• Any areas of your tax assessment under review
• Any resulting interest and penalties
• Your ATO officer’s contact details

At this stage, you will want to make final comments and challenges before the ATO rules on the matter. You can also ask for there to be an independent review of your case to have full confidence that the case has been handled impartially, the outcome of which is made about one week following the final decision.

Disagree with the ATO audit outcome?

In some cases, you will fervently object to the decision made against you. If this happens, you can seek alternative dispute resolution whereby a third party assists to resolve the matter. The ATO aims to avoid long and drawn out, litigious claims and often will consider early settlement options instead. Otherwise, there are vehicles of in-house facilitation available, which involves bringing in an impartial facilitator to help resolve the matter. In any case, you can challenge the ATO’s decisions. These challenges are put into writing and provided to the ATO to then be reviewed by the Review and Dispute Resolution Department – an objective body separate from the ATO.

Takeaway: Minimize ATO audit risk with an accountant, and manage professional fees with audit insurance

Without question, the point to be taken away here is the absolute indispensability of accountants and tax agents in dealing with an ATO audit. The ATO does not know your business as intimately as you will, and while the data-matching technology is impressive and often accurate, mistakes are not unheard of. It is important that you know your rights and understands your responsibilities in dealing with the ATO effectively to minimize time and financial investment in paying the professional fees incurred during the audit process. If you are considering tax audit insurance for yourself, your business, or your clients, speak with the AuditCover team.

Completing a tax declaration need not be an overly complex task. But if you make a mistake, you can bank on the ATO finding out about it. The ATO relies on sophisticated data-matching analytics when it conducts millions of reviews of tax returns in Australia. Identifying wherein lies fraud or inaccuracy is now generally an automated process carried out by programmed algorithms (arguably machine learning or artificial intelligence). The algorithms will detect deduction claims that are larger than usual or altogether false, and may also pick up on unaccounted assessable income.

These computer systems continue running checks for every tax return with a number of scripts set up for anomaly detection. Auditors are notified when there is any kind of inaccuracy or red flag and from there, they can pull up the file and delve deeper into the nuts and bolts of the tax return.

What is the primary purpose of ATO Tax Audits?

In a nutshell, the goal is to expose any individual or legal trading entity that falsely claimed tax and superannuation refunds. Not every instance of tax return fraud is intentional. Some false claims are completely innocuous while others involve deliberately falsified documentation of business expenses.

What forms can tax fraud take?

ATO tax audits seek to pull back the curtain on different kinds of fraud, including:

• Superannuation release or access without meeting requisite criteria
• Fudging your payment summaries or income statements
• GST claims from fraudulent business enterprise
• Making tax declarations through identity theft or manipulation
• Giving the ATO false statements of information
• Making up offsets and claims to yield a bigger tax return

In a post-Covid environment, it becomes easy to imagine ATO tax audits growing in volume over the coming years.

What does an ATO tax audit involve?

There is a range of actions that the ATO takes to carry out its auditing functions. Anything from examining source documents to more comprehensive actions like investigating a company’s history of deductions and transactions come within the purview of the ATO. In appropriate cases, an account manager will ring a company to schedule a visit to the premises. The ATO will typically arrange an agenda canvassing the different items and “issues” to cover in an ATO tax audit management plan.

The majority of ATO tax audits elevate to another level of investigation after the review. In some cases, the initial review will lead straight into a full-blown audit, especially when it appears to involve fraud, tax evasion or a higher level of risk. In making an assessment as to whether there is any wrongdoing, intention or otherwise, the ATO reviews any relevant documentation to ascertain whether you rightfully or wrongfully claimed a refund or tax deductions.

How confidently do you fill your (or your clients’) tax returns?

If you do your tax returns without an accountant, mistakes are common. Online self-serve tax returns are ubiquitous among salary earners and small business owners because it supposedly saves costs on professional fees. Ironically, this approach often leads to errors when you’re not sure how to answer each question. These raise alarm bells and spark investigations by the ATO into your claims. 

The ATO expects timely lodgement of tax returns and business activity statements. However, the ATO can be forgiving if you’ve inadvertently erred or left out important tax information. The process involves requesting an amendment to your lodgement which either results in more tax owing or more tax payable. If you end up owing more to the ATO, typically these penalties and interest charges will be waived or reduced to encourage ongoing accurate reporting.

What are the most commonly made errors when lodging a tax return?

In reality, not everyone has the literacy and numeracy skills to understand tax requirements and tax law – surprise, surprise. Accountants and tax lawyers exist for this exact reason. Even the professionals need to be on top of their game to avoid making mistakes in dealing with complex tax scenarios and how they play out in even more complex business structures.

Should I lodge my tax return without an accountant?

As expected, it depends on the complexity and your own confidence and knowledge. Here is what could go wrong:

1. Getting the numbers wrong
   • If you are juggling numbers in your head or not using an accounting system or software to keep track of all your numbers, in all likelihood you will eventually make a mistake!
2. Leaving out relevant deductions
   • There are lots of items to claim as deductions and the ATO has no duty to inform you of all of your tax entitlements. An accountant will pick up on things you may overlook or fail to consider.
3. Misreporting your assessable income
   • Salary and wage do not always cover all of your taxable income. Consider any dividends, earnings from investments, interest from banks, trust payments, to mention but a few.

Dealing with ATO tax audits with the right evidence

If the spotlight is on you and your business, the ATO may demand all relevant documents to support your claims. Receipts will be a good starting point, with the ATO able to request further information to prove the expenses you claim were in fact paid by you and not another tax-paying entity. Among other actions, the ATO has powers to contact previous employers in their information-collection process. For this reason, businesses maintain sharp and tidy records for at least five years in preparation for a potential ATO tax audit.

What work-related expenses can you include?

When assessing what to legally claim, consider the following three questions:

1. Is this expense directly related to my work? Yes
2. Have I been reimbursed for this expense before? No
3. Can I prove that I spent this money? Yes

What if I did nothing wrong? Will tax audit insurance protect me?

Dodgy tax declarations do not always trigger ATO tax audits. In fact, sometimes an ATO tax audit is somewhat randomized in nature. The ATO also audits companies with nothing to hide, and it happens a lot.

When this occurs, these organizations take advantage of their accountant and any other professionals needed to respond to the ATO’s varied requests for information and documentation. These fees catch business owners by surprise and tax audit insurance is one way accountants and clients can manage the risk of time and money needed in dealing with an audit from the ATO. 

The ATO hit pause on tax audits in light of changing circumstances

The ATO has indicated that its tax-audit task forces will pick up where they left off before the coronavirus pandemic hit Australian shores and wreaked havoc on the domestic economy. In light of the unprecedented government response in the form of various stimulus packages, such as JobKeeper, cash-flow boost and early release of superannuation, the ATO has focussed its personnel and resources on rolling out these fiscal measures.

As a result of this redirection, many accountants and business owners are wondering when they can expect tax audits to start up again. Given the fluidity of the situation, no hard date has been set by the ATO.

Will Victoria’s stage 4 restrictions factor into the start date?

The last announcement around the tax audit restart date pencilled in August to September as the period where the ATO would get back to its regular tasks. These announcements were made before Premier Daniel Andrews imposed new stage 4 restrictions off the back of declaring a state of disaster in Victoria. While this grace period has given Australian taxpayers, including the broader business community, some breathing room, it has also meant that there is an ever-growing backlog that will eventually need to be resolved.

Where do the accountants stand on the matter?

Accountants know and understand that this grace period will come to an end and acknowledge the necessity of the ATO recommencing its usual mandate of carrying out tax audits. Given the situation has evolved differently in each state, it is likely that the ATO will look to first focus its tax audit efforts on those states with more relative economic stability.

What will happen with JobKeeper 2.0?

The ATO recognises that many will need guidance and education to better understand and respond to the JobKeeper 2.0 eligibility criteria. Included in this is the requirement that from 28 September, businesses must be able to demonstrate the requisite turnover decline using actual GST turnover for the September quarter if they wish to access the new financial support payments for full-time and part-time workers.From 4 January, these new payment structures for full and part-time workers are set to shift again, and businesses will need to keep across these changes as the situation develops. For more information, it is worthwhile checking out the JobKeeper Payment Fact Sheet so that your business does everything in its power to avoid getting a letter from the ATO saying  “The ATO has selected you for a tax audit”.

How can tax-paying businesses and individuals prepare?

As a business owner, tax audit insurance can save you from having to pay your accountant’s professional fees, and as an accountant it can save you from having to request these funds from your clients. The key message here is that once an audit is underway, it may already be too late to get covered.

AuditCover provides a simple solution without a drawn-out claims process. To protect against paying unexpected professional fees, get in touch to get a quote today.

How ATO Is Tackling The Problem

As an accountant, it makes sense to offer your clients tax audit insurance, particularly in light of the Australian Tax Office’s (ATO) aggressive ramping up of audit efforts, activities, and personnel. This mammoth task to close the growing $9 billion income tax gap has prompted accountants and other professional service providers to seek partnership with the right tax audit insurance provider. So who is the right provider, and what should professionals be seeking? After all, it is their professional fees that this type of insurance is supposed to cover.

In the new Covid-19 environment, where many Australians substantially depend on government schemes and welfare initiatives, the ATO is readying itself to audit unheard of numbers of businesses and individuals. Some reports suggest that up to 25% of taxpayers will receive an audit. These professional fees can very quickly balloon without a contingency plan in place. As a result of improved data-matching capabilities, the ATO is now incredibly efficient in identifying anomalies and potential breaches.

Keep in mind that the majority of individual tax returns will have at least one error. The types of mistakes vary, but of the roughly 70% that include inconsistencies, more than half of these relate to rental-property deductions, work-related claims, SMSFs, and misreporting within the cash economy. The key takeaway here is that the number of reviews, queries, investigations, and ultimately audits will increase substantially. Accountants should be ready to protect their clients with the right provider.

The costs of responding to an official audit may start as low as a couple of thousand dollars depending on the complexity of the audit and which other professionals must respond appropriately, e.g., a tax lawyer. These costs need to be worn by someone, whether the accountants themselves, the clients under investigation, or the insurance provider. Being unprepared for this kind of scenario can lead to a breakdown of the accountant-client relationship. In one potential situation, the accountant loses out by wearing these costs (out of fear that they’ll lose the fee-paying client altogether). In the other, the client pays and is caught off guard by “bill shock” sewing seeds of distrust or resentment into the relationship. In reality, these accountants were only doing their job at their billable rates.

In summary, having adequate tax audit insurance in place goes a long way. It is becoming a ‘must-have’ add-on for accountants and their portfolios.

So what’s available, and what is essential?

There are many tax audit insurance products on the market, and plenty of accountants are across these offerings, having already integrated them into their product mix to add value to their service. Typically the tax audit insurance solutions are facilitated through insurance brokerages with backing from larger insurers. Accountants and other financial advisers offering tax audit insurance to their clients (for a fee or not) should be cautious of quasi-insurance offerings that lack insurance backing. The blanket rule should always be to read the Policy Wording and discover who the insurer is and what the coverage includes or excludes.

Without proper insurance backing, the so-called tax audit insurance becomes largely ineffective and financially risky for an accountant to offer to clients. There is no transfer of risk to an external insurer, and so the insurance risk falls squarely on the practice. If the ATO or another government agency commences an audit, the accounting practice will wear all the risk with products that lack insurance backing.

Maybe you’re wondering who buys into shoddy tax audit insurance products. Often it is the temptation of an additional revenue stream that attracts an accountant to work with a tax audit insurance provider. The accountant will usually allow the tax audit insurance provider to manage and take the lead of the communications covering things like sales and compliance. Some providers use physical letters in their onboarding process. In contrast, others use digital forms of media to deliver their message and maximize uptake, such as email marketing.

Understanding Tax Audit Insurance Policies

In general, it is accountants benefiting most from offering tax audit insurance to clients, however other professionals looking out for clients in this regard include:

• Insurance brokers
• Financial planners
• Financial advisers
• Wealth managers; and
• Tax lawyers

In most cases, however, accountants can respond to an ATO audit without another professional’s assistance. In terms of coverage, it differs depending on the conditions of the Policy Wording, however, will typically cover companies, partnerships, sole traders, individual taxpayers (like employees), directors, Self Managed Superannuation Funds (SMSFs), Corporate groups, and discretionary trusts.

Make sure to double-check the rules around disclosing financial benefits or remuneration to clients before they take out a policy. In general, accounting practices get a commission for each policy bound by a client. In some cases, this will cover the cost of the premium or a Master Policy. Other offerings like AuditCover do not charge accountants and instead work on an “opt-in” basis where the end-user can quote and bind themselves in several clicks.

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.